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Iraq Report: March 6, 2008

Sunnis Say Iran Working To Solidify Economic Control

By RFE/RL analyst Kathleen Ridolfo

Ahmadinejad (left) with Prime Minister Nuri al-Maliki in Baghdad

Even before his foot touched Iraqi soil, Iranian President Mahmud Ahmadinejad had much to celebrate.

His country has entrenched itself in the Iraqi economy, so much so that observers say Iraq is becoming economically, if not politically, subordinate to Iran. This point has not been lost on the Sunni Arab press in Iraq, nor by pan-Arab dailies, which surmised that Tehran has shrewdly filled a vacuum long ignored by Arab leaders.

Ahmadinejad's visit to Iraq has been widely described as "historic," primarily because he is the first Iranian leader to visit Iraq in 29 years. But he is also the first senior regional leader to visit Iraq since the fall of the Hussein regime. Sunni observers claimed that the fact that he dared stay overnight in the Iraqi capital was proof enough that Iran's military has control over Baghdad. But it is growing economic integration that has Sunni Arabs -- both in Iraq and across the region -- most worried.

Iraq is Iran's largest export market. Iraq imported an estimated $1.3 billion in goods from Iran in 2006, according to U.S. figures. Estimates for non-oil trade since 2006 have ranged as high as $2 billion, some 97 percent of which is one way from Iran to Iraq. Iran expects trade to soar to $10 billion over the next five years.

In June, Iran opened a branch of Bank Melli in Baghdad -- the same bank that the U.S. Treasury identified last year as a financial conduit to facilitating the purchases of sensitive materials for Iran's nuclear and ballistic-missile programs. The bank also provides banking services to the Islamic Revolutionary Guards Corps (IRGC) and its Qods Force, which the United States says is providing financial and material support to militias in Iraq.

"From 2002 to 2006, Bank Melli was used to send at least $100 million to the Qods Force," the U.S. Treasury warned in October 2007. "When handling financial transactions on behalf of the IRGC, Bank Melli has employed deceptive banking practices to obscure its involvement from the international banking system."

Two agreements on electricity supply were also solidified during Ahmadinejad's visit: one is a 400-megawatt electricity line running from the Iranian port city of Abadan to the Iraqi town of Alharasa, which should become operational this year; the second is on a transmission line that will run from the Iranian Kurdish city of Marivan to Panjwin in Iraqi Kurdistan. Tehran already signed a $150 million contract last year to build a 300-megawatt power plant in Baghdad, and it supplies power to Khanaqin, in Iraq's Diyala Governorate.

Ahmadinejad was expected to attend groundbreaking ceremonies for two more power plants in Al-Najaf and Al-Amarah during his visit but cancelled, allegedly because of time constraints. Iran's Deputy Energy Minister Mohammad Ahmadian said on February 29 that Iran intends to link its power networks to Iraq through nine border points, IRNA reported. The deals will benefit Iran's longtime allies in Iraq, the Shi'a and the Kurds.

Other agreements include cooperation in education, customs affairs, insurance, and transportation; the establishment of industrial towns; supervision of imports; and the implementation of joint industrial projects. In addition, Iran offered Baghdad a $1 billion soft loan, though Iraq reportedly had a budget surplus of between $21 billion and $28 billion last year.

Good For Iraq?

Iraq's locally produced products, including agricultural products, are already struggling to compete in marketplaces flooded with Iranian goods, the "Ilaf" website reported on March 2. Farmers say that Iranian goods are sold at far below Iraqi market prices, which places a strain on local producers.

In addition to official trade, smuggling generates hundreds of millions of dollars a year. The head of Iraq's Supreme Audit Board said in October that at least 15,000 barrels of crude oil are smuggled everyday from Iraq's southern fields to Iran and the Persian Gulf states. In reality, the figure could be significantly higher. In January 2007, U.S.-based petroleum expert Jerry Kiser told the BBC that up to 300,000 barrels per day are smuggled from Al-Basrah to Iran through smuggling routes established by Saddam Hussein when Iraq was under sanctions in the 1990s.

The smuggling of alcohol between Iraq and Iran along the northern borders is estimated to be worth $2.5 million a day. Food, illicit drugs, livestock, cars, and other commodities also fuel the black market.

Sunni Press Criticizes Visit

Sunni Arabs have attacked the latest agreements forged between the two countries. Al-Sharqiyah television, which represents the Sunni Arab perspective, claimed on March 3 that Ahmadinejad "asked Iraqi officials to merge the Iraqi economy with the Iranian economy and ensure that they complement each other, particularly in the financial and industrial areas, with a view to breaking the sanctions imposed on Iran in the fields of banking and money transfers."

