On 8 February, 2023, an Iraqi delegation led by Deputy Prime Minister and Minister of Foreign Affairs Fuad Hussein arrived in Washington to discuss easing the recent US Treasury measures that have restricted the supply of dollars to Baghdad and imposed sanctions on the Central Bank of Iraq.

The high-level delegation, which includes several government officials, has indefinitely extended its stay in Washington for the “difficult” negotiations, indicating Iraq’s limited options in these talks. If the discussions fail and Washington does not ease its punishing measures, a major crisis could erupt in Iraq – resulting in the collapse of the dinar’s value because of high demand and limited supply.

A Washington Institute report suggests that the US is exerting “severe” pressure on Baghdad to redirect its energy sector away from Iran and to address allegations that its banking sector assists the Islamic Republic in evading western sanctions. These demands are likely to be challenging for Iraq to meet, given its vital ties to Iran and the importance of the energy sector to its economy.

New government, old challenges

The Iraqi visit takes place 100 days after the formation of the government of Mohammed Shia al-Sudani, which had to immediately grapple with the imposition of US sanctions on three Iraqi banks, and restrictions on dollar transfers from Iraq’s oil revenue account in New York to the Central Bank of Iraq.

These measures were put in place to ensure that Iraq did not violate US sanctions on Iran and Syria, which led to a significant decrease in the supply of dollars and a decline in the value of the dinar. This, in turn, stirred up discontent within a population already facing financial hardships.

Sudani’s new government responded by implementing quick measures: subsidizing some basic commodities, launching a campaign of arrests against dollar smugglers, and reducing the official exchange rate from 1,450 dinars to 1,300 dinars per dollar.

However, these steps were unable to control spiraling prices, and only resulted in a slight decrease in the dollar value in the parallel market. This situation has made negotiations with US officials even more critical for the Iraqi delegation, as failure to ease the US measures could have dire consequences for Iraq’s already fragile economy.

‘Forced to negotiate’

Sources in Iraq’s cabinet confirmed to The Cradle that the US did not want Prime Minister Sudani to lead the delegation to Washington, and requested a lower level of representation. As a result, Baghdad carefully selected the members of the visiting team, which is currently led by Fuad Hussein from the Kurdistan Democratic Party (KDP), who is considered an “old friend” of the US.

The Iraqi delegation also includes Adnan al Zarfi, a member of the Parliamentary Finance Committee (PFC), who was previously nominated for the prime ministerial position. Zarfi maintains good relations with Washington officialdom, and has held US citizenship since 2003, making him a strategic choice for inclusion in the Iraqi mission.

Hussein Muanis, a PFC member and head of the Huqouq movement – which is close to Iran-supported Kataeb Hezbollah – tells The Cradle that Iraq was “forced to negotiate:”

“Negotiations should have been based on the strategic framework agreement [which the two countries signed in 2008]. What has been leaked from it so far indicates that the talks were not limited to the economic issues, and that the Iraqi delegation heard American diktats.”

However, Muanis denies that the US had placed a veto on the participation of any Iraqi political personages in the delegation. He emphasized that the PFC had unanimously selected Zarfi as a representative of the legislative authority: “we understand the position of a large part of the political parties regarding relations with Washington.”

Hard bargaining by the US

Thamer Dhiban, a member of the PFC for the Al-Fateh Alliance, which opposes the US presence in Iraq and includes Asa’ib Ahl al-Haq and the Badr Organization, confirmed that the “Coalition for State Administration,” the largest bloc in the Iraqi parliament, supports these negotiations. Dhiban added that “what we have heard so far is positive in principle.”

He tells The Cradle: “There was an agreement to send another delegation to delve into the details of the economic issues, and we were not informed that the negotiations discussed political or military matters,” adding:

“The conditions for financial compliance and connection with the SWIFT system are in the interest of Iraq in the first place, and we will not allow the repetition of the economic blockade that was imposed on Iraq previously.”

Other sources suggest that the meeting between Central Bank Governor Ali al-Alaq and the US Treasury Department only discussed the conditions of the US Federal Reserve regarding financial transfers in dollars and Baghdad’s plans to reform the economic and financial sector.

However, during Hussein’s meeting with his US counterpart Anthony Blinken, political issues were also on the table. According to a Kurdish source who insisted on confidentiality, these included:

“Iraq’s accession to the Abraham Accords, normalization with Israel (which is currently criminalized in Iraq), urging Baghdad to find alternatives to Iranian energy imports, implementing electrical interconnection with Persian Gulf states and Jordan, facilitating the extension of the oil pipeline from Basra to Aqaba, and accelerating the export of gas. The Americans also requested that the ISIS-fighting and pro-Iran Popular Mobilizations Units (PMUs or Hashd al-Shaabi) be repositioned far way from US military bases in Iraq.”

Sources close to Iraq’s pro-Iran political factions, however, believe that “the idea of dissolving the PMUs will be impossible to implement due to legal obstacles on the one hand, and an urgent need for its existence, in addition to the difficulty of integrating it into the regular army.”

Regarding normalization with Tel Aviv, the sources say that the law criminalizing any interaction with Israel – approved by Iraq’s parliament in 2022 – blocked this project.

The sources also say one possible solution toward brokering the US dollar-control issue in Iraq is to resolve Baghdad’s tensions with the Kurdistan Regional Government (KRG) in Erbil, as the latter is a trusted US intermediary in Iraq. If Baghdad accepts to pay Erbil’s public salaries, for instance, this may smooth the way for the US to reduce pressures.

Ditching the dollar

Iraq is facing a multitude of crises, from political divisions to economic struggles. Due to its vast oil and gas resources, it has become an object of interest for both global and regional powers. Hours before the Iraqi delegation headed to Washington, Russian Foreign Minister Sergei Lavrov visited Baghdad and held talks with Iraqi officials about the dollar crisis and ways to enhance energy cooperation.

According to Kuwaiti newspaper, Al-Jarida, some Iraqi experts described this particular Lavrov proposal as returning Baghdad to the era of “barter trade,” when the administration of Saddam Hussein entered into a food-for-oil exchange. For them, any payments outside the exalted dollar currency cannot build a proper economy.

But this is only one view from inside Iraq. According to official sources in Sudani’s media office, Baghdad does in fact “aspire to obtain membership in the Asian Development Bank and deposit the financial surplus in it instead of buying US bonds or increasing the financial reserves of the dollar.” The Asian Bank, the sources say, grants larger loan amounts with fewer conditions and lower interest rates than the World Bank.

Likewise, Iraq plans to submit membership requests to join the multipolar BRICS+ group of countries and the Chinese-led Shanghai Cooperation Organization (SCO).