The United States will withdraw from its last bases in Iraq on Wednesday. This withdrawal is seen as a victory for Iran and its allies, who have deep influence in the country. Over more than two decades of war, 4,500 Americans lost their lives in Iraq. However, since the invasion of Iraq in 2003, the United States has maintained effective control over the oil revenues of this country, allowing Washington to influence Baghdad's affairs.
How the United States Controls Iraq's Oil Revenues
The U.S. control over Iraq's oil revenues is primarily through the management of these revenues in the Federal Reserve Bank of New York. Following the invasion in 2003, the U.S.-led "Coalition Provisional Authority" established the "Development Fund for Iraq," which is held at the Federal Reserve Bank of New York and was designed to collect oil revenues for use in reconstruction and development efforts.
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This fund was also established to protect Iraq's oil revenues from claims and lawsuits related to the Saddam Hussein era. An executive order issued by George W. Bush, the then-President, has since been renewed by every subsequent president. The Development Fund for Iraq has now been converted to an account of the Central Bank of Iraq at the Federal Reserve Bank of New York, and this situation continues.
The Impact of This Control on Iraq
Oil is Iraq's most important source of income, accounting for about 90 percent of the government budget. This gives Washington significant power to influence the economic and political stability of Iraq. When the Iraqi government requested the United States to withdraw its forces in 2020, reports emerged that Washington threatened to cut off Iraq's access to financial resources at the Federal Reserve Bank of New York, which ultimately forced Baghdad to back down.
Although Iraq has gained more control over its financial affairs since the early years of occupation, this connection reflects the lasting impact of the United States on Iraq's economic outlook, even as Baghdad struggles to assert its sovereignty and independence.
Why Does This Agreement Remain in Place?
According to government officials, this system has helped stabilize Iraq's finances and protect government revenues. This increases international confidence in the management of oil revenues and facilitates access to the U.S. dollars needed for trade and imports. It also protects revenues against foreign claims and financial shocks.
This agreement has helped stabilize the exchange rate and strengthen confidence in Iraq's economy while attempting to bolster domestic financial institutions and assert greater economic sovereignty. It also allows the government to resist certain groups, such as Iranian-affiliated groups that seek to reduce restrictions on access to dollars. Last year, the United States imposed sanctions on some Iraqi banks and individuals accused of money laundering for Iran.
Severe restrictions on the supply of U.S. dollars have led to the creation of a parallel and informal market for dollars, resulting in a price discrepancy between the official rate set by the Central Bank and the black market rate. This price difference effectively represents a risk premium for transactions outside the official system.
During his second presidential term, Donald Trump pursued a maximum pressure policy against Iran, in which Iraq often finds itself in the crosshairs. The country is seen as an economic lifeline for Tehran. The war he initiated with Israel against Iran on February 28 has put additional pressure on Baghdad.
The Status of Iraq's Oil Revenue Management
Iraq's oil revenues remain under the control of the Federal Reserve Bank of New York. Historically, the Central Bank of Iraq has used dollar auctions, officially known as the "foreign currency window," as the primary mechanism for securing dollars. Banks and private exchange offices can daily bid for U.S. dollars using Iraqi dinars. Iraq is officially set to end the auction system at the beginning of 2025 following intense U.S. pressure, which is part of a broader crackdown on claims of dollar misuse to sanctioned parties, particularly Iran.
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