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DUBAI — The Trump administration is granting Iraq a renewed 90-day waiver exempting it from U.S. sanctions on Iran, a State Department official told CNBC on Tuesday.
The waiver, last issued in December and which expired on the morning of March 19, will allow Iraq to continue buying electricity from its neighbor even as the White House pledges a maximum pressure campaign against Tehran.
"While this waiver is intended to help Iraq mitigate energy shortages, we continue to discuss our Iran-related sanctions with our partners in Iraq," the official said on condition of anonymity to discuss the matter.
Despite being OPEC's second-largest producer of oil, years of war and lack of investment have left Iraq dependent on Iranian natural gas plants for up to 45 percent of its electricity.
The Trump administration reinstated sanctions on Iran last year after withdrawing from the Joint Comprehensive Plan of Action, which lifted economic restrictions on Iran in exchange for curbs to its nuclear program. The White House is carrying out a "maximum pressure" campaign against the Islamic Republic in an effort to counter what it deems its "malign and destabilizing activity" around the world.
Iraq is a special case, putting the administration in an awkward position as putting too much pressure on Iran — Baghdad's third-largest trading partner — could lead to destabilization in Iraq. Iraq imports some 28 million cubic meters of Iranian natural gas daily, which powers up to 1 million Iraqi homes, but the country still faces severe power shortages thanks to its outdated power infrastructure and frequent failure to pay its bills.
Without continued sanctions exemptions, Iraq could lose more than a third of its power overnight, energy analysts say. Already burdened by failing infrastructure, pockets of ISIS activity and poor public service provision, the scenario makes Iraq a "ticking time bomb," according to Michael Stephens, a regional expert at the Royal United Services Institute in London.
Last summer, Iraq failed to pay its electricity bill to Iran on time. This prompted Tehran to cut the power off and triggered widespread protests in the country's south, particularly in poverty-stricken Basra, where government buildings and the consulates of Iran and the U.S. were attacked.
The U.S. government is encouraging greater Iraqi energy independence as a more sustainable means of blunting Iran's clout in Iraq, which extends from energy provision to trade, security and politics. This has so far come in the form of deals with American energy companies like GE to upgrade the Iraqi grid and generate electricity from gas flare capturing.
"We are continuing to work with Iraq to end its dependence on Iranian natural gas and electricity and increase its energy independence," the State Department official said. "Expanding the use of Iraq's own natural resources and diversifying energy imports away from Iran will strengthen Iraq's economy and development as well as encourage a united, democratic, and prosperous Iraq free from malign Iranian influence."
Still, experts say achieving energy self-sufficiency for Iraq will likely take years, and that continued sanctions waivers may be the reality for the foreseeable future.
The U.S. decision comes just a week after Iranian President Hassan Rouhani's first official visit to Iraq, which saw more than a dozen treaties signed to expand trade and infrastructure ties between the two countries.