Regional Economic Integration Comes into Focus at Second Baghdad Conference

The second meeting of the Baghdad Conference on Cooperation and Partnership took place in Amman, Jordan on December 20. Last year’s meeting in Baghdad initiated a process for multilateralism, dialogue, and cooperation between Iraq and its neighbours, some of whom met for the first time in years. This year’s gathering in Amman cemented the initiative as an annual regional summit and, importantly, added economic integration to the regional agenda.

In August 2021, former Iraqi prime minister, Mustafa Al-Kadhimi, with the support of French president Emmanuel Macron, managed to bring together officials from Egypt, Iran, Jordan, Kuwait, Qatar, Saudi Arabia, Turkey, and the United Arab Emirates, as well as representatives from the European Union, Gulf Cooperation Council (GCC), Arab League, Organisation of Islamic Countries, and the United Nations. This year, in addition to all those who participated in the first conference, the two missing GCC states—Oman and Bahrain—were present as well.

Al-Kadhimi largely succeeded by focusing on foreign policy, particularly as he sought to ease regional tensions. He was instrumental in revitalising relations with Iraq’s neighbours, which had been strained for years. He was also key in kickstarting dialogue between Iran and Saudi Arabia, as well as setting the stage for Iran-Egypt and Iran-Jordan talks. His hosting of the first Baghdad Conference positioned him—and by extension Iraq—as a trusted regional intermediary.

That is why Iraq’s recent transition to a new government was initially met with concern around the region. Mohamed Shia Al-Sudani’s seemingly pro-Iran stance was expected to once again strain Iraq’s ties with its Arab neighbours. There were reports that Saudi Arabia paused negotiations with Iran because of this change of government in Baghdad. But Al-Sudani’s efforts to retain the mantle passed by Al-Kadhimi put regional leaders at ease. He has committed to continuing his predecessor’s efforts to secure regional and international support for the development of Iraq—Baghdad remains in the title of the conference for this reason.

At the conference, Al-Sudani said, “The priority now lies in strengthening the bonds of cooperation and partnership between our countries through interdependence in infrastructure, economic integration and joint investments.” To that end, he argued that regional states should “strive to work together to transform from consuming to manufacturing countries by establishing joint industrial zones that enhance our collective industrial capacity and link the supply chains to one integrated chain capable of competing in global markets and launching mega projects in various sectors.”

By focusing on economic opportunities, Al-Sudani connected the Baghdad Conference to a wider agenda. He was also making an appeal for support from partners beyond the region, such as the European Union. EU High Representative Josep Borrell was present at the gathering in Amman.

In the Joint Communication on a “Strategic Partnership with the Gulf,” which was published in May 2022, the European Union praised the first Baghdad Conference and committed to supporting the region-led process. While France was the only European country supporting the Iraqi initiative initially, the European Union called for a follow-up process to the Baghdad Conference “with EU involvement” and as part of “a structured, EU-facilitated dialogue process”.

In the face of rising competition with other external players, such as China, Russia, and even India and Japan, European countries and the EU are falling behind. But Europeans can make significant contributions towards regional dialogue on economic integration by helping to create multilateral platforms, transfer know-how and technology, and provide financial support. European expertise can help the region find ways to jointly tackle the basic issues that have impeded economic growth and have resulted in spillover effects, such as increased food insecurity and inability to mitigate the rising challenges of climate change.

Establishing a new development fund by using existing instruments and institutions is key. This would mean including sovereign wealth funds, co-investment programmes, economic zones, or multi-party investment initiatives through regional banks or multinational institutions. The Islamic Development Bank, the various state-owned sovereign wealth funds within the GCC, as well as the European Investment Bank, and the European Bank for Reconstruction and Development, have all supported projects that have a multilateral or regional outlook. This could happen through matching funds allocated to the initiative by involved parties.

Through its Global Gateway project, the EU and regional partners could also “explore joint initiatives in third countries through triangular cooperation, financial support, capacity building and technical assistance.” The EU can draw in the regional players to help with reconstruction efforts in Iraq. The Global Europe Instrument foresees projects and investments in Iraq as well. The Instrument aims to fund international cooperation through grants, technical assistance, financial instruments, and budgetary guarantees.