Ghassan al-Atiyah, who heads the Iraqi Foundation for Development and Democracy, told Al-Sharqiyah on March 2 that Ahmadinejad's visit "will give the impression that Iraq is to be politically and economically subordinate to Iran, which will raise much Iraqi concern, particularly since there is a well-established Iraqi political inclination toward independence." Asked about the $1 billion Iranian loan, he said: "The Iranian aid to Iraq is in reality a shop window for Iranian economic activities in Iraq, and consequently if we follow this line we will find that it is merely economic subordination to Iran.... Rather than unifying the Iraqis, this visit will split them more and arouse feelings of mistrust and fear" among Sunni Arabs.

Summarizing the Shi'ite perspective on relations with Iran, Shi'ite legislator Hamid al-Mu'allah told Al-Jazeera television on March 2: "Iran came [to Iraq] while [other states] were absent. We [Shi'a] regret the strange paradox that the absentee is calling to account the one who is present. The other [Arab states] should also come and find themselves a place in Iraq."

Indeed, that point was not lost on the pages of the pan-Arab press this week. A March 3 commentary published in "Al-Dustur" noted: "This visit indicates the growing status and influence of Iran as a regional power.... Ahmadinejad is in Baghdad, while all Arab leaders have not been in Iraq for the last two decades."

A March 4 commentary in the same daily written by Husayn al-Rawashdah adopted a similar line. Rawashdah said it would have been "acceptable to understand the protests staged in our Arab world against Ahmadinejad's visit to Iraq if there was a united Arab stance towards Iraq, its occupation, and the U.S. threats to Iran, and if the Arab world had already settled its crises in Lebanon and Palestine in particular."

A commentary by Wahid Abd al-Majid in Cairo's "Al-Wafd" noted: "It seems that it was only the Turks [referring to Turkey's cross-border incursion last week] who were compelled to cross the border on a specific and brief mission were the ones who violated Iraq's sovereignty. As for the Iranians who infiltrated Iraq and influenced its people, they are not guests and not even partners.... Rather they are the owners of the country." In a scathing criticism of Iraq's Shi'ite-led administration, Abd al-Majid continued, "As far as the Iraqi rulers, or to be fair, most of them, are concerned, everything these Iranians do tastes better than honey."

A March 2 commentary in "Ilaf," a Saudi-funded website, claimed: "Now that Iranian agencies have infiltrated the Iraqi state agencies and religious parties whose vile political practices have been exposed up and down the country, Iran's aim is to subjugate the Iraqis and impose a de facto situation on them. That is the odious psychological aim that will fulfill the Tehran rulers' cheap desire for revenge" for the suffering imposed by Saddam Hussein on Iran.

Meanwhile, the Iranian press described the visit as a success. Golam Reza Karami, a member of the Iranian parliament's National Security and Foreign Policy Committee, said on March 3 that Ahmadinejad's visit confirmed Iran's strength in the region. "Although there are no Iranian troops in Iraq, the results of Tehran's spiritual power in Iraq are fully visible," ISNA quoted Karami as saying.

Iranian Foreign Minister Manuchehr Mottaki, who accompanied Ahmadinejad to Baghdad said Iran is able to resolve a number of concerns existing in the region, so those countries making wrong interpretations against Iran must reform their policies and interpretations, ISNA reported on March 3.

While it is natural to assume that Iraq would establish economic ties to neighboring states in the post-Hussein era, the establishment of such ties with Iran could have substantial negative effects on the security situation, particularly with regards to the Sunni Arab community.

While the Iraqi government has seen few overtures by neighboring Arab states in recent years, strengthened relations with Iran is an affront to the sacrifices Sunni Arabs say they have made in recent months in the fight against Al-Qaeda. The Iraqi government is alienating Sunni Arabs at a time when it should be building on recent strides.

The failure of Iraqi leaders to address Iranian support for Shi'ite militias before the government concluded an array of investment and integration projects severely damages the government's credibility among the Sunni Arab population, and by extension, its Sunni Arab neighbors.

Trade Flow Increases, But Mostly From Tehran To Baghdad

By Gulnoza Saidazimova

Iranian trucks must unload their cargoes at the border, for Iraqi trucks to take over

Since the collapse of the Saddam Hussein regime in 2003, Iraq has seen a large influx of goods from various countries, most prominently from Iran.

