U.S. Economic ‘D-Day’ Sanctions Push Iran to Leverage Iraq as Last Economic Lifeline

As the United States intensifies economic pressure on Iran, Tehran is increasingly turning to Iraq as its primary escape route from international isolation.

The neighboring country, whose political and economic spheres Tehran has dominated for two decades, is emerging as the regime’s final economic lifeline. To secure this relationship, Iran is expanding its on-the-ground influence through militias and financial networks, according to officials and analysts.

This strategy is placing significant pressure on Iraqi Prime Minister Ali al-Zaidi, a self-proclaimed reformer who has demanded that Iraqi militias disarm and who was personally welcomed by U.S. President Donald Trump at the White House in July.

To dismantle Shiite Iran’s financial networks, Mr. Zaidi must confront the powerful Iran-backed Shiite militias. Yet with Iran flexing its regional muscles, the Baghdad government risks becoming little more than a bystander to the U.S.-Iran confrontation.

In announcing the U.S. administration’s “economic D-Day” for Iran, Treasury Secretary Scott Bessent described it as a “sustained campaign” to “sever every economic lifeline that sustains this tyrannical regime until Tehran stands alone.”

“Nations that facilitate any interactions with the regime … should expect to share in the isolation,” he warned.

However, experts question what concrete measures the Trump administration can take to suppress illicit Iranian cash networks in Iraq—an oil-rich nation with a cash-based economy, a 994-mile border with Iran, and numerous political groups and armed factions loyal to Tehran.

Julia Demaree Nikhinson/AP

President Donald Trump meets with Iraqi Prime Minister Ali al-Zaidi in the Oval Office of the White House, in Washington, July 14, 2026.

“Iraqis simply do not put money in banks,” says Victoria Taylor, director of the Iraq Initiative at the Atlantic Council and former U.S. deputy assistant secretary of state for Iraq and Iran. She notes that Iraqis’ limited use of banking systems has hindered Mr. Zaidi’s efforts to combat corruption, another of his key priorities.

“There is a question as to what impacts sanctions will have when people are burying money underground in jars. I don’t think sanctions as a tool will necessarily place pressure on Iranian interference in Iraq as we may wish.”

Prior to Monday’s D-Day sanctions announcement, Iran-backed groups in Iraq urgently attempted to convert millions of dollars into cryptocurrency, several sources from diverse backgrounds told the Monitor.

A sustained U.S. effort

The “economic D-Day” represents the latest phase in Washington’s long-standing effort to leverage the flow of dollars through Iraq.

Under a mechanism established during the U.S. occupation of Iraq, the nation’s oil revenues are held and processed through the Federal Reserve Bank in New York, with $100 billion of the country’s reserves held in the United States.

In 2024, the Treasury Department severed Iraqi Al Huda Bank from the U.S. financial system, stating that it channeled billions to the powerful Islamic Revolutionary Guard Corps and Iran-backed militias.

The Central Bank of Iraq even barred Mr. Zaidi’s own Al Janoob Islamic Bank, along with six other banks, from using U.S. dollars in 2024 amid Treasury suspicions that they smuggled currency to Iran and Tehran-backed groups.

In April 2026, the Trump administration withheld $500 million of Iraqi government revenues and suspended all shipments of U.S. currency in an effort to choke off these militias.

Yet after Mr. Zaidi pledged strict financial monitoring and safeguards at his White House meeting in July, the United States resumed air shipments of dollars to Iraq.

Security forces stand guard during a demonstration in front of the Iraqi central bank as the currency plummets against the U.S. dollar, in Baghdad, Oct. 5, 2023.

Last week, after the United Arab Emirates—Iran’s second-largest trading partner—suspended trade and financial ties with Iran following what it described as an Iranian rocket attack, Iraq’s importance as Iran’s last economic lifeline has only intensified, according to experts.

Militias and money

To avoid being drawn further into regional conflict, the Iraqi government faces mounting pressure to control militias targeting its Gulf neighbors and U.S. bases.

Mr. Zaidi represents the largest political bloc in Iraq, a broad Shiite coalition. This coalition includes diverse factions espousing varying degrees of Iraqi nationalism, Iranian allegiance, skepticism, and even outright disdain for Tehran’s dominance over Iraq. Some maintain ties to militias.

Shiite militias such as the Popular Mobilization Front units, formed a decade ago to combat the Islamic State insurgency, have since been loosely integrated under the umbrella of the Iraqi state.

Other “Islamic resistance” militias such as Kataib Hezbollah and Asa’ib Ahl al-Haq operate outside the control of the state or Mr. Zaidi’s coalition and take direction from Tehran. Throughout the U.S.-Iran conflict, they have played a instrumental role in targeting Gulf states’ energy infrastructure and U.S. military bases with missiles and drones.

While previously relying on distant shadowy patronage networks, IRGC commanders in Iraq are now directly overseeing both militias and their funding networks, securing them through the threat of force, according to observers and regional officials. Several IRGC officers were killed in U.S.-Saudi strikes on paramilitary groups in Iraq in July.

“For the last 10 years, Iraq has been the breathing lung for the Iranian economy,” says Muhanad Seloom, nonresident senior fellow at the Doha-based Middle East Council on Global Affairs. “To ensure that money reaches Iran eventually, they need these militias on the ground to control and pressure banks and the dollar market. Over the years they have perfected a money-laundering machine in Baghdad that obtains U.S. dollars and takes them to Iran.”

Morteza Nikoubazl/NurPhoto/AP/File

An Iraqi Shiite fighter from the Popular Mobilization Front monitors an area on the front line in the Al-Attasa area, near positions held by Islamic State militants south of Mosul, Iraq, Nov. 13, 2016. Today the Popular Mobilization Front units, unlike Shiite militias loyal to Iran, have been placed under the umbrella of the state.

Zaidi’s logic

Mr. Zaidi’s government has ordered all militias to disarm or integrate into the state by September 30, the same date when the last American and international combat forces are scheduled to depart Iraq after 23 years.

The Iraqi government’s rationale for linking these two moves is that without a U.S. or Western troop presence in Iraq, these Iran-backed militias would lose their primary justification for operating in the country.

“The thing is, these militias don’t need a legitimate excuse,” says Ms. Taylor, the Atlantic Council Iraq expert. “The militias exist because Iran wishes them to exist and sees them as an important economic lifeline. These militias have become businesses in Iraq.”

While some militias aligned with Mr. Zaidi’s coalition may nominally disarm and others integrate with the state, the hardline Iran-directed militias will remain an outlier, according to experts.

“What is not plausible is disarming or integrating the IRGC-led militias. I don’t think anybody in Iraq can or will do that. These militias are deeply embedded and can threaten anybody,” says Dr. Seloom.

“Iraq is not completely controlled by Iran, but Iran-backed groups have the guns and the money.”

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