Sovereignty strain: US sanctions trigger Iraq's liquidity nightmare
Shafaq News
The United States has imposed sanctions on several Iraqi banks, companies, and businessmen linked to Iran-backed armed groups, signaling a sharp escalation in economic and political pressure on Baghdad. By restricting access to essential dollar transactions, the measures have increased uncertainty over government budgets and the functioning of state institutions.
The move has deepened tensions within Iraq’s fragile political scene, raising concerns about the country’s ability to manage these mounting challenges.
Government Response
The sanctions, announced by the US Treasury Department, targeted Al-Muhandis General Company — the economic arm of Iraq’s Popular Mobilization Forces (PMF) — along with several prominent bankers and firms suspected of links to Iran’s Islamic Revolutionary Guard Corps (IRGC) and its Iraqi ally Kataib Hezbollah.
According to the Treasury’s statement, the designated entities were involved in “corruption and money-laundering networks” that financed armed groups operating inside and beyond Iraq. In reaction, Baghdad formed a high-level national investigative committee, including representatives from the Ministry of Finance, the Central Bank, the Integrity Commission, and the Federal Board of Audit, to scrutinize the basis of the sanctions.
In a statement, Baghdad described the US action as “unilateral and regrettable,” advocating instead for “the exchange of technical and banking information rather than punitive measures.” The government also reaffirmed its rejection of any external interference in Iraq’s internal affairs while emphasizing its refusal to permit economic activity that supports groups operating outside the law.
Dollar Warzone
The sanctions represent a direct threat to Iraq’s financial structure, noted Nawar al-Saadi, professor of international economics, describing them as a “real warning” to the economy. He explained that the measures do not target isolated entities but create a cumulative negative impact on the investment and financial environment.
“Iraq has inadvertently become part of an economic battlefield between Washington and Tehran,” al-Saadi observed to Shafaq News, stressing that the sanctions could trigger a severe contraction in liquidity and disrupt a financial system heavily dependent on the dollar.
He also warned that the restrictions may provoke higher demand for dollars in parallel markets, a depreciation of the dinar, delays or freezes in investment projects, and difficulties securing trade shipments.
“This represents a direct threat to the execution of the state budget and to salaries if sanctions eventually target government-linked banks,” he highlighted, adding that the current measures are not merely punishment of specific firms, but an alarm bell for structural vulnerabilities in Iraq’s financial system.
Bank Blacklist Grows
The new sanctions form part of a steadily expanding wave of US measures over the past two years targeting Iraq’s banking sector. In January 2024, the US Treasury Department designated Al-Huda Bank a “financial institution of primary money-laundering concern” and cut it off from dollar correspondent accounts, signaling the start of a broader clampdown.
A year later, in February 2025, Baghdad — in coordination with Washington — suspended five more local banks from dealing in US currency: the Arab Islamic Bank, United Investment Bank, Sanam Islamic Bank, Misk Islamic Bank, and Amin al-Iraq Bank.
A 2025 World Bank report estimated that more than thirty Iraqi banks have faced restrictions or sanctions on dollar transfers due to suspected links with Iranian institutions or groups connected to armed factions. The report highlighted that the measures deepened Iraq’s liquidity shortage and limited government funding for investment projects in an economy reliant on dollar-based oil and trade revenues.
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Additionally, the tightening has deterred foreign investors, unsettled markets, and widened the gap between the official and parallel exchange rates of the dinar — eroding purchasing power and pushing inflation higher.
In Baghdad, each new US restriction is perceived not only as a financial measure but also as part of a broader pattern of political and security pressure. That perception has magnified the sanctions’ impact, fueling public concern and debate over Iraq’s financial sovereignty and its ability to preserve stability under growing external strain.
Security Implications
Security experts caution that the sanctions may signal the onset of a deeper escalation. Strategic analyst Alaa al-Nashou suggested that such measures could precede targeted military operations inside Iraq. “If these sanctions expand, they could create widespread public fear,” he explained to Shafaq News.
Military analyst Sarmad al-Bayati expressed similar concerns, noting that the sanctions’ security dimension is closely linked to recent accusations over attacks that killed US soldiers. “The inclusion of Al-Muhandis Company in the sanctions list, despite being under Iraq’s Federal Board of Supreme Audit, raises questions about the accuracy of the US evidence and whether it relies on solid intelligence or political considerations,” he noted.
Al-Bayati added that maintaining the sanctions despite Iraq’s financial reforms during the past two years has caused confusion within the banking sector and placed undue pressure on financial institutions.
Political analyst Aeed al-Hilali viewed the sanctions as carrying political weight equal to their economic impact, suggesting they aim to erode Iraq’s sovereignty through pressure on state institutions. He anticipated Prime Minister Mohammed Shia al-Sudani’s government will engage in dialogue with Washington to limit the repercussions while preserving internal stability.
Meanwhile, Imran al-Karkoushi, a member of Nouri al-Maliki’s State of Law Coalition, labeled the sanctions a “violation of Iraq’s sovereignty and independence in security, politics, and the economy,” warning that the continuation of this path could spark significant internal political and security tensions.
Tensions intensified when US Congressman Joe Wilson posted on X shortly after the sanctions announcement, hinting that similar measures could soon target the Badr Organization, its leader Hadi al-Amiri, and Iraq’s state-owned Rafidain Bank — accompanied by an hourglass emoji to imply that “time is running out.”
Wilson has previously accused Rafidain Bank of conducting financial transactions with Yemen’s Houthis Movement and threatened to suspend US funding to Iraq.
Written and edited by Shafaq News staff.
