Under its effective leader, firebrand ultra-nationalist cleric Moqtada al-Sadr, Iraq is theoretically committed to not allowing itself to become overly dependent on any one country. That was the rallying call of al-Sadr’s ‘Sairoon’ (‘Marching Forward’) power bloc during the last general election in Iraq in May 2018 that saw him and his grouping win the most seats of any party. For a while, this theory seemed to be in effect, with Iraq playing off Chinese and Russian interests against those of the U.S. All the time, though, in practice, Iran continued to dodge and weave around any and all sanctions aimed at preventing it from continuing to wield the deciding power in its neighbour through the leverage of its military, militias, and pro-Iran politicians in Baghdad. The surest sign yet that the U.S. has had enough of this situation came in the shape of the latest waiver granted just over a week ago by the U.S. to Iraq to continue to import Iranian electricity and natural gas – just 30 days, its shortest waiver ever, by a long way.
At the same press conference that Morgan Ortagus, a U.S. State Department spokeswoman, announced the new short waiver, she also pointedly announced new sanctions against 20 Iran- and Iraq-based entities that were cited as funnelling money to Iran’s Islamic Revolutionary Guards Corps’ (IRGC) elite Quds Force. This Force functions in large part as Iran’s chief foreign intelligence operation, as well as its most zealous military unit – more akin to Russia’s GRU than the U.K.’s SIS – having been built up and led by General Qassem Soleimani until his assassination by the U.S. on 3 January. According to Ortagus – and absolutely correct - these 20 entities (there are more than that but this is a start) are exploiting Iraq’s dependence on Iran as an electricity and gas source by smuggling Iranian petroleum through the Iraqi port of Umm Qasr (true, and other sites) and money laundering through Iraqi front companies (also true), among other sanctions-busting activities. Prior to this 30-day only waiver being granted, the U.S. had originally granted an initial 45-day waiver to Iraq after the U.S. re-imposed sanctions on Iranian energy exports in November 2018.
This was followed by another five waivers - two 90-day waivers in a row followed by two 120-day waivers in a row in June and October, and then a 45-day waiver in February before the U.S. specifically asked that Iraq show signs that it was reducing its imports of Iranian gas and power to meet its electricity demand. Clearly these were not forthcoming and, according to sources in Washington close to the Presidential Administration spoken to by OilPrice.com last week, unless Iraq does show the U.S. some compelling evidence to this effect, this will be the last waiver for Iraq to import Iranian energy. “We’ve been down this road before with Pakistan – [with] the government pretending to help in our fight against AQ [Al-Qaeda] but at the same time the ISI [Inter-Services Intelligence] offering all the help it could to [Osama] bin Laden and we’re not playing that game again,” the source underlined. Related: Saudi Arabia Sends Wave Of Supertankers To U.S. Ahead Of Oil Meeting
The parallels between Iraq and Pakistan from the U.S. perspective go beyond just money, as U.S. President Donald Trump made clear recently. At the beginning of January, after Iranian surface-to-surface missiles hit two Iraqi military bases housing U.S. troops, Trump said that he would impose sanctions directly on Iraq if the U.S. military was forced out of the country by further such incidents. Earlier last month, though, 30 107-mm Russian-made Katyusha rockets were fired at the U.S. allied Camp Taji military base north of Baghdad, killing three service members, two of them Americans and one British, according to U.S. and Iraq military officials. This attack was in the same style as the rocket attacks on 4 January on the U.S.’s Balad Air Base near Baghdad and on the Green Zone, both reportedly Iran-sponsored retaliation for the Soleimani killing, and as the multiple rocket attack of 3 December 2019 on the U.S. Ayn al-Asad airbase in Iraq that was a key factor in the U.S. deciding to neutralise the al-Quds leader.
