US forces are set to withdraw from their remaining bases in Iraq on Wednesday, ending the US-led military presence in the country. The withdrawal is being celebrated by Iran and its allies as a significant development after more than two decades of war.
However, despite the military withdrawal, the United States continues to have significant influence over Iraq through the management of the country’s oil revenues.
How does the US control Iraq’s oil revenues?
The arrangement dates back to the 2003 US-led invasion of Iraq. The Coalition Provisional Authority established the Development Fund for Iraq (DFI), which was held at the Federal Reserve Bank of New York.
The fund was created to collect Iraq’s oil revenues and use them for reconstruction and development. It was also intended to protect the funds from legal claims linked to the rule of former Iraqi President Saddam Hussein.
An executive order signed by then-US President George W. Bush established the arrangement, which has been renewed by successive US presidents.
The DFI later became an account of the Central Bank of Iraq at the Federal Reserve Bank of New York, where Iraq’s oil revenues remain held.
What leverage does this give Washington?
Oil accounts for around 90% of Iraq’s state revenue, making the management of its oil income a major factor in the country’s economic stability.
The arrangement therefore gives Washington considerable influence over Iraq’s financial and economic affairs.
In 2020, when the Iraqi government sought the withdrawal of US troops, Washington reportedly threatened to restrict Iraq’s access to funds held at the Federal Reserve Bank of New York. Baghdad eventually backed down.
Why has the system remained in place?
Iraqi officials told Reuters that the system has helped support the country’s financial stability.
They said it strengthens international confidence in the management of Iraq’s oil revenues, facilitates access to US dollars needed for imports and international trade, and provides protection against external claims, lawsuits and financial shocks.
The arrangement also supports exchange-rate stability and contributes to confidence in Iraq’s economy.
At the same time, it gives Iraqi authorities a mechanism to restrict access to dollars by groups accused of attempting to move funds outside the formal financial system.
The United States has previously imposed sanctions on Iraqi banks and individuals it accused of laundering money for Iran.
What impact has the system had on Iraq?
Restrictions on the supply of US dollars have contributed to the development of a parallel market, where the exchange rate differs from the official rate set by Iraq’s central bank.
The difference between the official and informal rates represents a risk premium for transactions conducted outside the formal financial system.
Iraq has also faced increased pressure as the United States has pursued its policy of maximum pressure on Iran. Tehran has long maintained close economic ties with Iraq.
The conflict involving the United States, Israel and Iran that began on February 28 has added further pressure on Baghdad.
What is the current status of Iraq’s oil revenues?
Iraq’s oil revenues remain under the custody of the Federal Reserve Bank of New York.
Historically, the Central Bank of Iraq used daily dollar auctions, known as the foreign currency window, to provide US dollars to private banks and exchange companies in exchange for Iraqi dinars.
Iraq formally ended the auction system at the beginning of 2025 following significant US pressure as part of efforts to prevent the alleged diversion of dollars to sanctioned entities, particularly those linked to Iran.
Despite the withdrawal of US forces, the financial arrangement means Washington continues to have an important role in Iraq’s economic and financial affairs.
Source: Reuters
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