Two powers, one grid: The geopolitical siege of Iraq’s economy

Shafaq News

Every summer, when Iraq’s electricity grid begins to strain under rising temperatures, the crisis that follows is never just technical. It is geopolitical. On one side, gas flows from Iran keep power plants running. On the other, the dollars that finance those imports —and sustain Iraq’s entire state budget— move through a financial system overseen by the United States.

These are often described as two separate dependencies. In reality, they form two sides of a single strategic equation. Iran’s leverage is built into Iraq’s energy supply. The United States’ leverage is embedded in its financial bloodstream. Between them, Iraq has become a space where competition is operational, constant, and deeply consequential.

This dual structure did not emerge overnight. It has taken shape gradually since the 2003 US-led invasion that toppled the regime of Saddam Hussein, embedding itself in the foundations of Iraq’s post-war economic order and becoming more entrenched over time.

Read more: Twenty-three years on: Iraq got what the 2003 invasion produced

Wired to Tehran

Iran’s relationship with Iraq is often framed through trade. According to Iran’s Trade Promotion Organization, bilateral exchange reached about $11.6 billion in 2025, with a target of $15 billion by 2026. Iraq’s Ministry of Finance identifies Iran as one of its largest sources of imported goods. Yet the strategic significance of the relationship extends far beyond commercial exchange, particularly in the energy sector.

Data from the US Energy Information Administration (EIA) shows that Iranian natural gas fuels power plants responsible for roughly 30% to 40% of Iraq’s electricity generation, placing Tehran at the center of Iraq’s energy stability.

The scale of dependency becomes clearer when measured against domestic demand. Iraq imports about 15 million cubic meters of gas per day, while its gas-fired power stations require roughly 50 million. The resulting shortfall —around 35 million cubic meters daily— leaves the system operating at only about 30% of its required capacity.

On paper, Iraq is permitted to import up to 50 million cubic meters per day under its arrangement with Iran. In practice, deliveries consistently fall below that ceiling, creating a gap between formal capacity and actual supply. That gap is where leverage quietly operates.

During periods of reduced inflows, including in March 2026, Iraq lost between 4,000 and 4,500 megawatts of generating capacity, forcing plants to scale back operations and pushing the grid into crisis during peak summer demand. Access to fuel has therefore become closely tied to timing, reliability, and predictability —factors that directly shape domestic stability.

Iran’s economic influence also extends well beyond gas supplies. Figures from Iraq’s Central Statistical Organization show that Baghdad imported more than $7 billion worth of Iranian non-oil products in the first seven months of 2025, including construction materials, machinery, food, and plastics. These goods are deeply embedded in everyday consumption patterns, especially in Iraq’s southern provinces like Basra, Karbala, and Dhi Qar.

At the same time, Iraq’s exports to Iran remain between $400 million and $700 million annually, mostly raw materials and agricultural products. The imbalance reinforces a broader structural asymmetry between the two economies.

Along the border, Iranian goods circulate through partially regulated channels. Financial transactions often bypass formal banking systems, forming what the International Monetary Fund (IMF) describes as a parallel economic layer that weakens oversight and increases exposure to external shocks. Over time, Iran’s role has expanded beyond that of a neighboring supplier, becoming intertwined with Iraq’s consumption networks, energy system, and segments of its informal economy.

But this is only one side of the equation. The other is not a counterweight; it is a different kind of control system entirely.

Read more: Iraq's power crisis: Dependence on Iranian gas and limited alternatives

The Green Gate

More than 85% of Iraq’s government income comes from oil, according to the World Bank. Those revenues pass through accounts at the Federal Reserve Bank of New York before being released in US dollars to Baghdad.

The arrangement emerged in the aftermath of the 2003 US-led regime change and was designed to integrate Iraq’s oil revenues into a monitored international financial system. Over time, it evolved into a structural feature of Iraq’s economic sovereignty, effectively placing liquidity management within an externally supervised framework while maintaining the appearance of financial independence.