Iraq is Iran's second-largest, nonoil export market. Iraqis bought some $1.3 billion worth of goods from Iran during 2006. And estimates for nonoil trade during 2007 are as high as $2 billion -- but almost entirely one way -- from Iran to Iraq, according to a report by the U.S. Congressional Research Service issued in January.

Iraq imports a wide variety of goods from Iran, including air conditioners, construction material, office furniture, carpets, clothes, medicine, fish, spices, and fruit.

Hundreds of Iraqi trucks pass through border checkpoints every day. However, fuel trucks are the only Iranian vehicles that are allowed to enter Iraq. Iranian trucks that carry food or other products usually go to border "transloading" points where they are unloaded and their cargoes are transferred to empty Iraqi trucks.

A seller in the Iraqi city of Al-Kut, near the Iranian border, tells RFE/RL's Radio Free Iraq (RFI) that he regularly stocks Iranian produce that has passed through the transloading points.

"The imported goods from Iran stand out because of their low prices and good quality, which is the reason for their popularity," he says. "When you compare them with local [Iraqi] goods, you find that the local products are expensive and of lower quality compared to those being imported. Even vegetables are being imported from Iran -- as well as poultry, meat, canned foods, carbonated drinks, and dairy products. And they are all lower in price and better in quality."

Many Iraqi shoppers say they prefer Iranian food as a cheap alternative to products imported from other Persian Gulf countries. They say Iranian produce also is more competitive in terms of quality and durability than produce from China.

Shoddy Imports?

Majid Abd al-Husayn, from the predominantly Shi'ite city of Karbala in southern Iraq, says Iran has "excellent products that taste good and we buy them. For example, raw cream is good and we buy it. Regarding other dairy products, I find that the Iranian products are tastier than their Saudi equivalents."

Ties between the Shi'ite Iranian traders and sellers in Karbala have been on the rise since the ouster of Hussein's Sunni-dominated regime and the reemergence of Karbala as a pilgrimage destination for Shi'ite Muslims. Iranian merchants also have been trying to increase their presence in Karbala by organizing trade fairs in the city.

However, not everyone is happy about the growing amount of imports from Iran. "We have observed that the goods reaching Iraq are not of the quality level we desire for Iranian goods coming to Iraq. This is because the quality of the Iranian goods reaching Iraq is not the same as what we have seen of Iranian production," says Shakir Abd Odeh Shhayib, the head of the Karbala Chamber of Commerce.

"While it is true that the Iraqi and Iranian merchants may be responsible for this, some Iranian merchants are seeking to increase their profits by exporting cheap goods to Iraq," he says. "And some Iraqi merchants are driven by their desire for a quick profit to bring in below-standard goods."

Nowruz al-Khaffaf, head of the Kurdistan Contractors' Association in northern Iraq, agrees. He tells RFI that Iraq's dependence on imported goods has forced local producers and sellers in northern Iraq to suspend their work. Al-Khaffaf wants Iraqi authorities to protect local producers by limiting imports from Iran.

"In my personal opinion, the Kurdistan regional government should do nothing. It should not import. We don't want any water or anything else [from Iran]. Let them only provide electricity. The entire regional budget should be allocated to [providing] electricity," al-Khaffaf says.

"Is it reasonable for [Iraq], with its fertile lands, to import cucumbers and tomatoes from Iran and Turkey?" he asks. "We even import dates from there. We have date [groves] stretching from Ba'qubah all the way to Al-Basrah. If you go now to any shop selling fruit, you will find canned date products from Turkey and Iran. Is this reasonable?"

Religious Tourism On The Rise

During Iranian President Mahmud Ahmadinejad's historic visit to Iraq this week, Ahmadinejad and Iraqi President Jalal Talabani signed seven agreements on issues including industrial development, trade, and customs.

Sunnis in many Iraqi cities demonstrated against the Iranian leader's visit (epa)

Improved relations between the two countries are not limited to trade only. Tourism also has been on the rise in recent years.

Since the fall of the Hussein regime in 2003, Iranian pilgrims have been able to visit holy Shi'ite shrines in Karbala, Al-Najaf, and other sites in neighboring Iraq.

Despite a lack of security, Iranian pilgrims make their way to Iraq in large numbers, with 1,500 to 2,000 entering each day.

About 500,000 Iranian Shi'ite pilgrims visit Iraq every year, and hundreds of Iranian religious scholars head to Karbala and Al-Najaf to study every year. Iranian authorities say they hope the annual number of Iranians visiting Iraq eventually will increase to 3 million.

