Iran Could Lose Iraq: The Axis of Resistance Is Primed to Take Another Hit
Ever since its revolution in 1979, Iran has cultivated a network of proxies and friends throughout the Middle East. For years, this strategy proved successful. Slowly but surely, Tehran’s “axis of resistance” gained influence in Iraq, Lebanon, and Syria, where it railed against Israel and the United States. In September 2014, Iran-backed Houthi militants captured Yemen’s biggest city. Shortly thereafter, an Iranian parliamentarian boasted that his government controlled four Arab capitals: Baghdad, Beirut, Damascus, and Sanaa.
But events over the past year have upended the regional order. Today, Iran has largely lost control of two of those four Arab capitals. Israel’s war in Lebanon has decimated Hezbollah, the Tehran-backed militant group that dominated Beirut. In December, Turkish-backed Sunni forces wrested control of Damascus from Bashar al-Assad’s regime, an Iranian ally that had controlled Syria for half a century. Now, the Islamic Republic is terrified that another domino might fall.
Iraq is the most likely place for that to happen. Security forces in Yemen and in Iran itself appear strong and brutal enough to maintain control of their own populations. But Tehran’s lackeys in Iraq are getting nervous. Iran-backed Iraqi militias attacked U.S. forces and Israeli targets regularly throughout 2024, killing three U.S. soldiers in a drone strike in March of that year. But these militias appear to have changed course. They have not launched a strike since early December—a sign that they are growing more fearful of attracting Washington’s attention.
Iraq’s politicians also seem more eager than usual to appease the United States. Iraq’s government is led by Prime Minister Mohammed Shia al-Sudani and his Coordination Framework, a coalition closely allied with Iran. But Sudani’s team made three compromises with U.S. officials in late January: removing an arrest warrant on U.S. President Donald Trump for ordering the killing of terrorists in Baghdad during his last administration; agreeing to release the Princeton researcher Elizabeth Tsurkov, who has been held hostage by Kataib Hezbollah, an Iran-backed militia; and passing a vital budget amendment that has long been sought by Iraq’s Kurds, the segment of Iraqi society that has the closest ties to Trump. These compromises indicate that Iran’s allies in Iraq are feeling vulnerable.
Washington should take advantage of this moment to permanently reduce the level of Iranian control in Iraq. It should do so not through wide-scale military action but with tough diplomacy, the threat of sanctions, and intelligence operations. Such measures would deprive Iran of a vital source of funding and give the United States leverage in any negotiations with the regime’s leaders. Most important, it would lead to better governance for Iraqis, who have suffered for too long under Iran’s thumb.
CASH COW
Tehran is desperate to hold on to Iraq, in part because the country is a cash cow for the Islamic Republic. For centuries, the East India Company, a commercial and military organization, pillaged the riches of India to fund the British Empire and the company’s own expansion. Iran’s Islamic Revolutionary Guard Corps and its foreign operations wing, the Quds Force, are doing the same in Iraq today. The country is the world’s fifth-biggest petroleum producer (Iran is ninth) and is subject to no international sanctions on its oil exports, unlike Iran and its proxies. As a result, the IRGC, Iraqi terrorists, Hezbollah in Lebanon, and even the Houthis in Yemen can all get rich by parasitically feeding off Iraq’s economy. Iran, for example, avoids sanctions by moving its oil into Iraq’s waters so it can be falsely labeled as Iraqi and exported to world markets. Iran-backed militias in Iraq, such Asaib Ahl al-Haq and Kataib Hezbollah—both designated by the United States as terrorist organizations—outright steal Iraqi oil by pilfering it from wells directly or by creating fake companies that unfairly receive government-subsidized fuel.
Sometimes, this theft is covert. But in other cases, it happens in broad daylight. In 2014 the Popular Mobilization Forces, a consortium of Iran-backed Iraqi militias, was brought under the nominal control of the Iraqi government, effectively creating a parallel military. The PMF now receives more than $3 billion of Iraqi government funding each year, much of it in the form of salaries for its 250,000 militiamen. Many of these fighters refuse to follow commands from the prime minister, instead firing rockets at U.S. bases and fighting in Syria at Iran’s request. Some show up to work only on payday, collecting salaries for doing practically nothing. Sudani’s government has also allowed the PMF to establish its own economic conglomerate, the Muhandis General Company, named after Abu Mahdi al-Muhandis, a terrorist leader killed by a U.S. airstrike in January 2020. This conglomerate partners with Chinese and IRGC-run companies to receive oil and construction contracts from Iraq’s government. The IRGC’s business empire enjoys huge advantages within Iraq’s economy, including in religious tourism, pharmaceutical imports, transportation, communications, and military industries. Iraq’s Supreme Committee for Reconstruction and Development, a body run by Sudani, gives businesses with IRGC connections preferential access to land grants and all kinds of permits.
Economically, Iran needs Iraq now more than ever. The Iranian government is under immense financial pressure. The national currency is in freefall, and the price of essential goods is increasing daily. Between January 2024 and January 2025, the Iranian rial fell in value by 62 percent and inflation averaged 32 percent. Bilking Iraq is thus one of the only ways that Iran can get enough cash to provide basic services to Iranians. In doing so, Tehran also ensures that much of the cost of its malign activities throughout the Middle East are paid for by Iraqis, not by Iranians.
