x Abu Dhabi, UAEWednesday 26 July 2017

Follow the money to measure Iraq's move away from Iran

Iraq is producing and selling more oil; Iran is producing and selling less. The balance between the two states is changing.

Geopolitical shifts move quietly, like slow-moving tectonic plates. To witness one of the tectonic shifts in today's Middle East, follow the oil - Iraqi oil to be exact.

In July, Iraq quietly surpassed the 3 million barrel per day production mark, a figure last achieved more than a decade ago. In August, Iraq exported nearly 2.6 million barrels of oil per day, its highest export total in three decades. This export figure amounted to revenues of nearly $8.5 billion (Dh31.2 billion).

Iraq's security situation and politics are still a sectarian mess - punctuated on Sunday by a death sentence pronounced on Vice President Tariq Al Hashemi, a Sunni rival of Prime Minister Nouri Al Maliki, and a series of suicide bombs that killed more than 100 in Baghdad's Shia districts.

But the underlying economic fundamentals tell a more nuanced story about Iraq's trajectory with oil production and exports breaking records. Neighbouring Iran, on the other hand, is also breaking records of an entirely different kind.

Iran's oil exports in July plummeted to historic lows, amounting to 940,000 barrels a day, according to a study by Rhodium Group, an oil- shipping tracker. This represents a dramatic fall, marking the kind of low that Iran had not seen in a quarter-century since the Iran-Iraq War of 1980-88. It also dropped Iran far down the Opec totem pole to become one of its smallest exporters, ahead of only Algeria, Ecuador and gas-rich Qatar.

To understand what Iran's fall in exports means in dollars, consider this: Iran made $9.8 billion in revenue in July 2011. In July 2012? $2.9 billion. While Iraq is pulling in nearly $9 billion a month, Iran is sputtering at under $3 billion.

These are dramatically contrasting numbers. Even assuming that Iran makes up some of these losses by covert, non-documented oil sales, Iran's oil patch is in trouble and, therefore, so is its economy. Oil accounts for 80 per cent of hard currency earnings and some 60 per cent of fiscal revenues.

Iran is having trouble finding buyers for its oil because of stepped-up sanctions, reductions by its key Asian buyers and global banks' fears of doing business with Iran. But Iran's oil decline is not just a story of shut-in exports, but also of declining production.

In July, the same month that Iraq broke the 3 million barrel per day mark, Iran also broke the 3 million barrel mark, but on the way down, producing 2.9 million barrels per day. This marked the first time in 20 years Iran's production fell under 3 million barrels.

Enter the geopolitics. Iraq and Iran have been historic rivals. The two countries fought their brutal 1980s war, with some 500,000 dead on both sides, and Saddam Hussein liberally deploying chemical weapons against what he called "Persian insects".

The 2003 war that overthrew Hussein provided Iran a rare opportunity to shape Iraq's political future. It was natural they would choose to do so. Many of Iran's current political elite, particularly members of the politically and economically powerful Islamic Revolutionary Guards Corps, established their reputations in the fight against Iraq. Whether reformist or conservative, most members of the Islamic Republic elite agree on one thing: Iraq should never again be a security threat to Iran.

As a result, Iran poured money, materiel and men into the Iraqi theatre over the past decade, becoming a major player in Iraq's internal politics. Many of the Iraqi political leaders in power today spent some of their formative exile years opposed to the Saddam regime while living in Iran. The Commander of the IRGC's Qods Brigade, Qassem Suleimani, boasts about his power in Iraq - and it's no empty boast. He is indeed a formidable power broker.

But Iran also has often overplayed its hand. Popular Iraqi feelings toward Iran - largely favourable in the early years after the war - has fallen significantly. Iraqi nationalism should not be discounted, even among Shia leaders with close ties to Iran.

Meanwhile, anger towards Tehran has mounted among opponents of Mr Al Maliki. Despite the prime minister's apparent upper hand in Baghdad politics, he is vulnerable to a political challenge. In July, he fought off a no-confidence vote and one charge that is frequently levelled at him is that he is a "stooge" of Tehran. It's a charge that isn't fully supported by Mr Al Maliki's actions, but one that hurts nonetheless.

Politicians in today's Iraq are more careful about waving the Iranian flag. Even Muqtada Al Sadr, the Shia cleric with close links to Tehran, has turned against Iran's political allies in Iraq recently for populist purposes. Tehran pulled him back from the brink, but Mr Al Sadr's move reflects the instincts of a populist who knows the way the winds are blowing.

Iraqi politics remains muddled. Its sectarian divisions have sharpened. Violence clearly remains a threat. And yet, amid these problems, Iraq is pushing oil production uphill, while Iran's is falling.

As Iraq's coffers fill and Iran's empty, a balance will emerge. Tehran will lose the ability to decisively influence Iraqi politics. Meanwhile, Iraq will improve relations with Arab powers who are hostile to Tehran's influence. China and other Asian buyers will look more to Iraq as a major new source of oil. And Baghdad will re-emerge in its traditional role as a regional power, alongside Iran, Egypt and Saudi Arabia.

As Iraq grows richer, it will be able to play "rial-politik" on its own and, more importantly, be less swayed by outsiders waving wads of cash. As Iraq stabilises over the next decade, its geopolitical influence will grow.

There is no abrupt shift in the balance of power today, but the tectonic plates are moving. Iraq and Iran are moving towards equilibrium again, and that will benefit Iraq's long-term stability.

 

Afshin Molavi is a senior adviser at Oxford Analytica and a senior fellow at the New America Foundation

On Twitter @afshinmolavi