Iraq's ties with Iran are likely to grow stronger as a result of renewed US economic sanctions on Tehran, experts say.
Iran is Iraq’s second-largest trading partner after Turkey, supplying everything from gas to electricity, fruits and vegetables, and the countries share a 1,500-kilometre border.
Prime Minister Haider Al Abadi said his country would comply reluctantly with the US sanctions, drawing objections from many Iran-allied Iraqi politicians, but later clarified that only the restrictions on dealings in US dollars would be observed.
The US sanctions were reactivated on August 6 after President Donald Trump pulled out of the 2015 Iran nuclear deal. They impose penalties for transactions with Iran in US currency, gold, precious metals, graphite, coal and semi-finished metals, as well as large sales of Iranian rials, issuing Iranian debt and car sanctions. US imports of food and carpets from Iran are also restricted.
However, if any government in Baghdad is presented with a choice between the US or Iran, they will lean towards Iran, Renad Mansour, senior research fellow at Chatham House, told The National.
“Iran has a better track record [with Iraq], it’s much more ingrained in the system both in state and non-state processes,” Mr Mansour said.
Washington and Tehran are Baghdad's two biggest allies and the sanctions put Mr Al Abadi's outgoing government in a very delicate situation.
The embargo hardly helps Mr Al Abadi to retain his role as prime minister in the next Iraqi government, Andrew Parasiliti of the RAND Corporation told The National.
“The US sanctions on Iran put Iraq in a huge bind; Iraq depends on Iranian business and trade, as well as the banking sector," Mr Parasiliti said.
“I don’t think any government in Iraq will be able to abide completely by the tough sanctions on Iran,” Mr Mansour said.
He said Iran dominates the Iraqi market and will not like it if Iraq complies with the sanctions in full, so there needs to be a compromise.
The Central Bank of Iraq announced this week that it has prohibited all Iraqi banks from conducting business with Iran in US dollars.
Iran has very few export markets in the region, and Iraq is one of its biggest and most important, said Amir Handjani, senior resident fellow at the Atlantic Council.
"I don't think that trade will be affected all that much because they trade in local Iraqi or Iranian currency and not dollars and so it could make things either more expensive or cheaper," Mr Handjani told The National.
The sanctions will not stop bilateral trade and relations will remain strong as Iraq is one of the few Arab countries that Iran has a friendly and strategic connection with, he said.
"They have been increasingly aligned on a whole host of issues ranging from expanding trade, the fight against terrorism and cultural tourism. The long-term projection is more about being intertwined than being disconnected from one another," Mr Handjani said.
Further US measures due to hit in November will affect Iran's central bank and the vital oil and gas industry.
Meanwhile, Iraqis in the holy city of Najaf are already feeling the effect of the sanctions, as cash-strapped Iranian pilgrims are forced to stay home.
The Iranian rial has been severely hit by internal economic woes and the US measures, losing about half of its value against the dollar since April.
"Iran sends millions of religious pilgrims a year to Iraq," Mr Handjani said.
Cancellations by Iranian pilgrims could have drastic consequences for Iraq's tourism sector, which last year directly or indirectly employed about 544,500 people.
It also contributed 3 per cent of GDP, or nearly $5 billion, according to the World Travel and Tourism Council.
Tourism is almost exclusively religious in Iraq and is concentrated in Najaf and nearby Karbala, the country's other holy Shiite city.