Shafaq News

By Dr. Frank Musmar*

The arrangement by which Iraq’s oil revenues are held in
accounts supervised by the U.S. Federal Reserve, even after the completion of
Kuwait war reparations in 2022, is a subject of ongoing debate and rigorous
analysis in international economic and political circles. This ongoing
discourse underscores the significance and complexity of the issue.

While the original justification for this mechanism was
rooted in the need to ensure the payment of reparations following Iraq’s 1990
invasion of Kuwait, its persistence after the full settlement of those debts
speaks to a more multifaceted set of economic, financial, and geopolitical
factors.

The system originated in the wake of United Nations
Security Council Resolution 1483 (2003), which established the Development Fund
for Iraq (DFI) and mandated that Iraqi oil proceeds be deposited in an account
at the Federal Reserve Bank of New York. The central purpose was to guarantee
transparency and ensure the ability to meet international obligations, most
notably reparations to Kuwait through the UN Compensation Commission.

1. A stabilizing force for Iraq’s financial
system

The Federal Reserve’s oversight is not just a perceived
stabilizing force, but a tangible one for Iraq’s financial system. The global
oil market’s volatility is a well-known challenge. By retaining revenues in
Federal Reserve accounts, Iraq can benefit from the stability provided by the
world’s premier central bank, which insulates its assets from abrupt political
or economic shocks. This stability is a testament to the reliability of the
system, and the presence of the Federal Reserve acts as a signal to international
creditors and investors that Iraq’s oil revenues are being managed
transparently and reliably, bolstering confidence in the country’s financial
management and attracting foreign investment.

2. Dollar-Denomination

Much of Iraq’s external trade, debt servicing, and
governmental transactions are conducted in U.S. dollars. The Federal Reserve
provides Iraq with seamless access to the international dollar payment system,
a crucial aspect of its financial operations. This is particularly important
for the import of goods, services, and technology, as well as for the servicing
of sovereign debt or payment of salaries to officials working abroad. Moreover,
by maintaining oil revenues in dollar accounts, the risk of mismanagement,
misallocation, or even outright theft is significantly reduced, given the
robust U.S. regulatory oversight and auditing mechanisms.

3. Monitor Money Laundering and Corruption

The retention of funds allows for more rigorous
monitoring and compliance with anti-money laundering (AML) and
counter-terrorism financing (CTF) regulations. Oversight and Compliance: Iraq
has struggled with endemic corruption and irregularities in its banking system.
US oversight ensures that the movement of large sums is scrutinized, reducing
the risk that revenues will be siphoned into illicit networks or used to
finance destabilizing activities. Moreover, Washington often ties reforms in
financial transparency and governance to continued access to the Federal
Reserve account, leveraging its position to encourage best practices within
Iraq’s financial institutions.

4. Economic Leverage

The retention of Iraqi funds provides Washington with a
form of economic leverage. In the event of a dispute or deterioration in
bilateral relations, the U.S. can exert pressure by restricting access to
accounts or freezing assets, thereby protecting its geopolitical interests.
Moreover, Iraq has seen periods of intense political instability and violence.
The U.S. government may view direct control over significant financial flows as
essential insurance against sudden changes in Iraq’s domestic landscape that
could threaten regional security or American lives and assets.

5. Ensuring Iraq’s Obligations to Creditors

Maintaining the funds in Federal Reserve accounts
guarantees that Iraq continues to meet obligations to international
institutions and creditors. The arrangement allows for the automatic payment of
debts, fees, and other liabilities, reducing the risk of default and preserving
Iraq’s international standing. Moreover, with oversight, the funds are more
likely to be used for critical expenditures, such as humanitarian aid,
infrastructure investment, or social services, rather than being diverted for
political or personal gain.

6. Support Currency Stability

Oil revenues held in the Federal Reserve help back the
Iraqi dinar and support monetary policy. The retention of oil income in U.S.
dollar accounts provides the Central Bank of Iraq with the reserves needed to
stabilize the dinar, intervene in currency markets, and manage inflation.
Moreover, in times of crisis, these reserves act as a buffer, allowing Iraq to
continue critical imports and expenditures even if other sources of revenue are
disrupted.

