The U.S. ability to control the flow of dollars to Iraq’s cash-based economy has long been described as the “nuclear option” for Washington to impose its will on Baghdad.
Now, in the shadow of the U.S. war with Iran, the Trump administration is doing just that.
The United States has suspended air shipments of dollars to Iraq, according to two senior Iraqi officials, withholding money that Iraq earned from its own oil sales.
It is part of a vigorous pressure campaign by the U.S. administration to force the Baghdad government to distance itself from Iran. Washington has also suspended cooperation with and funding for Iraq’s security services, two Iraqi officials said earlier this week.
The State Department referred questions on the dollar shipments to the Treasury Department, which declined to comment.
The U.S. measures could potentially cripple Iraq’s already wobbly economy, which relies on cash. Demand for dollars began to rise as news of the halt in shipments spread, stoking anxiety.
Iraq has long maintained close ties with both Iran and the United States and often finds itself caught between the two rivals. That tug of war has now pushed the country into crisis.
The U.S. measures send the message that Washington is treating Iraq more as an enemy than an ally, said Ramzy Mardini, the founder of Geopol Labs, a geopolitical risk advisory firm based in the Middle East.
“Halting dollar transfers amounts to a nuclear option,” he said, calling this a “weaponization” of the currency. “Iraq isn’t an adversary of the U.S., and yet it is threatened in a way that sends a terrible signal to other oil-producing partners in the region.”
Washington was particularly angered over a series of recent attacks by Iran-linked Iraqi militias on U.S. interests in Iraq in retaliation for the U.S.-Israeli war on Iran that began in late February. The militias have also attacked close U.S. allies — the forces of Iraq’s semiautonomous Kurdistan region — and sometimes even the Iraqi military itself.
The Iran-linked militias have claimed responsibility for several attacks on U.S. interests in Iraq — including the U.S. Embassy in Baghdad — since the war in Iran began. The attacks came after an airstrike hit the headquarters of one of the militias and killed three people — an airstrike the militias blamed on the United States and Israel.
In addition to reining in the militias, Washington has been open about wanting to influence the impending formation of a new government in Iraq.
In January, President Trump threatened to withdraw U.S. support for Iraq if Nuri Kamal al-Maliki, a leading Shiite politician, returned as the prime minister. Mr. al-Maliki was first elected prime minister in 2006, at the time with U.S. backing. But the relationship soured over his two four-year terms as he was increasingly seen as aligned with Iran.
Mr. al-Maliki said in a social media post at the time that Iraqis “categorically reject this blatant American interference.”
Since the war with Iran began, the economic effect of the Iranian and American parallel blockades on the Strait of Hormuz, a vital shipping route for Iraq’s crude exports, has also forced a steep drop in oil exports critical to paying state salaries that support at least a third of the Iraqi population.
One of the legacies of the American-structured financial system since the U.S. occupation of Iraq is that most of the country’s oil revenues — the main source of government income and the underpinning of its economy — are often paid not to accounts in Iraq, but to accounts held at the Federal Reserve Bank of New York.
Every day, Iraq’s central bank facilitates wire transfers in dollars from its account at the Fed on behalf of Iraqi businesses and individuals to pay for imports to Iraq. Iraq also relies on planes that transport pallets of U.S. dollars into the country every few weeks.
The planeloads have been halted since February, initially because the war in neighboring Iran had forced Iraq to close its airspace, according to a senior Iraqi Kurdish official briefed on the matter. He spoke on condition of anonymity to discuss sensitive issues.
Then, in a double blow, the United States decided to suspend dollar shipments around the time of a drone attack on April 8 near U.S. diplomats in the Baghdad airport, two Iraqi officials said. When a cease-fire this month allowed Iraqi airspace to reopen, the shipments did not resume.
Addressing the April 8 strike, the State Department said that a militia had used multiple drones in the attack. Iraqi security officials said one drone had struck 50 meters from where U.S. diplomats were escorting a recently freed American journalist, who had been held hostage by an Iran-linked Iraqi militia, to a helicopter flight out of the country.
The following day, the U.S. deputy secretary of state, Christopher Landau, summoned the Iraqi ambassador in Washington, Nazar Al Khirullah, to the State Department.
The Iraqi Kurdish official said the U.S. suspension of dollar shipments had been intended to stem the smuggling of dollars by Iran-aligned Iraqi militias, as well as to pressure Iraq to tighten control over the Iran-linked militias.
He said he feared “a death by a thousand cuts” for Iraq’s economy, which is not only dependent on U.S. dollars, but also on imports and oil — all now being deeply affected by the mix of U.S. pressure and the regional war.
For now, the suspension appears to affect only the planeloads of dollars flown to Iraq, according to the Iraqi officials. Other transfers, such as electronic banking, are continuing but the United States could escalate by further restricting Iraq’s access to dollars if it chooses to prevent bank-to-bank transfers.
A second Iraqi official, an economic adviser to Prime Minister Mohammed Shia al-Sudani, Mudhir Mohammad Salih, downplayed the potential effect of the U.S. move. He told The New York Times that the halt would affect only 5 percent of the demand for the dollar in Iraq, mostly related to meeting the cash needs of Iraqis traveling abroad.
The other 95 percent of dollar demand, he said, was still “being managed normally through official banking channels without any significant interruption.”
Iraq analysts said, nonetheless, that this was a sour point in U.S.-Iraqi relations.
Ahmed Tabaqchali, a senior fellow at the Atlantic Council, which is an international affairs research organization, said that the move would have a minimal effect on the country’s economy, especially since internal transactions must be conducted in the Iraqi dinar and Iraqis were increasingly using debit and credit cards.
But the broader importance is the message it sends.
“It certainly is a negative development,” he said. “Is this the opening shot? Maybe there will be more to come. I would not underestimate the negativeness of the gesture.”
Falih Hassan and Edward Wong contributed reporting.
