Whether by design or chance the Trump administration’s bomb and dance routine on Iran has had a devastating effect on its western neighbor. Iraq’s trade routes are wrecked, its crude exports that support more than 90 percent of the state budget have collapsed, inflation is rising fast, and it is burning through foreign currency reserves at an unsustainable rate.
Iraq currently depends on oil exports for upwards of 90 percent of state revenue, which according to a 2021 report from Carbon Tracker, makes it the most fossil fuel-reliant state in the world—and it wasn’t particularly close.
Eco Iraq, an economic affairs observatory, reported on Saturday that Iraq has lost an estimated 350 million barrels of oil exports worth $37.7 billion since February 28. That means nearly 30 percent of the state’s annual budget evaporated in just over three months time. The situation was already in dire straits with oil income falling 16 percent in 2025 due to low market rates.
Dollars Arrive with Sanctions Threat
Making the moment more challenging is Uncle Sam’s control over Iraq’s oil revenue. As part of the illegal 2003 invasion a program was set up in which Iraq’s money from oil exports are deposited in the US Federal Reserve before being forwarded to Iraq—usually.
Coinciding with the launch of the illegal war against Iran in February, Washington froze dollar shipments to Iraq as part of its pressure campaign on Baghdad to dismantle Iran-backed factions in the country.
Last week, the tap was reportedly turned on again when Middle East viceroy Tom Barrack visited Iraq, but that gesture also came with more threats. From The New Arab:
Following the Barrack–al-Zaidi meeting, a statement issued by the U.S. State Department appeared less like a joint agreement between two countries and more like a set of political, economic, and security conditions that Iraq’s government must meet in exchange for U.S. support and avoidance of what one official described as “massive” sanctions.
The statement included broad demands, beginning with the disarmament of armed factions and, for the first time, using terms such as the dissolution of armed groups and formations. It also called for preventing threats to neighboring countries from originating on Iraqi territory and included what resembled guidance regarding the entry of American companies into Iraq.
In response, Prime Minister Ali al-Zaidi’s office republished the statement almost verbatim. It contained three sections written in direct language, the first of which called on the government to:
“Implement plans for the complete disarmament and dissolution of all armed groups and formations operating outside the authority and control of the Iraqi state; restrict weapons exclusively to the Iraqi state; and enforce full sovereignty to keep Iraq away from conflicts and prevent its territory from being used by any party to threaten regional peace.”
According to official U.S. and Iraqi announcements, Prime Minister Ali al-Zaidi is scheduled to visit the White House in mid-July to discuss the future of this relationship.
The Paris-headquartered Financial Action Task Force already placed Iraq on its dreaded grey list earlier this month. That will increase scrutiny of Iraqi bank transactions, raise costs, and make it harder for the country to attract private capital. It could also be seen as a prelude to sanctions unless Baghdad gets with the Washington program.
In a Sunday ceremony to name a new central bank governor, Iraqi Prime Minister Ali Al Zaidi stressed the “importance of proceeding with banking reform programmes” initiated under his predecessor. Some detail on those reforms, courtesy of The National:
Since late 2022, Iraq’s banking sector has come under heavy scrutiny from the US Treasury Department, which has accused the sector of money laundering and supporting Iran and other US-sanctioned countries to access US dollars.
Under pressure from Washington, former prime minister Mohammed Shia Al Sudani’s government introduced financial and economic reforms. These included strict controls on foreign transactions in US dollars and requiring traders to file all details of goods they want to import and the final beneficiary. Other steps taken included activating an electronic payment system, encouraging banks to offer a variety of services, and calling on the public and businesses to open accounts.
Progress has been slow, however. State banks and cash payments still dominate. And the US accuses the Iraqi banks of helping Iran to evade sanctions.
Iraq’s new central bank governor, Nazar Nasser Hussein, happens to be an anti-money laundering specialist
Dangling Economic Relief
Among the news to come out of Barrack’s mid-June meeting with Al-Zaidi is the following:
- A contract for Texas-based Excelerate Energy to develop an LNG Floating Storage and Regasification Unit at the southern port of Khor al-Zubair, which could reduce Iraq’s dependence on Iranian natural gas imports by 30 to 35 percent.
