Iraq, US agree goods-for-debt plan to pay part of Iran energy dues

BAGHDAD – Iraq will seek to settle part of its outstanding debt to Iran for gas and electricity imports by supplying food, medicine and other goods instead of cash under a mechanism agreed with the United States, as Baghdad seeks to navigate US sanctions while preserving vital Iranian gas supplies.

The arrangement is intended to allow Iraq to meet part of its financial obligations to Tehran without violating US restrictions on financial transfers to Iran, while reducing the risk of disruptions to gas supplies that are critical for Iraq’s electricity network.

Riyadh Uday, a member of the Iraqi parliament’s Electricity and Energy Committee, said on Monday that Baghdad and Washington had agreed on a mechanism under which Iran would receive goods and commodities in lieu of direct cash payments.

Iran is seeking around $11 billion in unpaid dues for exports of natural gas and electricity, he said, adding that part of the money is currently held at the Trade Bank of Iraq but cannot be transferred because of US sanctions.

“There are ongoing discussions between the Iraqi and Iranian delegations to resolve the issue of these funds and resume the supply of Iranian gas to Iraq’s power plants,” Uday said.

The issue has become increasingly urgent as Iraq’s power system comes under seasonal pressure. The country relies heavily on Iranian natural gas to fuel electricity generation, and any interruption in supplies can lead to longer power cuts during the summer, when electricity demand peaks.

The proposed arrangement comes days after Iranian Central Bank Governor Abd al-Naser Hemmati said Iran was owed between $10 billion and $11 billion by Iraq, including about $7 billion deposited with the Central Bank of Iraq and more than $3 billion owed to Iran’s Oil Ministry.

Hemmati said the issue featured prominently in talks with Iraqi Central Bank Governor Nizar Nasser Hussein during Iraqi Prime Minister Ali al-Zaidi’s recent visit to Tehran, as both sides explored practical ways of unlocking or using the frozen funds.

The dispute dates back to 2018, when the United States withdrew from the nuclear agreement with Iran and reimposed sanctions, preventing Iraq from paying for Iranian gas and electricity imports in foreign currencies despite continuing to deposit the payments into designated accounts at the Central Bank of Iraq and the Trade Bank of Iraq.

Under bilateral contracts, Iraq was to pay for imported gas in euros and electricity in US dollars. However, banking restrictions effectively blocked transfers to Iran, causing billions of dollars to accumulate in Iraqi financial institutions.

Officials and energy analysts say settling part of the debt through goods rather than cash offers Baghdad a practical compromise, allowing it to honour its obligations to Tehran while remaining within the framework of US sanctions and avoiding additional risks to its banking sector.

Baghdad hopes the mechanism will help secure continued Iranian gas flows while it pursues longer-term plans to diversify energy supplies, expand domestic gas production and strengthen electricity interconnections with neighbouring countries.