Iraq has once again been hit by US financial restrictions, this time aimed at restricting specific banks and individuals from trading in the Central Bank of Iraq (CBI)’s daily currency auctions. The timing of these economic measures can in part be attributed to increased tensions between the US and Iran, that are once again being played out in Iraq. However, the elites targeted by the sanctions are finding ways around them, while the real impact is being felt by ordinary Iraqis, whose lives are made even more difficult as currency fluctuations make essential goods, like food and medicine, more expensive and less accessible.
What has happened?
Banks such as Asia Islamic Bank, Al-Sharq Al-Awsat, Al-Ansari Islamic Bank and Al-Qabith Islamic Bank have long used CBI’s daily currency auction to gain US dollars and launder money. In fact, the governor of CBI once admitted that a majority of the money is going to neighbouring countries such as Iran via electronic transfers, often with fake invoices. These banks are also backed by political figures and are deeply entrenched in Iraq’s political elite and armed factions, and some of their partners have been targets of US sanctions in the past.
As part of a larger set of demands by Washington, in November 2022 the CBI started banning several of these banks from dealing in US dollars. Security forces added to the pressure by arresting or fining employees at currency exchange offices selling at black market rates, leading to the majority of exchange offices ceasing to sell US dollars.
These currency auctions have been a haven for illicit financial transactions for over a decade, so why has the US decided to clamp down now? Some experts argue the restrictions are linked to when Iraq joined the international electronic banking system in November 2022. But exposing Iraq’s financial procedures to international scrutiny also revealed transactions linked to Iranian-affiliated trading houses which divert the cash back to Iran or its allies across the region, rekindling the US-Iran dispute. As early as 2018, the US reported that some Iraqi banks were linked to parties that diverted the money to Iran or for Iran throughout the region, and it threatened to impose sanctions as far back as 2020.
The political element of these new restrictions relates to emerging dynamics in Baghdad. Unlike his predecessor, Iraq’s new prime minister, Mohammed Shia al-Sudani, is backed primarily by a network of Shia leaders, some of whom are US-designated terrorists and allies of Iran. Washington is therefore demonstrating its discomfort by flexing its economic muscle, warning Baghdad not to stray too far in the wrong direction.
Iraq’s people are the ultimate victims
Iraq’s elites have quickly found ways around these restrictions. Blocking international transactions have not prevented the majority of funds from being smuggled to neighbouring countries, either through exchange offices or in cash over Iraq’s borders. Despite threats from security services, exchange offices in Baghdad, supported by political elites and parties, continue to purchase US dollars on their behalf. Exchange offices are only one part of a complex system – including federal government contracts, border checkpoints and other official bodies – that helps finance these political parties and their backers to the tune of up to $300 million per day.
Instead of hitting their intended targets, the absence of a comprehensive strategy means these US restrictions have impacted the everyday lives of Iraqi citizens by driving up exchange rates, leading to protests. While most Iraqis are paid in the Iraqi dinar, many essential goods are priced based on the value of the US dollar, making them unaffordable for many people