The United States has blocked a cargo plane shipment of nearly $500 million in US banknotes destined for Iraq’s central bank, marking the second consecutive dollar transfer delayed by Washington since late February in what analysts view as a calculated pressure campaign to pull Baghdad out of Tehran’s orbit.
The funds, drawn from Iraqi oil revenues held in accounts at the Federal Reserve Bank of New York, were intercepted by the US Treasury before the scheduled delivery could proceed. The arrangement dates to the aftermath of the 2003 US-led invasion of Iraq, when Washington assumed control over the management of the country’s oil revenues. Tens of billions of dollars in proceeds were subsequently deposited at the Federal Reserve, with large cash shipments dispatched to Baghdad on a regular annual basis ever since.
The suspension arrives at a moment of acute regional tension. The US-Israeli military campaign against Iran, which began in late February, had entered its eighth week at the time of the latest blocked transfer. American forces have conducted air strikes against Iran-aligned armed factions operating inside Iraq, while those same groups — describing their actions as solidarity with Tehran — have launched attacks against US military facilities and neighbouring countries.
Central to the standoff is the Popular Mobilisation Forces (PMF), an umbrella body of predominantly Iran-aligned factions that has been formally incorporated into Iraq’s state security apparatus. Washington’s discomfort with the PMF’s dual loyalties has long complicated the bilateral relationship, and the dollar freeze appears designed to force a reckoning on that question.
Beyond the financial lever, the United States has also paused certain security cooperation programmes with the Iraqi military, compounding pressure on the government in Baghdad. US officials have characterised both the financial and security suspensions as temporary measures, though they have stopped short of specifying what concrete steps Iraq would need to take for normal operations to resume — a deliberate ambiguity that leaves Prime Minister Mohammed Shia al-Sudani with limited room to manoeuvre.
Al-Sudani, who has held office since 2022, faces a particularly delicate balancing act. He has actively sought US backing for a second term, making open confrontation with Washington politically costly. At the same time, the PMF factions whose support underpins his domestic coalition maintain deep institutional and ideological ties to Iran. Publicly capitulating to American demands risks fracturing that coalition; resisting them jeopardises both financial flows and security partnerships that Baghdad depends upon.
Iraq’s central bank moved quickly to project calm, issuing a statement asserting that it holds sufficient US currency reserves to meet the country’s needs. The reassurance appeared aimed at preventing the kind of market anxiety that a prolonged dollar shortage could trigger in an economy heavily reliant on dollar-denominated oil transactions.
The broader US strategy is unmistakable: leverage the unique financial architecture established after 2003 — one that routes Iraqi sovereign revenues through American institutions — to extract geopolitical concessions from a government caught between two powerful patrons. Washington’s core demand is that Baghdad move measurably closer to the United States and loosen its ties with Iran, a structural shift that would require al-Sudani to confront entrenched PMF influence within his own government.
Whether the financial squeeze will produce that outcome remains uncertain. Iraq has navigated similar pressure before, and Tehran retains significant tools of its own to reward or punish Baghdad’s choices. What is clear is that the Federal Reserve’s role as custodian of Iraqi oil wealth — an arrangement born from the chaos of invasion more than two decades ago — has become one of Washington’s most potent instruments of leverage in a conflict that now extends well beyond Iraq’s borders.
The situation is expected to evolve rapidly as the US-Israeli campaign against Iran continues and both Washington and Tehran compete for influence over a country that shares a long border, deep cultural ties, and significant economic relationships with both sides of the confrontation.
