By Ahmed Rasheed
DUBAI (Reuters) — U.S. forces are scheduled to withdraw from their final bases in Iraq this Wednesday, a retreat celebrated as a major victory by Iran and its regional allies. Despite the departure of American troops, which cost thousands of lives over two decades of conflict, Washington’s geopolitical influence over Baghdad remains firmly anchored in the financial sector.
Since the 2003 invasion, the United States has maintained effective control over the flow of Iraq’s oil-generated dollars, granting Washington extraordinary leverage over Baghdad’s political and economic decisions. This financial grip continues to shape regional dynamics, particularly in relation to Iran.
The Mechanism of U.S. Control Over Iraqi Oil Revenues
This leverage stems directly from the management of Iraq’s primary oil revenues, which are held in an account at the Federal Reserve Bank of New York.
Following the 2003 invasion, the U.S.-led Coalition Provisional Authority (CPA) established the Development Fund for Iraq (DFI) at the New York Fed. This fund was designed to collect oil revenues and direct them toward national reconstruction and development.
Beyond reconstruction, the fund was designed to shield Iraqi oil revenues from international lawsuits and financial claims stemming from the era of Saddam Hussein.
An executive order issued by President George W. Bush established this framework, a mandate renewed by every subsequent administration. Over time, the DFI transitioned into the Central Bank of Iraq’s account at the New York Federal Reserve, a structure that remains in place today.
The Extent of U.S. Leverage Over Baghdad
Because oil constitutes approximately 90% of the Iraqi state budget, control over these dollars gives Washington immense sway over the nation’s economic and political stability.
This dependency was highlighted in 2020, when Baghdad requested the withdrawal of U.S. troops. Washington reportedly threatened to cut off Iraq’s access to its Federal Reserve funds, forcing the Iraqi government to back down.
Although Iraq has gradually regained greater autonomy over its financial affairs since the early occupation years, the arrangement underscores the enduring influence of Washington over Baghdad’s economic landscape, even as Iraq seeks to assert full sovereignty.
Why the Financial Arrangement Persists
According to government officials speaking anonymously, the system has been crucial in anchoring Iraq’s financial stability and safeguarding state finances during periods of volatility.
It bolsters international confidence in the management of oil income, facilitates access to crucial U.S. dollars for trade and imports, and shields revenues from external claims, lawsuits, and severe financial shocks.
Furthermore, the arrangement supports exchange-rate stability and underpins confidence in the broader Iraqi economy, helping to strengthen domestic financial institutions while fostering greater economic sovereignty.
This framework also enables the Iraqi government to push back against Iran-aligned factions seeking fewer restrictions on dollar access. In the past year, Washington has leveraged this system to impose sanctions on Iraqi banks and individuals accused of facilitating Iranian money laundering.
The Domestic and Market Impact of the Arrangement
Tight restrictions on the U.S. dollar supply have fostered a parallel, informal market, leading to a significant spread between the official central bank exchange rate and black-market rates.
This price discrepancy essentially functions as a risk premium for transactions conducted outside the formal regulatory system.
During his second term, President Donald Trump’s campaign of maximum pressure on Iran has frequently caught Iraq in the crossfire, as Tehran relies on Iraq as a vital economic conduit.
The military conflict initiated between Israel and Iran on February 28 further intensified economic pressures on Baghdad.
Current Status of Iraq’s Oil Revenue Management
Today, Iraqi oil revenues remain securely held in the custody of the Federal Reserve Bank of New York.
Historically, the Central Bank of Iraq (CBI) utilized daily dollar auctions—formally known as the foreign currency window—as the primary mechanism to supply U.S. dollars. Private banks and exchange houses would bid to purchase dollars using Iraqi dinars.
Under significant U.S. pressure, Iraq formally discontinued the auction system at the beginning of 2025. This move was part of a broader crackdown on the alleged diversion of dollars to sanctioned entities, particularly in Iran.