By Yousef Saba and Ahmed Rasheed
DUBAI, Jan 23 (Reuters) - The United States, since its 2003 invasion of Iraq, has held effective control over the country's oil revenue dollars, giving Washington extraordinary leverage over Baghdad's affairs, with implications for regional dynamics involving Iran.
How does the U.S. control Iraq's oil revenues?
The U.S. control over Iraq's oil revenues primarily stems from the management of Iraq's oil income through the Federal Reserve Bank of New York. After the 2003
invasion, the Coalition Provisional Authority (CPA), led by the U.S., established the Development Fund for Iraq (DFI), which was held at the New York Fed. The DFI was designed to collect Iraq's oil revenues and use them for the country's reconstruction and development. It was also set up to protect the Iraqi oil revenues from lawsuits and claims relating to Saddam Hussein's rule. Then-president George W. Bush signed an executive order, which has been renewed by every president since, that set up the arrangement. The DFI eventually became an account of the Central Bank of Iraq at the New York Federal Reserve, which remains the case today.
What leverage does this give the U.S. over Iraq?
Oil is Iraq's most important revenue source, accounting for some 90% of the state budget. This gives Washington significant sway over the country's economic and political stability. When the Iraqi government asked U.S. troops to leave the country in 2020, Washington reportedly threatened to cut Iraq's access to the New York Federal Reserve funds, with Baghdad ultimately backing down. While the Iraqi government has gained more control over its financial affairs since the early years of the U.S. occupation, the ongoing relationship highlights the enduring influence of the U.S. on Iraq's economic landscape, even as the country seeks to assert its sovereignty and independence.
Why has the arrangement endured for so long?
Iraqi government officials, who spoke to Reuters anonymously, said the system helped anchor Iraq’s financial stability and safeguards state finances. It provides international confidence in the management of oil income, facilitates smooth access to U.S. dollars needed for trade and imports, and protects revenues from external claims and financial shocks, including claims by creditors and lawsuits, they said. The arrangement supports exchange-rate stability and underpins confidence in the Iraqi economy, while working to strengthen domestic financial institutions and assert greater economic sovereignty, they added. It also allows the government to push back against some actors, including Iran-allied groups, who want fewer restrictions on dollar access. The U.S. last year imposed sanctions on Iraqi banks and and individuals it accused of laundering money for Iran.
How has this arrangement impacted Iraq?
The heavy restrictions on U.S. dollar supply into Iraq created a parallel, informal market for dollars, creating a price spread between the official exchange rate set by the central bank and that on the black market. The price difference is essentially a risk premium for dealing outside the formal system. Since U.S. President Donald Trump returned to office for a second term, he has pursued a maximum pressure campaign against Iran, with Iraq often caught in the crossfire as Tehran has used it as a vital economic lung.
What is the current status of Iraq's oil revenue management?
Iraqi oil revenues remain under the custody of the Federal Reserve Bank of New York. CBI has historically used dollar auctions, formally known as the foreign currency window, as the main mechanism to supply dollars. Private banks and exchange houses could bid daily to purchase U.S. dollars using Iraqi dinars. Iraq formally ended the auction system at the beginning of 2025 after significant U.S. pressure, part of a broad crackdown on alleged siphoning of dollars to sanctioned entities, especially Iran.
(Reporting by Yousef Saba; Editing by Frank Jack Daniel)
