Aletho News

The legacy of US sanctions, war, and occupation in Iraq

By Hala Farhat | Al Mayadeen | September 30, 2026

Iraq’s government has declared September 30 the final date for ending the US-led coalition’s military mission. Prime Minister Ali al-Zaidi’s office says October 1 will find the country “free of any foreign military presence,” closing a deployment that once reached about 170,000 US troops.

But withdrawal leaves intact much of the damage inflicted by the invasion and the 13 years of sanctions that preceded it, along with the financial arrangements through which Washington continues to exert influence.

The US left Iraq’s productive economy devastated, its institutions dismantled and reshaped, and its workforce left increasingly dependent on a state funded by oil. Access to that income remains vulnerable to US pressure.

The question after the troops leave is how much control Iraq will have over the economy they leave behind.

Thirteen years of sanctions

The erosion of Iraq’s economy began long before March 2003. The UN Security Council imposed sweeping sanctions after Saddam Hussein’s regime invaded Kuwait in 1990. Drawing on internal UN records, Joy Gordon’s Invisible War describes one of the most comprehensive and devastating sanctions regimes ever imposed.

The embargo quickly collapsed incomes. Reconstructed World Bank estimates showed GDP per capita collapsing to a third in a single year,  going from about $3,527 in 1990 to $1,255 in 1991.

Public employees who had earned $150 to $200 a month before sanctions were earning $3 to $5 by 1996, according to a 1997 assessment. By 2000, the International Committee of the Red Cross reported salaries as low as $2 a month and unemployment around 50 percent.

Factories, power stations, and water plants could not recover without imported equipment and spare parts. Yet any member of the sanctions committee could hold an entire contract indefinitely, even over a single disputed item. Gordon documents Washington’s use of the “dual-use” designation to restrict goods as basic as water pipes. By August 2002, the UN counted 2,058 contracts worth about $5.2 billion that had been placed on hold, including $745 million in oil industry equipment.

The restrictions also placed Iraq’s oil income beyond Baghdad’s direct control. Under the Oil-for-Food program, buyers paid into a UN-administered escrow account. After deductions for compensation, administration, and weapons inspections, the proceeds could finance only approved purchases. Iraq exported roughly $65 billion in oil under the program but could not use that money as ordinary budget revenue for wages, maintenance, or local services.

The collapse pushed skilled workers out of their professions. A UN humanitarian survey of 1,157 degree holders employed by aid organizations found 725 in general-service or menial jobs, including doctors, engineers, and scientists working as drivers, clerks, and guards.

By the time US troops arrived, Iraq had endured years of falling wages, industrial decline, and lost expertise. The occupation’s first decisions deepened that damage.

Dismantling the state, contracting out reconstruction

On May 16, 2003, the occupation authority issued Order 1, barring senior Baath Party members from public employment and requiring the screening of senior staff in ministries, hospitals, and universities. A week later, Order 2 dissolved the Defense Ministry, army, Republican Guard, and intelligence bodies.

The International Center for Transitional Justice estimates that Order 2 alone left about 400,000 conscripts, officers, and officials without jobs. The World Bank counted more than 2 million unemployed Iraqis, nearly 30 percent of the labor force, around 2003–2004. Meanwhile, Iraq’s health minister estimated that roughly half the country’s prewar doctors had fled as kidnapping and assassination made their work increasingly dangerous.

The occupation then opened the weakened economy to foreign competition. Order 39 allowed wholly foreign-owned companies and guaranteed investors treatment no less favorable than Iraqi businesses, while excluding natural resource extraction. Other orders suspended tariffs, later replaced by a flat 5 percent levy, and capped income tax at 15 percent from 2004. The World Bank warned that rapid opening would cost jobs in a country whose private sector was too weak to employ displaced workers.

Reconstruction brought billions of dollars, but much of the spending flowed through foreign contractors. The United States spent more than $60 billion over roughly a decade, according to the Special Inspector General for Iraq Reconstruction (SIGIR). More than $25 billion went to training and equipping security forces after the occupation had dissolved Iraq’s existing military institutions.

SIGIR found that reconstruction began without adequate security, consultation with Iraqi ministries, or planning for long-term maintenance. Its final report estimated waste at $3 billion to $5 billion from the main reconstruction fund and as much as $8 billion overall. The largest early infrastructure contracts went mainly to US firms. A $1.8 billion award to Bechtel in January 2004 was open only to American bidders.

Iraq’s own money followed a similar path. UN Security Council Resolution 1483 established the Development Fund for Iraq to receive oil revenue, with the occupation authority directing spending until June 2004.

An Iraq Revenue Watch analysis of contracts paid from Iraqi funds found that US companies received 74 percent of their value. US and British companies together received 85 percent, while Iraqi firms received 2 percent. Audits found that 73 percent of the value of Development Fund contracts above $5 million had been awarded without competitive bidding.

