Iraq is caught in the crossfire of the Iran war, with attacks by both sides on its soil

Iraq Caught in Crossfire as Iran-Israel Conflict Threatens Economic Stability

Iraq finds itself in a precarious position as the only nation facing attacks from both sides in the ongoing Iran-Israel conflict, threatening to plunge the country into a full-blown crisis after two years of relative stability amid regional turmoil.

Nearly two weeks into the war that began on February 28 following a major U.S. and Israeli strike in Iran, Iraq’s situation has grown increasingly desperate. Disruptions to Gulf shipping and strikes on oil fields and infrastructure have virtually halted exports, jeopardizing a state that relies on such trade for the bulk of its revenue.

The economic consequences could be swift and severe. If the export shutdown continues, Baghdad may be unable to meet its oversized public-sector payroll as soon as next month, potentially triggering widespread unrest, according to Iraqi Kurdish officials speaking on condition of anonymity due to the sensitivity of the matter.

In a bid to mitigate the crisis, the federal government has appealed to northern Kurdish leaders to resume exports via a pipeline to Turkey, but negotiations remain deadlocked over longstanding domestic issues related to economic controls and trade benefits.

Meanwhile, a parallel conflict has intensified between Iran-backed Iraqi militia groups and the United States. Near-daily drone strikes target American interests across the country, including military bases at Baghdad and Erbil airports and diplomatic facilities, while the U.S. has conducted retaliatory strikes against militia bases to protect its troops.

Iraq’s unique vulnerability stems from its position hosting both entrenched Iran-aligned forces and significant U.S. interests. With an economy that depends overwhelmingly on oil, disruptions to production or exports through the Strait of Hormuz threaten to sharply cut government revenue at a particularly sensitive time, as a fraught political transition unfolds in Baghdad.

“The longer the conflict lasts, the greater the risk that economic shocks, political paralysis and friction with Iran-backed militias will combine to unravel Iraq’s hard-won relative stability,” noted a regional analyst familiar with the situation.

Leaders in Baghdad and Erbil continue urging caution and insisting the war must not be fought on their soil, but the conflict’s trajectory increasingly appears beyond their control. U.S. officials have reportedly provided assurances to Iraqi leaders that the country won’t be dragged into the wider regional war, though these guarantees provide little comfort as attacks continue.

In Erbil, the capital of Iraq’s autonomous Kurdish region, near-daily drone attacks have targeted not only U.S. military and allied interests but also commercial sites and hotels. Iran-backed groups have also struck Kurdish organizations in northern Iraq following reports that Washington planned to arm some of them to apply pressure against Tehran.

The political context exacerbates Iraq’s vulnerability. The country is operating under a caretaker government after the U.S. opposed the nomination of former Prime Minister Nouri al-Maliki following the November 2023 election. Caretaker premier Mohammed Shia al-Sudani, with severely limited powers, lacks the influence to rein in powerful militia groups that operate with significant autonomy.

Perhaps the most serious threat to Iraq’s stability is the disruption to oil production, which could rapidly deplete government resources. Baghdad has ordered production curtailed from oil fields in southern Iraq, where the majority of its 4.8 million barrels per day is produced, after the war virtually stopped traffic through the Strait of Hormuz and militias attacked facilities. Oil sales account for over 90% of state revenues.

Several international energy companies have already suspended operations. Canada’s ShaMaran Petroleum and U.S. private firm HKN have halted output at the Sarsang and Atrush blocks in the Kurdish region following attacks.

“If oil exports are disrupted, the immediate impact would likely be a decline in the value of the Iraqi dinar. This would quickly trigger inflation, and within a short time the prices of basic goods could rise sharply,” explained Farhad Soleimanpour, an Iraqi Kurdish political analyst. “For the Kurdistan region, the situation could be even more difficult because it does not have its own central bank or significant financial reserves.”

The war has also damaged power infrastructure. The Khor Mor gas field in the autonomous Kurdish region is offline, cutting electricity generation by nearly two-thirds. Where the region once provided 24-hour power, households now receive just four to six hours daily.

Iraq has defied the odds so far, largely avoiding the regional upheaval from the Gaza conflict that began in 2023. Political and religious leaders have remained committed to keeping the country out of wider conflicts to preserve its fragile stability.

However, as strikes continue and economic pressures mount, Iraq’s ability to maintain this delicate balance grows increasingly uncertain. With no clear path to de-escalation on either the regional or domestic front, the coming weeks may prove decisive for Iraq’s future stability.