The US government blocked a cargo plane delivery of nearly $500 million in US banknotes destined for Baghdad, according to the Wall Street Journal, which first reported the move on Tuesday, citing US and Iraqi officials.
It was the second such shipment delayed since the start of the US-Israeli war against Iran in late February, official sources told the Journal.
The measures come after a series of attacks on US facilities in Iraq and neighbouring countries, carried out by groups Washington says are showing solidarity with Tehran since the war began.
"Iran has been feeding money into militias in Iraq, which have been launching raids against some of Iran's neighbours since the start of the war," FRANCE 24's International Affairs Editor Philip Turle said.
The attacks have been wide-ranging, with nearly a thousand drone strikes launched against Saudi Arabia as well as against Kuwait, Bahrain and even the US Embassy in Baghdad, which has been evacuated several times, Turle said.
Turle said the current escalation is driven by a sense of threat within the militias themselves. "They see the attacks against the Iranian regime from the US and from Israel and they themselves now feel threatened so that's why they suddenly up the ante," he argued.
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Washington turns off the tap
Iraq's oil revenues, worth billions of dollars annually, have been held at the Federal Reserve Bank of New York for the past twenty years. "Ever since the fall of Saddam Hussein in 2003, Iraq has not had a monopoly over its own economy, over its own money," said Adel Bakawan, director of the European Institute for Studies on the Middle East and North Africa.
This system was put in place after the US invasion, when Iraq was burdened with massive debts. The United States agreed to hold Iraqi funds in New York to shield them from creditors.
"Because if that money were to arrive directly in Iraq, meaning at the Iraqi central bank, then every company, every country that had won a judgment against Iraq would have the right to claim that money," Bakawan explained.
"Whereas if that money is under American protection, no one can touch it."
Since then, the Fed has shipped up to $13 billion a year in cash to Iraq so that Baghdad can pay its six million civil servants and run the state.
Washington already suspended the mechanism once before, in 2015, amid fears the cash was reaching Islamic State militants.
US officials told the Wall Street Journal the current suspension is temporary without giving any further details on when and how the dollar shipments could resume.
The Federal Reserve Bank of New York and the US Treasury Department did not respond to a request for comment.
Baghdad at a standstill
The Central Bank of Iraq, which has yet to comment specifically about the reports, said on Tuesday it was not lacking US dollars and that it had "fulfilled all requests from banks and exchange companies for US dollars, which are intended for pilgrims, travellers and foreign transfers".
However, an Iraqi official on Tuesday confirmed to The National that dollar shipments have stopped.
"The Americans conveyed the decision to senior politicians that the hard currency, which is usually flown to Iraq, will stop until forming the next government and arresting militia members for attacking the US embassy and troops in Iraq," the source told the UAE state-owned newspaper.
Washington has also "suspended participation in security meetings, which is essential for Iraq for the co-operation in this field, including intelligence sharing", they added.
Bakawan warned the suspension could have dire consequences for Iraq's population in a heavily cash-based economy.
"The only money is oil money," he said. "And that oil money sits in an account held at the Federal Reserve in New York. If the money doesn't come, the salaries aren't paid, the government has nothing."
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'Make Iraq great again'
Iraq's most powerful armed groups – which include the Badr Brigade, Asaib Ahl al-Haq and Kataib Hezbollah – wield huge influence within the country's financial sectors and government, with some of their units formally incorporated into the Iraqi armed forces.
As Baghdad is currently in the process of choosing a new prime minister, Tehran and the armed groups are pushing for a candidate who will maintain close ties with Iran.
US President Donald Trump warned in January that he would cut off assistance to Iraq if former prime minister Nouri al-Maliki, leader of the Iran-aligned Islamic Dawa Party, returned to the role.
"That should not be allowed to happen again," Trump wrote on Truth Social. "Because of his insane policies and ideologies, if elected, the United States of America will no longer help Iraq. If we are not there to help, Iraq has ZERO chance of success, prosperity, or freedom. MAKE IRAQ GREAT AGAIN!"
Maliki initially rejected Trump's threat as "blatant American interference" and vowed to "continue to work until we reach the end". However, speculation about his possible withdrawal has intensified in recent weeks.
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Bakawan said Iraq remains trapped between Washington and Tehran. "The Iraqi government has never been able to choose between the US and Iran," he explained, describing the country as governed through an "American-Iranian co-management system".
"The moment that co-management breaks down, all of Iraq collapses with it," he said.
Iraq has long tried to balance ties with both powers, but that balance has proved increasingly difficult to maintain as war engulfs the region.
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