Shafaq News

US pressure on Iran is no longer a matter concerning Tehran alone. As sanctions enter a new phase and their scope widens to cover sectors, individuals, entities, and vessels linked to the Iranian economy, Iraq finds itself facing a test that directly affects three critical areas: energy, trade and the financial sector.

In its latest punitive measures, Washington expanded the scope of its targets to around 60 individuals, entities, and vessels, while the US Treasury Department announced the launch of “Operation Economic Outcast,” warning countries, companies and financial institutions that continue dealing with targeted Iranian sectors that they could face secondary sanctions and restrictions on access to the dollar-based financial system.

The new measures extend beyond oil and finance. They also cover digital assets, technology, gold, aviation and shipping, alongside individuals, entities and vessels linked to Iranian oil, financial, military, nuclear and cyber networks.

For Iraq, the stakes are particularly high. Economic ties with Iran are not marginal; they run from the movement of goods through border crossings to gas and electricity, and ultimately to funds and banking settlements.

Official figures indicate that bilateral trade reached around $13 billion in 2025, with the possibility of rising to $25 billion annually once agreements covering border markets, joint economic zones and shared industrial cities are completed.

hat leaves Baghdad with a difficult choice: how can it preserve its economic relationship with Tehran without turning that relationship into a direct point of friction with the renewed US sanctions regime?

Sanctions: Baghdad’s Narrow Room for Maneuver

Iraqi political science professor at Al-Mustansiriyah University, Issam Al-Faili, considers the US measures, in part, a “warning shot” aimed at shadow companies and networks involved in money laundering and the smuggling of oil and currencies. In his assessment, Iraq will need to ensure that its dealings with Iran pass through official channels and the international banking system, particularly as the expanding sanctions raise the level of risk for entities dealing with targeted Iranian parties.

Al-Faili says Baghdad would be “forced to deal seriously” with the sanctions if Washington moved to further restrict dealings with Iran, warning that continued transactions with sanctioned entities could expose Iraqi parties to penalties. He described the measures as part of a broader US effort to cut off sources of funding to Tehran.

For Iraq, however, the most pressing question is whether it can secure US exemptions, particularly for gas and electricity. Baghdad therefore needs, according to Al-Faili, to move early and establish mechanisms to protect its economic interests.

Read more: Record Arbaeen crowds, thin returns: Iran's collapse drains Iraq's religious tourism

Gas and Electricity: Key Vulnerability

Iraq relies on Iranian gas to operate a significant part of its power-generation system, while annual payments for gas range, according to Iraqi estimates cited in previous reports, between $4 billion and $5 billion. Washington has granted Baghdad temporary exemptions in previous years to allow energy imports from Iran, but those exemptions have gradually become one of the tools used to pressure Iraq to diversify its energy sources.

Parliamentary Foreign Relations Committee member Mukhtar Al-Mousawi says the government faces a difficult balancing act: it is, in his words, “forced” to comply with US sanctions, yet the scale of financial and commercial interests with Iran makes the issue more complicated.

Al-Mousawi tells Shafaq News that Iraqi funds are held in Iranian banks, making the impact direct. At the same time, he believes Baghdad could secure “possible exemptions” if the Iraqi government approaches its US counterpart, particularly because Iraq is “in dire need of Iranian gas.”

Al-Mousawi considers Iraq likely to be among the countries most affected if the sanctions widen, making exemptions and negotiations with Washington a central part of managing the crisis.

Electricity-sector figures illustrate the scale of dependence. In March 2025, Iraqi Parliament Deputy Chairman of the Electricity Committee Walid Al-Sahlani said Iraq needed 1,800 MCM of Iranian gas, and that losing this quantity would result in a loss of 8,000 megawatts from the electricity system.