Oversight was inadequate even to establish how some of that money had been used. A 2010 SIGIR audit found that the Defense Department had failed to establish required accounting controls for about $8.7 billion of the $9.1 billion it received from the fund. It could not document spending of about $2.6 billion.

The result was a reconstruction process that directed vast sums abroad while leaving Iraq with damaged services, limited productive capacity, and institutions struggling to rebuild.

An oil-funded system of patronage

With factories closed or looted and no private industry to replace them, the state became the place where Iraqis look for work. An assessment by the International Fund for Agricultural Development, using World Bank data, says public employment accounts for nearly all formal jobs and 40 percent of all jobs. Salaries and pensions took about 90 trillion dinars, roughly $69 billion, more than 40 percent of the 2024 budget, and the World Bank says another half a million government jobs were added during the spending expansion that preceded 2025.

The private sector has not filled the gap. Estimates put imports at more than 90 percent of the goods in Iraqi shops, while manufacturing makes up only around 2 percent of GDP. The World Bank says nearly 29 percent of the population is aged 15 to 29, and that this large group is entering the labor market amid limited job creation, a preference for public-sector work, and a private sector too small to absorb them. Youth unemployment is about 32 percent, and only around 11 percent of women take part in the labor force.

The IMF’s 2025 assessment describes the same pattern, citing high unemployment, an excessive state footprint, corruption, a weak banking system, and an inefficient electricity sector, and it called the wage trajectory fiscally unsustainable. Analysts describe a cycle in which secure public wages raise the pay that educated workers expect, private firms struggle with unreliable power and weak finance, and young graduates keep turning to the state for jobs, which raises the demand for more public hiring.

Oil pays for all of it. The World Bank estimates that oil supplied about 88 percent of government revenue and 91 percent of exports in 2025.

The financial levers Washington keeps

Iraq’s oil income has passed through outside hands since 1996, first a UN escrow, then the occupation authority’s fund, and now the New York Fed.

The Development Fund’s accounts were opened at the Federal Reserve Bank of New York, where Iraqi oil revenue still flows. Buyers pay dollars into a Ministry of Finance account, and the Central Bank of Iraq converts part of the income into dinars for government spending. US jurisdiction over dollar clearing, correspondent banking, and physical cash shipments gives Washington substantial influence over Iraq’s access to its money.

In January 2020, after Iraq’s parliament called for foreign troops to leave, the Trump administration threatened to block access to the account. Iraqi officials said it then held about $35 billion and warned that losing access would disrupt salary payments and the exchange rate.

US restrictions introduced in November 2022 forced banks seeking dollars for international transfers to disclose the final beneficiaries and purposes of transactions through an electronic platform, with requests screened by the New York Fed. US and Iraqi accounts linked the measures to concerns about transfers to sanctioned Iranian actors.

Consequently, more than 80 percent of daily wire requests were initially blocked or returned. Transfers fell from $224.4 million on October 17, 2022, to $22.9 million on January 17, 2023. Demand shifted to the parallel market, where the dinar traded at about 1,588 to the dollar in February against a newly set official rate of 1,300. In a country dependent on imported food and consumer goods, restricted dollar access raised costs for ordinary households.

In April 2026, Washington applied pressure through physical cash, halting a shipment of about $500 million and suspending parts of security cooperation. Iraqi officials said the halt affected banknotes used for travel, medical treatment, education, and retail exchange, while electronic transfers for imports continued. Some shipments resumed in July. On September 26, Baghdad announced that Washington had agreed to continue them.

US sanctions have also reshaped access to Iraq’s oil fields. Russia’s Lukoil left West Qurna 2 after sanctions, and Chevron signed agreements to take over its development. During al-Zaidi’s July visit to Washington, Iraq signed dozens of agreements with companies including ExxonMobil, KBR, Halliburton, and Shell. US Energy Secretary Chris Wright cited more than $60 billion in commercial agreements, while al-Zaidi told The National that US companies would receive top priority. According to the Atlantic Council, Donald Trump framed the deals as American oil companies taking the place of US forces.

As US forces prepare to leave Iraq, they leave behind a trail of devastation. Decades of sanctions and occupation have weakened its productive economy, dismantled state institutions, and left livelihoods dependent on an oil-funded system of patronage. The consequences will endure long after the troops depart.

Washington retains substantial power over Iraq through its influence over dollar access and the financial channels that sustain the state. The withdrawal ends a military mission, while leaving Baghdad to contend with both the damage of US intervention and the control Washington continues to exercise.

September 30, 2026 - Posted by aletho | Economics, Wars for Israel | Iraq, United States, Zionism