Iraq is facing growing economic and political pressures amid delayed state employee salary payments and ongoing geopolitical tensions driven by its complex relationships with Iran and the United States. The salary delays, occurring after Baghdad failed to distribute July payments, have so far prompted only relatively small protests, but analysts warn these demonstrations could escalate if the situation does not improve.

Iraq’s Finance Ministry reports that the government allocates approximately $6.5 billion monthly to public sector salaries, pensions, and social welfare programs. The recent payment delays have been linked to disruptions in oil exports triggered by Iran’s blockade of the Strait of Hormuz, a critical route for Iraqi oil shipments. Iraq’s economy heavily depends on oil earnings, which account for roughly 90% of government revenue, 95% of export earnings, and over half of its gross domestic product.

Ronen Zeidel, a researcher at the Moshe Dayan Center, explained that the bottleneck partly stems from difficulties accessing oil revenues controlled by the United States through the Development Fund for Iraq (DFI), based in New York. The U.S. leverages control over these funds as a means to press Baghdad for banking reforms and to prevent money laundering linked to Iran and certain Iraqi militias. Until these reforms are fully implemented, Iraq faces challenges in securing dollar payments necessary for government spending.

“The Iraqi banking and financial systems are not yet compliant with American regulations,” Zeidel said, noting that some Iraqi banks remain on U.S. blacklists due to alleged connections with Iranian entities and militias. These restrictions have exacerbated the country’s financial strain, limiting Baghdad’s ability to pay public employees promptly.

The current unrest in Iraq’s cities is partially subdued by the ongoing Ziyarat al-Arbaeen Shia pilgrimage, but analysts caution that the combination of economic hardship and regional power struggles creates a volatile environment. Zeidel drew parallels to protests in Iran last December, which began over economic grievances but soon morphed into broader dissent against the ruling regime.

Iraq finds itself caught between its dependence on Washington and Tehran, described metaphorically by Zeidel as the “child of divorced parents.” While the U.S. remains a key financial partner and investor—with recent visit agreements between Iraqi Prime Minister Ali al-Zaidi and American energy companies estimated at $200 billion—Iran continues to exert significant influence, particularly as a supplier of between one-third and 40% of Iraq’s gas and electricity needs.

Power outages have become common following repeated halts to Iranian gas deliveries, a situation aggravated by US sanctions limiting Iraq’s ability to pay Iran in cash. Instead, Baghdad has engaged in crude oil and fuel barter arrangements to settle debts. During Zaidi’s recent trip to Tehran, Iraq did not secure exemptions for oil tanker shipments or expanded gas supplies, though it signed joint agreements addressing foreign affairs, finance, economy, and energy cooperation.

Sources also report that Iran demanded approximately $11 billion in outstanding payments for gas supplies during the visit, while Baghdad offered to transfer $1 billion to Saudi Arabia to cover Hajj-related fees on Iran’s behalf—an offer reportedly rejected. This dynamic reflects Tehran’s unease over growing U.S. economic engagement in Iraq.

Zeidel noted that while increased American involvement could bring economic benefits such as job creation and investment, Iranian influence remains potent and capable of destabilizing Iraqi politics. The delicate balancing act between these competing pressures continues to shape Iraq’s immediate prospects amid significant economic challenges and social unrest.