Iraq may show how US can squeeze Iran's trade partners

Iraq may show how US can squeeze Iran's trade partners.

Key points

• Iraq has long been an effective sanctions-evasion route for Iran, remarked Tom Keatinge, director at the Centre for Finance and Security at the Royal United Services Institute.
• That could put Iran's main trading partners of recent years in the frame: China, the United Arab Emirates, Turkey, India, Pakistan and Oman.
• Iraq's trade with Iran topped $10 billion in 2025, according to official figures, driven mainly by Iranian exports of food and consumer goods to the Iraqi market.
• Reuters made public in late 2024 a fuel oil smuggling network generating at least $1 billion a year for Iran and its proxies in Iraq.
• In April, Reuters documented the US halted a $500 million cash shipment to Iraq and suspended parts of security cooperation to pressure Baghdad over Iran-backed militias.

Iraq may show how US can squeeze Iran's trade partners. Reuters Published August 25, 2026 Updated August 25, 2026 11: 23pm. Join our Whatsapp Channel. Add Dawn as a trusted source.

Iraq could serve as an example of how the United States could carry out its threat to force countries that continue trading with Iran out of the dollar-based financial system.

Though it has avoided measures that would devastate the economy of the strategic ally of both countries, washington has already sanctioned a host of Iraqi banks accused of doing business with Tehran.

US President Donald Trump has cautioned that any country that provides Iran with an economic lifeline would face severe consequences.

US Treasury Secretary Scott Bessent on Monday confirmed "an economic onslaught" against Iran with sanctions, saying its trading partners would be targeted, without naming them. How the US influences the Iraqi economy.

Since its 2003 invasion of Iraq, has held effective control over the country's oil revenue dollars, primarily through the Federal Reserve Bank of New York, giving Washington extraordinary leverage over Baghdad's affairs, the United States.

Meanwhile, a rare ally of both the United States and Iran, with more than $100 billion in reserves held in the US, Iraq relies heavily on Washington's goodwill to keep its oil revenues and finances flowing. Reuters made public in late 2024 a fuel oil smuggling network generating at least $1 billion a year for Iran and its proxies in Iraq. Other neighbours of Iran involved in similar schemes could face similar scrutiny from Washington.

While the US has uniquely solid leverage over Iraq compared with other major trading partners of Iran, the US dollar's status as the linchpin of global trade makes its reach formidable. What measures has the US already taken against Iraq?

In April, Reuters documented the US halted a $500 million cash shipment to Iraq and suspended parts of security cooperation to pressure Baghdad over Iran-backed militias. In January, Washington reportedly threatened senior Iraqi politicians with sanctions, including on oil revenues should such groups join the next administration.

Though some of the largest banks were spared, successive US administrations have sought to choke that dollar stream with sanctions on Iraqi banks over recent years.

Iraq's current prime minister emerged as a candidate seen as acceptable to the Trump administration. It has steadily pressured Baghdad to curb Tehran's influence.

US pressure has raised the costs and risks of financial dealings with Iran, forcing Iraqi institutions to improve compliance, remarked Neil Quilliam, associate fellow at UK-based think tank Chatham House.

But it hasn't broken Iraq's economic ties with Iran. It extend beyond the financial system, leaving Baghdad caught between its dependence on both Washington and Tehran.

"Countries such as China or Turkey have larger economies and more room to absorb pressure. Iraq has fewer alternatives and significantly less financial resilience, " Quilliam remarked.

"Its vulnerability comes less from the scale of its trade with Iran and more from its dependence on continued access to the US-led financial architecture." What are Iraq's trade ties with Iran?

Trade has fallen in 2026 after the Iran war began, raising security risks, disrupting border crossings and increasing transport costs.

Iran has long viewed its neighbour and ally Iraq as an economic "lung" and wields considerable military, political and economic influence there through the powerful militias and political parties it backs. It has additionally sourced hard currency from Iraq through exports and has avoided US sanctions via its neighbour's banking system.

Energy is central to the relationship: Iraq pays Iran $4 billion to $5 billion a year for natural gas applied to generate electricity, Iraqi energy office-holders say, and authorities warn new US measures could jeopardise those payments. Will any new US measures against Iraq be effective?

"As Iran's connections with the international financial system are squeezed further, existing vulnerabilities will find themselves exploited to a greater extent. In that regard, Iraq, its banking system and its informal financial sector can expect to face mounting challenges, " he continued.

He remarked, even so, that an approach based on incentives rather than punitive measures could be more effective. For example, the US could provide technical assistance for the Iraqi central bank and the broader Iraqi administration in "a strategy based on carrots rather than sticks, " he went on. The US is additionally wary of wider fallout for the financial system. Asked why he halted short of penalising Iran directly or naming targeted countries, Bessent stated: "Why would I want to blow up the global financial system? ".

In short, iraq may show how US can squeeze Iran' s trade partners is the central thread here, and readers can expect follow-up reporting as the picture becomes clearer.