Regional Focus

Doing Business in Iraq: mitigating financial supply chain risks

Published: Oct 2012

Iraq’s potential has attracted increasing interest from investors and companies looking to take advantage of its significant energy reserves, large infrastructure needs and young, growing population. However, there are also significant risks to doing business in this market. These risks should not be an impediment to entry and can be managed through innovative financial supply chain strategies and structures which will ensure that doing business in Iraq is truly rewarding.

The Iraq opportunity

The fact that Iraq is a unique business opportunity has been increasingly recognised over the last few years. For example, in a paper published in 2011, Citi’s Chief Economist identified Iraq as one of only 11 global growth generators over the next 40 years. This growth story has been echoed in numerous other articles and seminars.

There has been notable success in tapping one of the world’s largest oil reserves; production has sharply risen to more than 3m barrels per day (bpd). Iraq’s infrastructure is also in focus after decades of war and sanctions; the National Investment Commission estimates that Iraq’s reconstruction needs would be approximately $200 billion over the next five years. And lastly, a population of 30m represents one of the largest consumer markets in the region with growing purchasing power.

Key considerations and risks to doing business

However, it is key to note that while Iraq is a significant opportunity, companies looking to do business in Iraq need to bear in mind the fact that this is a frontier market that warrants enhanced due diligence. This article aims to provide a summary of the main financial supply chain challenges that businesses could face and suggests mitigating factors.

Banking sector

Iraq’s banking sector is dominated by the main public sector banks which have limited ability to facilitate international financial flows. Private banks, while more numerous, need further development and strengthening. There have been recent instances of select banks being placed into guardianship. This has led to potential counterparty risk when using Iraqi banks for local cash management needs.

Companies also need to consider issues around exporting into Iraq. Traditional risk mitigation mechanisms, such as Letters of Credit (LCs) issued by Iraqi banks have limited acceptance. More recently, there have been restrictions, both market and regulatory-driven, around the availability of foreign currency leading to delayed payments to exporters.

Lastly, banks also play an extremely limited role in financial intermediation thereby limiting access to credit. Iraqi banks extended credit representing only 9.8% of GDP (compared to 55% for the MENA region). Alternative sources of financing such as stock market bond issuance or investment schemes are either non-existent or miniscule (for example, the Iraq Stock Exchange has a market capitalisation of only IQD 3.5 trillion).

The main state owned banks also have antiquated technology platforms. The systems of the private banks are comparatively more advanced but vary quite significantly from bank to bank. Additionally, a lack of trained and qualified staff impacts customer service.

The above factors combined with other issues such as regulatory uncertainty has meant that only one in three financial transactions flow through banks; cash is still king. This is inefficient, expensive and could present a potential security risk.

Regulatory uncertainty

Iraq’s evolving regulatory and legal regime is also a factor that companies need to take into consideration. From a financial supply chain perspective, some recent regulatory changes that have caused uncertainty are:

FX controls

The Central Bank of Iraq has introduced regulations that have impacted the availability of foreign currency, especially US dollars in country. These coupled with reduced supply of US dollars in the daily auctions has resulted in severe shortage of the currency and a spike in the spread between the official exchange rate (1166/US dollars) and the “market” rate (1250 and upwards). This has had a twofold impact; one, it has become more difficult to remit funds from Iraq, and two, more expensive. Conversely, when remitting funds into Iraq, firms face challenges in paying their employees or suppliers in US dollars.

Tax payments

Companies should obtain clarity on the most appropriate tax rates applicable to their line of business and nature of payments from qualified advisers. However, the two most common tax payments affecting the financial supply chain are withholding and social security payments. These are typically required to be paid through banker’s cheques in Arabic, drawn on an Iraqi bank and payable in select cities. However, over the last year, companies have reported that the authorities have occasionally either not accepted cheques drawn on private banks or only cheques below a certain threshold amount which has affected supply chain processes.

Other considerations

Company registration – capital injection account

There are various corporate forms in Iraq, ranging from sole proprietorships to joint stock companies which can be used to do business. To establish the above entities and obtain a registration certificate, a capital injection account (in IQD) will need to be opened with an Iraqi bank. The utilisation of the injected capital also needs to be considered; should it remain in Iraq to be used for local operations (and transactions effected through a local bank) or should it be repatriated to a treasury centre? Repatriation can be challenging in light of some of the currency and regulatory challenges detailed earlier.

Guarantee issuance

When bidding for business in Iraq, especially for government contracts, guarantees will need to be issued (though public sector banks for the latter case). As mentioned earlier, Iraqi banks have limited international correspondent networks (especially the dominant domestic-focussed public sector banks). Multinational companies find it a challenge to issue these guarantees through their relationship banks (who may not have correspondent relationships with Iraqi banks).

