This archive report was first published on 2 July 2019.
Published on July 2, 2019, Iraq has found a way to pay Iran for energy imports without violating US sanctions. The country has set up a special purpose vehicle (SPV) that allows Baghdad to pay for Iranian energy in Iraqi dinars, which Iran can use to buy humanitarian goods.
This workaround would enable Iraq to keep its power supply running and avoid protests without triggering US sanctions, which have been a major concern for the country. The US has imposed strict sanctions on Iran, but has granted Iraq temporary waivers to continue purchasing Iranian power until October.
According to senior Iraqi officials, the SPV was the result of months of talks between Iraqi, Iranian, and US officials. The mechanism would allow the Iraqi government to deposit money into a special bank account in Iraq, in Iraqi dinars, which Iran could use to purchase goods from outside Iraq.
"The Iraqi government will continue to pay Iran for gas by depositing money into a special bank account inside Iraq, in Iraqi dinars," said a senior government official. "Iran will not be able to withdraw the money, but will be able to use it to purchase goods from outside Iraq."
The US is aware of the mechanism's creation, and a US official confirmed that Washington was aware of the SPV's establishment. However, the US embassy in Baghdad declined to comment, while Iran's embassy did not respond to an AFP request.
Two additional high-level Iraqi officials confirmed that Baghdad was establishing such an account with US knowledge, but could not say whether payments into the account had begun. "How else is Iraq supposed to pay what it owes Iran? We have no other choice," said the second official.
The reliance on Iranian energy has been a contentious issue between Iraq and the US. Iraq imports around 1,400 MW of electricity and 28 million cubic meters of gas for power stations from neighboring Iran, which together make up about a third of Iraq's power supply.
"We would become Iran's ATM," said another Iraqi official, highlighting the potential risks of the mechanism. According to two senior Iraqi officials, Baghdad's SPV would likely be set up at the Trade Bank of Iraq, which has handled most of the Iraqi government's international transactions since its establishment in 2003.
A senior TBI source told AFP that the bank had been involved in the negotiations but the account had not yet been created. "The US Treasury has confidence in the TBI's processes. We are in discussions to reach an agreement, which would be fully within US exemptions," the source said.
Experts have described the system as a "loophole" around sanctions, similar to the INSTEX mechanism recently activated by Britain, Germany, and France to trade legitimately with Iran without falling foul of US sanctions.
However, the system is fraught with political, financial, and practical complexities. Iraq's economy relies almost exclusively on oil revenues, paid in dollars, which leaves Baghdad extremely vulnerable to any punitive measures the US could take in response to a violation.
