The United States government has indicated it may use its influence over Iraq's financial system as a model for enforcing sanctions against other trading partners of Iran. U.S. Treasury Secretary Scott Bessent announced an "economic onslaught" on Monday, warning that countries providing an economic lifeline to Iran would face consequences, including potential removal from the dollar-based financial system. While the Treasury did not name specific targets, Iran’s major trading partners include China, the United Arab Emirates, Turkey, India, Pakistan, and Oman.
Washington holds significant leverage over Baghdad because it controls Iraq's oil revenue dollars through the Federal Reserve Bank of New York. Iraq currently holds more than $100 billion in reserves in the U.S. and relies on Washington to maintain the flow of its finances. In recent years, the U.S. has sanctioned several Iraqi banks accused of conducting business with Tehran and has pressured the Iraqi government to curb Iranian influence.
In April 2026, the U.S. halted a $500 million cash shipment to Iraq and suspended portions of security cooperation to exert pressure regarding Iran-backed militias. Iraq’s trade with Iran exceeded $10 billion in 2025, primarily involving food and consumer goods, though volume has decreased in 2026 due to the ongoing Iran war. Iraqi energy officials noted that the country also pays Iran between $4 billion and $5 billion annually for natural gas to generate electricity, payments that could be at risk under new U.S. measures.
The scale of this policy involves the management of Iraq’s $100 billion in U.S.-held reserves and the monitoring of trade networks, such as a fuel oil smuggling operation that Reuters reported generates $1 billion annually for Iran and its proxies. For global markets, the knock-on effects are substantial; as U.S. Treasury Secretary Bessent noted, aggressive penalization of major trading partners carries the risk of destabilizing the global financial system. Neil Quilliam of Chatham House observed that while larger economies like China or Turkey may have more room to absorb such pressure, Iraq’s high level of dependence on the U.S.-led financial architecture makes it uniquely vulnerable to these policy shifts.
What happens next depends on how the U.S. balances punitive actions with economic stability. Some analysts, including Tom Keatinge of the Royal United Services Institute, suggest the U.S. may consider incentives, such as technical assistance for the Iraqi central bank, rather than solely relying on sanctions. The U.S. has already threatened senior Iraqi politicians with sanctions on oil revenues if certain groups join the next government. Future dates for specific new sanctions or the naming of additional targeted countries have not yet been disclosed by the Treasury Department.