For more than two decades, Iraq has lived a dangerous lie. To Washington and Europe, Baghdad has posed as a fragile democracy-unstable but reformable, worthy of aid and access to the global financial system. To Tehran, however, Iraq has functioned as something else entirely: a sovereign shield for militias, a logistics corridor for weapons, and a financial artery sustaining Iran’s regional war machine.
As 2026 begins, that illusion is collapsing. The Trump administration has made clear that Iraq’s long-running double game-absorbing American support while advancing Iranian interests-has reached its limit. Washington is no longer issuing warnings or quiet waivers. It is moving to deploy its most decisive form of leverage: control over Iraq’s access to dollars, and therefore over the Iraqi economy itself.
This is not a technical dispute over banking rules. It is a security confrontation with direct implications for Israel. For years, Iraq has served as the central land bridge in Iran’s “unity of fronts" strategy. Through Iraqi territory, the Islamic Revolutionary Guard Corps has transported missiles, drones, and personnel toward Syria and Lebanon, steadily tightening pressure on Israel from multiple directions.
What has changed is Iraq’s role. Baghdad is no longer just a transit zone. In recent weeks, Iranian-backed militias operating on Iraqi soil have increasingly turned the country into a launchpad. Drone and cruise missile attacks linked to these groups have alarmed both the US and Israel. The fear is now explicit: the next major strike on Israeli cities may come not from Gaza or southern Lebanon, but from militia bases near Baghdad.
That reality explains the sudden urgency in Washington, including congressional moves to revive legislation targeting “killer drones." It also explains the blunt message delivered by U.S. Charge d’Affaires Joshua Harris to Iraqi leaders. The era of diplomatic ambiguity is over. The survival of the Iraqi government is now directly tied to the removal of Iranian proxies from positions of power.
The leverage behind this ultimatum is existential. Iraq’s oil revenues-its economic lifeblood-flow through accounts overseen by the Federal Reserve Bank of New York. Without access to that system, the state cannot pay salaries, import basic goods, or maintain social stability. For years, the United States tolerated this arrangement despite overwhelming evidence that Iraq’s currency auctions were being exploited to funnel billions of dollars to Iran and its militia network. That tolerance has ended.
This marks a shift from symbolic pressure on Tehran to real accountability for its enablers. Washington is no longer treating Iraq as a passive victim of Iranian coercion, but as a willing accomplice.
The immediate trigger for this harder line is the open fusion of Iraq’s political institutions with U.S.-designated terrorist groups. The elevation of Adnan Faihan to First Deputy Speaker of Parliament captures the problem. Faihan is a senior figure in Asa’ib Ahl al-Haq, a militia designated by the United States as a Foreign Terrorist Organization. Its leader, Qais al-Khazali, built his career attacking American forces and openly calls for Israel’s destruction. When figures tied to such groups sit at the heart of parliament, the distinction between state authority and militia rule disappears.
For Israel, the implications are severe. A militia-dominated Iraq represents a fully militarized eastern front under Iranian influence. Israeli leaders have already signaled that sustained attacks originating from Iraqi territory will not be tolerated. If Baghdad continues to shelter groups launching drones at Israeli population centers, Israeli military action becomes increasingly likely. Washington’s financial pressure is therefore an attempt to impose discipline before the region slides into open war.
Inside Iraq, this pressure is exposing deep fractures. Pragmatists understand the arithmetic. Cut off from dollars, the economy could unravel within weeks, triggering inflation and unrest that no militia can contain. Ideologues insist Iraq can survive through alignment with Tehran and a so-called “resistance economy." The region’s record suggests otherwise. No modern state can function without access to the global dollar system.
By forcing this choice, Washington is making the cost of Iranian alignment unavoidable. Iraq can either reclaim a measure of sovereignty and remain integrated into the international system, or continue down the path toward becoming a provincial outpost of Iran’s revolutionary project-isolated, impoverished, and increasingly viewed as a legitimate military target.