Letter of credit confirmation

Exports into Iraq are growing at a swift pace and expected to touch $80 billion by 2014. The public sector dominates official imports into Iraq but there is a thriving trade increasingly driven by the private sector. Exporters look to mitigate the risk of exporting into Iraq. The challenge is that very few international banks have credit appetite on Iraqi banks and can confirm or reissue LCs issued by Iraqi banks.

Operating in Iraq: suggested financial supply chain factors

The following suggestions can potentially mitigate some of the related risks and issues described earlier:

Offshore model

Many companies have discovered that they can support almost all their financial supply chain needs through an offshore approach. This envisages the following:

  • Maintaining bank accounts outside Iraq thereby mitigating both counterparty and cross-border risk while still retaining the ability to make all types of payments within the country.

  • Exporting into Iraq and exploring trade risk mitigation strategies including LC confirmation through select international banks or more recently, credit insurance or Export Credit Agency structures.

  • Similarly, guarantee issuance favouring beneficiaries in Iraq can be initiated through banks based offshore leveraging their correspondent banking network in Iraq.

  • Receipt of sales proceeds into accounts domiciled abroad thereby mitigating both currency and transferability issues.

  • Leveraging centralised treasury centres to initiate payments with further integration with company-wide ERP or TWS systems.

Of course in select instances, a completely offshore solution may not work. Hence, where sales are in IQD and generated throughout the country, there will be a need for a local bank and its branch network to act as a collection bank. There is an associated challenge in remitting these receivables from Iraq (if required).

Banking partner

One of the key factors in supporting an offshore model is identifying appropriate banking partners. As detailed earlier, Iraqi banks present potential issues of cross-border and counterparty risk as well as having to deal with evolving technology and service standards. On the other hand, international banks have superior technology platforms and harmonised service standards; moreover, notwithstanding recent global events, they also represent better credit risk than their Iraqi peers. However, there are a limited number of foreign banks with a presence in Iraq and they do not have wide branch networks.

In identifying a banking partner, the following need to be considered:

  • Network

    Does the bank have an extensive network in Iraq? Also, is there diversity in the network thereby enabling a diverse solution set; ranging from guarantee issuance and LC confirmation to payment solutions across the country?

  • Service and Technology Model

    Considering the service standards in Iraqi banks, it is preferable to deal with the relationship teams of an international bank. The global bank should liaise with its’ correspondent banks rather than allowing the company to deal with the local bank.

  • Credit Exposure

    One of the key advantages of the offshore model is the ability to mitigate counter-party and cross-border risk issues. Therefore, it is essential that the banking partner have appropriate credit appetite on their correspondent bank.

  • Liquidity and Accounts

    Most important choice in a banking provider, especially from a cash management perspective, is the account structure that will be used to support the business in country. The bank should be able to support all payment types, whether to a beneficiary in Iraq or globally, through accounts held outside the country thereby mitigating cross-border risk.

Trusted advisors

Needless to say, doing business in Iraq can be complex. It is vital to work with trusted legal, tax and other business advisors. Not only do they act as advisors but also perform valuable on the ground services. Hence, law firms also liaise with the Iraq Registrar of Companies during registration and will arrange for attestation of documents by the relevant Iraqi Embassy or Consulate in the country of domicile. Accounting firms facilitate payment of taxes by picking up certified cheques from the designated branches of select Iraqi banks. This obviates the need to maintain administrative staff in these locations for these functions.

Companies also look for advice and guidance from their peers who have already been operating in Iraq. This could either be through formal industry associations (for example, the US Business Council in Iraq or the Iraq Britain Business Council) or informally through ad hoc meetings and one-one discussions. These forums are also an opportunity to share best practices and suggest appropriate providers based on experience.


The economic potential of Iraq is unquestioned. A combination of one of the world’s most significant hydrocarbon reserves, large population and immense infrastructure needs makes it not just an ideal investment opportunity but also one of the most exciting emerging markets for the medium-long term. Companies cannot afford to not have an Iraq focussed-strategy

However, as with other emerging markets, there are challenges and risks to doing business in the country. Needless to say, it is essential that extensive due diligence be performed and risks and associated rewards be identified. Financial supply chain issues can be mitigated by using an Offshore Model that is executed by an appropriate Banking Partner working in conjunction with Trusted Advisors. This winning combination will ensure that doing business in Iraq is truly rewarding.

Citi: supporting clients in Iraq

Citi has been supporting clients doing business in Iraq since 2003. Since then, it has worked on a number of key initiatives including:

  • Joint book runner on Iraq’s first sovereign debt issue of $2.7 billion (“Iraq 2028”).

