Iraq's economy is so closely linked to Iran that Baghdad is going to ask Washington for permission to ignore some U.S. sanctions on its neighbour, Iraqi government and central bank officials said.
U.S. President Donald Trump withdrew the United States from an international deal aimed at limiting Iran's nuclear programme earlier this year and reimposed trade sanctions.
Washington has said there will be consequences for countries that do not respect the sanctions.
Baghdad is in a difficult position. Iraq imports crucial supplies from ally Iran but its other major ally is the United States, which provides security assistance and training.
The request would mark an important change in political tactics for Iraqi Prime Minister Haider al-Abadi. He initially said Baghdad would respect all the U.S. sanctions but faced heavy criticism from rivals.
The officials told Reuters a delegation will travel to Washington to ask for exemptions in applying the sanctions. They did not say when that trip would take place.
"The government plans to ask Washington for a waiver. It's going to happen soon," one central bank official said.
An official in Abadi's office declined to comment.
An official in the U.S. State Department said it was discussing Iran policy with its partners around the world.
"We have given the same message to all countries around the world that the President has said, the United States is fully committed to enforcing all of our sanctions," the official said.
"Iraq is a friend and important partner of the U.S and we are we are committed to ensuring Iraqi stability and prosperity."
Iraqi officials fear shortages of key items if Baghdad complies with all the sanctions. This could lead to political turmoil at a delicate time in Iraqi politics.
Iraq imports a wide range of goods from Iran including food, agricultural products, home appliances, air conditioners and spare car parts. The goods element of Iranian imports to Iraq was about $6 billion for the 12 months ending March 2018, about 15 percent of Iraq's total imports for 2017.
There are also energy contracts between the two countries contributing to a volume of trade of $12 billion last year.
The officials said they were asking each ministry to put together a list of imports that are essential for Iraq's economy. Those items will make up the request for exemptions.
The U.S. sanctions that came into effect earlier this month target Iran's trade in gold and other precious metals, its purchases of U.S. dollars and its car industry. Other sanctions will come into force in November.
EUROS NOT DOLLARS
Abadi has said Iraq will still respect the requirement on U.S. dollar purchases, which is a major part of the sanctions and one of the most awkward for businesses, given energy and other big trade deals.
It means that Iraqi banks and the government cannot pay the Iranian government or Iranian entities in dollars.
The central bank circulated a warning to private banks to abide by the ban on dollar transactions but it will allow transactions in euros, one central bank official said.
Several European countries, including France, Britain and Germany wanted the United States to stick by the international nuclear deal. The EU is working to maintain trade with Iran.
"We were encouraged by the position of European Union states towards Iran in respect to the American sanctions. They keep dealing with Iran in euros so why shouldn't we?" a second Iraqi central bank official said.
SPARE CAR PARTS
The sanctions are particularly sensitive for companies with U.S. operations. Trump has said that those who do business in Iran will not be able to do business in the United Sates.
But most Iraqi private companies will be relatively unharmed by the sanctions, said a Western diplomat in Baghdad.
"Plenty of Iraqi businesses don't have U.S. investments, don't deal in dollars. Those can carry on dealing with Iran without issue," he said.
It is government and public sector-run energy, construction and car industries, which will take a bigger hit, one Iraqi trade ministry official told Reuters.
"We rely mainly on Iran as a source of construction materials and automobiles, including spare parts, due to low prices and the ease of shipping through many joint border crossings," he said.
Even if the government has committed to complying with some of the sanctions, it may be difficult to enforce.
Local traders may still be happy to deal with Iranian counterparts because the fall of the Iranian rial against the U.S. dollar has made goods cheap and political and economic ties between the two countries are strong.
"It will be mission impossible for the government to prevent Iranian commodities from flowing across more than 1,300 kilometres (808 miles) of joint borders," said Basim Antwan, a leading Iraqi economic consultant and member of the Iraqi Businessmen Union.
"Iran will use every single option at hand to keep the exports flowing, including the help of allied militia groups to secure what could be called 'organised smuggling'."
Abadi is leading a fragile caretaker cabinet while political parties try to negotiate a new governing coalition after a May election in which his bloc came third.
He has managed to balance U.S. and Iranian interests and hopes to stay on as a compromise premier.
But he may have been damaged after declaring he would fully comply with the U.S. sanctions. This could have helped his more pro-Iran rivals, who heavily criticized his decision.
Some Western diplomats say he must now come up with a compromise to balance U.S. and Iranian interests.
"There is a fear that Washington will force Iraq into a 'you are with us or against us' situation," the Western diplomat said. "They should not force Iraq to make that choice."