Although these have been the most high-profile attacks on U.S. assets in Iraq to date, and only the 4 January attack was cited as a direct act of retaliation for Soleimani’s killing by Iran, there have in fact been at least 15 further attacks on U.S. military and neo-military personnel (and those of its allies) in Iraq by Iran proxies this year alone, according to U.S. military sources. Given the distaste of President Trump for becoming involved in ‘endless wars in the Middle East’, the U.S. response to this ongoing provocation from Iran via Iraq is almost certainly not going to be of the military variety in either in Iran or Iraq but rather of the financial type favoured by Trump, in the specific form of sanctions against Iraq.
The timing for these is currently ideal for two key reasons. First, it would mean more oil taken off the already high-supply, low-demand market, as Iraq would simply not be able to pay its developers. Second, it would come at a time when Iraq’s finances are already ravaged not just by the ongoing oil price war but also by endemic corruption in its oil sector, as even its own ministers have admitted during rare occasions of candour. In the case of the former, only last week saw Iraq’s economic parliamentary committee recommend that international oil companies (IOCs) operating in OPEC’s second-largest oil producer are paid with crude oil instead of cash and that they lower ‘unnecessary’ costs due to the oil price crash. The committee also proposed delaying payments of foreign debt, including reparations to Kuwait, cutting the salaries of various public sector employees by 60 per cent, and lowering investment spending and non-essential current spending. In the northern semi-autonomous region of Kurdistan, matters are also not helped by the fact that around US$1 billion of its own cash from oil exports is stuck in the Lebanese bank, BankMed, because it is frozen whilst oil trading firm, IMMS, sues the regional government for the return of the sum.
On the second issue, Iraq’s current financial situation looks like it may well become as bad as the situation it faced just five years ago when the Baghdad government itself estimated that dues to the IOCs of US$18 billon would accrue over the course of the year, adding to the US$9 billion in outstanding arrears from 2014. Given that the average remuneration fee per barrel of non-heavy oil produced over an initial threshold level, as delineated in the Long-Term Service Contracts (LTSCs) awarded in the first and second rounds of bidding to international oil companies (IOCs), ranges between US$1.15 (Lukoil, West Qurna 2) and US$5.50 (GazpromNeft, Badra), the question that inexorably bubbles up was how the figure owed to the IOCs could be so high?
One of the reasons is that as the Iraqi government was in so much debt at the time the contracts were awarded in 2009 the IOCs in many cases were asked to make large upfront payments as part of their bid, which would be repaid at a later date. These were broadly understood by the IOCs to be once the initial production thresholds were reached but there were no regular payment schedules incorporated into many of these contracts by the Iraqi authorities. Instead, they were regarded as being repayable on an ‘ad hoc’ basis, as and when it could afford to pay them. Also related to the contracts – which are still in place for many of the fields offered in 2009 - was an ‘infrastructure support payment’ on a per barrel basis of output. This vague category of payments related and still do not just to general field maintenance as it is generally understood in standard oil contracts but also to the ‘development costs and security of the fields’. All of these were billed separately from the remuneration per barrel fee, all were liable for payment by the Iraqi government, and all were highly opaque in their terms of reference. In practical terms, the scale of these payments was often at least as great as the headline per barrel remuneration fee itself and much of these payments went on ‘administration’ of these elements connected to the fields. According to the Oil Minister at the time, Adil Abdul Mahdi, Iraq “lost US$14,448,146,000” from the beginning of 2011 up to the end of 2014 as “cash compensation” payments relating to these fields’ development.
In this precise context, Iraq as a whole ranked 162 out of 180 countries in 2019 by the independent international non-governmental organisation, Transparency International (TI), in its ‘Corruption Perceptions Index’. TI describes Iraq as demonstrating: “Massive embezzlement, procurement scams, money laundering, oil smuggling and widespread bureaucratic bribery that have led the country to the bottom of international corruption rankings, fuelled political violence and hampered effective state building and service delivery.” Although acknowledging that the country’s anti-corruption initiatives and framework have expanded since 2005, TI adds that they still fail to provide a strong and comprehensive integrity system. “Political interference in anti-corruption bodies and politicisation of corruption issues, weak civil society, insecurity, lack of resources and incomplete legal provisions severely limit the government’s capacity to efficiently curb soaring corruption,” concludes the agency.
By Simon Watkins for Oilprice.com
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