Subtitle: Baghdad and Washington have reportedly agreed on a sanctions-compliant mechanism allowing Iraq to repay billions of dollars owed to Iran through food and medicine, highlighting the growing complexity of regional energy, sanctions, and financial diplomacy.

Iraq and the United States have reportedly agreed to settle Iran's gas debt through goods rather than cash, reflecting the growing impact of sanctions on regional energy security.

Iraq and US Agree on Goods-Based Payments for Iran Gas Debt

Iraq and the United States have reportedly reached an agreement that would allow Baghdad to settle billions of dollars in outstanding payments owed to Iran for natural gas imports through the provision of goods, including food and medicine, rather than direct cash transfers. The arrangement represents another attempt to balance Iraq's critical dependence on Iranian energy supplies with Washington's sanctions regime targeting Tehran.

According to Riyadh Uday, a member of the Iraqi Parliament's Electricity and Energy Committee, Iran is seeking approximately $11 billion in unpaid dues from Iraq. A significant portion of these funds remains frozen in Iraqi financial institutions, particularly the Trade Bank of Iraq (TBI), where the money cannot be transferred because of US sanctions imposed on Iran.

"The United States and Iraq have agreed that these funds can instead be used to purchase humanitarian goods such as food and medicine," Uday told Shafaq News, describing the mechanism as a practical solution designed to comply with existing sanctions while allowing Iraq to address part of its financial obligations.

Frozen Funds Continue to Complicate Energy Trade

The dispute stems from Iraq's long-standing reliance on Iranian natural gas and electricity imports to fuel its power generation network.

Under previous bilateral agreements, Iraq deposited payments for imported Iranian gas and electricity into accounts held by the Central Bank of Iraq and the Trade Bank of Iraq. The contracts originally required gas payments to be made in euros and electricity payments in US dollars.

However, following the United States' withdrawal from the 2015 Joint Comprehensive Plan of Action (JCPOA) in 2018 and the subsequent reimposition of sanctions on Iran, Iraq lost the ability to transfer these funds in foreign currencies.

As a result, billions of dollars accumulated inside Iraq's banking system, where they remain largely inaccessible to Tehran except under tightly controlled humanitarian exemptions.

Iran Says Iraq Owes Between $10 Billion and $11 Billion

The issue gained renewed attention last week when Iranian Central Bank Governor Abd al-Naser Hemmati publicly addressed the outstanding debt during meetings with Iraqi officials on the sidelines of Iraqi Prime Minister Ali Falih Al-Zaidi's visit to Tehran.

According to Hemmati, approximately $7 billion belonging to the Central Bank of Iran remains deposited in Iraq, while an additional more than $3 billion is owed to Iran's Oil Ministry.

Combined, Iranian officials estimate that Iraqi government institutions and Iraqi banks owe Tehran between $10 billion and $11 billion for previous exports of natural gas and electricity.

Iraqi and Iranian delegations are reportedly continuing negotiations over how these funds can be accessed while ensuring compliance with international sanctions.

Why Iranian Gas Matters to Iraq

Despite years of efforts to diversify its energy sector, Iraq continues to depend heavily on Iranian natural gas to operate many of its electricity generation plants.

During peak summer demand, disruptions in Iranian gas supplies have repeatedly contributed to nationwide electricity shortages, triggering public frustration and political pressure on successive Iraqi governments.

The recurring payment disputes have therefore become not only a financial issue but also a matter of national energy security.

Baghdad has simultaneously pursued several long-term strategies aimed at reducing this dependence, including:

• Expanding domestic natural gas production.
• Increasing investment in gas capture projects.
• Developing renewable energy capacity.
• Importing electricity through regional interconnection projects with Gulf countries.
• Attracting foreign investment into Iraq's energy infrastructure.

However, most analysts agree that Iraq will remain dependent on Iranian gas for several more years while these projects are completed.

Geopolitical Implications

The reported goods-for-debt arrangement illustrates how sanctions continue to reshape economic relations across the Middle East.

Rather than removing sanctions or permitting unrestricted financial transfers, Washington appears willing to support humanitarian payment mechanisms that provide Iran with access to essential goods without allowing unrestricted hard currency flows.

For Iraq, the agreement offers a possible avenue to maintain energy cooperation with Iran while avoiding violations of US sanctions—a delicate balancing act that has characterised Iraqi foreign policy for years.

The arrangement also reflects Baghdad's increasingly complex diplomatic position. Iraq maintains close economic and energy ties with neighbouring Iran while simultaneously relying on security cooperation, financial access, and international support from the United States.

Any disruption to either relationship carries significant political and economic risks.

Analysis: A Temporary Financial Solution Rather Than a Strategic Breakthrough

If implemented, the agreement could ease immediate tensions surrounding Iraq's unpaid energy bills and help preserve Iranian gas exports that remain essential to Iraq's electricity grid.

Nevertheless, the mechanism does not resolve the structural challenge facing Iraq. As long as Baghdad depends heavily on Iranian energy imports while US sanctions remain in place, similar payment disputes are likely to recur.

The arrangement therefore represents a pragmatic workaround rather than a permanent solution. It demonstrates the flexibility available within sanctions frameworks for humanitarian trade, but it also underscores Iraq's continuing vulnerability to geopolitical tensions beyond its control.

Ultimately, Iraq's long-term energy security will depend less on innovative payment mechanisms than on its success in expanding domestic gas production, capturing flared gas, and diversifying its sources of electricity generation.

 #Iraq #Iran #UnitedStates #EnergySecurity #Sanctions