Geopolitical Leverage and Fiscal Suppression: The Iranian Regime’s Influence on Iraq’s Financial Policy Toward the Kurdistan Region

Abstract:

Since 2020, the Kurdistan Regional Government (KRG) of Iraq has faced increasing financial and military pressure, driven not only by Baghdad’s fiscal policy but also by the geopolitical objectives of the Islamic Republic of Iran. Under the guise of legal and economic disputes, the central Iraqi government, heavily influenced by Tehran, has utilised salary suspensions and budgetary cuts as tools to erode Kurdish autonomy. This paper examines how regional geopolitics, particularly Iran’s antagonism toward Kurdish-Western alignment, has driven both fiscal and kinetic aggression against the KRG. It also assesses the socioeconomic impacts of these pressures and highlights the uncertain future of both Iraq and the Kurdistan Region under these persistent threats.

Introduction

The Kurdistan Region of Iraq (KRI) is constitutionally recognised as a federal entity with significant administrative and economic autonomy. Despite this, since 2020, the region has experienced mounting financial restrictions from Baghdad. The central government’s refusal to pay public salaries and deliver constitutionally mandated budget allocations has crippled the KRG’s fiscal stability. While these actions are often justified through economic disputes over oil revenues and customs duties, they are increasingly entangled with broader regional power politics, particularly Iran’s strategic influence over Iraq.

Iranian Leverage Over Iraqi Sovereignty

Iran has embedded itself into Iraqi political and security infrastructures, effectively wielding influence over key policy decisions in Baghdad. The weakness of Iraq’s sovereignty has allowed Iran to use Iraq as a proxy space for advancing its interests, often at the expense of internal stability. Pro-Iranian militias operate with significant autonomy and undermine the central government's accountability. These groups are frequently implicated in actions that align more with Tehran’s strategic goals than with Baghdad’s national interest.

Iran’s Strategic Hostility Toward the KRG

The KRG’s political parties, primarily the Kurdistan Democratic Party (KDP) and the Patriotic Union of Kurdistan (PUK), maintain strong diplomatic and economic ties with Western nations, particularly the United States. These relationships are viewed by Tehran as a direct threat to its national security, given Iran’s long-standing suspicion of U.S. presence near its borders. In response, Iran has escalated pressure on the KRG not only through indirect financial influence over Baghdad but also through direct military attacks.

Iran has repeatedly targeted the Kurdistan Region with drone and missile strikes, claiming the presence of Mossad intelligence bases. One such attack prompted President Masoud Barzani to publicly state in an interview, “If there were Mossad headquarters in Erbil, Iran wouldn’t dare to attack it.” These strikes have caused civilian casualties, including women and children, further destabilising

the region.

Just days ago, following a high-level meeting between the KDP and PUK to formulate a unified response to Baghdad’s continued budget cuts, two drone strikes hit vital oil infrastructure in the region. Iraqi Prime Minister Mohammed Shia’ Al-Sudani claimed ignorance about the perpetrators. However, evidence and patterns point toward Iranian-backed militias, groups that routinely operate with impunity and outside the bounds of Iraqi constitutional authority.

Economic Retaliation and Oil Politics

In a move that further escalated tensions, Prime Minister Masrour Barzani of the KRG signed an oil agreement with the U.S. Department of Trade in Washington last month. This deal was seen by Baghdad, and by extension Tehran, as a defiant act of economic independence. Almost immediately, the Iraqi central government retaliated by suspending the KRG’s public sector budget once again, deepening the financial crisis.

The oil and gas sector is a pillar of the Kurdistan Region’s development strategy. It supports government revenues and underpins infrastructure projects, education, health care, and private investment. However, persistent financial sanctions from Baghdad have stalled many of these initiatives. Development projects have been delayed or cancelled, unemployment has risen, and investor confidence has eroded. Small businesses are struggling to survive, public services are deteriorating, and migration out of the region is increasing as youth lose hope in economic stability.

Conclusion

The Kurdistan Region stands at a precarious crossroads. Surrounded by geopolitical forces and beset by internal and external pressure, its aspirations for stability, autonomy, and development are constantly under threat. The repeated use of financial punishment and military aggression reflects a broader strategy of containment, driven not by constitutional concerns but by regional rivalries.

As Iran continues to pull the strings behind Baghdad’s policy toward the KRG, and as the Iraqi government remains unable or unwilling to assert full sovereignty, the future remains alarmingly uncertain. Oil, sovereignty, and political alliances have become weapons in a broader regional chess game.

Above all, the Kurdistan Region, with its rich energy resources and resilient population, continues to push forward. Yet it does so under the shadow of instability and the threat of abandonment. The fate of Iraq and the Kurdistan Region hangs in a delicate balance. In a land long burdened by conflict and hope, the future remains unwritten. No one knows what will happen next.