"The number of visitors differs in line with the occasions, but the average is between 100 to 150 per week," says Nasir al-Juburi, who owns a hotel in Karbala. "We receive Iranian visitors as well as those of other nationalities who come to Karbala to commemorate the memory of [Imam] al-Husayn and for other [occasions]. The ages of visitors varies. But a large portion of them are elderly -- between 70 and 80 years old."

Some Iraqis see the large number of Iranian visitors to their country as a key reason for the revival of the tourism industry that is now under way. Others, however, complain about rising prices and other inconveniences that they blame on the influx of foreigners.

Iraqis, for their part, visit Iran for similar reasons, with about 1 million Iraqis heading to holy sites in Iran each year. Tahsin Ali, the owner of a travel company in Al-Kut, says Iraqis also go to Iran for recreation and medical treatment.

"Tourism between Iraq and Iran has undergone major development since the fall of the [Hussein] regime," Ali says. "Most [Iraqi] travelers to Iran are in one of three categories: first, for a religious visit; second, for recreation; and third, for medical treatment -- because Iran has capable doctors, modern equipment, and lower prices for medical care than nearby Arab countries like the [United Arab] Emirates, Jordan, and Egypt."

Contributors to this report include Radio Free Iraq correspondents Ahmad al-Zubaidi, Shamal Ramadhan, Mustafa Abd al-Wahid, Saif Abd al-Rahman, and Ayad al-Gailani.

Is Rising Dinar An Attractive Investment?

By Antoine Blua
"Every dinar you buy represents a share in Iraq's bright new future."

That's how one website selling Iraqi dinars tries to convince potential investors to acquire the currency.

A commonly quoted fact on such "dinar" websites is that the Kuwaiti dinar plunged to a worth of about $0.10 after Iraq invaded Kuwait in August 1990. But within a few years the Kuwaiti dinar had rebounded to be worth more than $3.

That means that a $1,000 investment during the first Gulf War would yield the investor a profit of some $30,000.

Could the same thing also happen with the Iraqi dinar? The currency has already risen more than 60 percent in value against the dollar since the new banknotes began to circulate.

The U.S. Coalition Provisional Authority introduced the new dinar in October 2003 at the initial rate of 2,050 to $1. Today the exchange rate is about 1,230 dinars to $1.

Robert Powell, the Iraq analyst at the Economist Intelligence Unit, says the dinar's appreciation against the dollar is the result of an antiinflationary strategy -- not necessarily a reflection of the demand for the currency.

"It's mainly a Central Bank [of Iraq] policy to appreciate the dinar, which they do through auctions," Powell says. "So sometimes they will sell a limited number of dinars and then, as such, that causes [the currency] to appreciate. So they simply ration the supply of dinars. And obviously if you lower the supply of something the price goes up."

Since 2006, the Central Bank of Iraq has also implemented several interest-rate increases in an effort to counter rising inflation and an increase in "dollarization" -- people using dollars instead of the local currency.

But Powell says he thinks the pace of the dinar's appreciation against the dollar will slow in the coming two years compared with 2007. "It looks like at the moment, having gotten inflation below 10 percent -- which was the target -- then they're going to end this policy and probably reintroduce the [informal] peg [to the dollar] that they had in place from around 2005 to late 2006," he says.

However the "dinar" websites are banking on the hope that the Iraqi currency will gain even more strength against the dollar.

Promoters of that hope explain that the expansion of stability in Iraq will stimulate the economy and the value of the dinar, creating huge profits for dinar speculators. "Imagine the growth potential of the Iraqi dinar once Iraq recovers and begins to enjoy the potential revenue of a country rich in oil and other natural resources," says one website.

"In the near term, frankly, the predominant question should be: 'If I hold Iraqi dinars, who is going to buy them off me?'" Powell says. "Maybe in the long term, if Iraq became stable, if Iraq became an economic success, if [Iraqis] were able to utilize their full oil potential, then the currency could appreciate enormously. But making such a bet at this stage seems highly speculative. [Kuwait] was liberated in the space of about six months whereas the Iraq situation is now going toward a fifth year. And it's a long, long way to go before we can possibly see a stable, successful Iraq."

Two years ago, the state of Utah's Division of Securities included Iraqi currency trading on its list of the most common investment scams. Among other things, the agency warned that the dinars couldn't be freely traded on the world market. To put it simply, you couldn't physically trade dinars anywhere except in Iraq.

Today, dinars are exchangeable at select U.S. banks and currency traders.