US threatens to withhold Iraq oil revenue over Iran influence

WASHINGTON,— The United States has warned senior Iraqi officials that it could impose sanctions on Iraq, including potentially targeting its vital oil revenue, if Iran-backed armed groups participate in the next government, four sources familiar with the matter told Reuters.

The warning represents the most direct effort yet by U.S. President Donald Trump to limit the influence of Iran-linked factions in Iraq, a country that has long balanced close ties with both Washington and Tehran.

U.S. diplomatic messages were delivered repeatedly over the past two months by the U.S. Charge d’Affaires in Baghdad, Joshua Harris, according to three Iraqi officials and one source with direct knowledge of the discussions who spoke on condition of anonymity.

Harris conveyed the warnings both to Iraqi leaders and, through intermediaries, to heads of Iran-backed groups, the sources said.

The embassy and Harris did not respond to requests for comment.

Since taking office a year ago, Trump has acted to weaken the Iranian government, including through pressure on Iraq. U.S. and Iraqi officials have said Iran relies on Iraq to maintain its economy amid sanctions and has long used Baghdad’s banking system to bypass restrictions.

Washington has previously sanctioned more than a dozen Iraqi banks in efforts to limit this flow of funds.

However, the United States has never restricted the transfer of Iraq’s oil revenues, which are held in an account at the Federal Reserve Bank of New York and sent to the Central Bank of Iraq. The U.S. has had practical control over these funds since invading Iraq in 2003.

Requests for comment from Iraqi Prime Minister Mohammed Shia al-Sudani, the Central Bank of Iraq, and Iran’s mission to the United Nations were not answered.

A U.S. State Department spokesperson told Reuters, “The United States supports Iraqi sovereignty, and the sovereignty of every country in the region. That leaves absolutely no role for Iran-backed militias that pursue malign interests, cause sectarian division, and spread terrorism across the region.” The spokesperson declined to comment directly on the sanction threats.

Trump, who targeted Iranian nuclear facilities in a bombing campaign in June, warned last week that the U.S. could intervene militarily again if necessary.

No Armed Groups in Government

Among the Iraqi officials who received Harris’ messages were Prime Minister Sudani, Shi’ite politicians Ammar Hakim and Hadi Al Ameri, and caretaker Kurdistan region Prime Minister Masrour Barzani, three sources said.

The discussions began after Iraq’s November elections, in which Sudani’s bloc won the largest number of parliamentary seats, but Iran-backed militias also increased their presence in the legislature, the sources added.

The U.S. warning focused on 58 members of parliament believed by Washington to have links to Iran, the sources said.

One Iraqi official described the message as making clear that Washington would “suspend engagement with the new government should any of those 58 MPs be represented in cabinet.” When asked for clarification, the official added that this included potential suspension of dollar transfers to Iraq.

Renad Mansour, director of the Iraq Initiative at London’s Chatham House think tank, said Iran-backed factions in Iraq increasingly benefit from government positions, making them sensitive to U.S. threats against the country’s oil revenues.

“The U.S. has significant leverage. The threat of the loss of access to U.S. dollars, which is how Iraq’s economy functions through the sale of oil, has made it very concerning,” Mansour said.

Opposition to First Deputy Speaker

One figure targeted by Washington is Adnan Faihan of Asaib Ahl al-Haq (AAH), an Iran-backed political and armed group. Faihan was elected first deputy speaker of parliament in late December. U.S. officials reportedly objected to his appointment.

The threat appears to have prompted AAH leader Qais al-Khazali to signal a willingness to remove Faihan, though he remains in his position, the sources said. Neither Faihan nor AAH’s media office responded to requests for comment.

AAH previously held the education ministry and is expected to seek posts in the next government. The group was involved in an oil smuggling network that generated an estimated $1 billion annually for Iran and its Iraqi allies, sources previously told Reuters.

Khazali was sanctioned in 2019 for alleged human rights abuses, including the killing of protesters and a 2007 attack that killed five U.S. soldiers.

Dollar Control

Iraq keeps most of its oil revenue in an account at the Federal Reserve Bank of New York. While this account is technically Iraqi, it gives the United States control over a key source of state income, leaving Baghdad dependent on Washington’s cooperation.

A U.S. State Department spokesperson said, “U.S. efforts to achieve stability in the region are focused on ensuring states retain their sovereignty and can achieve security through mutual economic prosperity.”

The potential suspension of dollar transfers comes as the U.S. begins marketing Venezuelan oil. Following the capture of Venezuelan president Nicolas Maduro and his transfer to New York for trial on drug charges, U.S. officials have said proceeds from Venezuelan oil sales will initially be held in U.S.-controlled accounts.

(With files from Reuters)