Iraq’s high stakes in the US–Iran crossfire

Iraq today finds itself precariously wedged between two great powers. Decades of war and sanctions have left its economy fragile, its infrastructure battered, and its politics deeply fragmented. 

Meanwhile, Iraq's vast oil wealth has made it a focal point of competition. Washington still wields unusual leverage over Baghdad – partly through financial mechanisms put in place during the 2003 invasion – while Tehran courts Iraq as a crucial ally. 

The result is an uneasy neutrality. Iraq must balance between US demands and Iranian patronage, even as proxies and public sentiment pull it in conflicting directions. Iraq risks becoming an expendable pawn in any broader US–Iran confrontation, its sovereignty constrained by outside forces.

American control of Iraqi oil revenues

Iraq's budget is almost entirely funded by oil – roughly 90% of government revenue comes from energy exports – so whoever controls the oil money wields immense power over Iraq's politics and economy. A little-noticed feature of post-war Iraq is that all of its oil export income is managed in accounts at the Federal Reserve Bank of New York. This arrangement dates back to a UN resolution and a 2003 executive order protecting Iraqi oil revenue from creditors by routing it through US banks. 

In practice, it means that Iraq must deposit every dollar of oil sales in a Fed account, and US regulators have final say on disbursing those funds. In 2020, Baghdad bristled at this setup, threatening to expel US troops; Washington responded by warning that it could simply cut off Iraq's funds. That showdown underscored how the US effectively holds Baghdad's purse strings.

It makes Iraq extremely vulnerable. Any sign of policy divergence risks triggering US penalties on Iraqi banks or even a freeze on the oil account. In recent years, US authorities have tightened scrutiny of Iraqi dollar flows, sanctioning Iraqi banks accused of laundering money for Iranian-linked groups. The net effect is that the US dollar is both a lifeline and a leash for Iraq.

US policy has long aimed to push Iraq toward energy self-sufficiency – ostensibly to avoid financing Iran. Washington attached conditions to waivers allowing Iraqi imports of Iranian gas and electricity, demanding that Baghdad invest in domestic power plants instead. When the Trump administration unilaterally ended Iraq's sanctions waiver for Iranian electricity in March 2025, Iraqi officials warned it would immediately knock out about 30% of the country's power generation. In that episode, US leverage over Iraqi finances directly translated into an energy crisis at home.

More recently, political turmoil in Baghdad has repeatedly been resolved under American pressure. When contested elections produced a deadlock, the US embassy quietly pushed rival parties toward compromise candidates. Iraq's new government has thus far been composed with Washington's consent. In all these ways – from money flows to political appointments – Iraq's room for independent policy is severely constrained by its reliance on US-controlled financial and diplomatic channels.

Foreign Oil Deals: ConocoPhillips and US Oil Interests

Washington's influence in Iraq is also evident in which companies develop Iraq's oil fields. Recently, Baghdad has moved to attract more American involvement. A stark example is the ConocoPhillips deal announced very recently. Conoco, a Houston-based oil giant, agreed to acquire roughly 42% of the equity in the Kirkuk oilfield consortium (joining BP and state partners) under a contract that covers several major northern fields. 

It not only deepens US economic presence in Iraq's hydrocarbon sector but also means that a significant share of Iraq's oil output will be managed by an entity ultimately subject to US jurisdiction. Conoco's entry follows a wave of recent deals skewing toward the US side.

In 2025, Baghdad signed production contracts with HKN, a Chevron-backed partnership, giving it roughly half of the planned reserves in the Himreen fields (central Iraq). General Electric, the American conglomerate, won a multi-billion-dollar contract to upgrade power plants in Basra. And several new energy agreements were inked at the US-Iraq strategic dialogue meetings in Houston. Iraqi officials have openly courted US investors, branding America's energy technology as "fantastic" and promising more contracts.

These developments raise concerns about sovereignty over Iraq's resources. Each contract obliges Iraq to prioritise foreign partners' returns and to supply them in hard currency.

The upshot is that Iraq's oil development strategy now aligns significantly with US geo-economic goals. If tensions rise with Iran, some in Washington may view these projects as assets to defend; if tensions ease, these projects still bind Iraq into contracts that may limit how Baghdad can redirect its oil revenue in a financial squeeze. In effect, Iraq's oil wealth – which should be the backbone of its independence – is being tapped in ways that embed US influence into the Iraqi economy.

Iran's energy lifeline and unpaid debts

After years of war damage and underinvestment, Iraq cannot keep the lights on with its power plants alone. The country suffers chronic shortages. Iraq imports vast amounts of electricity and natural gas from Iran.

This dependence is a direct legacy of Iraq's ruined infrastructure. Decades of sanctions (under Saddam) and the 2003 invasion left many power plants damaged or obsolete. The ISIS occupation later blew up transmission lines and exacerbated the crisis. As a result, even as Iraq became a major oil exporter, it remained a net energy importer. Starting in 2004, Iran began selling electricity into Iraq to help rebuild the grid. That arrangement grew over time. This trade was informal and politically sensitive, since the US sanctions on Tehran made payment difficult, but both countries repeatedly found workarounds. Despite the importance of these deliveries, Iraq has chronically lagged in paying the bills.

The US, however, has sought to break this arrangement. For years, Washington insisted that oil-rich Iraq should not be paying Tehran at all and threatened to stop waivers unless Baghdad ended its dependence. The Trump administration's "maximum pressure" campaign in 2025 revoked the exemptions for electricity imports, putting Iraq in an immediate pinch. 

Forced to scramble, Iraq made quick deals to buy extra power from Turkey and Kuwait. Meanwhile, any Iranian gas exports to Iraq were supposed to end too, though legal loopholes for "humanitarian" energy temporarily kept the fuel flowing at reduced rates.

The upshot is a cruel irony. Iraq cannot afford to pay Iran, but Iraq also cannot easily live without Iran's help. When the US raises the financial squeeze, Iraq ends up facing power cuts. When Iran cuts the gas, Iraq faces blackouts. Ordinary Iraqis bear the brunt.

Iraq in the regional crossfire

Beyond economics, the US–Iran rivalry plays out in violence that often spills into Iraq. Tehran's closest Iraqi allies are powerful Shia militias, some integrated into the state and some operating more independently.

Iraq's government is nominally neutral in any US–Iran conflict, but it lacks the authority to enforce that stance. Politically, Iraq is fragmented between pro-Iran parties, more nationalist Shiite factions, secular groups, and the Kurdish north. Forming a government often requires delicate power-sharing. 

In the streets, Iraqi citizens feel powerless. Many Iraqis are outraged that a foreign war could be fought at their expense. The underlying cause is frustration with a political system that seems beholden to foreigners.

Iraq has the misfortune of being rich in resources yet insecure in its position. US policies aimed at containing Iran often rely on Iraqi compliance – compliance that is enforced by holding Iraq's bank accounts hostage. Meanwhile, Iran's willingness to prop up Iraq's energy system keeps Baghdad afloat but does not come without strings attached. 

In the middle of these pressures, ordinary Iraqis suffer the daily fallout: low-paid jobs, erratic electricity, and a brittle political order. Without a decisive shift toward energy independence and true financial autonomy, Iraq risks remaining a "playing field" for external powers.

Simon Mohsin, Political and International Affairs Analyst

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.