As the US prepares to reimpose wide-ranging economic sanctions against Iran, most of its diplomatic energy has been focused on trying to persuade its European allies to support its more aggressive stance. That is proving hard to achieve though, as secretary of state Mike Pompeo acknowledged in a speech to the conservative Heritage Foundation on May 21 when he said “I’ve spent a great deal of time with our allies in my first three weeks [in office]. I know that they may decide to try and keep their old nuclear deal going with Tehran.”
Whether European governments are able to devise a scheme to shield their companies and citizens from the US sanctions remains to be seen. But they do at least potentially have the strength to resist Washington’s efforts, and the knowledge that their trade with Iran forms a relatively tiny part of their overall trade networks.
However, two other US allies much closer to Iran have rather more to lose from the new trade restrictions, which are due to take effect in two waves, in August and November. Afghanistan and Iraq have a few things in common, including weak economies that have been ravaged by corruption and warfare – they also both have borders with Iran, which is an important trading partner.
Afghanistan’s economy is small and it is only the 145th largest exporter in the world. However, Iran plays a central role as the largest source of Afghan imports and the third largest destination for its exports, according to the World Bank. The importance of trade via Iran has been rising and was set to be further enhanced by the development of Chabahar port on Iran’s Arabian Sea coast.
This port is being developed with the help of a $500m investment from India and the scheme includes a direct rail link to land-locked Afghanistan. The project was sealed with the tripartite Chabahar Agreement in May last year, signed by Iranian president Hassan Rouhani, Indian prime minister Narendra Modi and Afghan president Ashraf Ghani.
For Afghanistan, the port offers a welcome alternative to its current reliance on the seaport of Karachi in Pakistan – a country with which it has an uncomfortably complex relationship. For Iran, the project offers a way to develop its trading relationship with central Asian countries while also bypassing Pakistan. The first shipment of goods from India to Afghanistan via Chabahar arrived in the Iranian port in November last year, with the shipment of wheat hailed by Modi at the time as “a new chapter in regional cooperation and connectivity”.
As the IMF pointed out in a review of the Afghan economy published in December, such regional integration “can help the country alleviate its competitiveness challenges”. However, the new US sanctions will make it difficult, if not impossible, for this trade route to be further developed. A senior Indian diplomat recently told the Reuters news agency that the project has gone back to the drawing board. “We will have to renegotiate terms and conditions on using Chabahar,” they said. “For now everything is in a state of uncertainty.”
Curtains for Kurdistan-Iran trade?
Iraq too has myriad close economic and political ties with Iran, despite decades of mutual mistrust between the two countries. The majority of the trade is in the form of Iranian exports to Iraq, with officials in Tehran claiming Iran is now Iraq’s third largest trading partner, behind Turkey and China.
Of particular note is the Kurdistan region of northern Iraq, which has developed a close web of cross-border trade links. A conference held in early May in the Iraqi Kurdish city of Erbil to discuss the development of these ties attracted Kurdistan Regional Government (KRG) prime minister Nechirvan Barzani and Iran’s industry and minerals minister Mohammed al Sudani among others.
As Barzani pointed out, Iran now accounts for more than 25% of Iraqi Kurdistan’s imports, valued at some $6.5bn a year. Two thirds of the vehicles imported into the Kurdistan Region come via Iran, there are 359 Iranian companies in the area and 135 Iranian-owned factories providing hundreds of jobs.
The KRG is keen to build up these ties further and plans to develop a free trade zone at Pervez Khan, one of the three main border crossings between Iraqi Kurdistan and Iran. “We have taken practical steps and allocated a site, but more effective steps are still needed from both sides and by the Iraqi government,” said Barzani in his speech at the Erbil conference.
It is not clear to what extent these Iranian companies in Iraq will be affected by a renewed wave of American sanctions on Iran. Most of them are likely to have little or no direct exposure to the US, but it may become more difficult to arrange cross-border payments for instance and the Baghdad and KRG authorities are likely to come under pressure from Washington to clamp down on their operations – something that is just likely to encourage more smuggling across the frontier.
The viability of some other large projects must now also be called into question. For example, a planned scheme to send crude oil from Iraq’s Kirkuk field – in an area which has been hotly contested by KRG and federal Iraqi authorities in the recent past – to the Kermanshah refinery in Iran is also likely to be disrupted. In return for the crude, Iran is due to deliver refined fuel to Basra, in southern Iraq.
Efforts by the Iraqi and Iranian authorities to jointly develop oil fields that straddle their border are also now likely to come under pressure, given that the oil and gas sector is one of the main targets of US sanctions.
The disruption to trade with Iraq also has implications for Iran’s domestic political scene – which will no doubt be welcomed by US policymakers. There were reports of demonstrations by merchants on the Iranian side of the border in mid-April, angered at the impact of Iran’s decision to temporarily close the border with the Kurdistan region of Iraq following the KRG’s ill-fated effort to establish an independent state via a referendum in September last year.
It has been one of a number of flash-points around Iran, with strikes and protests in relation to water shortages, unpaid wages and other issues over recent months. Should cross-border trade be disrupted further, it is likely to fuel anger on both sides of those borders in the coming months, whether in Afghanistan, Iraq or other countries neighbouring the Islamic Republic.
However, any economic pain felt by its allies is unlikely to persuade the US to change its approach. In comments following his speech on May 21, Pompeo bluntly said “Any time sanctions are put in place, countries have to give up economic activity…Everyone is going to have to participate in this. Every country is going to have to understand that we cannot continue to create wealth for [influential Iranian major general] Qasem Soleimani.”