What is the cost of rebellion?
LEARN ABOUT THE REASONS FOR AMERICA’S “GUARDIANSHIP” OVER IRAQ… AND THE CONSEQUENCES THAT AWAIT US IF THIS PROTECTION IS LIFTED
Despite more than 23 years having passed since the fall of Saddam Hussein’s regime, Iraqi oil revenues remain channeled through the Federal Reserve Bank of New York. This arrangement is viewed within Iraq as a complex mix of legal “protection” and financial “guardianship” that grants Washington significant influence over economic decision-making in Baghdad. Although most of the legal foundations that originally established this mechanism have expired, the United States effectively still controls the flow of dollars that fund the Iraqi budget through a combination of executive orders, protectionist measures, and strict oversight of dollar flows into and out of Iraq. With Trump’s threats to cut “aid” to Iraq—which is practically understood as a threat to cut off its dollar supply—let’s examine the implications.
What if Trump carries out his threat and cuts off or reduces dollar aid to Iraq?
-Financial strangulation within weeks: because almost every artery in the economy runs through the dollar coming out of New York, and any significant reduction or cut in supply would cripple the central bank’s ability to finance the market.
What we are currently experiencing has escalated into a full-blown crisis: today, with only limited supply constraints and exchange rate fluctuations, markets are in turmoil and prices are soaring. What will happen if the cuts become more drastic or if the currency freeze becomes a declared political decision?
– Direct pressure on the central bank and the government: The central bank will find itself facing practically frozen reserves, unable to inject sufficient quantities to maintain the official exchange rate or cover imports, and the government will be forced to choose between:
1- Employee salaries.
2-Financing food, medicine, and energy.
3- The gap between the official and parallel exchange rates has exploded.
This means a rapid erosion of the purchasing power of salaries, a significant rise in the prices of basic commodities, an expansion of hoarding in dollars and gold, and perhaps a return to barter patterns in some sectors.
– Widespread paralysis in the private sector and foreign trade: letters of credit and transfers have stopped, shipments are delayed, and weak companies are leaving the market in favor of a few who own private channels to obtain hard currency.
-The impossibility of a rapid transition to alternative currencies: Even if Iraq were to consider the yuan, the ruble, or regional settlements in other currencies, this is a project that would require years to amend contracts and supply chains, and it cannot be accomplished as an emergency solution under pressure within months.
-A potential social and political explosion: The collapse of purchasing power, rising unemployment, and shortages of goods could turn into a wave of protests and unrest, which could be exploited by internal and external forces to rearrange influence within the country.
-Turning Iraq into an arena for settling scores: Cutting off or strangling the dollar will be used as a tool in the American-Iranian conflict, and perhaps in wider conflicts, turning Iraq from a player trying to balance its relations into an open arena for the rivalries of others.
-The current crisis is just a small “rehearsal”: What is happening today in terms of pressures, partial reductions, and tightening of controls reveals the fragility of the financial and monetary structure, and shows what the image of a “complete financial blockade” could look like if the threat turns into a strategic decision.
The question is: Why is Iraq still mortgaging its oil revenues to America?
(Mnt Goat: With the election going the way it is with Nori al-Maliki and the other 28 Iranians newly elected into parliament, now we know why America has maintained this leverage with Iraq. Get it? The answer is obvious! 
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From the “Development Fund for Iraq” to the Central Bank account in New York
Economic expert Nabil Al-Marsoumi presents an analysis that moves from legal backgrounds to the financial reality today, and then proposes a practical path to get out of the state of dependency, by addressing the file of lawsuits and compensations accumulated against Iraq since the nineties, instead of just complaining about the “dominance” of the US Federal Reserve.
Following the 2003 invasion of Iraq, the Coalition Provisional Authority established the “Development Fund for Iraq” to be the repository for oil and gas export revenues, obligating countries around the world to deposit the sales proceeds into it, based on Security Council Resolution 1483, which stipulated that oil revenues be transferred to this fund and used for reconstruction, and protected from seizure and litigation proceedings abroad.
In 2010, UN Security Council Resolution 1956 paved the way for the dissolution of the Development Fund for Iraq (DFI) and the transfer of management of the funds to the Iraqi government and the Central Bank of Iraq, while maintaining some legal protections for a specified period. Concurrently, former US President George W. Bush issued Executive Order 13303 in 2003, which granted special protection to the DFI and “all property in which Iraq has an interest,” treating them as US funds with respect to immunity from seizure and court orders. This order remains in effect today, with some amendments, and is the most important legal basis for protecting Iraqi funds within the US financial system.