Cooperation in developing a particular port or completing segments of Iraq’s national railway should be the priority. Exploring joint investments in Iraq’s oil and gas industry as well as green energy transition should also be considered.

Dust and sandstorms, as well as drought and water scarcity, are causing huge financial and human costs for Iraq, but also for all neighbouring countries, as well. Key projects that combat shared environmental challenges, which have proven to be the easiest avenue for cooperation, should be explored.

Even though various regional tensions remain, the outlook for regional cooperation and multilateralism seems bright and the Baghdad Conference is helping define a framework for broader regional cooperation, with integration as its aim. As Dutch diplomat Jeanine Hennis-Plasschaert, Special Representative of the Secretary-General for the United Nations Assistance Mission for Iraq, reflected during the meeting, the “demonstration of regional partnership” can now “result in a number of concrete steps.” Hennis-Plasschaert added that these steps “might even lead to a framework for regional integration as an effective means of achieving prosperity, peace and security.”

Photo: King Abdullah Press Office

Attendance in Baghdad Shows Iran's Commitment to Regional Diplomacy

The Baghdad Conference for Cooperation and Partnership, which took place on Saturday, was intended to boost Iraq’s regional profile, gather political and economic support for the country and, most importantly, provide a unique venue for diplomatic engagement between Iraq and its neighbours—Iran, the United Arab Emirates, Qatar, Saudi Arabia, Kuwait, Turkey, Jordan, and Egypt.

The decade since the Arab Spring has been marked by rising tensions in the Middle East. The Baghdad Conference offered a hopeful message that regional actors could move beyond tensions and violence. While it was the first time in recent years that officials from Iran and its Arab neighbours had met in such a multilateral format, the conference was not solely intended to foster reconciliation between Tehran and Arab capitals. Numerous intra-Arab conflicts had threatened regional security and the conference presented an opportunity to begin the mending of those fractured relations.

Such a gathering would have been impossible to imagine even just a few months ago. With the help and support of French president Emmanuel Macron, approval from the Biden administration, and the buy-in of all participating states, Iraq successfully managed to play the role of regional mediator.

Since beginning his term in May 2020, Iraqi Prime Minister Mustafa Al-Kadhimi has made it a priority to facilitate greater regional diplomacy. But the conditions were not right until Donald Trump’s departure from the White House, the end of the GCC rift following the Al Ula Summit, and the commencement of back-channel talks between Iranian security officials and both Saudi and Emirati counterparts. Moreover, the impact of the COVID-19 pandemic, which underlined the interconnectedness of the region and the importance of coordinated economic and public health interventions, made Khadimi’s call for dialogue more convincing.

While the summit itself may have comprised more of symbolism than of substance, the mere presence of officials from the nine countries in the same venue and the numerous bilateral talks that took place on the sidelines provided a foundation for further regional diplomacy.

Last December, I suggested that 2021 could be the year that Iran and the GCC states enter into a robust dialogue. In recent years, Iranian leaders have increasingly focused on regional dialogue, reacting to an overall deterioration in regional security and the increased risk of escalation. In 2019, the Rouhani administration proposed the Hormuz Peace Endeavor (HOPE), a plan of action for regional diplomacy on issues including energy security, arms control, and nuclear non-proliferation. A summit was envisioned as one of the initial components of the plan.

The HOPE plan was not taken seriously by many Arab officials nor analytics, who remained sceptical that the plan put forward by the Rouhani administration had backing from the Iranian deep state, which had taken an interventionist line in the region in recent years. But today, the participation of the Raisi administration in the Baghdad Conference provides evidence that the importance of regional diplomacy is understood even among Iran’s so-called hardliners.

Iran’s new foreign minister, Hossein Amir-Abdollahian, made clear that regional diplomacy would be a cornerstone of the Raisi administration’s foreign policy. Of course, there are competing visions of what such diplomacy should entail. Amir-Abdollahian was unhappy about Syria’s exclusion from the Baghdad Conference, and it is precisely for that reason that his next trip after Baghdad was to Damascus. That the conference took place, however, should encourage Iranian leaders to put grudges aside.  Extended hands will encourage Iran to unclench its fists.