As a result, Iraq’s fiscal core remains tied to a system beyond its direct control. Government spending —including salaries, pensions, and subsidies— depends on the uninterrupted conversion of oil revenues into liquidity. The state’s ability to function is therefore shaped not only by how much revenue it generates, but also by the speed and conditions under which those funds become accessible.

This framework is reinforced through periodic cash shipments linked to oil revenues, typically ranging between $400 million and $500 million per transfer. The flows help stabilize domestic liquidity while also illustrating Iraq’s continuing reliance on external financial authorization.

Whenever transfers are delayed or suspended, the consequences emerge quickly. Dollar scarcity intensifies inside the country, pressure mounts on the Iraqi dinar, and import costs rise across essential goods.

Recent developments have underscored the scale of this vulnerability. According to the US-based Foundation for Defense of Democracies, Washington has halted roughly $500 million in cash shipments to Iraq amid pressure linked to Iran-backed groups, while also suspending parts of security cooperation with Baghdad. Kataib Hezbollah and elements within the Popular Mobilization Forces (PMF) have been specifically cited in relation to financial restrictions and enforcement measures.

At the center of the system stands Rafidain Bank, which channels oil revenues after their release from New York and distributes them across the Iraqi economy, including public sector salaries. Under the new US oversight framework, parts of this distribution have shifted through smaller institutions such as Al-Nahrain Islamic Bank, altering the channels through which funds move without changing the underlying structure itself.

The financial system also serves as a mechanism for behavioral pressure. US authorities have tightened access to the dollar system for Iraqi banks suspected of facilitating transactions linked to sanctioned financial networks. The measures include efforts to restrict monetary flows connected to Iran-aligned actors operating within Iraq’s political and security landscape.

The effect is therefore cumulative: banking supervision becomes a mechanism of geopolitical pressure. Speaking to Shafaq News, Myles Caggins, who served three tours in Iraq between 2003 and 2020, noted that currency restrictions and banking oversight function as tools to encourage Iraq to reduce reliance on Iranian energy while also restricting illicit financial flows.

“The United States is using all elements of its power to encourage Iraq to distance itself from Iranian control, particularly after attacks by outlaw groups such as the Islamic Resistance in Iraq (IRI) on American assets,” he explained, describing economic leverage as the main focus at this stage.

He added that restrictions on liquidity and access to dollars carry clear macroeconomic consequences, placing pressure on exchange rates, raising import costs, and fueling inflation in a highly dollar-dependent economy like Iraq.

But the deeper impact is slower and more structural. “When formal banking channels tighten, parts of the economy shift into informal networks, increasing opacity and weakening the state’s ability to fully track financial flows,” he remarked, pointing to recent comments by caretaker Prime Minister Mohammed Shia al-Sudani, who expressed a desire to recalibrate Baghdad’s ties with both Washington and Tehran toward a more balanced relationship.

Read more: Sovereignty strain: US sanctions trigger Iraq's liquidity nightmare

Sovereignty Divided

Iraq’s experience is shaped by the simultaneous presence of two external systems operating through different mechanisms inside the same state structure. Together, they have narrowed Baghdad’s room for independent economic maneuvering.

Since 2003, Iraq has struggled to transform formal sovereignty into fully autonomous state capacity. Its political landscape remains divided between forces that lean toward Washington —often including parts of the Kurdish and Sunni communities— and others that prioritize ties with Tehran, particularly within the Shiite camp. External pressure, as a result, is reinforced not only from abroad, but also through internal political alignments.

Baghdad has nevertheless attempted to ease parts of these dependencies by expanding domestic gas production, pursuing electricity connections with Gulf States, and introducing banking reforms. Progress, however, remains uneven and constrained by structural challenges that cannot be resolved quickly, according to the World Bank.

Until Iraq moves beyond this model, its sovereignty is likely to remain constrained in practice.

Read more: Multiple actors, one battlefield: Iraq since US-Israel-Iran war began

Written and edited by Shafaq News staff.