In practice, the “Development Fund for Iraq” evolved into an account in the name of the Central Bank of Iraq at the Federal Reserve Bank of New York, into which almost all crude oil revenues were transferred. The Central Bank then recycled these proceeds back into the country by selling dollars to banks, financing imports, and supporting the exchange rate.
Why does the depositing continue at the Federal Reserve while other oil-producing countries do the same thing without restrictions?
Technically, having oil revenues in the US Federal Reserve is not unusual; many oil-producing countries prefer to deposit their reserves there because oil is priced and sold in dollars, and because holding dollar reserves in New York gives these countries quick and secure access to the global financial system. However, Iraq’s situation is different for two main reasons:
-Absolute dependence on oil and the dollar: More than 90% of public revenues come from oil sales, making the Federal Reserve account the “bottleneck” for all hard currency entering the Iraqi budget.
– Exceptional oversight of dollar transactions: For years, and especially after 2022, the US Federal Reserve and the Treasury Department have tightened controls on transfers leaving Iraq’s account, linking dollar allocations to Iraqi banks’ adherence to a strict compliance system to prevent currency smuggling to Iran and other sanctioned countries. This included banning 14 Iraqi banks from dealing in dollars and subsequently preventing additional banks from conducting dollar transfers, citing weak anti-money laundering and counter-terrorism financing controls.
The result, as summarized by Al-Marsoumi, is that the problem is not in the “place” of depositing the funds, but in the type of restrictions imposed on Iraq’s freedom to use them compared to other countries; many oil-producing countries deposit their funds in the Federal Reserve, but they do not face the same level of scrutiny and restriction on every bank transfer.
Old lawsuits: The Kuwait invasion bill that has not been fully settled
A significant part of the complexity of the situation is linked to a long history of lawsuits filed against Iraq stemming from its 1990 invasion of Kuwait. The United Nations Compensation Commission was established to receive claims from affected countries, companies, and individuals, and to disburse compensation from Iraqi oil revenues for many years. Although the compensation file for Kuwait was declared closed in 2022 after full payment, other cases and compensation claims filed by companies and private parties in various international and national courts remain, some resulting in substantial default judgments due to the lack of effective Iraqi legal representation.
These provisions make Iraqi assets a constant target for seizure attempts by creditors. This is why the American protection (Resolution 13303) was originally used to prevent the seizure of Iraq’s assets in New York, but linking the protection to an American presidential decision put Iraq at the mercy of the political will in Washington: if the protection is lifted without addressing the claims and debts, the assets are at risk of almost immediate seizure in more than one jurisdiction.
From here, Al-Marsoumi points out that protecting funds through the United States gives Washington great influence over Baghdad; because whoever has the “button” of protection, consequently has the ability to threaten Baghdad with losing part of its assets if it deviates from the path required by America.
Direct political influence: When assets become a weapon in negotiations
American control is not limited to the technical procedures of banks; it also manifests as a tool of political pressure. Numerous reports indicate that, amidst discussions about the future of the American military presence in Iraq, US officials have threatened to restrict Baghdad’s access to its funds held at the Federal Reserve. This would effectively cripple the government’s ability to pay salaries and finance imports within weeks if implemented.
This influence was further strengthened by tightening the noose on the smuggling routes of dollars to Iran and the factions close to it, whether through the currency auction, which was subjected to severe restrictions and later was gradually dismantled, or through pursuing new channels such as international payment cards that were used for transfers and smuggling, before the noose was also tightened on them.
For Iraq, this means that the financial file is no longer governed solely by the necessities of economic stability, but also by the balances of the American-Iranian conflict; whenever the confrontation between the two sides intensifies, the pressure on the dollar increases within Iraq, and the presence of the US Federal Reserve increases as the “oxygen cutter” for the Iraqi economy if necessary.
The cost of the current arrangement on the Iraqi economy
The existing arrangement produces a range of profound effects on daily economic life in Iraq, most notably:
-Parallel market and two dollar exchange rates: Reducing the amount of dollars allowed to be injected into banks and tightening the conditions for transfers pushes a large part of trade into the informal market, where the dollar is sold at a higher price than the official rate, which raises the cost of imports, goods and food.
– Strangling the private sector: Importing companies that cannot meet the requirements of the US-Iraqi regulatory platforms are forced to resort to the parallel market, incurring additional costs, or exit the market in favor of “protected” players who have their own channels to access the dollar.