  • Export Credit Agency (ECA) Structure with OPIC (Overseas Private Investment Corporation) and Iraq’s dominant trade bank.

  • Developed an LC Reissuance and confirmation structure for a leading public sector bank as well as select private banks.

  • Organised road shows over 2011-2012 in India, Turkey, China, Japan, UK, France, Germany, Switzerland and UAE.

  • Training seminars for Iraqi Ministries and Banks in Amsterdam, Baghdad, and Beirut coupled with regular meetings at Iraq forums in Washington, Istanbul and other locations.

Today, Citi has one of the largest correspondent banking networks in Iraq through five leading public and private sector banks with more than 100 branches across Iraq and Kurdistan. Citi’s innovative cash management services are utilised by nearly 40 clients across the country including a majority of companies in the energy sector. Additionally, Citi is also one of the leading reissuing and confirming banks for Letters of Credit issued by the dominant public sector trade bank in country and, since 2006, has reissued Letters of Credit for nearly 250 companies, both large multinationals as well as smaller regional firms, exporting to Iraq.

Case study

Cash management services in Iraq

  • Large US-based oil field services company.

  • Offices in two locations in Iraq with approximately 500 employees on the ground.

  • Struggled with Iraq’s antiquated banking infrastructure, risk and existing local bank’s lack of online banking (subsidiary of an international bank).

Client’s need
  • Need to make payments (payroll, vendors, tax) across Iraq in both USD and IQD.

  • International payments in US dollars, GBP and select other currencies. (Existing process: managed through parent’s treasury centre in USA).

  • Need for a centralised solution, elimination of manual processes and strong on-the-ground support.

  • Mitigation of risk of doing business in country (cross-border and counterparty).

Citi solution
  • Online access to CitiDirect® Online Banking (Citi’s online banking platform) to meet payment needs in both IQD and US dollars.

  • Tax payments through cheque disbursements in IQD at main branch of alliance bank in Baghdad (handed over to representative from client’s audit firm).

  • Payroll solution through opening of employee bank accounts and installation of shared ATM at camp-site to support servicing of the payroll solution; direct transfer of payroll through CitiDirect®.

  • International payments through WorldLink®, Citi’s international payments platform.

Exports into Iraq: LC reissuance and confirmation

  • Large Indian pipe manufacturer.

  • Won large contracts awarded by the Ministry of Oil (and select subsidiaries) to supply specialised steel and line pipes.

Client’s need
  • Needed a global bank that would be able to confirm these LCs as well as provide guidance on some of the key issues related to exporting to Iraq.

  • Ensure that payments are secured with country risk also covered.

Citi solution
  • Citi had a series of discussions pre and post issuance of LCs with the client.

  • Comprehensive review of underlying commercial agreement between applicant and client.

  • Citi prepared a structured LC which will allow client to secure their payments over the period of the contract.

  • Citi was able to leverage a focused multi-country/multi-product team to execute the transaction in a very short timeframe.

To understand how Citi can support you in Iraq, please do contact the author:

Rohit Fernandes
Client Sales Manager, UAE & Iraq
Citi Transaction Services
+971 4 604 4599


Taoufik Rabbaa
Head, Client Sales Management, Middle East & Pakistan
Citi Transaction Services
+971 4 604 4518
Surendra Bardia
Head, Citi Transaction Services, Iraq
Citi Transaction Services
+971 4 604 4414
Asif Ali
Trade Sales Head, Middle East & Pakistan
Citi Transaction Services
+971 4 604 4319

Notes & Sources:

I US dollars: 1166 IQD (Central Bank of Iraq)

Citi does not provide tax, legal or related advice and would recommend that you engage qualified advisors for such purposes. The risks and key considerations provided in this document are not exhaustive and do not purport to discuss any risks emanating from inter alia, corruption and money laundering etc.

Buiter, Willem and Rahbari, Ebrahim, “Global Growth Generators: Moving beyond ‘Emerging Markets’ and ‘BRIC’”, Citi Global Economics View, February 2011

UK Trade & Investment, “The New Iraq: 2012 Discovering Business”, November 2011

Kami, Aseel, “Iraq’s central bank places Warka bank under guardianship”, Reuters, March 2012

World Bank, “Republic of Iraq Financial Sector Review”, September 2011

Kami, Aseel and Bayoumy, Yara, “Banks that can’t cash a cheque slow Iraq economy”, Reuters, March 2012

Anon, “Cabinet agrees to accept instruments of private banks IQD 25 million instead of 5 million”, AKNews, July 2012

Saleh, Ahmed & Opdyke, Tom, Perspectives on Iraq’s Private Banks: Growth, Consolidation and Outlook, 2011 Annual Report”, Iraqixchange in collaboration with Al-Fawz Brokerage, September 2011

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