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Iraqis feel Iran’s growing clout in their wallets

June 15, 2010

KARBALA, Iraq (AP) — Iranian rials change hands as easily as Iraqi dinars in this holy city’s old bazaar, its alleyways teeming with Iranian pilgrims bused in on package tours run by Tehran.

The Ayatollah Khomeini banknotes and Farsi chatter aren’t alone in lending a Persian flavor. Shelves in merchant stalls like Yassin Saleh’s sit heavy with containers of honey, cosmetics and toothpaste, all made across the still-disputed border. Best-sellers include travel-size bottles of Iranian Sehat brand shampoo.

“They’re cheap but effective,” Saleh says, as boxy Iranian-built Barfab air coolers trundle away nearby. “Some people don’t care about the cost ... but those who want lower prices like the Iranian products.”

Trade with longtime rival Iran is bringing Iraq investments it sorely needs. Billion-dollar pacts are being signed. Branches of Iranian banks blacklisted by the United States are opening. But the growing ties also frame a political imbalance the U.S. is loath to see in a country struggling to rebuild after years of war.

As America’s influence wanes in Iraq, and its troops withdraw, Iran is capitalizing on centuries-old religious and cultural ties to secure greater leverage in the country — even as Washington works to dissuade others from dealing with Tehran over its nuclear program.

It’s a political and economic tug-of-war the U.S. risks losing, if only because Iraq’s reconstruction needs open the door for a marriage of convenience. Iran, squeezed elsewhere by sanctions, finds in Iraq a rare and ready market at a time when lingering security fears continue to discourage Western investments in the country.

“Iran would like to have a stronger presence in Iraq ... primarily because so many other places have been closed off to it. It’s partly necessity,” said Anoush Ehteshami, a professor at Britain’s Durham University. “Iran doesn’t want to lose its footing again in Iraq.”

Under Saddam Hussein, Iraq fought a ruinous eight-year war with Iran beginning in 1980 that killed hundreds of thousands of people and devastated both countries’ economies. Many of Iraq’s majority Shiites, persecuted by Saddam, sought sanctuary in Iran, only to return after the Iraqi dictator’s fall in 2003.

Some now hold key government posts. Many others have bought homes and set up businesses in places like Karbala, relying on Farsi learned in exile to cater to Iranians. That allows the trade links to keep growing — quadrupling to $4 billion last year compared to three years earlier, according to Iranian government figures.

Senior Iraqi and Iranian officials meet frequently. The visits have netted a series of economic cooperation agreements, including power supply deals for Iraq and pledges to create cross-border free trade zones. Iran has offered its neighbor a $1 billion loan to buy Iranian goods.

In Basra, Iraq’s second largest city and a nucleus for powerful Shiite groups, more than 60 Iranian companies gathered this year for a five-day trade fair. The fair was the biggest such Iranian-run event since the U.S.-led invasion. Freezer trucks and motorcycles were on display, along with dairy products, canned goods, clothes and cement.

The port city, which is also the springboard for the majority of Iraq’s oil exports, last month signed off on a nearly $1 billion plan for an Iranian construction company to build thousands of homes, hotels and a mall, said Haider Ali Fadhil, who heads the Basra Investment Commission.

In March, Iran state-run Bank Melli opened its second Iraqi branch, even though the bank is under U.S. and European sanctions over its alleged ties to Iran’s nuclear program. Two other Iranian banks on a U.S. watch list, Parsian and Karafarin, plan to open in Iraq soon.

Iranian embassy officials in Baghdad say actual trade levels are as high as $7 billion, making Iraq one of its biggest trading partners. Iran’s Commerce Ministry is aiming for trade of $10 billion per year within three years.

For Iran, investing in places like Basra and the shrine cities of Najaf and Karbala is a “supplementary means of exerting influence in Iraq,” said Kenneth Katzman, a Mideast specialist at the U.S. government’s Congressional Research Service.

“I don’t see the U.S. as wanting to promote that. The U.S. interest is to ... isolate Iran,” not encourage greater economic integration, he said.

The increasing closeness also worries many of Iraq’s minority Sunni Muslims, and Iraq’s mostly Sunni neighbors, such as fellow OPEC member Saudi Arabia.

Tehran has for years pushed for a pipeline to carry Iraqi crude oil to Iran’s Abadan refinery. Refined fuel would then be shipped in the opposite direction.

Iran already exports fuel to Iraq, even though both lack the refining capacity to meet local demand. It’s a strategy that analysts say makes little economic sense.

“It’s a politically motivated decision,” said IHS Global Insight energy analyst Samuel Ciszuk.

While many Iraqis say they benefit from the closer ties, they also grumble that Iran floods the market with cheap, low-quality goods that make it hard for domestic companies to compete.

There are other complaints too.

In the lobby of Karbala’s Noor al-Zahra Hotel, across from the gold-domed Imam Hussein shrine, two clocks hang on the wall: One set to local Iraqi time, the other to the time in Tehran.

But owner Samoel Muhsin Abid-Ali says he tries to avoid renting rooms to Iranians, who he complains are “full of problems.”

The issue, he says, is that a state-run Iranian firm known as the Hajj and Pilgrimage Organization has a virtual lock on the religious tourist trade that delivers 5,000 Iranian Shiites to Iraq each day.

Representatives for the government body impose stringent terms, demand steep discounts and deal only with a handful of well-connected travel agencies, according to Abid-Ali and other businessmen. Its Karbala office did not respond to interview requests.

Karbala traders also fear that Iranian intelligence agents could infiltrate pilgrimage groups. And they say they resent being addressed in Farsi rather than Arabic, making them feel like foreigners in their own country.

Even so, no one here said they missed the days before the war, when store shelves offered less variety and far fewer pilgrims came.

“Tourists — and mainly the Iranians — contribute so much to our economy,” said Saleh, the grocery stall owner. “Under Saddam, it was very hard for the pilgrims. Now Iraq is open to all.”


Associated Press writers Ali Akbar Dareini in Tehran and Sinan Salaheddin in Baghdad contributed reporting.

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