Iraq’s Impossible Choice: Economic Survival or Iranian Influence

As US sanctions tighten around Iran, Iraq finds itself trapped between preserving crucial economic ties with its neighbor and risking deeper entanglement in Tehran’s regional proxy conflicts.

The Sanctions Spillover Effect

The reimposition and expansion of US sanctions on Iran has created a cascading crisis that extends well beyond Tehran’s borders. Iraq, which shares a 900-mile border with Iran and maintains deep economic interdependence with its neighbor, faces an increasingly untenable position. The sanctions regime, designed to pressure Iran over its nuclear program and regional activities, threatens to ensnare Iraqi businesses, banks, and political entities that maintain ties with Iranian-backed groups.

This economic entanglement is no accident. Since the 2003 US invasion, Iran has methodically woven itself into Iraq’s political and economic fabric. Iranian-backed militias, many of which evolved from the Popular Mobilization Forces that helped defeat ISIS, now control significant portions of Iraq’s security apparatus and hold substantial political power through affiliated parties in parliament. These groups represent not just military influence but economic networks that control border crossings, construction contracts, and even portions of Iraq’s oil sector.

Tehran’s Tightening Grip Amid Domestic Turmoil

The timing of this pressure could not be more precarious. As Arab analysts note, Iran is desperately fighting to maintain its influence in Baghdad even as it faces unprecedented domestic challenges. The Iranian economy, battered by sanctions and mismanagement, has triggered waves of protests from citizens exhausted by their government’s costly foreign interventions in Iraq, Syria, Lebanon, and Yemen. Yet rather than retreating, Tehran appears to be doubling down on its regional proxy network, viewing Iraq as too strategically vital to abandon.

This dynamic creates a vicious cycle for Iraq. The more Iran feels pressured domestically and internationally, the more it relies on its Iraqi proxies to maintain regional leverage and generate revenue through smuggling and other illicit activities. These militias, in turn, drag Iraq deeper into regional conflicts, as seen in recent rocket attacks on US facilities and the ongoing tensions with Gulf states who view Iraq as an Iranian satellite.

The Economic Death Spiral

The economic implications for Iraq are staggering. The country relies on Iran for critical electricity imports, natural gas, and consumer goods. Iranian pilgrims contribute billions to Iraq’s tourism sector, while cross-border trade supports millions of jobs. Yet maintaining these ties increasingly means risking secondary sanctions from the United States, Iraq’s other crucial partner who provides security assistance and helps facilitate Iraq’s oil exports to global markets.

Baghdad’s attempts to navigate between these two poles have largely failed. Requests for sanctions waivers are becoming harder to secure, while efforts to reduce dependence on Iranian electricity have proceeded at a glacial pace due to corruption and infrastructure challenges. Meanwhile, Iranian-backed groups actively sabotage efforts to diversify Iraq’s energy sources, including attacks on electricity infrastructure that would reduce dependence on Iranian imports.

A Nation Held Hostage

The human cost of this geopolitical tug-of-war falls squarely on ordinary Iraqis. Already suffering from corruption, inadequate services, and the lingering effects of decades of conflict, Iraqi citizens now face the prospect of their country becoming even more isolated economically while simultaneously being drawn into proxy conflicts they have no desire to fight. The youth protests of 2019, which explicitly rejected both Iranian and American influence, demonstrated the Iraqi public’s exhaustion with being a battleground for foreign powers.

As one Baghdad analyst recently observed, Iraq’s political class faces a stark choice: continue down the path of Iranian alignment and risk economic isolation and perpetual instability, or attempt to chart an independent course and face the wrath of powerful militias that have proven willing to use violence to protect their interests. Neither option offers much hope for the stability and prosperity that Iraqis desperately seek. The question remains: how many more years can Iraq survive as the rope in a geopolitical tug-of-war before it finally snaps?