Iraq is seeing its access to Iraqi government dollar accounts held at the New York Federal Reserve bank severely squeezed. A little-reported change in U.S. government policy in November over how it processes Iraqi government requests for the dollar revenues from Iraqi oil sales has now become public. As a result, the Iraqi dinar has devalued inflating the cost of key Iraq imports. The reason for the policy change, and the longer-term implications of the shift, are still unclear. However, given that Iraq is so dependent on the revenues from oil sales for its government budget and economy writ large, this change could have a significant impact on stability for both Iraq and Iran – the latter which was a beneficiary of the previously lax U.S. oversight in allowing Iraq to access its dollar accounts.
A January 19 article in the Wall Street Journal, and reporting in other outlets, indicated that in November the U.S. Federal Reserve of New York started increasing scrutiny of Iraqi requests for dollar wire transfers from its accounts at the bank. Since 2003, the U.S. Federal Reserve of New York has held the dollar revenues from Iraq’s oil sales. Since this change, more than eighty percent of the transfers have been blocked. Some press reports describe this change as simply requiring Iraqi banks to provide more information on their requests in line with global banking standards. Others, however, point to a U.S. desire to crack down on rampant money laundering with a particular but not exclusive focus on keeping Iraqi oil revenue money from flowing to Iranian-supported Iraqi militias and politicians or from being moved across the border to Iran as a way for Tehran to avoid U.S. sanctions.
Some Iranian-backed Iraqi politicians have stated that the U.S. actions are aimed directly at Iran, while others have made supportive statements – largely indicating that Iraq and its banking sector need to come into compliance with international norms. Iraq’s new Prime Minister Mohammed al Sudani indicated that the Fed’s actions and the resulting currency devaluation was hurting poor Iraqis and would threaten his government’s upcoming budget. He has said that he will bring a proposal to Washington for a six-month moratorium on the new measures. However, he has not yet been invited to visit, and it is unlikely that the new policies are going to be suspended. The economic and political turmoil caused by the measures, particularly as the dollar flows remain constrained, is likely to increase. Iraq only recently managed to form a government a year after its parliamentary elections. A dollar-based crisis that affects common Iraqis as well as those who have benefited from the money laundering (politicians and militia leaders) could threaten the stability of the new government.
To the degree that dollar revenues from Iraqi oil sales were making their way to Iran and/or its supporters and proxies in Iraq, a significant staunching of that flow could also further destabilize an Iranian government still in crisis. Iran views political dominance of Iraq as vital to its national security. Significant decreases in its access to Iraqi oil revenues in dollar form threaten its ability to support friendly Iraqi politicians, buy off opposition, and arm and pay Iranian-backed militias in Iraq. Dollar revenues from Iraqi oil sales smuggled to Iran also help Tehran evade sanctions. Finally, even if the U.S. move is not entirely driven by Washington’s Iran policy, both the Iranian leadership and protesters might see it that way, encouraging each to double down, resulting in yet more violence on Iranian streets.