Photo: IRNA

Dysfunction at the Border Jeopardizes Growth of Iran-Iraq Trade

When the United States re-imposed secondary sanctions on Iran in November 2018, the Rouhani administration belatedly decided that increasing the country’s non-oil exports, particularly to Iran’s regional neighbors, would become a central aim of economic policy.

In 2019, Hossein Modarres Khiyabani, currently the acting industry minister, stated that Iran’s neighboring countries currently import USD 1.2 trillion worth of goods each year, of which Iran accounts for USD 24 billion, equivalent to a 2 percent share. The government aims to grow regional exports to USD 48 billion by the Iranian calendar year ending in March 2022.

Among these countries, Iraq has emerged as Iran’s leading regional trade partner. Iran and Iraq share religious and cultural connections and a border nearly 1,500 kilometers long. But it is Iraq’s large consumer market that makes it ideally suited to play a role in Iran’s non-oil trade agenda. The quality of products produced in Iran is compatible with standards in the Iraqi market, which means a wider range of Iranian producers can target exports to Iraq. This also makes Iraq an arguably more important export destination than China.

While exports to China totaled USD 9.5 billion in the Iranian calendar year ending in March 2020, exports to Iraq were a close second at USD 8.9 billion. Yahya Ale-Es’haq, Chairman of the Iran-Iraq Joint Chamber of Commerce, notes that the composition of trade with China is dominated by raw materials, whereas trade with Iraq includes value-added goods that generate employment in Iran.

“Iran and Iraq set a 5-year target to increase bilateral trade to $20 billion per year in 2018. This has been hampered this year to some extent, partly due to the trade restrictions caused by the COVID-19 outbreak and partly because of Iraq’s reduced purchasing power, a consequence of depleting global oil prices,” Ale-Es’haq told Bourse & Bazaar.

In response to economic pressure at home, Ale-Es’haq explained, Iraq is trying to be more frugal and to address public demands to deal with rampant corruption.

“In reopening Mandali border crossing earlier this month, Iraqi Prime Minister Mustafa Al-Kadhimi said he aims to launch a full-throttle battle against corruption in the borders and customs offices. This is because the central government is not being given its share of customs revenues.”

Officials at the Islamic Republic of Iran Customs Administration (IRICA) describe the Iraqi prime minister’s vow to fight corruption as an internal matter.

“Our customs offices and checkpoints are disciplined and every step and procedure is documented in our electronic system. The Iraqi PM was addressing a matter of national governance as Iraq is a nation made up of different ethnic, religious, tribal and political groups. Each of these have their own regulations and practices which, of course, extend to economic activities of which all groups claim a share,” a spokesperson for IRICA stated.

But Iranian exporters feel that their own government should be doing more to support trade.

Ali Hosseini Sakha is the owner of Nasl-e-Jonoub-e-Karoun Trading Company, based in the southern province of Khuzestan. The company maintains an office in the Iraqi city of Basra. Sakha has been trading in Iraq for over 25 years and last year exported nearly USD 22 million worth of foodstuff, construction material, and minerals across the border.

Sakha also runs a research center under the auspices of the Trade Promotion Organization of Iran, an agency of the Ministry of Industry. He conducts market research and organizes trade forums to try to facilitate greater cooperation and trade on both sides of the border.

“Based on our latest research, the share of Iranian commodities in the Iraqi market amounts to no more than 3 percent. You can hardly find Iranian goods when walking through supermarket aisles in Iraq and that’s a shame,” he said.

Sakha points to a lack of coordination among government agencies. While the government provides a budget to wide range of agencies and to each Iranian province for export promotion activities, the funds are largely squandered on forums and meetings or allocated to those with “special interests.”

Moreover, Sakha explained that Iranian exporters are increasingly reliant on unreliable middlemen in the hopes of getting their products into the Iraq market without having to do the hard work of distribution themselves.

“Iranian exporters take their goods to the border for sale and usually end up making deals with middlemen because that’s how they think they can ‘get ahead in the game.’”

The unregulated middlemen then sell goods on to “the real Iraqi merchants.” Sakha noted that it is not uncommon for middlemen to disappear without having made payment for the goods they have just taken across the border.

