US forces exit Iraq, Iran’s proxies and Islamic State set to take over

US forces ended their mission in Iraq on Wednesday, raising fears they will leave behind a security vacuum, further embolden Iranian-backed Shi’ite militias and give the resurgent Islamic State group an opening to regroup. The withdrawal, mainly from an airbase in Erbil in the semi-autonomous Kurdish region, was celebrated as a victory by Tehran and its allies. It was agreed in 2024 under President Joe Biden and carried out by Donald Trump’s administration even as it wages war against Iran. How the US controls Iraq’s oil revenues HOW DOES THE US CONTROL IRAQ’S OIL REVENUES? This stems primarily from the management of Iraq’s oil income through the Federal Reserve Bank of New York. After the 2003 invasion, the Coalition Provisional Authority (CPA), led by the US, set up the Development Fund for Iraq (DFI), held at the New York Fed, and designed to collect the oil revenues for use in reconstruction and development efforts. The Fund also aimed to protect the Iraqi oil revenues from lawsuits and claims relating to Saddam Hussein’s rule. An executive order by then president George W. Bush to set up the arrangement has been renewed by every president since. The DFI eventually became an account of the Central Bank of Iraq at the New York Federal Reserve, as it remains today. WHAT LEVERAGE DOES THIS GIVE THE US OVER IRAQ? Oil is Iraq’s most important revenue source, making up about 90% of the state budget. This gives Washington significant sway over the country’s economic and political stability. When the Iraqi government asked US troops to leave in 2020, Washington reportedly threatened to cut Iraq’s access to the New York Federal Reserve funds, with Baghdad ultimately backing down. While Iraq has gained more control over its financial affairs since the early years of the occupation, the link highlights the enduring influence of the US on the economic landscape of Iraq, even as the latter seeks to assert sovereignty and independence. WHY HAS THE ARRANGEMENT ENDURED FOR SO LONG? The system helped anchor Iraq’s financial stability and safeguards state finances, government officials told Reuters on condition of anonymity. It boosts international confidence in the management of oil income, eases access to US dollars needed for trade and imports, and protects revenues from external claims and financial shocks, including claims by creditors and lawsuits, they said. The arrangement supports exchange-rate stability and underpins confidence in the Iraqi economy, while working to strengthen domestic financial institutions and assert greater economic sovereignty, they added. It also allows the government to push back against some actors, such as Iran-allied groups, who seek fewer curbs on dollar access. Last year, the US imposed sanctions on Iraqi banks and individuals it accused of laundering money for Iran. HOW HAS THIS ARRANGEMENT AFFECTED IRAQ? The heavy curbs on US dollar supply led to a parallel, informal market for dollars, resulting in a price spread between the official exchange rate set by the central bank and that on the black market. The price difference is essentially a risk premium for dealing outside the formal system. In his second term, President Donald Trump has pursued a campaign of maximum pressure on Iran, with Iraq often caught in the crossfire as Tehran has used it as a vital economic lung. The war he launched with Israel against Iran on February 28 added further pressure on Baghdad. WHAT IS THE STATUS OF IRAQ’S OIL REVENUE MANAGEMENT? Iraqi oil revenues remain in the custody of the Federal Reserve Bank of New York. CBI has historically used dollar auctions, formally known as the foreign currency window, as the main mechanism to supply dollars. Private banks and exchange houses could bid daily to purchase US dollars using Iraqi dinars. Iraq formally ended the auction system at the start of 2025 after significant US pressure, part of a broad crackdown on alleged siphoning of dollars to sanctioned parties, especially Iran. The pullout comes 23 years after US-led forces toppled Saddam Hussein, then triggered years of upheaval and chaos, culminating with the rise of Islamic State. The Pentagon said the United States and its coalition partners formally concluded Operation Inherent Resolve and that the Pentagon will continue to provide targeted training and intelligence support to Iraqi partners. The Iraqis are expected to lead the effort to secure the country, an ally of both Washington and Tehran, and keep the remnants of Islamic State suppressed. Iran’s Islamic Revolutionary Guard Corps urged Americans to vote out Trump’s allies in Congress as US forces exit from neighbouring Iraq, where Tehran has steadily entrenched itself through proxies since the Iraqi dictator’s fall. While the departure of US forces is broadly popular among Iraqis, some worry that security forces trained and funded by the United States still can’t protect the country, where 4,500 American forces died in more than 20 years of war. “The lesson from the past two decades is that security vacuums can be extremely dangerous,” said Jassim al-Bahadli, an Iraqi analyst who advises the security forces. After US forces invaded in 2003, it went on to occupy the country, install a Shi’ite-led government and fight a years-long insurgency — first by Saddam loyalists, then al-Qaeda, as a sectarian civil war devastated Iraq — before withdrawing at the end of 2011. They returned less than three years later to help Iraqi forces defeat the Sunni militant group Islamic State, which terrorized millions, in a major war from 2014 to 2017. Around twice as many Americans died in “Operation Iraqi Freedom” as in the parallel war in Afghanistan, which ended with an abrupt US withdrawal in 2021. In this year’s conflict with Iran, 7 of the 18 US service members listed as killed were in Iraq, the last an army sergeant who died during the controlled detonation of a drone at a base near Erbil in July. IRAN, ALLIES ARE THE WINNERS Iran, which says its ultimate aim is to force American forces to leave the entire Middle East, casts the US pullout from Iraq as a triumph for its “axis of resistance” of allied armed groups across the region. “What is further concerning is not necessarily direct Iranian intervention, but the possibility that Iran’s proxies will feel increasingly empowered in the absence of a Western military presence. These groups may attempt to expand their role in shaping state policies and consolidating their presence within key institutions,” said Baghdad-based political analyst Ahmed Younis. Some Iraqi security officials, both in the federal government and the semi-autonomous northern Kurdish region, say the US pullout also risks giving new life to Islamic State fighters, who, despite the defeat of their self-proclaimed caliphate nearly a decade ago, retain a sleeper cell network. At their height, the militants occupied a third of Iraq and slaughtered thousands of people, including hundreds they videotaped themselves gunning down inside a former US military base. US troops had been providing Iraqi security forces with critical intelligence on Islamic State movements, aerial surveillance and reconnaissance. “The most important question now is whether Iraq’s security institutions have prepared a viable Plan B for the post-coalition phase,” said retired Iraqi Army General Mohammed al-Jubouri, who led a brigade in the war against Islamic State. “One of the worst-case scenarios would be Islamic State obtaining armed drones or improvised explosive drones at a time when Iraq still lacks sufficient air defense capabilities to counter such threats effectively.”