Iraq’s vast oil wealth is the foundation of its economy, yet the flow of its most critical revenues does not move freely through Baghdad alone. Instead, the financial architecture governing Iraq’s oil income places the United States at the centre of the system, giving Washington enduring influence over the country’s economic stability, political choices and regional positioning. This control is not exercised through direct ownership of oil assets, but through custodianship of the dollar revenues that oil exports generate.

The arrangement, established in the aftermath of the 2003 invasion, has survived multiple Iraqi governments, shifting U.S. administrations and repeated calls for greater sovereignty. Its persistence reflects a complex trade-off between autonomy and stability, in which Iraq’s reliance on oil and the dollar-based global financial system continues to bind it to U.S. oversight.

Oil Revenues and the Architecture of Dollar Control

Iraq sells the overwhelming majority of its crude oil in U.S. dollars, as is standard in global energy markets. Those dollars do not flow directly into Iraqi commercial banks or government ministries. Instead, they are deposited into accounts held at the Federal Reserve Bank of New York in the name of the Central Bank of Iraq.

This structure traces back to the creation of the Development Fund for Iraq after the U.S.-led invasion. The fund was designed to centralise oil revenues, shield them from claims linked to the Saddam Hussein era and place them under international supervision during Iraq’s reconstruction. Although the Development Fund itself was eventually dissolved, its core mechanism endured, evolving into the current custodial arrangement at the New York Fed.

An executive order issued by the U.S. president and renewed annually since 2003 underpins this framework. The legal continuity of that order has ensured that Iraqi oil revenues remain protected from litigation while simultaneously subject to U.S. regulatory oversight. In practical terms, Iraq retains ownership of the funds, but access is mediated through compliance with U.S. financial rules.

Leverage Rooted in Economic Dependence

Oil accounts for roughly 90% of Iraq’s state revenue, making access to oil dollars synonymous with the government’s ability to function. Salaries, pensions, imports, infrastructure spending and currency stability all depend on the steady release of funds from the New York Fed account into Iraq’s domestic financial system.

This dependence gives the United States significant leverage. While Washington does not routinely block access to funds, the implicit power to delay or restrict dollar flows acts as a powerful deterrent against policies viewed as destabilising or contrary to U.S. interests. That leverage became visible when tensions escalated after Baghdad called for the withdrawal of U.S. troops, prompting warnings that financial access could be curtailed.

The influence is subtle rather than overt. Iraqi officials authorise payments, but transactions are processed within a system that subjects them to U.S. scrutiny. Compliance failures, weak controls or suspected diversion of funds can trigger intervention, reinforcing Washington’s role as gatekeeper.

Stability Versus Sovereignty in Iraqi Calculations

Despite periodic criticism from Iraqi politicians and factions, the arrangement has endured in part because it provides tangible benefits. Holding reserves at the New York Fed lends credibility to Iraq’s financial management and reassures international partners that oil revenues are insulated from domestic political turmoil.

The system also facilitates access to dollars for trade. Iraq imports much of its food, fuel and manufactured goods, transactions that require reliable dollar liquidity. By anchoring reserves within the U.S. financial system, Iraq reduces the risk of sudden shortages that could destabilise the economy and provoke social unrest.

For Iraqi technocrats, the custodial framework also offers a degree of insulation from internal pressures. It strengthens the hand of institutions seeking to enforce financial discipline against political actors or militias that prefer unrestricted access to cash. In this sense, external oversight has become a tool in Iraq’s internal power struggles.

Sanctions, Iran and the Regional Dimension

U.S. control over dollar flows into Iraq is inseparable from Washington’s broader strategy toward Iran. Iraq occupies a delicate position between the two countries, economically intertwined with Iran while dependent on U.S.-controlled financial channels.

Tighter enforcement of dollar transactions has been used to curb alleged money laundering and the diversion of funds to sanctioned entities. U.S. sanctions on Iraqi banks and individuals accused of facilitating illicit transfers have reinforced the message that access to dollars comes with strict conditions.

These measures have placed Iraq in a difficult position. On one hand, compliance is essential to maintain financial stability. On the other, restrictions disrupt trade with Iran, a major supplier of electricity, gas and consumer goods. Iraq has repeatedly found itself caught between U.S. enforcement and domestic pressures to maintain economic ties with its neighbour.

Currency Controls and the Rise of Parallel Markets

The constraints imposed by dollar oversight have had unintended consequences inside Iraq. Limited access to dollars through official channels has contributed to the emergence of parallel markets, where currency trades at a premium to the official exchange rate.

This gap reflects both demand and risk. Businesses and individuals unable to secure dollars through formal mechanisms turn to informal networks, paying higher prices in exchange for speed and fewer compliance requirements. The spread between official and market rates has become a barometer of confidence in the financial system.

Efforts to tighten controls, while aimed at transparency, have sometimes exacerbated volatility. Sudden changes in access rules ripple through the economy, affecting import prices, inflation and public sentiment. For ordinary Iraqis, dollar policy is felt not as abstract geopolitics but as rising costs of living.

Reform, Pressure and the End of Dollar Auctions

For years, the Central Bank of Iraq relied on daily dollar auctions to supply the domestic market. Banks and exchange houses could purchase dollars using dinars, providing liquidity for imports and stabilising the currency. The system, however, drew criticism for enabling leakage to sanctioned actors.

Under sustained U.S. pressure, Iraq formally ended the auction mechanism in early 2025, replacing it with more restrictive and transparent channels. The shift marked a significant change in how oil revenues are distributed within the economy and underscored Washington’s influence over financial reform.

While the move was intended to reduce abuse, it also tightened dollar supply, reinforcing the centrality of U.S. oversight. The reform illustrates how control over oil revenues extends beyond custody to shaping domestic financial policy.

An Enduring System With Long-Term Implications

More than two decades after the invasion, the U.S. role in Iraq’s oil revenue management remains a defining feature of the country’s political economy. The arrangement persists not because Iraq lacks oil wealth, but because that wealth is inseparable from the dollar system in which it is priced, stored and circulated.

For Washington, the system provides leverage without direct intervention. For Baghdad, it offers stability at the cost of autonomy. As long as oil dominates Iraq’s economy and global finance remains dollar-centric, this balance is unlikely to change fundamentally.

The control of Iraq’s oil revenues thus operates less as a visible constraint and more as a structural reality, shaping policy choices, regional alignments and economic outcomes long after the guns of war have fallen silent.

(Adapted from TradingView.com)

Categories: Economy & Finance