• Iraq’s new prime minister, Mohammad Shia’ al-Sudani, is accommodating Washington’s interests amidst escalating tensions between the United States and Iran.
• In mid-January, Sudani risked upsetting his political base to support the indefinite presence of 2,000 U.S. military personnel helping Iraqi forces combat Islamic State remnants.
• American financial officials are implementing additional measures to reduce the flow of U.S. dollars from Iraqi commercial entities to sanctioned Iranian entities.
• Iraq’s compliance with U.S. sanctions enforcement is causing economic hardships, triggering a backlash from Iraqi traders and poorer segments of its population.

The new Iraqi government’s leader, Prime Minister Mohammad Shia’ al-Sudani, is an ally of former Prime Minister Nouri al-Maliki, a pro-Tehran figure whose term in office alienated many Sunni Iraqis and arguably facilitated, at least in part, the rise of ISIS. Many U.S. officials forecast that the new government would cater to the demands of pro-Iranian faction leaders that the United States withdraw its remaining forces from Iraq, though a former Trump official has privately commented that the country’s prime ministers expressed consistent support for the U.S. presence since the U.S. assassination of Iran’s Qassem Suleimani in early 2020. While the Iraqi parliament passed a non-binding resolution calling for the expulsion of U.S. troops from the country shortly after the killing, a poll released that year found that the United States still enjoyed a favorability rating in Iraq double that of Iran, according to the Iraq-based Independent Institute of Administration and Civil Society Studies.

The balance of influence in Iraq shifted further away from Iran in late 2022 as U.S. and European leaders heaped additional sanctions onto Iran’s regime for repressing a large domestic uprising sparked by its human rights violations and denial of women’s rights, and for its material support for Russia’s war effort in Ukraine. Iran’s domestic and international actions further tarnished its image among vast segments of the Iraqi population – much of which already viewed Iran as exploiting Iraq’s economy and fomenting sectarian tensions between the majority Shia and minority Sunni Arab population. In mid-January, Sudani, apparently recognizing that the Iranian regime’s domestic and international position was weakening, risked a backlash from his core political base by tilting decidedly toward continued reliance on the United States. He openly declined to put a deadline on the presence of U.S. military advisors in Iraq, now numbering about 2,000, or on that of NATO troops still in the country, citing the need to block ISIS fighters entering Iraq from Syria. Sudani told the Wall Street Journal: “We think that we need the foreign forces.… Elimination of ISIS needs some more time.” However, the prime minister also stated the country did not require “combat forces,” and suggested it could maintain positive relations with both the United States and Iran.

Expanding on his intent to maintain close ties to Washington, and likely alarming leaders in Tehran and many of his own Shia allies in the process, Sudani added that he wanted Iraq to have the same depth of relations with the United States as Saudi Arabia and other Persian Gulf oil and gas producers. To further solidify relations with U.S. officials, Sudani met with White House Middle East envoy Brett McGurk on January 16, and Iraq’s Foreign Minister Fuad Hussein will visit Washington in early February, in part to pave the way for Sudani to meet with U.S. President Joe Biden later in 2023. Still, the risks of Sudani’s tilt were quickly apparent: in the wake of his Wall Street Journal comments, the “International Resistance Faction,” a militia almost certainly linked to Iraqi Shia factions supported by Iran’s Islamic Revolutionary Guard Corps – Quds Force (IRGC-QF), claimed responsibility for a roadside bomb attack on a U.S. convoy traveling near Baghdad.

Sudani’s efforts to engage more closely with Washington might also be intended to persuade U.S. officials to ease those sanctions policies targeting Iran which also have second order impacts on Iraq’s economy and population.  As part of the U.S. effort to tighten sanctions on Iran, the Federal Reserve Bank of New York, which holds Iraqi government accounts in which Iraq’s oil revenues are deposited, imposed new transparency requirements in November 2022 that led Iraq’s Central Bank to blacklist several banks. This, in turn, reduced dollar transactions and ultimately weakened the Iraqi dinar. The Federal Reserve measures were intended to restrict the flow of U.S. dollars into the Iraqi banking system and informal money-trading networks, which facilitated ongoing passage to sanctioned Iranian entities. According to a financial adviser to Sudani, the U.S. central bank has blocked about 80 percent of transfer request to Iraqi banks since enacting the policy in November.

As part of his cooperation efforts with U.S. authorities, on January 21, Sudani ordered an elite Iraqi counterterrorism unit, primarily assigned to combat ISIS, to crack down on private currency traders delivering U.S. currency to Iran. However, this triggered a domestic backlash as Iraqi forces reportedly were fired upon by traders unhappy with the government intervention. One of Sudani’s allies in the Iraqi parliament, Aqeel al-Fatlawi, indirectly accused Sudani of caving to U.S. pressure, stating that U.S. currency restrictions were implemented to coerce Sudani into alignment with “American interests.”

Beyond jeopardizing his own political support, Sudani’s efforts to comply with U.S. sanctions on Iran have set off broader public unrest. With dollar-denominated transactions in Iraq reduced from $200 million per day to about $60 million per day, and the dinar’s falling exchange rate with the dollar (from 1,470 in December to around 1,620 in late January) has set off inflation for Iraqi consumer goods – a result that particularly affects the lower income segments of Iraq’s population – and touched off demonstrations near the country’s central bank in Baghdad. Seeking to stabilize the currency, Sudani replaced the central bank governor, Mustafa Ghaleb Mukheef, on January 23. If Prime Minister Sudani meets with President Biden later this year, he will undoubtedly press U.S. officials to ease dollar restrictions and other policies that are forcing him into a difficult balancing act between Tehran and Washington. Still, U.S. officials hope that Sudani’s will remain willing to work with Washington despite the political risks to his leadership, enabling the expansion of a U.S. regional alliance network that facilitates power projection, in addition to the ability to secure global oil supplies, and apply diplomatic solutions to the region’s numerous ongoing conflicts.