- A memorandum of understanding with Los Angeles-based TI Capital to rehabilitate the Kirkuk-Baniyas oil pipeline, which would reconnect northern Iraq’s oil fields to Syria‘s Mediterranean coast. It has been non-operational since the early 1980s.
- The Iraqi Federal Armed Forces committed to guaranteeing the physical security of the Kurdistan Region’s energy infrastructure. This is intended to allow three American upstream giants (HKN Energy, Western Zagros, and Hunt Oil) to immediately resume full-scale production. According to Iraqi News:
Moving forward, federal anti-air units, localized border patrols, and joint intelligence cordons will shield these foreign-operated assets from non-state drone and missile attacks, signaling absolute alignment between Baghdad and Erbil to protect Western capital outlays.
We’ll see how that works out. Due the pressure being applied by Washington, Baghdad has little choice but to acquiesce. Following through will be something else entirely.
It’s also not just Washington squeezing Iraq, though.
Coordination with Türkiye?
Iraq is currently exporting between 150,000 and 200,000 barrels per day through the Kurdistan Region’s pipeline to the port of Ceyhan in Türkiye. The Kurdistan pipeline was recently closed for about two-and-a-half years after an international arbitration tribunal ordered Türkiye to pay Iraq $1.5 billion for allowing oil exports from the Kurdistan region without Baghdad’s authorization between 2014 and 2018. Oil flows resumed in late 2025, but could soon stop again.
On July 27, Iraq’s oil pipeline agreement with Türkiye expires, threatening its key lifeline during the Strait of Hormuz shutdown/slowdown. Ankara, knowing it is in a strong position, is demanding higher transit fees, investment commitments to offset that $1.5 billion decision, and more oil.
It’s probably not a coincidence Barrack was in Ankara just before heading off to Iraq.
Productive meeting with FM @HakanFidan ahead of the NATO summit in Ankara. As strong allies with many shared goals, the U.S.-Türkiye partnership is delivering results. 🇺🇸 🤝 🇹🇷 https://t.co/IMcs6Wh835
— Ambassador Tom Barrack (@USAMBTurkiye) June 12, 2026
Meanwhile, an older Kirkuk-Ceyhan pipeline remains out of service as Iraq works on the extensive repairs it requires. That could eventually add up to 1.6 million barrels per day of Iraqi exports.
Pressuring the Kurds
At the same time that Türkiye threatens to not to renew the Kurdistan pipeline deal, the billionaire Barrack is telling the Kurds they need to fall in line behind Zaidi and his efforts on security and oil or risk losing the support of Washington.
And one would imagine that Barrack —who is the US ambassador to Türkiye along with his role as presidential envoy to Syria and Iraq— is also pitching the US’ usefulness in helping come to an agreement with the Turks to keep the oil flowing.
On its face, it would appear Washington, while failing in Iran, has used the disaster there to at least pull Baghdad away from Tehran, but there are reasons for pause.
One rather critical item many articles on US deals with the al-Zaidi government omit is that Iran has outsize influence in Iraq over the Popular Mobilization Forces, which have targeted US bases inside the country and hit Gulf states, as well.
In recent weeks armed groups in Iraq have said they will integrate with state security forces. These include the militia of powerful cleric Muqtada al-Sadr, the Imam Ali Brigades, Falah al Fayed, and Popular Mobilization Force head Falah al Fayed.
It’s usually not so simple. Iraq has made promises about reining in militias and pursuing alternative oil export routes for years, and here we are. But the chaos in the Strait of Hormuz may well be enough of a motivating factor—or perhaps not. From Al-Monitor:
The statements are being greeted with a degree of skepticism. Some believe they are an Iran-inspired foil designed to give Iraq critical breathing space amid its ballooning financial woes.
Ultimately, Zaidi still has to answer to the Coordination Framework, the alliance of Shiite parties that selected him, analysts say. But he will try to expand his space to maneuver, they add.
Maria Fantappie heads the Mediterranean, Middle East and Africa Program at the Istituto Affari Internazionali in Rome. “The new PM is the clear expression of a network of relations and interests tied to the Iran-backed groups. He is pragmatic, too, and, in line with the tradition of the last Iraqi PM, he will try to leave behind those ties with Iran and operate a balancing act with the US,” she told Al-Monitor.
“But US pressure, if mishandled, could also create the opposite effect: strengthen his ties with the Iran bloc and lead him to abandon that pragmatism,” Fantappie said.