Maintaining control in Iraq is vital to the Iranian regime for symbolic reasons as well. The failure of Iran’s proxies and allies in two Arab countries has made the Islamic Republic seem shaky and has strengthened the morale of the regime’s opposition. From Tehran’s vantage point, losing influence in yet another Arab country—one that is geographically and socially closer to its own—would be devastating and could cause ripple effects at home. Iranians regularly travel to Iraq for pilgrimages and business; what happens in Iraq does not tend to stay there. The regime in Tehran fears that if it loses control of its neighbor, it will be more likely to lose control of its own people.
BAD NEIGHBOR
Dislodging Iran from Iraq will not be simple: Tehran has far more influence inside the Iraqi government than does the United States. Iran may not micromanage all aspects of governance in Iraq. But Tehran has control over Baghdad when it counts, such as when a prime minister is picked, when an IRGC force wants to transit Iraq, or when Iran wants to fire a drone at U.S. military advisers from Iraqi soil. At these moments, Iran can get away with meddling in its neighbor’s affairs.
Iran, for example, is expert at picking the winners of Iraqi elections. In 2018, it masterminded Adel Abdul-Mahdi’s ascent to the premiership. The head of the IRGC Quds Force, Qassem Soleimani, gave Abdul-Mahdi a loyalty test and, once he passed, instructed pro-Iranian factions to back his bid. Tehran also successfully pulled strings during Iraq’s last parliamentary elections, held in 2021, even though Iran-linked factions lost by a wide margin. As independent-minded officials tried to form a government, the IRGC encouraged Iran-backed militias to change the rules of government formation to their advantage, protest the election results, and physically attack political rivals. As a result, Sudani and the Iran-backed Coordination Framework was able to take charge despite holding a minority of seats.
Washington can disrupt this pattern. But it needs to confront Iran’s efforts head on. Over the past decade, the U.S. government developed a habit of backing Iraqi prime ministers, including Abdul-Mahdi and Sudani, even if they were Iranian puppets. American policymakers feared that Iraq could collapse into civil war or be taken over by the Islamic State, also known as ISIS. It was, therefore, vital to sustain relations with Iraq’s government at all costs.
But Washington should do away with such an approach. ISIS militants are no longer banging on the doors of Baghdad, Iran’s influence has been weakened across the region, and Iraq is fully reintegrated into the fold of Arab states. In the lead-up to the October 2025 parliamentary elections, Washington must instead show that it has no vested interest in Sudani remaining prime minister. The United States should not invite Sudani to the White House this year, sending a clear signal that he does not have Washington’s support. The U.S. embassy in Baghdad should closely monitor every stage of the election process and publicly condemn and sanction those undermining democracy. The 2025 elections and the subsequent government formation process should be free, fair, and influenced only by Iraqis.
FINISHING THE JOB
The United States should take other steps to ensure that Iraqi leaders do not bow to Iranian demands. To do so, it must lay out clear redlines that Iraqi leaders can understand. Washington should hold public meetings exclusively with Iraqis who serve Iraqi national interests. Conversely, the United States should get tougher on the subset of Iraqi elites who harm their country’s interests by aligning with Iran. The U.S. government should sanction their assets, give them the cold shoulder diplomatically, and threaten to use force against Iran-backed terrorists and their financial enablers in Iraq. The Trump administration has already taken a couple steps in the right direction. On February 4, it issued a memo calling for the Treasury Department to “immediately impose sanctions or appropriate enforcement remedies” on anyone violating sanctions on Iran. That includes Tehran’s flunkies next door. On March 7, the United States refused to renew a sanctions waiver that allowed Iraq to buy Iranian electricity.
These steps may not deter all of Iraq’s leaders from coordinating with Iran; there is a small contingent of elites who truly despise the United States. But the vast majority of Iraqis have little allegiance to Tehran or Washington. Instead, they simply react to incentives, which Iran has been better at shaping until now.
Sanctions and tough diplomacy could do more than just help Washington improve its position with Iraq. They could also help the United States gain the upper hand with Iran in nuclear talks. The Islamic Republic fears the loss of its influence in Baghdad, and the Trump administration can use that fear as leverage in negotiations. In his first term, Trump withdrew from the nuclear agreement negotiated by his predecessor and waged a campaign of “maximum pressure” against Iran in the hope of getting a better deal. This time around, Trump could reach out to Tehran while cracking down on its networks in Iraq. That way, Iran will be motivated to come to the table rather than stalling or dragging out negotiations.
This approach would be a change in tack for Washington. Over the past decade, successive U.S. administrations have ignored Iran’s nefarious regional activities during nuclear negotiations because trying to dismantle Iran’s huge regional proxy network was an overwhelming, complex process. But after the fall of Assad and the weakening of Hezbollah, U.S. officials may be able to do both. By edging Iran out of Iraq, Washington has a chance to simultaneously reduce Tehran’s global footprint and improve the odds for a deal that stops its nuclear program. The Trump administration should jump at the chance.
