Washington Turns the Screw: The Dollar Freeze and Iraq's Reckoning with Iran

The United States has suspended the shipment of U.S. dollars to Iraq, halting the flow of proceeds from Iraqi oil sales, the single largest source of revenue keeping the country afloat. The timing could not be more consequential. Iraq has yet to form a government, regional tensions continue to mount, and the long-running tug of war between Washington and Tehran has now fully arrived on Iraqi soil.

Although the suspension of dollar transfers has been on the table for some time, the United States had, until now, refrained from using it as leverage against Baghdad. In recent months, Washington has repeatedly warned the Iraqi government and its political elites, particularly within the Shia coordination bloc, to dismantle the Popular Mobilization Forces (PMF). The Iranian-linked umbrella of proxy militias has established a near-total grip on Iraqi politics, on the country's foreign relations, and on its internal dynamics with the Kurdistan Region and other communities.

A Parallel State Inside Iraq

The PMF's reach extends well beyond the battlefield. These militias have effectively taken charge of internal security, while attacking foreign offices, embassies, and consulates, kidnapping foreign nationals, and pressuring private businesses seeking to operate in Iraq. They have also moved to monopolize the militia economy itself, sponsoring the creation of hardliner armed groups within other ethnic and religious communities as a means of extending their influence. The rise of figures such as Rayan al-Kildani and his Babylon Brigades, operating under the banner of Christian representation, illustrates this strategy of absorbing minority armed factions into the broader Iranian-aligned network.

Washington has designated the majority of PMF factions as terrorist organizations, yet the Iraqi government has neither responded meaningfully nor shown any capacity to push back. The reason is structural. Most members of the Shia Coordination Framework maintain their own militia forces, and it is precisely this armed leverage that secures their political dominance. These same networks serve to extend Iran's reach not only within Iraq, but across the wider Middle East.

An Economy Built on a Single Pillar

The suspension of dollar transfers could prove devastating. Iraq depends almost entirely on oil revenues to fund its payments and, critically, its public sector salaries. Current estimates suggest that by the end of May, the Iraqi state will no longer be able to pay full salaries on time, a consequence of declining oil exports caused by the blockade of the Strait of Hormuz. Combined with the loss of dollar inflows, the shock could trigger an economic collapse.

The Iraqi treasury does hold significant gold reserves, but these do little to ease the immediate crisis. Gold is a long-term buffer, not an instrument for meeting payroll in a liquidity squeeze. If the current pressure persists, Iraq risks entering a period of economic decline that could last for years.

A Relationship Built on a Single Condition

Washington's posture toward Iraq in the post-ISIS period has always rested on a clear condition: there is no appetite in the United States for the PMF, nor for Iranian-linked militias and the politics they enable. This was the underlying logic behind the U.S. military withdrawal, the establishment of new security and military arrangements, and the decision to empower the Iraqi political elite as the legitimate interlocutor. The idea was to demonstrate that American forces were no longer on the ground, that militias were therefore unnecessary, and that political leaders could use this opening as leverage to disarm the armed groups.

That bet has not paid off. Rather than receding, the PMF has expanded its footprint in Iraqi political and economic life, a trajectory directly at odds with the support Baghdad both enjoys and continues to need from Washington.

The Missed Opportunity of Diversification

Iraq's political elite has failed to diversify the economy, a failure rooted in entrenched corruption and in the deliberate use of state resources as a conduit for Iranian interests. The country's fertile lands, once capable of sustaining a significant agricultural sector, have been abandoned in favor of the poison of oil. Oil generates quick revenue, and quick revenue allows politicians to reward their followers in real time, an option far more attractive than the slow work of long-term economic planning.

This dependence on the U.S. dollar, sustained for years by the generosity of successive administrations in Washington, has now returned to haunt the political class that took it for granted.

The Escalation Path

If Iraq fails to confront the PMF question and to recalibrate its position between Tehran and Washington, the crisis is likely to escalate into far harsher sanctions, measures the United States has already discussed internally.

Until now, Washington has granted Iraq a waiver to continue importing Iranian gas for its electricity generation. The purpose of the waiver was twofold: to keep Iraq stable, and to create political space for the gradual displacement of Iranian influence in favor of greater U.S. commercial and energy investment. With proper management and political will, Iraq possesses the resources to meet its own gas needs. Yet under Iranian alignment and pressure, it continues to import from Tehran, a transaction that also serves as one of Iran's key mechanisms for surviving international sanctions. Washington's strategic objective is clear: sever Iraq from Iranian influence, and deny Tehran the economic gateway that Iraq currently provides.

Adding to the pressure, the United States has also suspended its security arrangements with Iraq, removing another layer of the protective architecture that has underwritten Iraqi stability since the defeat of ISIS.

The Reckoning

Iraq now stands at a decision point it has long sought to avoid. For two decades, successive governments have managed the contradiction between their dependence on the United States and their entanglement with Iran by offering just enough to each side to avoid a rupture with either. That balancing act is no longer sustainable. Washington has signaled, with the dollar freeze and the suspension of security cooperation, that the cost of indecision will now be paid in economic and institutional terms.

The question is no longer whether Iraq can continue to hedge. It is whether the political class in Baghdad is willing to confront the armed networks that brought it to power, before the state itself becomes collateral in a confrontation it neither chose nor controls.