How the US Retains Influence Over Iraq’s Oil Revenues

DUBAI -UNS : The United States is set to withdraw its forces from their remaining bases in Iraq, marking the end of a major chapter in Washington’s military presence in the country. However, the US continues to exercise significant financial influence over Iraq through the management of its oil revenues.
Since the 2003 US-led invasion, Iraq’s oil income has been held through arrangements involving the Federal Reserve Bank of New York, giving Washington considerable leverage over Baghdad’s financial affairs.
How does the US manage Iraq’s oil revenues?
The arrangement dates back to the establishment of the Development Fund for Iraq (DFI) following the 2003 invasion. Created by the US-led Coalition Provisional Authority, the fund was maintained at the New York Federal Reserve and was intended to collect Iraq’s oil revenues and support reconstruction and development.
The mechanism was also designed to protect Iraqi oil income from legal claims and lawsuits linked to the regime of former President Saddam Hussein.
An executive order issued by then-US President George W. Bush established the framework, which has subsequently been renewed by successive US administrations. The DFI was later transformed into an account belonging to Iraq’s central bank at the New York Federal Reserve, where Iraqi oil revenues remain held.
What leverage does this give Washington?
Oil is the backbone of Iraq’s economy, accounting for roughly 90% of government revenues. As a result, control over the financial channels through which oil income is managed gives Washington substantial influence over Iraq’s economic and political stability.
When Baghdad sought the withdrawal of US troops in 2020, Washington reportedly warned that Iraq could lose access to its accounts at the New York Federal Reserve. The episode highlighted the financial leverage created by the arrangement.
Although Iraq has gradually assumed greater control over its financial system, the continued custody of its oil revenues in the United States remains an important element of Washington’s influence.
Why has the system remained in place?
Iraqi officials told Reuters that the arrangement has helped maintain financial stability and protect the country’s oil income.
The system also facilitates access to US dollars required for international trade and imports while helping shield Iraqi revenues from external claims, creditor actions and financial shocks.
Officials said the arrangement has supported exchange-rate stability, strengthened confidence in Iraq’s financial system and helped the country develop its domestic banking institutions.
It has also provided Baghdad with greater oversight of dollar flows, including efforts to restrict financial activities by groups accused of circumventing US sanctions.
What impact has the system had on Iraq?
Restrictions on the supply of US dollars have contributed to the emergence of a parallel currency market, creating a gap between the official exchange rate and the rate available on the informal market.
The difference effectively represents an additional risk premium for transactions conducted outside Iraq’s formal financial system.
Iraq has also found itself caught between Washington and Tehran. Iran relies heavily on Iraq for economic access, while successive US administrations have sought to limit the flow of dollars to entities accused of supporting or financing sanctioned Iranian interests.
What is the current status?
Iraq’s oil revenues continue to be held at the Federal Reserve Bank of New York, while the Central Bank of Iraq has historically used its foreign-currency window to supply dollars to banks and exchange companies.
Under the previous system, private banks and exchange houses could purchase US dollars through daily auctions using Iraqi dinars.
Iraq formally ended the dollar auction system at the beginning of 2025 following significant US pressure as part of broader efforts to tighten controls over dollar flows and prevent funds from being diverted to sanctioned entities.
Despite the reduction of US military involvement, the financial arrangements surrounding Iraq’s oil revenues continue to give Washington an important role in the country’s economic affairs.