The gradual withdrawal of US forces from the last bases in Iraq marks a significant shift in the US physical presence in the country. However, the control and oversight associated with the flow of oil revenues show that US influence is not only military. For Iraq, the mechanism provides access to the international financial system, protection of reserves and monetary stability. For Washington, meanwhile, it constitutes an important instrument of influence in a country at the center of the US rivalry with Iran.
Although the US military presence in Iraq is entering a new phase, Washington’s influence over the country is not limited to security issues. One of the most important mechanisms of this influence is the way Iraq’s oil revenues, which continue to be held in the US financial system, are managed.
The United States has played a major role in managing the country’s oil revenues since 2003. The main mechanism is the Central Bank of Iraq’s account at the New York Federal Reserve, Reuters reported. After the 2003 invasion, the U.S.-led Coalition Provisional Authority established the Development Fund for Iraq, known as the DFI. The fund was housed at the New York Federal Reserve and was intended to collect oil revenues to finance the reconstruction and development of Iraq.
Another purpose was to protect these revenues from claims and lawsuits related to Saddam Hussein’s regime. The mechanism was created through an executive order by then-US President George W. Bush and has been renewed by subsequent US presidents. Over the years, the DFI was transformed into an account of the Central Bank of Iraq at the New York Federal Reserve, where oil revenues continue to be held.
WHY DOES THIS GIVE THE US INFLUENCE OVER BAGHDAD?
Oil is the main source of income for the Iraqi state, accounting for about 90% of the country’s budget. For this reason, the way oil revenues are managed has direct relevance to the functioning of Iraq’s economy and public finances. This mechanism gives Washington significant economic leverage.
According to Reuters, in 2020, when the Iraqi government demanded the withdrawal of US troops, Washington reportedly threatened to cut off Iraq’s access to funds held at the Federal Reserve. Baghdad later withdrew the request. Although Iraq has gained more control over its finances since the early years of the occupation, the connection to the US financial system remains an important element of relations between the two countries.
WHY HAS IRAQ KEPT THIS SYSTEM?
According to Iraqi officials quoted by Reuters, the mechanism has helped maintain the country’s financial stability and protect state revenues. Keeping reserves in the US financial system also aims to increase international confidence in the management of oil revenues, facilitate Iraq’s access to dollars for trade and imports, and protect the funds from claims by creditors or financial shocks.
The system also plays a role in exchange rate stability and the functioning of the Iraqi economy. At the same time, control over access to dollars has created tensions with groups and political actors linked to Iran. The United States has imposed sanctions on several Iraqi banks and individuals, accusing them of laundering money for Iran.
CONSEQUENCES ON THE DOLLAR MARKET
The restrictions on the supply of dollars have also had consequences for the domestic Iraqi economy. They have contributed to the creation of a parallel dollar market, where the exchange rate differs from the official one set by the Central Bank of Iraq. The difference between the official rate and the informal market rate reflects the risks and costs of transactions outside the formal financial system.
The issue has become even more sensitive because of Iraq’s relations with Iran. Tehran has used Iraq as an important economic conduit, while the US policy of “maximum pressure” on Iran has put additional pressure on Baghdad.
AN IMPACT THAT GOES BEYOND MILITARY PRESENCE
The gradual withdrawal of US forces from the last bases in Iraq marks a significant shift in the US physical presence in the country. However, the control and surveillance associated with the flow of oil revenues show that American influence is not only military.
For Iraq, the mechanism offers access to the international financial system, protection of reserves and monetary stability. For Washington, meanwhile, it constitutes an important instrument of influence in a country at the center of the US rivalry with Iran.
Thus, even at a time when Iraq seeks to strengthen its economic and political sovereignty, the way in which billions of dollars in oil are managed remains closely linked to the United States financial system. (Reuters)