Executive Intelligence Snapshot

This report evaluates the critical geopolitical exposure of Iraq as it becomes the central battleground in a multi-front regional escalation involving the United States, Saudi Arabia, and Iran.

It assesses Baghdad’s security vulnerabilities, sovereign constraints, and structural economic dependencies.

Context

Iraqi sovereign territory has recently sustained kinetic strikes from both the US-Saudi coalition and Tehran, transforming Baghdad into a frontline arena. The Saudi Arabian and US strikes responded to long-range drone attacks allegedly launched from Iraqi territory by Iranian-aligned Shia militias against eastern Saudi energy infrastructure, as well as over thirty attacks targeting US personnel across Iraq and Jordan, striking IRGC command centres in Diyala. Concurrently, Iran continues to execute military operations within Iraqi borders, targeting US installations and Iranian-Kurdish dissident camps in Iraqi Kurdistan, treating Iraq as an indispensable strategic depth and leveraging Popular Mobilisation Units to project force without engaging in direct state-to-state warfare.

On 14 July 2026, the newly elected Iraqi Prime Minister Ali al Zaidi met with US President Donald Trump as part of his multi-day trip to Washington. The recently appointed prime minister has faced US pressure to move forward with plans to disarm Iranian-backed militias in the country and place their arms under state control. Zaidi’s trip also comes as the US prepares to withdraw forces from the Middle Eastern country at the end of September.

One week later, on 23 July 2026, al-Zaidi went to Iran on his first official visit since assuming office in May. Al-Zaidi and Iranian President Masoud Pezeshkian oversaw the signing of several agreements and memoranda of understanding (MoUs) pertaining to foreign affairs, finance, the economy, and energy in Tehran. The Iraqi officials also praised the long-lasting cooperation with the Islamic Republic of Iran against the Islamic State threat.

Why Does It Matter?

Baghdad exists within a state of operational paralysis, caught between the maximalist pressure campaign of the Trump administration and Tehran’s deep-rooted influence. Prime Minister Ali al-Zaidi and the National Security Council face a structural erosion of state sovereignty, as autonomous brigades within the Popular Mobilisation Units ignore government directives and trigger foreign interventions. The Trump administration’s demand for Prime Minister al-Zaidi to disarm these Shia militias exposes an acute strategic miscalculation, as Baghdad lacks the physical capability and internal political leverage to execute such a mandate without provoking a systemic collapse.

Severe economic vulnerabilities dictates Baghdad’s choices. Washington holds absolute financial leverage through the Federal Reserve Bank of New York, which processes Iraq’s vital oil revenues and physically ships US dollar currency to Baghdad to fund state payrolls and public operations. Conversely, Iran maintains an asymmetric counter-lever through its strategic control over the Strait of Hormuz, the maritime transit bottleneck for 95% of Iraqi crude exports, and through its control of essential gas and electricity supplies feeding Iraq’s power grid.

Any aggressive move by al-Zaidi to satisfy Washington risks an immediate Iranian energy embargo capable of triggering mass civil unrest, whereas non-compliance risks crippling financial sanctions or restrictions on dollar deliveries from the Federal Reserve.

The primary danger to regional stability is the potential for full-scale civil war and executive collapse in Baghdad. For Tehran, the Iraqi militia network forms a non-negotiable defensive shield, ensuring that Iran will exert maximum force on Baghdad to prevent alignment with the US-Saudi axis. Forced disarming of these deeply entrenched paramilitaries would pit regular armed forces directly against Shia militias embedded in the state’s political and economic apparatus, fragmenting the military, paralysing parliament, and forcing the immediate collapse of al-Zaidi’s administration.

Notably, Iran’s strategic doctrine explicitly relies on keeping kinetic conflict off Iranian soil. By forcing the US and Saudi Arabia to strike targets inside Iraq, Tehran successfully absorbs regional military pressure using Iraqi infrastructure, civilian tolerance, and casualties.

Contrary to assumptions that the Islamic Republic of Iran requires a stable Iraqi executive, Tehran regards a chaotic, weak, or politically paralysed Baghdad as far preferable to an Iraq aligned with Washington. If forced to choose between the survival of al-Zaidi’s government and the preservation of its militia network, Tehran will sacrifice the Iraqi executive every time.

As for Saudi Arabia, Eastern Province facilities (such as Abqaiq and Khurais) represent the crown jewels of Saudi Aramco’s processing infrastructure. Saudi Arabia’s air defence network, despite heavy US investment, remains fundamentally ill-equipped to counter low-altitude, low-radar-cross-section loitering munitions launched from short range across the Iraqi border.

Riyadh’s primary goal in joining these kinetic actions is not regime change in Baghdad but forcing Washington to establish a hard border buffer in western and southern Iraq. Saudi Arabia cannot afford long-term disruption to its hydrocarbon production while executing its Vision 2030 economic transformation, making Saudi participation far more urgent and uncompromising than typical Coalition operations.

The US lever is also leaky. A massive portion of the physical USD shipped to Baghdad is systematically siphoned through local auction banks and front companies controlled by Shia militias, returning directly to Iran to bypass US sanctions. If Washington abruptly cuts off dollar flows to force al-Zaidi’s hand, it does not simply starve the state, it accelerates Baghdad’s complete integration into Tehran’s shadow financial and barter economy (gas-for-oil swaps, non-dollar trade clearings). A complete financial freeze by the Federal Reserve is a “nuclear option” that might destroy US leverage permanently once used.

Outlook

Iraq remains structurally incapable of extricating itself from this proxy conflict due to its dual economic dependence on Washington’s financial system and Tehran’s regional energy and trade infrastructure.

Unless a diplomatic compromise alters the current trajectory, Prime Minister al-Zaidi’s executive government might face political collapse, widespread internal civil conflict, and severe economic isolation before the end of the year.