Trump 2.0 and Iraq's Dollar Accounts at the Fed, 2 APRIL
The adage that ‘History never repeats itself, …’ is a relief of sorts for the government of Iraq (GoI) under the second Trump administration (T2), given the first Trump administration (T1)’s threats of sanctions that would ‘make Iranian sanctions seem somewhat tame’ (made in 2020 in response to parliament’s demands for the expulsion of US troops, itself in response to the American assassination of Iran’s top general in early 2020). However, the second part of the couplet – ‘…, but it does often rhyme’ – removes most of that relief, as T2 will likely reassess the reported agreement on the planned withdrawal of US forces; as well as the likely spillovers from the resurrection of the ‘maximum pressure campaign’ on Iran.
Despite the evolution of the US-Iraq relationship since then under the aegis of the Strategic Dialogue framework, the issue of US troop withdrawal will likely be entangled with the resuscitation of the ‘ideology of confrontation’ over Iran’s role in Iraq – this sees Iran as the true beneficiary, at the expense of the US, of the latter’s 2003 invasion of Iraq. This was evident with the revocation, without consultation with the GoI, of the waivers that allowed the imports of Iranian gas and electricity, whose obvious negative effect is the loss of around 31 percent of its power generation, while less obvious is the requirement to ‘ensure that the Iraqi financial system is not utilised by Iran for sanctions evasion or circumvention’.
This requirement is not linked to the imports of Iranian gas and electricity as their payments are governed by a series of US waivers and exemptions requiring them be deposited into restricted accounts that can only be used for the purchase of non-sanctionable transactions. Nevertheless, it has consequences for Iraq’s banking system and the Central Bank of Iraq (CBI)’s US dollar auction that enables the country’s interactions with the outside world. This is in large part due to the host of misinformation, misconceptions and conspiracy theories that claim that the CBI’s banking system and dollar auction facilitate sanctions evasion and circumvention. Most of these were addressed by the author in a series of papers for the LSE Middle East Centre, ‘A Fistful of Dinars’, ‘The Dinar, and the Conundrum over the Dollar and Iran’, and ‘Big Bad Wolf, or Is it?’
This piece complements these in providing an overview of Iraq’s oil revenue and the foreign reserves accounts held at the Federal Reserve Bank of New York (FRBNY), given T1’s other threat to Iraq in 2020 that it could lose access to these accounts.
Two Distinct but Linked Accounts
The two accounts are distinct, structurally different, but are linked. Both accounts start their lives with oil exports, whose revenues in dollars are deposited into what is termed the ‘Oil Proceeds Receipts Account’ held at FRBNY, and managed by CBI on behalf of Iraq as represented by the Ministry of Finance (MoF). These are then transferred into a second CBI managed account held at FRBNY, and then into MoF’s dollar account held at CBI – which is effectively Iraq’s oil revenue account and funds government expenditures. These two accounts are referred to as the DFI successor accounts, which replaced the Development Fund of Iraq (DFI) created by UN Security Council Resolution 1483, following the US invasion in 2003. The holdings of the oil revenue account vary depending on oil revenues, and budget expenditures, and were $2 billion as of the end of January 2025 (Figure 1).
The second account starts its life with the conversation of MoF’s dollars into Iraqi dinars by the CBI to fund the government’s domestic expenditures. This takes the form of the CBI buying dollars from MoF’s oil revenue account and selling the equivalent amount in dinars. The dollars that CBI buys from MoF become the nucleus of its foreign reserves held in its own account at FRBNY. Through the dollar auction, these reserves channel oil revenue-sourced dollars to meet the private sector’s dollar demands to pay for imports (see A Fistful of Dinars). The amounts of foreign reserves, like those in the oil revenue account, vary depending on oil revenues, and budget expenditures, and were $99 billion as of the end of January 2025 (Figure 2).
While these reserves start their life at the CBI’s own account held at FRNBY, most are transferred into accounts at global central banks, major international banks, investments in bonds, and gold. As of the end of 2023, only 4.2% of total reserves were at the CBI’s account at FRNBY (Table 1).
| 48.2% | bonds and bills | |
| 71.4% | bonds issued by international governments and international government banks | |
| 18.2% | bonds issued by financial and international institutions | |
| 5.3% | bonds issued by international banks and financial institutions | |
| 4.7% | Sukuk issued by international Islamic banks | |
| 0.4% | bills issued by international governments | |
| 26.2% | Accounts with international banks | |
| 16.1% | Accounts with global central banks | and cash at held |
| 59.4% | Banque de France | |
| 26.1% | FRBNY (equivalent to 4.2% of total reserves) | |
| 13.0% | Bank of England | |
| 0.1% | other global central banks | |
| 1.4% | CBI vaults | |
| 8.5% | Gold | |
| 97.0% | Abroad | |
| 3.0% | CBI Vaults | |
| 1.0% | Others |
Table 1: CBI Reserves
Thus, on the surface Iraq’s direct exposure to FRBNY is relatively small – oil revenue account, and CBI’s account at FRBNY – however, it is effectively much larger given that most of CBI’s accounts at global central banks, international banks, as well as the bonds are in dollars, and gold is priced in dollars. As such the foreign reserves’ dollar exposure was 90.2 percent at the end of 2023, and looks likely to remain at similar levels given the need to align these reserves with the country’s dollar-based revenues, as well as the depth, liquidity, and full convertibility of dollar assets. As a consequence, Iraq, like other holders of dollar assets, is subject to the rules of the global dollar system, and thus to any FRB imposed restrictions on transfers of funds – in particular access to foreign reserves for the payments of imports.
However, the implementation of CBI’s November 2022 procedures for cross-border transfers and subsequent measures, have resolved most of the compromises of the past that could have led to FRB imposing restrictions on fund flows as a consequence of possible threats by T2. Indeed in 2024, most cross-border transfers were by Iraqi banks with correspondent banking relationships with major US banks, in which transactions are reviewed by an international risk agency nominated by the Federal reserve Bank (FRB), and these will become the norm upon the ending of the dollar auction in 2025 (grey lines in Figure 3).
However, the continued growth of private sector imports from Iran, estimated at $7.7 billion in 2024, implies that importers and exporters have arrived at new opaque payment structures to circumvent CBI’s November 2022 procedures. Such opaque structures, with all their resultant negatives, have become a necessity for these importers due to the isolation of Iran’s banking system from the rest of the world, even though such private sector trade is not subject to sanctions.
Oil and the Dollar Exposure
Irrespective of the diversity of Iraq’s oil export destinations, the dollar will always dominate its revenues as a function of its prevalence in physical oil markets; themselves interwoven with the much larger oil financial markets that are traded in dollars in global financial centres and which play a major role in determining the price of the oil that Iraq exports. All of this means that Iraq will continue to have a large exposure to the dollar, through both its dollar revenue account, and its foreign reserves. However, it needs to be aware of the extent and consequences of this exposure and become proactive in managing it and its relationship with the US Treasury and the FRB. On the other hand, the past strategy of burying one’s head in the sand and hoping for the best seems to have worked during all prior crises that the country faced!
