Iraq's Dollar Dependence Makes It a Test Case for US Sanctions on Iran's Partners
US pressure on Iraq over Iran trade highlights how dollar dependence can be used to enforce sanctions on other partners.
Iraq is emerging as a key example of how Washington could enforce its threat to cut off countries trading with Iran from the dollar-based financial system. The United States has already sanctioned several Iraqi banks over alleged business with Tehran, while stopping short of measures that would cripple the economy of a strategic ally to both nations.
President Donald Trump has warned of severe consequences for any country providing Iran an economic lifeline. This could put Iran's major recent trading partners — China, the UAE, Turkey, India, Pakistan, and Oman — in focus. Treasury Secretary Scott Bessent recently announced an "economic onslaught" of sanctions against Iran, saying its trading partners would be targeted without naming them.
Washington's influence over Iraq stems from its control of the country's oil revenue dollars since the 2003 invasion, primarily through the Federal Reserve Bank of New York. Iraq, holding over $100 billion in US reserves, depends on Washington's goodwill to keep its finances flowing. This unique leverage is amplified by the dollar's central role in global trade.
Earlier this year, the US halted a $500 million cash shipment to Iraq and suspended parts of security cooperation to pressure Baghdad over Iran-backed militias. Washington has also threatened senior Iraqi politicians with sanctions, including on oil revenues. While these measures have raised the costs of dealing with Iran and pushed Iraqi institutions to improve compliance, they have not severed Iraq's economic ties with Tehran.
Iraq's trade with Iran exceeded $10 billion in 2025, driven by Iranian food and consumer goods exports. Energy is central, with Iraq paying $4-5 billion annually for Iranian natural gas. Iran views Iraq as an economic "lung" and maintains significant influence through allied militias and political parties.
Analysts note that Iraq's vulnerability comes less from the scale of its trade with Iran and more from its dependence on the US-led financial architecture. Countries like China or Turkey have larger economies and more room to absorb pressure. As Iran's access to the international financial system is squeezed, Iraq's banking system and informal financial sector face mounting challenges. Some experts suggest a strategy based on incentives, such as technical assistance for Iraq's central bank, could be more effective than punitive measures. Bessent's comment on not wanting to "blow up the global financial system" reflects Washington's caution about broader fallout.