When the U.S. and Israel attacked Iran twice within a year, first targeting Iran’s nuclear facilities and then its leadership and governing system, Iraq was caught in the crossfire of a zero-sum conflict between two diametrically opposed regional projects.

The Iraqi government declared neutrality but was unable to implement this policy. Acting against Iraq’s national interest and the will of the majority of Iraqis, Iran’s proxies dragged the country into a costly new war.

The war destabilized Iraq’s fragile economy and isolated it politically from its Arab neighbors. The reopening of the Strait of Hormuz – closed during the war – is vital for Iraq’s oil-based economy. Yet only decisive actions from the new government that ensure energy independence and state sovereignty can save Iraq from an impending crisis with far-reaching consequences.   

The Iraqi Paradox

Among all the regional countries affected by the fighting, Iraq stands out as the only country that has been attacked by both sides without being able to defend itself. Iran-aligned groups also attacked civilian infrastructure in the Kurdistan region of Iraq.

The root cause of this Iraqi paradox lies in the fragmented nature of the post-2003 political order that prevents the emergence of a sovereign state that controls a monopoly of force and has a unified foreign policy.

The deep, internal fragmentation of the political landscape has frequently led to months of gridlock after elections as occurred after the most recent Iraqi election last November. Only American political pressure and the impact of the war pushed Iraqi leaders to agree on a compromise candidate from no political party and with no prior governing experience to lead the cabinet.

The same fragmentation applies to Iraqi Kurdistan. Twenty months after a regional election in October 2024, the two main parties – the Kurdistan Democratic Party and the Patriotic Union of Kurdistan – have failed to form a new cabinet due to disagreements over government posts. Despite multiple efforts and financial and training incentives by Western partners, the parties also still maintain their own armed Peshmerga forces.   

Broken Trust with Arab Neighbors

The attacks by Iranian Iraqi proxies on Arab Gulf states and Jordan and the failure of the Iraqi government to prevent or stop them have severely undermined a decade of persistent official and non-official efforts at confidence and trust building with Arab neighbors that had led to considerable improvement in political and economic relations.

In a sign of nascent new diplomatic isolation, six Arab states issued a rare joint statement condemning these attacks and calling on the Iraqi government to immediately halt them. In an unprecedented development since the Iraqi invasion of Kuwait in 1991 by Saddam Hussein’s regime, Saudi Arabia, the United Arab Emirates and Kuwait reportedly also retaliated against targets linked to Iran-aligned groups believed to be behind the recent assaults.

The economic fallout of these attacks could be extremely severe as Iraq seeks to diversify export routes for its oil, attract and sustain Gulf investments, and become a hub for regional connectivity. For the time being, gone are the days when Iraq was accepted as a neutral player and mediated between Iran and Saudi Arabia. Rebuilding broken trust will take years.  

Impact of the US-Iran MOU on Iraq

While it is too soon to assess the full implications for Iraq of the agreement the U.S. and Iran signed on June 17, Ali Taher, managing director of the Al Bayan Center for Planning and Studies in Baghdad, told this author that Iran-aligned groups view it as a victory for Iran.

In their opinion, the memorandum of understanding strengthens the “unity of battlefields” of the Iran-backed Axis of Resistance because it links a ceasefire in Lebanon with the reopening of the Strait of Hormuz. The agreement increases Iran’s leverage and may lead to tensions with the Iraqi government at a time when U.S. pressure on Iraqi leaders to disarm the Iran-backed Popular Mobilization Units is also increasing. The Coordination Framework which groups Iran-backed political parties – many of them affiliated with militias – derives its legitimacy from patronage networks and international connections. American sanctions would undermine both sources of legitimacy as well as, potentially, the entire political order.

The Iraqi government and Coordination Framework have pledged to disarm militias, but at this stage, it is unclear whether the U.S. will be satisfied by symbolic disarmament or will demand something more serious and detailed, Ali Taher said. Also, it is unclear whether the armed groups are serious about their pledges or are simply engaging in a performative exercise, while waiting for an opportune moment to regain their weapons and power, according to Yassen Taha, another Iraqi analyst.

Yet, despite Iran’s new leverage in the wake of the closure of the Strait of Hormuz, the U.S. retains significant influence in Iraq. As Hiwa Osman, Director General of 964media, told me, “U.S. leverage remains strong through the dollar, banking oversight, sanctions, and state institutions. Iran’s influence operates through geography, identity, proxy networks, and narratives of resistance.” In his view, upcoming funeral ceremonies in Iraq for Ayatollah Ali Khamenei, the Iranian supreme leader killed by Israel on the first day of the war, will give a clearer picture of the extent of the influence of both sides. “It will not be a funeral; it will be a referendum,” Osman said.

In the short to midterm, the reopening of the Strait of Hormuz will restore oil flows, stabilize public revenues, and reduce the risk of a prolonged fiscal crisis, said Mohammed Hussein, Resident Research Fellow at the Dhia Jafer Center for Energy and Natural Resources at the American University of Iraq – Sulaimani.

A joint statement by new Iraqi Prime Minister Ali Al-Zaidi and U.S. envoy for Syria and Iraq Tom Barrack reflects a clear mutual willingness to strengthen economic cooperation and deepen commercial ties. But its implementation depends on a conducive, stable regional environment and the willingness of the Iraqi government to minimize internal fragmentation, assert state sovereignty, and prevent new militia attacks on energy companies and Arab neighbors.