Iraq Faces Economic Crisis as Regional War Brings Strikes from Both Iran and U.S.
Iraq confronts mounting economic and security pressures as ongoing regional conflict triggers attacks by both Iranian-backed militias and U.S. forces on its territory.
Iraq is experiencing escalating economic and security challenges as it becomes the only country facing military strikes from both sides in the regional conflict between Iran and the United States that began February 28. The war started following a major U.S. and Israeli strike in Iran and has now entered its second week.
The conflict has severely disrupted Iraq's oil-dependent economy, with attacks on oil fields and infrastructure halting most exports. Iraqi Kurdish officials said Baghdad could be unable to meet public-sector payroll obligations as early as next month if the shutdown continues, potentially triggering widespread unrest. Oil sales account for over 90% of state revenues, and Iraq maintains one of the world's largest public-sector workforces.
Daily drone and missile attacks have targeted U.S. military bases at Baghdad and Irbil airports, diplomatic facilities, and commercial sites across Iraq. Iran-backed Iraqi militia groups have conducted near-daily strikes against American interests, while U.S. forces have retaliated against militia bases in locations including Jurf al-Sakhr, northern Iraq, and al-Qaim along the Iraq-Syria border.
Production has been suspended at multiple oil facilities, including the Sarsang and Atrush blocks operated by Canada's ShaMaran Petroleum and U.S. firm HKN in the Kurdish region. The Khor Mor gas field shutdown has cut electricity generation by nearly two-thirds, reducing power availability from 24 hours to just four to six hours daily in some areas.
Political instability has complicated Iraq's response to the crisis. The country has operated under a caretaker government since November 2025 elections, after the U.S. opposed the return of former Prime Minister Nouri al-Maliki. Current caretaker Premier Mohammed Shia al-Sudani has limited authority to control powerful militia groups or negotiate major policy changes.
Baghdad has appealed to Kurdish regional leaders to resume oil exports of at least 250,000 barrels per day through a pipeline to Turkey, but negotiations remain stalled over domestic economic disputes. Kurdish officials have conditioned any agreement on lifting existing financial restrictions and restoring trade benefits.