Caught in the Crossfire: Israel–Iran escalation puts Iraqi economy at risk

Shafaq News

15-06-2025

Shafaq News/ Though not a direct participant in the Israel–Iran conflict, Iraq finds itself in the middle of its economic fallout, with its geographic proximity, oil-dependent economy, and heavy reliance on US dollar mechanisms making it acutely vulnerable to regional shocks.
As Iran and Israel continue to exchange missile and drone attacks in the wake of Operation Rising Lion and True Promise 3, Iraq's fragile market has begun to absorb the pressure: the local currency has weakened, food prices are climbing, and concerns are mounting over disrupted trade routes and logistical bottlenecks at ports and borders.
Currency Jitters Amid Regional Firestorms
The moment Israeli airstrikes intensified against Iranian nuclear and military targets, the Iraqi dinar began slipping—a reflection not of market speculation alone, but of broad anxiety over Iraq's ability to contain the fallout.
On Friday, just hours after Israel's unprecedented assault on Iranian soil, the exchange rate soared above 146,000 dinars per 100 US dollars in several parallel markets, marking its lowest point in months.
'This isn't just a technical reaction,' said Ahmed Eid, an economic researcher. 'It's a wave of panic. People aren't just worried about the missiles—they're worried about what comes next: tighter US restrictions on transfers, more scrutiny from the Treasury, and possible banking disruptions.'
He warned that continued smuggling of US dollars to Iran will only deepen monetary instability, noting that 'Iraq's economy is externally dependent—we don't produce, we import almost everything. And with every shock in the region, we're the first to crack.'
Despite these concerns, Finance Committee member Moein Al-Kadhimi confirmed to Shafaq News that airspace closures would not disrupt the flow of dollar remittances from the US Federal Reserve, which handles Iraq's oil revenues. 'There's no impact on employee salaries or cash liquidity,' he said.
Still, the psychological toll of regional instability is already rippling through Baghdad's currency markets and consumer confidence.
Oil Windfall or Energy Trap?
At first glance, the 5% spike in global oil prices that followed the Israeli strikes seems like a boon for Baghdad. With over 90% of its national budget funded by oil revenues, Iraq stands to benefit from Brent crude's jump to $74.23 and US crude reaching $72.98. But experts warn that this short-term gain masks deeper vulnerabilities.
'This is a fragile profit,' said economist Safwan Qusay, noting that any threat to the Strait of Hormuz—through which over 3 million barrels of Iraqi oil flow daily—could unravel Iraq's fiscal position overnight.
'Even if Iraq reactivates the Turkish Ceyhan pipeline as an alternative route, it can only handle a third of exports, and with high logistical costs,' he said. 'We're talking about thousands of trucks and expensive security requirements.'
JPMorgan has warned that oil could surge to $120 per barrel if Middle East tensions worsen. But for Iraq, higher prices won't help if tankers can't move. The Red Sea and Strait of Hormuz—now central to Houthi and Iranian military calculus—remain key vulnerabilities.
Broader Economic Pressures Mount
Beyond currency and energy risks, Iraq faces a range of indirect threats from the Israel–Iran escalation including flight suspensions due to airspace closures that are disrupting commerce and mobility, especially for Iraqi pilgrims, students, and workers returning from Iran.
Supply chain disruptions also loom large as cargo movements via ports or land routes may slow amid rising insurance and security costs.
The specter of refugee inflows or economic migration from Iran could add pressure to already strained public services in Iraqi provinces bordering Iran.
Financial expert Mahmoud Dagher told Shafaq News that Iraq is still 'in a stage of economic endurance,' propped up for now by high oil prices. But he cautioned that the country's exposure is growing rapidly.
'The worst-case scenario is a full closure of the Red Sea or the Gulf. If that happens, it's a blow not just to Baghdad but to every economy in the region,' he said.
Strategic Paralysis in a Dependent Economy
What makes Iraq uniquely exposed is its lack of economic insulation. With limited domestic production, high import dependency, and entrenched dollarization, the country has little room to maneuver.
Even minor geopolitical tremors—let alone open conflict between Israel and Iran—send immediate shockwaves through Iraqi markets. In the absence of robust local industries, the average Iraqi household feels the crisis not just through headlines, but in the price of rice, medicine, and fuel.
Iraq's economy, in essence, remains a passenger car hitched to the region's volatile geopolitical locomotive. And with missiles flying between Tehran and Tel Aviv, that ride is growing bumpier by the day.