Iraq's plan to diversify regional trade relations aims to fend off Iran's influence

UAE and Saudi Arabia have both allocated $3 billion for joint investment funds with Iraq

Sheikh Mohamed bin Zayed, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces, welcomes Iraq's Prime Minister Mustafa Al Kadhimi upon his arrival in Abu Dhabi, UAE. The EmirShow more

Iraq’s strategy of diversifying its trade relations is aimed at repelling Iran’s influence in the country, by reaching out to the wider region for investment opportunities, experts and officials said on Monday.

Saudi Arabia and the UAE separately announced this week that they will invest $3 billion in Iraq following Prime Minister Mustafa Al Kadhimi’s visit to the Gulf. The joint funds raise Gulf financial commitments in the country of 40 million people to levels not seen in decades.

"By reaching out to UAE and other gulf states, Iraq is trying to regain alternative investments and lifelines so it's not stuck to one primarily trading partner," Renad Mansour, director of the Iraq initiative at London's Chatham House, told The National.

“Iraq at the moment is primarily linked to investments and economic relations with Iran and to a lesser extent Turkey, which puts it in a position where it is behest of Iran and its interest,” Mr Mansour said.

The country is not only diversifying away from oil as a resource but is also looking at different economic partners rather “than being stuck to one which is Iran”, he said.

Due to years of conflict and rampant corruption, Baghdad needs the support of Gulf states to revive its economy. Oil production was cut in the first half of 2020 as oil demand crashed when the world ground to a near-halt due to Covid-19 lockdowns.

Iraq’s economy shrank by almost 11 per cent in 2020 due to the pandemic.

So far the government is trying to be less dependent on oil and the country currently exports dates and bitumen – for road surfacing – to the UAE.

The UAE’s initiative aims to strengthen economic and investment relations, create new opportunities for cooperation and partnership, and advance economic, social, and developmental growth in support of Iraq, a statement by state news agency, WAM, said.

Saudi Arabia said the joint fund will be for the "benefit of the Saudi and Iraqi economies, with the participation of the private sector from both sides.”

It was welcomed by politicians and parliamentarians who claim the diversification will assist in stabilising the country.

“The visit to Riyadh and Abu Dhabi can be seen as part of a strategic tour that may result in a rearrangement of the region's priorities and to help secure Iraq’s role in the Arab world,” Raad Al Dahlaki, an Iraqi member of parliament said.

“It is a basis for restoring Iraq’s role in the region and to confront challenges and plots facing the Arab cause,” Mr Al Dahlaki said.

Iraq’s populist cleric, Muqtada Al Sadr, said Baghdad's move towards diversifying its trade relations is a "step in the right direction."

"We have a rich history with the two countries, and let us have a prosperous future with them," Mr Al Sadr said.

The cleric commands a large following among the urban poor of Baghdad and southern cities and was once the leader of a powerful militia who fought against American forces stationed in Iraq.

Baghdad lies on the fault line between the Shiite Muslim power Iran and the Sunni-ruled countries that are Tehran's regional rivals, among them Saudi Arabia.

"Let Iraq be the hub of peace in the entire region," he said.

What happens next?

Over the years, corruption and economic mismanagement have worsened conditions even further for the country to function adequately.

During times of economic crises, Iraq looks for foreign investment but as soon as oil prices rise, it often allows politics to carry on as usual, Mr Mansour said.

The opportunities presented by Abu Dhabi and Riyadh present an important lifeline to the Iraqi economy as it’s “economic system is rotten.”

“The political economy of corruption will most likely mean that any of these types of investment deals will not meet the ends for which they seek,” Mr Mansour said.

It will not resolve Iraq's “fundamental economic problem,” he said.

Cash flow is not the issue but instead is more of a structural problem, particularly the question of how funds are split between political parties, he said.

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In pictures: official Iraqi visits to Saudi Arabia