US threatened to block Iraq from its Federal Reserve deposits over Iran-aligned politicians
The US has threatened to cut Iraq off from its US-based oil sales profits if it includes members of Iranian-aligned paramilitaries in the country’s next government, an Iraqi official confirmed to Middle East Eye
Several reports on Friday indicated that the US is ramping up pressure to keep perceived Iranian allies out of the next government, as political horse trading takes off in Baghdad following the November parliamentary elections.
The Financial Times (FT) first reported the US threat to cut Baghdad off from its supply of dollar deposits, which are kept at the Federal Reserve Bank of New York.
Under an agreement that has been in place since the 2003 US invasion, Iraq stores the proceeds from its oil export sales in the US. Crates of hard currency are airlifted to Iraq each month from the US, giving Washington leverage over Baghdad.
The Trump administration has shown no qualms about playing this card in the past.
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When Baghdad threatened to expel US-led coalition forces from Iraq after the 2020 assassination of Iranian commander Qassem Soleimani, the Trump administration threatened to cut Iraq’s access to its dollar reserves, former US officials familiar with the talks told MEE.
Reuters reported on Friday that Joshua Harris, the chargé d'affaires at the US embassy in Baghdad, has delivered the warnings to Iraqi officials and influential Shia leaders in person and through proxy.
Harris is the top-ranking State Department official in Iraq. The Trump administration has not appointed an ambassador to Iraq. Mark Savaya, an Iraqi-American who previously worked as a legal Cannabis dealer in Michigan, is Trump’s special envoy to the country.
Iraq praise versus Shia militias
The warnings to Iraqi officials come at a time when Trump's inner circle has heaped praise on Iraq.
Tom Barrack, US ambassador to Turkey and all-around Trump trouble shooter in the Middle East, thanked Iraq for accepting Islamic State (IS) detainees this week as the US negotiated the unravelling of the Syrian Democratic Forces. The Kurdish-led group has guarded IS prisoners for years.
"We are deeply honored to thank the Iraqi government for its exceptional leadership within the Global Coalition to Defeat ISIS and for its steadfast willingness to help safeguard the international community from the enduring threat posed by ISIS detainees," Barrack wrote on X.
"Iraq’s vital contributions to promoting stability in Syria, and across the broader region, are indispensable," he added.
But Iraq's close links to Iran also put it in the Trump administration's crosshairs.
According to the FT, the US embassy in Iraq became angry when Adnan Fayhan was elected as the first deputy speaker of parliament last month.
Fayhan is a former member of the Asaib Ahl al-Haq militia (AAH), one of the most influential Iraqi armed factions backed by Iran.
AAH is part of a broader ruling Shia political alliance known as the "Coordination Framework". This includes political parties and armed groups that operate under an umbrella organisation called the Popular Mobilisation Forces.
Election horse trading
AAH arose from the Mahdi Army, the former armed wing of influential cleric Muqtada al-Sadr's movement, in 2006. It attracted fighters with experience and combat skills, and, in conjunction with Kataeb Hezbollah, carried out dozens of deadly attacks against US troops between 2006 and 2008.
Although it's been favoured by Iran, AAH has also shown independence. MEE reported that in 2020, the group rejected calls from Tehran to launch fresh attacks on US assets in Iraq. AAH had a minister in Iraq’s last government, as it tries to shift to a civilian face.
But the FT reported that Fayhan’s election so inflamed tensions that the US embassy paused all future meetings with officials who voted for him. The US has also provided their Iraqi counterparts with a list of MP’s they do not want in the next government.
Iraq had a successful election in November. A coalition led by Prime Minister Mohammed al-Sudani won the most votes, but not enough to form a government.
Sudani is eyeing a return to the prime minister's post. His predecessor, Nouri al-Maliki, served successive terms, but Iraq’s political elite have generally preferred prime ministers to serve one term as they wrangle for lucrative patronage positions.
The US’s interest in Iraq has waned. On Sunday, Iraq announced that US forces had completed a “full withdrawal” from the country’s military facilities, excluding the semi-autonomous Kurdish region. Around 1,500 US and allied troops are in Kurdistan, according to Rudaw.
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