With the US exemption ending, Iraq turned to alternative sources, including Qatar and Oman, while the Oil Ministry proposed importing around 600 million standard cubic feet of liquefied gas through floating platforms at Iraqi ports, providing around 4,000 megawatts, alongside the continuation of the agreement with Turkmenistan to import gas. The Gulf electricity interconnection project was also on the table, with a capacity of up to 500 megawatts, alongside efforts to strengthen interconnection with Jordan and Turkiye.

In November 2025, official figures indicated that Iraq’s electricity needs reached around 50,000 megawatts during the summer, compared with production of approximately 28,000 megawatts at the time.

These figures explain why Iranian gas remains central to Iraq’s calculations: the gap between demand and production remains wide, while alternatives require infrastructure, investment and time before they can bridge the shortfall.

Iraq's exposure extends beyond gas. Iranian electricity itself has remained part of the issue. In March 2025, Iran confirmed that electricity exports to Iraq would continue under an existing contract, alongside talks over outstanding payments and their settlement. By May of the same year, Iraq was still importing Iranian electricity and gas while exploring alternatives from the Gulf states, Jordan and Qatar, as well as ways to make use of domestically produced associated gas.

Hormuz Adds Another Layer of Risk

These calculations are unfolding as shipping through the Strait of Hormuz faces severe disruption. Fewer than 20 commercial vessels passed through the strait over the weekend of August 22 and 23, compared with levels before the war that began on February 28, 2026.

On August 22, Iran granted several Iraqi oil tankers permission to pass through Hormuz following diplomatic contacts from Baghdad. Iraq’s risks, therefore, are not confined to energy imported from Iran; its own oil exports are also exposed to the security and political environment surrounding the maritime corridor through which a large share of the region’s exports passes.

Read more: The end of a waiver: Iraq's struggle for energy independence

Banking: Sanctions from the Border to the Financial System

The secondary sanctions imposed by Washington force companies and banks to choose: continue dealing with targeted Iranian entities or risk losing access to the US financial system. That is particularly sensitive for Iraq, after Washington tightened its oversight of dollar transfers in recent years and acted against Iraqi banks over suspicions related to money laundering and the financing of networks linked to Iran.

According to Al-Faili, Iraq cannot bypass official and international banking channels in the gas and electricity files. “If US threats turn into direct measures against those dealing with Iran, failure to comply with the sanctions could expose Iraq to penalties.”

On August 7, the US Treasury Department announced measures against covert Iranian currency networks operating across several countries, saying the networks had helped Iran move hundreds of millions of dollars as part of what Washington describes as Iran’s “shadow banking system.” In another development on the same day, the Treasury said foreign financial institutions facilitating significant transactions on behalf of sanctioned Iranian entities could face restrictions on their banking relationships with the United States.

Against this backdrop, sanctions do not have to bring Iraq-Iran trade to a halt for their effects to emerge. The impact could begin with banks and money-transfer companies before extending to the costs of trade, insurance and shipping, as financial risks rise.

In July 2026, Baghdad and Washington agreed on a mechanism to address one of the thorniest issues: Iran's outstanding gas payments.

Iraq and the United States reached an agreement allowing Iranian gas dues to be settled through the supply of goods, including food and medicine, rather than cash transfers. According to official data, Iran is seeking around $11 billion in outstanding payments, while part of the funds is held at the Trade Bank of Iraq and cannot be transferred because of US sanctions. Iran’s central bank governor revealed that around $7 billion was held in Iraq, in addition to more than $3 billion owed to Iran’s Oil Ministry, bringing total receivables to between $10 billion and $11 billion.

Under bilateral agreements, payments for Iranian gas and electricity imports are deposited into accounts at the Central Bank of Iraq (CBI) and the Trade Bank of Iraq, while the original contracts stipulated payment for gas in euros and electricity in dollars. The US withdrawal from the nuclear agreement in 2018 and the reimposition of sanctions subsequently made it impossible to settle these dues in foreign currencies, causing them to accumulate within Iraq’s banking system.

