By Aseel Kami
BAGHDAD (Reuters) - In the money changing shops dotted around Baghdad's Karrada district, Iraqi merchants dabble in many currencies, but these days some joke that banknotes from neighboring Iran and Syria are only worth plastering on windows as decorations.
Discounted Iranian rials and Syrian pounds are pouring into the shops as Western economic sanctions against those two countries make it harder for them to conduct trade with much of the rest of the world, arrange international bank transactions and obtain hard currency.
Iraq, which shares porous borders and political ties with both countries, is emerging as an important source of dollars for them.
Sales of dollars in currency auctions held by Iraq's central rose as high as $400 million on some days in December from a previous average of $150 million, according to central bank data. Many of those dollars were bought by Iraqi traders for resale in Iran and Syria.
"The main reason for this is the sanctions imposed on Iran and Syria, and the fact that their bank transactions are having trouble. Iraqi businessmen play the role of middlemen," deputy central bank governor Mudher Kasim said in January.
Kadhim Sabri, who works at a Karrada currency exchange shop, said some of the dollars purchased in the central bank auctions went straight to Iran or Syria via a loosely monitored network of wire transfer agencies. "It is more profitable to sell them in Iran or Syria."
Sharp falls in the currencies of the sanctions-hit countries over the last several weeks indicate how desperate importers and travelers there have become to obtain hard currency. Last week Iran's central bank announced an 8 percent devaluation of the rial in an effort to stamp out trade in the black market, where the dollar has soared in value since U.S. and European sanctions in response to Tehran's controversial nuclear program were tightened late last year.
The Syrian pound, which traded at 47 to the dollar before that country's crisis, has slipped to an official rate of nearly 58 and has been changing hands at over 70 on the black market.
Iraq is a convenient place for both countries to obtain dollars because business ties have been growing rapidly. Since the fall of Iraq's Sunni dictator Saddam Hussein, its Shi'ite-led government has brought the country closer to Shi'ite power Iran and to the regime of Syria's Bashar al-Assad, a member of the Alawite minority, an offshoot of Shi'ite Islam.
Iran, a major investor in Iraq since the 2003 U.S. invasion, said last July that it aimed to boost bilateral trade to $10 billion in 2011 from $6 billion in 2010.
Baghdad has rejected Arab League calls to impose economic sanctions on Damascus over its bloody crackdown on dissent, citing Iraq's own painful experience with sanctions during the Saddam era.
Although Iraqi money changers are making profits from supplying dollars to Iran and Syria, the trade carries risks -- they could get saddled with large amounts of rials and pounds just before fresh devaluations. This prospect is now deterring some of the Karrada merchants.
"If someone offers me Iranian currency, I won't buy it any more," said Alaa al-Shimary at his exchange shop in the district. "I just do not know the next morning what will happen to its value...it's a big risk."
In the southern Iraqi city of Najaf, some merchants now refuse to accept Iranian currency from travelers, preferring the safety of demanding dollars, which are still widely used in Iraq.
The central bank says Iraq's large foreign reserves, which have risen to a record $60 billion on the back of high oil prices, will shield it from any damage to its financial system on the national level.
Dollar sales in any case fell off somewhat in January as the central bank tightened enforcement of regulations used to fight money-laundering; sales on Tuesday were $201 million compared with $252 million at the start of the month.
Any reduction in dollar supplies would be a blow to the thousands of Iranian pilgrims coming daily through the border with Iran in Iraq's Wassit province, on their way to Shi'ite shrines in the southern Iraqi holy city of Kerbala. The pilgrims are greeted by informal money changers in a dusty border park.
"The sharp decline of the Iranian currency price has forced us to double the travel costs between Kerbala and the border, and this created many problems for us and the pilgrims," said Iraqi driver Zaid Raheem. "Because of that we decided not to receive the Iranian currency any more."
(Additional reporting by Suadad al-Salhy; Editing by Andrew Torchia)