Despite the impending withdrawal of U.S. forces from Iraq, Washington maintains significant influence over Baghdad's affairs through its effective control of the nation's oil revenue dollars, a mechanism established following the 2003 invasion. This arrangement has provided the U.S. with considerable leverage over Iraq's economic and political landscape, with implications for regional dynamics, particularly concerning Iran.
The core of this control lies in the management of Iraq's oil income via an account at the Federal Reserve Bank of New York. Initially established as the Development Fund for Iraq (DFI) by the U.S.-led Coalition Provisional Authority, the fund was designed to manage oil revenues for reconstruction and to shield them from claims related to Saddam Hussein's regime. This arrangement, initially authorized by an executive order from President George W. Bush, has been consistently renewed by successive U.S. administrations. The DFI has since evolved into an account managed by the Central Bank of Iraq at the New York Federal Reserve.
Given that oil constitutes approximately 90% of Iraq's state budget, this financial linkage grants the U.S. substantial sway over the country's economic and political stability. Reports indicate that in 2020, when the Iraqi government requested the withdrawal of U.S. troops, Washington reportedly threatened to restrict Baghdad's access to these Federal Reserve funds, a threat that led to the Iraqi government reconsidering its position. While Iraq has progressively gained more autonomy over its finances, this enduring connection underscores the persistent U.S. influence on Iraq's economic framework, even as Iraq pursues greater sovereignty.
Iraqi government officials, speaking anonymously, have indicated that the system has bolstered Iraq's financial stability and safeguarded state finances. It reportedly enhances international confidence in oil revenue management, facilitates access to essential U.S. dollars for trade and imports, and protects revenues from external claims and financial shocks. Furthermore, the arrangement supports exchange-rate stability, bolsters confidence in the Iraqi economy, and assists in strengthening domestic financial institutions and asserting economic sovereignty. It also provides the government with a means to resist certain actors, such as Iran-aligned groups, who advocate for fewer restrictions on dollar access.
However, the stringent controls on U.S. dollar supply have inadvertently fostered a parallel, informal dollar market, leading to a disparity between the official exchange rate and the black market rate. This price difference essentially reflects a risk premium for transactions conducted outside the formal financial system. In recent years, particularly under the Trump administration's maximum pressure campaign against Iran, Iraq has often found itself caught in the crossfire, serving as an economic conduit for Tehran.
Currently, Iraqi oil revenues remain under the custodianship of the Federal Reserve Bank of New York. Historically, the Central Bank of Iraq has utilized dollar auctions, known as the foreign currency window, as its primary method for supplying U.S. dollars to private banks and exchange houses. In a significant development, Iraq formally discontinued this auction system at the beginning of 2025, following considerable pressure from the U.S. as part of a broader initiative to curb alleged dollar diversion to sanctioned entities, particularly Iran.