-Politicizing the economy: Any political disagreement with Washington, or a hardening of the relationship with Iran, is directly reflected in the flow of dollars into Iraq, turning fiscal policy into a geopolitical battleground, not just an economic management tool.
Deepening dependence on oil: As long as all funding lines pass through the Federal Reserve and oil revenues, any drop in global prices or disruption in the oil market reopens the debate on the deficit, while non-oil revenues remain weak and squandered by corruption, tax evasion, and customs fraud.
What does Nabil Al-Marsoumi propose to escape this “guardianship trap”?
Al-Marsoumi proposed a different approach that went beyond simply complaining about Iraq’s subservience to the US federal system; it addressed the legal root of the crisis. His idea can be summarized in three interconnected steps:
A comprehensive review of the lawsuits and debts file: This involves commissioning a reputable international law firm with full authority to conduct a thorough inventory of all cases filed against Iraq in foreign courts, including the amounts awarded, the nature of the judgments, and their binding nature.
Shifting from a passive defense to active negotiation: Given that many judgments have become final and cannot be easily overturned, the realistic option is to enter into negotiations with creditors (companies, individuals, and institutions) to reach settlements through a “debt buyout” approach: paying a percentage of the amount in exchange for dropping the lawsuits or halting the pursuit of Iraqi assets.
A political, not just economic, decision: Al-Marsoumi points out that countries like Greece and Argentina only overcame their crises with creditors through a major political decision, not just financial maneuvering. They negotiated significant debt reductions and long-term rescheduling in exchange for a commitment to a specific reform plan. By this measure, Iraq needs a sovereign decision that adopts a courageous legal and negotiating strategy to address the lawsuits file, rather than leaving it unresolved, which perpetuates American protection and its associated influence.
In this sense, addressing the issue of debts and claims becomes a necessary condition for freeing funds from the American “protection trusteeship”; because any sudden withdrawal from the current protection system, without cleaning up this file, means opening the door to a wave of judicial seizure of Iraqi assets abroad.
What are Iraq’s realistic options in the coming years?
The question is not, “Should we leave the Federal Reserve or stay?” but rather, “How can we reduce the Federal Reserve’s influence over Iraqi financial decisions and transform its role from a tool of guardianship into a temporary safety net?” A range of overlapping options can be outlined:
Internal reforms to reduce Washington’s appetite for intervention: As compliance systems in Iraqi banks improve and dollar smuggling and money laundering are curbed, the objective need for intervention by the Federal Reserve and the US Treasury Department under the pretext of protecting the financial system from exploitation diminishes.
Gradually diversify reserves and deposit destinations: Without taking any sudden risks, the Central Bank can gradually expand its currency basket and the destinations for its reserve investments (euro, yuan, gold, sovereign assets), thereby reducing some of the political pressures associated with dollar exclusivity, while the dollar remains a pivotal currency for trade.
Increase the weight of non-oil revenues: Addressing tax and customs evasion and corruption at border crossings, and fairly expanding the income and consumption tax base, means that a larger portion of state funding will no longer be held hostage to a single account in New York. This would reduce Washington’s ability to financially strangle Iraq.
Address the issue of lawsuits as proposed by the two decrees: inventory, negotiation, settlements, and then a legal-political understanding with the United States to gradually reduce protection in exchange for guarantees against the prosecution of Iraqi assets.
A balance between sovereignty and realism
Realistically, it does not appear that Iraq is able, in the short term, to sever its oil revenues from the US Federal Reserve with a single blow. The global financial structure, the almost complete dependence on oil and the dollar, and the issue of debts and lawsuits make this option a high-cost gamble, especially if the potential effects of any strict US move are taken into account, such as reducing dollar flows or threatening to cut them off completely, with the direct risks this entails for salaries, prices, the ability to finance imports, and the stability of the market and the street together.
But in the medium term, this “forced linkage” could turn into an intentional transitional phase, if work is carried out on three simultaneous tracks: restructuring debts and claims as the decree suggests, reforming the banking system and reducing dollar smuggling and enhancing compliance, and building internal sources of economic strength outside of oil, which would gradually mitigate the impact of any American shock on hard currency flows.
Only then can the question “Why does the US Federal Reserve control Iraqi funds?” be transformed from an expression of structural weakness into a political and economic negotiation file in which Iraq possesses real cards of strength, and at the same time reduces the cost and depth of the effects that may result from any US decision to tighten the noose on the dollar, instead of the country remaining hostage to a single account in New York that reduces the entire state to a dollar balance.