He believes that customs officials and the joint Iran-Iraq chamber of commerce could do more to ensure exporters are engaging reliable Iraqi merchants and trading companies. “None of this takes place. The joint chamber is there and has no other business than to serve the interests of certain groups and individuals.”

Sakha’s sentiments were echoed by Hemmat Shahbaz-Beigi, owner of Arshia Gostar Trading Company in Kermanshah province’s Qasr-e-Shirin County. The company exports everything from construction materials, to home appliances, and even vegetables.

Shahbaz-Beigi did not hold back in complaining about the lack of support for Iranian exporters.  

“There are rules and regulations, yet, there is no guarantee that any of them will be executed or applied to your case if you ever come across a problem,” he said.

Shahbaz-Beigi recounted the saga of a USD 200,000 order fulfilled in 2015 than went unpaid. Five years year later, he has spent USD 40,000 in pursuit of payment but “hasn’t gotten a penny back.”  

Shahbaz-Beigi has met with Iran’s consulate general in Iraq but was “not to spend any more on the case and forget about my money altogether.”

He has also been unable to get help from the joint chamber of commerce. “This is just frustrating,” he lamented.

In a recent tweet, Ali Shariati, a board member of the Iran Chamber of Commerce, the nationwide body representing the interests of the country’s private sector, claimed that the Iran-Iraq Joint Chamber of Commerce had been operating without a statute for 16 months and that the chamber no longer comprises of individuals with an interest in developing bilateral trade.

The failure of the joint chamber to support bilateral trade is not unique to the experience of Iranian exporters in Iraq.

“This is how most of our joint chambers are functioning,” explain Farhas Ehteshamzad, former head of Iran Auto Importers Association and a respected figure in business circles. “If these bodies are not made to fulfill their responsibilities towards the private sector, they will not only hamper trade but the members will probably end up monopolizing trade in their areas of interest.”

When asked to comment on the matter, Hamid Hosseini, former general secretary of Iran-Iraq joint chamber and current member, described the complaints of Shariati, Ehteshamzad, and others as “their take on the issue.”

Responding to Shariati’s tweet regarding the join chamber’s statute, Hosseini noted that the statute must be renewed every year during an “assembly with two thirds of the members are present.”

“We have more than 400 members and most of them live in the provinces bordering Iraq. So it’s been hard organizing such an assembly given that we are currently experiencing a pandemic. But we’ve recently been given the permit to hold the assembly online and this will solve the problem,” he explained.

Hosseini added that the joint chamber has an arbitration center with Iraq where disputes are settled, but the problem is that trade between Iranian and Iraqi partners is usually carried out traditionally on the basis of mutual trust rather than robust contracts.

“In such cases, no contracts are signed and there are no documents proving that a commercial interaction has taken place. That’s why these merchants can’t win their cases and the joint chamber should not be made to take the blame for this.”

Despite these challenges, companies committed to export growth can persevere with the right mindset, argued Ali Dorhi, a senior executive at Dina Food Industries, which produces Iran’s beloved “Cheetoz” cheese puffs.

Dorhi believes most Iranian enterprises lack an “export-oriented mindset” and that only “30 percent” of the problems facing Iranian firms eyeing export opportunities can be attributed to bureaucracy and red-tape.

“There is often no market research and trade takes place at the very gates of the borders. Products are not customized or at least adapted a bit to suit the tastes of the destination markets,” Dorhi noted.

“In Iraq, for example, customers demand that product information be written in Arabic on boxes and containers. Many Iranian producers will not meet that request. This is why we end up having an insignificant share of less than 2 percent in Iraq’s lucrative food industry market.”

With oil exports having earned Iran just USD 8.9 billion dollars in the Iranian calendar year that ended in March 2020, the government is finally recognizing the importance of non-oil exports. But what has been neglected, particularly in the case of trade with Iraq, is the need to support exporters with better regulations, better market research, and more responsive trade bodies and chambers of commerce.  

During Al-Khadimi’s recent trip to Iraq, Hassan Rouhani reiterated that Iran and Iraq intend “to expand bilateral trade ties to USD 20 billion”—a figure that reflects the effective doubling of Iranian exports to Iraq. Whether the two countries can reach that lofty goal will depend on whether Iranian authorities and exporters can address the dysfunction at the border.

Photo: IRNA