Tehran: Sanctions Should Not Extend to Neighboring States

Iranian affairs writer and researcher Saleh Al-Qazwini says Iran “does not want any country in the region to be harmed because of its relations with Iran or the sanctions,” stressing that Tehran is concerned about the interests of neighboring states, foremost among them Iraq.

Al-Qazwini told Shafaq News that, from the Iranian perspective, US sanctions lack a legal basis and that pressure on regional states to join the sanctions forms part of the “economic aggression” against Iran.

Iraq’s calculations, however, extend beyond the political position on sanctions. Baghdad is tied to the global financial system and the dollar on one side, while relying on Iran for a significant portion of its energy needs on the other. Trade with its eastern neighbor, meanwhile, remains a major part of Iraq's domestic trade.

On August 20, Reuters reported that US President Donald Trump’s threats to impose sanctions on Iran’s partners had raised concerns about global supplies, while shipping through the strait remained subdued. At the same time, Baghdad has begun exploring alternative routes for its oil exports, including expanding shipments through Turkiye’s Ceyhan port and other routes through Syria and Jordan. Estimates indicate that constructing a new pipeline through Syria could take years and require substantial costs.

Iran Seeks Alternatives, Iraq Seeks Space

In Tehran, the new sanctions are not viewed as separate from a broader course of economic and political pressure.

Iranian affairs expert Mahdi Azizi considers US sanctions nothing new for Iran and views the latest measures within a framework of economic, psychological and media warfare, alongside moves and mediation efforts aimed at bringing the two sides back to the negotiating table.

In an interview with Shafaq News, Azizi acknowledges the possibility of repercussions and problems, but points to Iran’s reliance on a “barter economy” and the expansion of ties with neighboring countries, as well as China and Russia, while making use of its membership in and relations with institutions such as the Shanghai Cooperation Organization and BRICS, alongside efforts to strengthen domestic production.

China announced that it would take the necessary measures to defend its interests after Washington warned countries that continued to deal with Iran. Beijing maintained that economic pressure does not resolve problems and that Chinese-Iranian cooperation takes place within international law.

The options Tehran is exploring, however, do not necessarily provide a direct answer to Baghdad’s needs. Iraq requires alternatives of its own, particularly in energy and the financial sector.

For this reason, Al-Faili believes that “Baghdad needs to develop a clear vision for dealing with the repercussions and should not wait for sanctions to turn into an actual crisis in electricity, trade, or the banking sector.” He points out that Iraq has explored options in recent years to reduce its dependence on Iranian gas, including floating gas-import platforms and electricity interconnections with other countries, but these projects still face implementation, technical, and financial challenges. He also maintains that grid interconnection and diversification of gas sources could give Iraq greater room to withstand any potential disruption, “but this requires swift decisions and investment, because alternatives cannot replace Iranian gas overnight.”

Religious Tourism May Prove More Resilient

Religious tourism represents a major economic channel in Iraq-Iran relations. Around 80% of hospitality, transport, and accommodation activity in Najaf during pilgrimage seasons is tied to Iranian visitors, according to the Najaf Hotels Association.

During the 2026 Arbaeen pilgrimage, more than 22 million people took part, including more than 4 million foreign visitors from 172 countries.

Najaf also received around 5 million visitors for the anniversary of the Prophet Muhammad’s death, while the pilgrimage marking the death anniversary of Imam Musa al-Kadhim in Baghdad drew around 15 million visitors during the same year.

These flows come as religious tourism contributes around 3.3% of Iraq’s gross domestic product. The impact of US sanctions on the number of visitors itself is likely to be indirect, since the sanctions do not target religious travel as such.

Financial restrictions and the decline in the value of the Iranian currency, which has lost more than half its value over a year, could nevertheless constrain Iranian visitors’ spending, a trend that has already affected hotel and market revenues despite continued visitor numbers. Visitor flows may remain high while the economic return they generate declines if financial pressure on Iranians and difficulties with payments and transfers persist.

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Written and edited by Shafaq News staff.