Iraq fears ‘collapse’ if US lives up to sanctions threat

BAGHDAD - Iraq’s government could lose access to it’s dollar account at the Federal Reserve and face crippling sanctions against essential oil revenues if it goes through with expelling American troops.

The Iraqi parliament voted on January 5th for a non-binding resolution to oust foreign forces, including some 5,200 Americans, who have been training local soldiers in the fight against Islamic State jihadists since 2014.

The decision to hold a vote came after an American drone attack in Baghdad killed top Iranian general Qasem Soleimani and his Iraqi right-hand-man, Abu Mahdi al-Muhandis, in what many feared would be the start of a war between Iran and the United States on Iraqi soil.

US President Donald Trump was incensed by the vote, threatening an aggressive response.

“If they do ask us to leave, if we don’t do it in a very friendly basis, we will charge them sanctions like they’ve never seen before ever,” Trump told reporters. “It’ll make Iranian sanctions look somewhat tame.”

Threat of collapse

Iraqi officials say that Washington delivered threatening calls directly to Prime Minister Adel Abdel Mahdi’s office.

"The PMO got a call threatening that if US troops are kicked out, 'we' -- the US -- will block your account at the Federal Reserve Bank in New York," one official said.

Iraq, OPEC’s second-biggest crude producer, derives 90 percent of its state budget from oil revenues, which peaked at $112 billion in 2019.

Revenues are paid in dollars into a Fed account on a daily basis, with the balance sitting at around $35 billion currently, from which $1-$2 billion is flown into Iraq in cash every month or so for official and commercial transactions.

The Central Bank of Iraq’s account was established in 2003 following the toppling of Saddam Hussein by US forces, and the lifting of global sanctions imposed after Iraq’s invasion of Kuwait.

Officials fear total economic collapse should access to these funds be restricted.

"We're an oil-producing country. Those accounts are in dollars. Cutting off access means totally turning off the tap," the first Iraqi official said.

A second official said it would mean the government could not carry out daily functions or pay salaries and the Iraqi currency would plummet in value.

"It would mean collapse for Iraq," the official said.

US threats were met with shock, anger and near-disbelief, with one official quoted as saying that ‘the PM was pissed and insulted’.

Another said the US could irreversibly "lose Iraq” and push them towards economic ties with other world powers.

"They'd push us towards Russia, China, Iran. We'd have to form a separate economy with those countries."

Harsh response

The US threat is highly unusual given that the Federal Reserve, which has declined to comment on the matter, is meant to be totally independent of foreign policy, and going through with the restrictions could effect its credibility.

"The attempt to politicise dollar shipments has the Bank worried because it affects its prestige and integrity in dealing with clients," a State Department official said.

"Trump is obviously willing to politicise everything."

A senior Iraqi official said that Washington was considering limiting cash access to ‘about a third of what they would usually send’.

"You can imagine why, if troops were expelled, banks might be nervous about sending lots of... cash to Baghdad," the State Department added.

The US already has sanctions imposed on certain Iraqi nationals, militias and banks with links to Iran, but has so far left oil revenues untouched.

Restricting access to the Fed account could involve blacklisting a government body.

Ties between the US and Iraq have taken a nosedive recently following the US drone strike in Baghdad on January 3rd, with Baghdad slamming the killings as a violation of its sovereignty, before immediately voting to remove foreign troops.

However, the US could consider far less provocative measures in response to the vote, such as declining to renew a waiver granted to Iraq in 2018 that allows Baghdad to import gas from Iran to feed its damaged power grid despite US sanctions on Tehran’s energy sector.

Four people, including at least two Iraqi soldiers, were wounded on Sunday in an attack on Balad air base in northern Iraq which houses US personnel.

There was no word of any US casualties among the US forces at the base, nor any immediate blame attributed.