When Iraqi Prime Minister Mohammed Shia Al Sudani called for de-escalation and dialogue in the early days of the war on Iran, his message reflected the fact that Iraq does not want this war. But wanting to stay out of a regional confrontation and having the institutional capacity to do so are two very different things. Iraq has the former. It has never built the latter.
Iraq’s vulnerability is first and foremost the result of structural ambiguities within the security sector that successive governments chose not to resolve. Many of the armed groups that expanded during the fight against ISIS were gradually absorbed into the formal state apparatus, drawing salaries, equipment and political cover from Baghdad. But absorption is not the same as subordination. These groups kept their weapons, their command structures and their external relationships, leaving them with one foot inside the state and one foot outside it. Sometimes when it suits them, they operate as state actors, while at other times, they cast themselves as resistance movements answerable to a higher cause.
Over time, this arrangement became normalised. The result is a system in which armed actors are formally part of the state while still capable of acting against its stated interests.
The current escalation reflects this, as it is not the Popular Mobilisation Forces – a network of largely Iran-aligned paramilitaries – as an institution that is dragging Iraq towards confrontation. It is a specific subset of Iran-aligned factions within it that have launched attacks and made operational decisions Baghdad was neither consulted on nor able to reverse. Other factions have limited themselves to rhetoric, and some groups not associated with Iran have found themselves exposed to retaliation for operations they had no part in. The Iraqi government condemns these actions. It also cannot stop them. The deeper problem is that Iraq does not fully control the conditions under which escalation unfolds on its own territory.
Baghdad’s dilemma is not only that armed factions can act outside the purview of the state, but that Iraq cannot fully police its own airspace, where US military action has become part of a wider conflict unfolding above a country that says it wants no part in it.
The economic impacts that the war on Iran has had on Iraq are just as serious, and much of it could have been avoided. Governments over the past decade had both the time and the oil revenue to diversify export routes and reduce the country’s near-total dependence on the Gulf. They did not. Oil revenues account for around 90 per cent of government income, and before the conflict Iraq was exporting more than 3.3 million barrels per day, almost entirely through southern terminals whose access to global markets runs through the Strait of Hormuz. The long-discussed pipeline to Aqaba, which would have offered an alternative route bypassing the Gulf, was studied, negotiated and left unbuilt due to political differences.
The Kirkuk-Ceyhan pipeline is a similar story. After a two-and-a-half-year shutdown following an international arbitration ruling, flows only partially resumed in September 2025. Now, with Iraq’s southern export operations largely halted after tanker attacks in Iraqi waters, the northern route should have offered a fallback. Instead, it too is mired in unresolved disputes between Baghdad and Erbil over transfers, oil control and customs. It took direct US pressure to produce a deal this week. At around 200,000 barrels per day, the resumed flows amount to just 6 per cent of what Iraq was exporting before the war, and the underlying disputes between Baghdad and Erbil remain far from settled.
The immediate fiscal damage is landing on an economy that is already vulnerable and unable to withstand shocks. Public sector salaries, pensions and social welfare transfers were already consuming most state revenues before a single export terminal came under pressure. The dinar adds another layer of strain. The Central Bank had made progress narrowing the gap between the official and parallel exchange rates in recent years, but falling revenues, domestic borrowing pressures and active hostilities have widened that gap. For ordinary Iraqis, this means more expensive imports, pressure on food and medicine prices and a renewed sense that basic economic stability cannot be taken for granted.
These failures did not emerge in a vacuum. The years of relative security and stable oil revenues from 2017 to 2025 offered ample opportunity to strengthen state capacity. Instead, the political system used that period largely to consolidate itself. The Muhasasa arrangement, Iraq’s informal ethno-sectarian power-sharing system, did not simply survive. It deepened and fractured as more actors entered the political economy, each claiming a quota of ministries, contracts and appointments. Parliament, which should have acted as a check on these dynamics, was absorbed into the same logic.
Iraq now faces this crisis with a caretaker government operating under restricted executive authority, a legislature incapable of holding anyone accountable and a political class still unable to form a government following last year's elections.
Iraq’s diplomatic position has compounded these vulnerabilities. In the months before the current crisis, tensions over Khor Abdullah, the waterway separating Iraq and Kuwait, were allowed to escalate in ways that damaged Baghdad's regional standing. Rather than contain the issue through quiet bilateral engagement with Kuwait, certain Iraqi political actors seized on a domestic legal ruling to advance a maximalist territorial posture for domestic gain. Several Gulf governments publicly backed Kuwait and rejected Iraq's unilateral submission of new maritime coordinates to the UN. Iraq has arrived at one of the most serious regional crises in a generation with strained ties to some of the neighbours whose support it may most likely need.
None of this is new. Iraq has spent years postponing the structural reforms needed to build a more coherent state, diversify the economy and establish clear lines of authority within its institutions. Successive governments have preferred temporary fixes, elite bargains and crisis management over long-term reform. That approach has allowed the system to survive, but it has left the state fragile, dependent and poorly equipped to absorb major shocks.
Iraqi leaders have a long record of pursuing reform only when crisis leaves them no other choice. That moment has arrived. What the war on Iran is exposing is not only Iraq’s vulnerability, but the failure of a governing model built to divide power and distribute rents rather than protect sovereignty and serve citizens.
