As US presses Iran, the economic battlefield shifts to Iraq
As the United States ratchets up economic pressure on Iran, Tehran is widening its largest escape hatch, Iraq.
Iran’s neighbor, whose political and economic spheres Tehran has dominated for two decades, is emerging as the regime’s last economic lifeline. To secure it, Iran is increasing its on-the-ground involvement through militias and money-launderers, officials and analysts say.
That is putting pressure on Iraqi Prime Minister Ali al-Zaidi, a self-styled reformer who has demanded that Iraqi militias disarm and who was personally embraced by U.S. President Donald Trump at the White House in July.
Why We Wrote This
One key goal for Iraqi Prime Minister Ali al-Zaidi has been the disarming of Iraqi militias, including those backed by, and serving, Iran. The Trump administration robustly endorses that goal, but its economic pressure on Iran is making it harder to attain.
To uproot Shiite Iran’s money networks, Mr. Zaidi must uproot the powerful Iran-backed Shiite militias. Yet with Iran flexing its muscles, the Baghdad government is increasingly being relegated to little more than a bystander to the U.S.-Iran clash.
In outlining the U.S. administration’s “economic D-Day” for Iran Monday, Treasury Secretary Scott Bessent said it was 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.
But experts question what the Trump administration could actually do to clamp down on illicit Iranian cash networks in Iraq – an oil-rich country with a cash-based economy, a 994-mile border with Iran, and a plethora of political groups and armed factions loyal to Tehran.
“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 Iraqis’ limited use of banking systems has frustrated Mr. Zaidi’s efforts to clean up corruption, another of his 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.”
Ahead of Monday’s D-Day sanctions declaration, Iran-backed groups in Iraq urgently tried to convert millions of dollars into cryptocurrency, several sources from a range of backgrounds told the Monitor.
A sustained U.S. effort
The “economic D-Day” is the latest phase in Washington’s long struggle to leverage the flow of dollars through Iraq.
Under a mechanism set up during the U.S. occupation of Iraq, the nation’s oil revenues are held and run through the Federal Reserve Bank in New York; $100 billion of the country’s reserves are held in the U.S.
In 2024, the Treasury severed the Iraqi Al Huda Bank from the U.S. financial system, stating 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 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 a bid to choke off these militias.
Yet after Mr. Zaidi pledged strict financial monitoring and safeguards at his White House meeting in July, the U.S. resumed air flights of dollars to Iraq.
Last week, after the United Arab Emirates, Iran’s second-largest trading partner, suspended trade and financial ties with Iran following what it said was an Iranian rocket attack, Iraq’s importance as Iran’s last economic lifeline has only intensified, experts say.
Militias and money
To prevent being dragged further into war, the Iraqi government is under 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. The coalition includes a diverse range of factions espousing varying levels of Iraqi nationalism, Iranian allegiance, skepticism, and even outright disdain for Tehran’s dominance of Iraq. Some have ties to militias.
Shiite militias such as the Popular Mobilization Front units, formed a decade ago to fight the Islamic State insurgency, have since been loosely placed under the umbrella of the Iraqi state.
Other “Islamic resistance” militias such as Kataib Hezbollah and Asa’ib Ahl al‑Haq are outside the control of the state or Mr. Zaidi’s coalition and are directed by Tehran. Throughout the U.S.-Iran war, they have been instrumental in targeting Gulf states’ energy infrastructure and U.S. military bases with missiles and drones.
While previously relying on shadowy patronage networks from afar, IRGC commanders in Iraq are now themselves directly overseeing both militias and their funding networks, securing them with the threat of force, observers and regional officials say. 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 make sure that money comes to 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 gets U.S. dollars and takes them to Iran.”
Morteza Nikoubazl/NurPhoto/AP/File
Zaidi’s logic
Mr. Zaidi’s government has told all militias to disarm or integrate into the state by Sept. 30, the same date the last American and international combat forces are to leave Iraq after 23 years.
The Iraqi government’s logic in linking the two moves is that without a U.S. or Western troop presence in Iraq, these Iran-backed militias would no longer have justification to operate in Iraq.
“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 close to Mr. Zaidi’s coalition may nominally disarm and others integrate with the state, the hardline Iran-directed militias will remain an outlier, experts say.
“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.”