Iraq agrees to new controls on dollar flows in exchange for U.S. cash shipments

Treasury resumes dollar shipments to Iraq after four-month halt

The Treasury Department halted the banknote deliveries in late February, at the start of the U.S.-Iran conflict, according to U.S. officials quoted by The Wall Street Journal. The suspension cut off a vital source of cash for Prime Minister Ali al-Zaidi’s government, which relies on oil-export earnings deposited at the Federal Reserve Bank of New York. With Iraq’s oil exports largely halted because of the war, the U.S. move placed enormous financial pressure on Baghdad to curtail its ties to Tehran.

During the suspension, the Federal Reserve canceled at least two cash deliveries on instruction from the Treasury, officials said. One of those shipments was valued at roughly $500 million. The deliveries, transported on cargo aircraft chartered by the Iraqi government, resumed late last month, Iraqi officials said.

In return for the resumption, Baghdad has promised to take steps to prevent Iran and its allies from obtaining dollars from Iraq’s currency-exchange businesses and from salary payments to Iran-aligned militia members, according to the Journal. A Treasury official said shipments resumed after Baghdad committed to additional safeguards to prevent militia groups from exploiting the country’s financial system. Haider al-Aboudi, a spokesman for Zaidi, confirmed that financial transfers have resumed but declined to address the specific restrictions agreed to by Baghdad.

The conditions Iraq agreed to have not been previously reported.

Zaidi, a political unknown who had never held office before, was chosen as prime minister by Iraq’s elected parliament in May after a lengthy standoff between the U.S. and Iran over the country’s next leader. He received Trump’s endorsement despite owning a bank that the Treasury had banned from dollar transactions over suspicions of business with an Iran-linked militia leader, the Journal reported. Iranian officials also publicly supported Zaidi’s selection.

The White House’s backing came with a demand that Zaidi exclude Iranian-backed militias from Iraq’s next government and reduce Tehran’s influence in Baghdad. Zaidi has ordered the militias to disarm and put their members under state control. But the demands carry enormous political risk, and progress on scaling back the militias’ power has been slow, analysts said. Previous Iraqi prime ministers have had little success challenging the militias, which maintain strong support in parliament.

Iraq’s Shia militias grew out of the political vacuum left by the U.S. invasion more than two decades ago. They defended Shia areas against attacks by Sunni militants and fought American forces. Iran funneled arms to many of the groups, which later fought Islamic State fighters who swept into Iraq from Syria in 2014. Numerous militias are on the Iraqi government payroll, and some hold formal roles in the country’s security forces. Fighters from units designated by the U.S. as terrorist organizations are not supposed to receive salaries, but analysts said there is overlap between official militias and rogue groups, and militia commanders collect the pay of absent or nonexistent members.

Iraq’s reliance on cash dollars surged after the 2003 invasion. Washington holds Iraq’s oil-sale earnings at the New York Fed, and the Fed began shipping as much as $13 billion a year in U.S. banknotes to Baghdad to supply the heavily cash-based economy. Unlike most countries, Iraq has few private banks with relationships to major international financial institutions, making it difficult to acquire U.S. currency in high demand by ordinary Iraqis, according to the Journal.

The Treasury banned more than two dozen Iraqi banks in 2023 and 2024 for siphoning dollars from Iraq’s Fed accounts through fraudulent wire transfers, many with ties to militias. The armed groups were also involved in acquiring huge quantities of Mastercard and Visa cards loaded with funds in Iraq, transporting them to the United Arab Emirates and other neighboring countries, and withdrawing the money as dollars. The cash was then transferred back to Iraq and exchanged for dinars, with the groups profiting from currency arbitrage in a scheme that also benefited Iran, the Treasury said.

“Iran and the militias have tentacles throughout the economy,” Victoria Taylor, who oversaw Iraq policy at the Biden administration State Department and is now at the Atlantic Council, told the Journal. “This is ultimately a political challenge as much as an economic one, and that’s why the Trump administration is pairing financial steps with pressure on the Iraqi government to disarm the militias.”