While the economic justifications for the arrangement are
substantial, it is not without criticism. Many observers argue that the
continued retention of Iraqi assets by the U.S. undermines Iraq’s economic
sovereignty and perpetuates dependency. Some point out that the system is a
legacy of an era of foreign tutelage and that Iraq should be empowered to
assume complete control over its revenues and financial destiny.

Moreover, the arrangement can be viewed as a double-edged
sword. While it provides stability and transparency, it also exposes Iraq to
the risk of unilateral decisions by Washington, especially in times of
diplomatic tension or if future executive orders alter the terms under which
these funds are held and managed. This recognition of potential risks
encourages a balanced view of the arrangement.

Yet, the power inherent in this financial arrangement is
not merely technical or economic—it is also profoundly political. By keeping a
substantial portion of Iraq’s oil revenues and foreign reserves under the
supervision of the U.S. Federal Reserve, Washington retains a potent instrument
that could, if relations sour, be used as leverage. In the event of diplomatic
discord or geopolitical disagreements, the U.S. can restrict, freeze, or delay
access to these critical funds through executive orders or regulatory actions.
Such measures would not only disrupt Iraq’s ability to conduct international
transactions and meet its obligations. Still, they could also destabilize its
currency, threaten vital imports, and undermine domestic confidence in the
government’s financial stewardship.

This potential for unilateral intervention means the
arrangement functions as a double-edged sword. While it offers stability and
oversight in ordinary times, it also makes Iraq vulnerable to external
pressures and decisions that may be driven by U.S. political interests rather
than Iraqi needs. The specter of withheld funds or sudden policy shifts serves
as a reminder of the delicate balance between international safeguards and
genuine economic sovereignty.

Despite these benefits, critics contend that the
continued reliance on executive orders—and, by extension, U.S.
oversight—perpetuates a financial dependency that undermines Iraq’s economic
sovereignty.

1. Limiting Iraq’s Control Over Its Wealth

The most obvious drawback is the diminished autonomy Iraq
faces in managing its resources. While the funds may be safe from external
threats, they are also subject to the political and regulatory whims of the
U.S. government. Should diplomatic relations sour or policies shift, Iraq could
find its access to these critical assets restricted, delayed, or even frozen.

2.
Exposure to Political Risk and Leverage

The arrangement is inherently political. Control over
Iraq’s reserves confers upon Washington a potent instrument of leverage, one
that has been employed or threatened in response to geopolitical developments.
Executive orders can be altered or revoked unilaterally, leaving Iraq exposed
to decisions driven by U.S. interests rather than its own needs. This
vulnerability is a stark reminder of the imbalance in the relationship.

The paradox at the heart of the current system is that
what secures Iraq’s economy today may imperil its sovereignty tomorrow. The
executive orders act, in ordinary times, as stabilizing agents—offering
transparency, insulating reserves, and supporting monetary policy. Yet the very
structure that provides stability also creates the potential for abrupt
instability, should external interests diverge from Iraq’s own.

This tension is not only technical but also profoundly
political. The specter of withheld funds, sudden policy shifts, or unilateral
intervention by a foreign government looms large. Such scenarios could disrupt
Iraq’s ability to conduct international transactions, threaten its currency
stability, and undermine confidence in its financial stewardship.

The challenge for Iraq, and policymakers in Washington,
is to strike a balance between safeguarding critical assets and empowering Iraq
to assume complete control over its financial destiny. Possible strategies
include phasing out external oversight as Iraq’s institutions mature, with
benchmarks for transparency, accountability, and governance, and establishing
shared management structures that blend international safeguards with increased
Iraqi control, Investing in domestic reforms, anti-corruption measures, and
financial sector development to facilitate eventual self-management, and Negotiating
frameworks that protect assets from external threats without perpetuating
dependency or exposing Iraq to political risk.

Note: The views expressed in this article
are those of the author and do not necessarily reflect the official policy or
position of Shafaq News.