Dysfunction at the border jeopardizes growth of Iran-Iraq trade

Bourse & Bazaar – 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.