By Omar Al-Nidawi

The U.S.-Iran memorandum of understanding signed last week at Versailles could mark a new opening in relations between Tehran and Washington after months of violent confrontation. However, its regional implications, particularly for Iraq, remain uncertain, and it is still too early to determine whether the agreement will ultimately benefit or harm the country. What is clear, however, is that while Iraq suffered significantly as a result of the conflict, the emerging settlement does not appear to address the damage to Iraq’s economy, security, or sovereignty.

The economic costs were severe. The closure of the Strait of Hormuz effectively shut down Iraq’s oil exports, which account for roughly 90 percent of government revenue, creating a major fiscal crisis and destabilizing the country’s economy. By May, the exports had collapsed to just 7% of pre-war levels with estimated losses of $37 billion.

Iraq was one of the countries most harmed by the conflict, yet the emerging settlement appears to give little consideration to its sovereignty and interests. 

Iraq also became a battlefield in a conflict that was not its own. It was the only country where all sides involved in the confrontation conducted military operations. The United States carried out strikes against elements of the Popular Mobilization Forces (PMF), killing Iraqi soldiers in the process. Iran-backed militias launched attacks against U.S. interests inside Iraq, including in the Kurdistan region, which by April had counted more than 700 missiles and drones. Their target list went beyond U.S. interests to include Iraq’s own energy infrastructure, civilian areas, and political leaders. These groups also undermined Iraq’s relations with neighboring Arab states by carrying out drone and missile attacks against them, including after the April ceasefire. Israel violated Iraqi sovereignty by establishing covert outposts inside Iraq from which it conducted attacks on Iran, while Iran targeted camps belonging to Iranian Kurdish opposition groups in the Kurdistan Region of Iraq. In effect, every major party to the conflict violated Iraqi sovereignty.

The resulting insecurity also created space for armed actors to threaten civil society, journalists, and activists. This is not a new dynamic. From the violent repression of the Tishreen protests to the more recent assassinations and kidnappings of activists and journalists, Iraq has repeatedly seen how violations of sovereignty and the weakening of state authority can translate quickly into risks for human security.

Ironically, despite the extent to which Iraq suffered from the conflict, the publicly-available text of the fourteen-point memorandum of understanding between Washington and Tehran does not mention Iraq. It addresses issues such as Hezbollah and Lebanon but includes no explicit safeguards to protect Iraqi sovereignty or prevent the country from once again becoming a theater for regional confrontation.

Baghdad should press for follow-on negotiations to include explicit guarantees against the use of Iraqi territory by external powers or allied armed groups.

Nevertheless, the agreement could have some immediate positive consequences for Iraq.

Most importantly, if the reopening of the Strait of Hormuz proves durable, Iraq will be able to restore its oil exports and resume generating the revenue needed to stabilize its finance and replenish its depleted coffers.

The reduction in tensions between Washington and Tehran could also make it easier for Baghdad to maintain its delicate balancing act between its two most important foreign partners. In recent years, the Iraqi government has struggled to maintain good relations with both the United States and Iran as hostility between the two countries intensified. Direct dialogue between Washington and Tehran could reduce that pressure.

Another important potential consequence involves sanctions. If sanctions relief for Iran proceeds as outlined, Iraq could benefit in several ways, particularly by reducing the legal and financial constraints on its energy trade with Tehran. It would become easier for Iraq to import Iranian natural gas and electricity, which remain essential to maintaining the country’s power supply – a necessary evil because the war widened Iraq’s power deficit as it reduced Iraq’s own production and delayed efforts to diversify imports.

At the same time, sanctions relief could reduce Iran’s dependence on Iraq as an economic lifeline. For years, Tehran has used Iraq’s economy to bypass sanctions, access foreign currency, and conduct international transactions indirectly. If Iran regains direct access to global markets and the international financial system, it may reduce the incentives for currency smuggling, money laundering, and other activities that have placed significant pressure on Iraq’s economy and financial institutions.

The larger and more difficult question is how the agreement will shape Iran’s future behavior and the behavior of its allied militias in Iraq. This remains uncertain, especially because the agreement is still fragile. Tehran has continued to threaten the closure of the Strait of Hormuz, Washington has warned that military strikes could resume, and regional tensions remain high.

The key question is whether improved relations between Iran and the United States will encourage Tehran to push its Iraqi allies toward greater moderation, lower tensions, and a more normalized relationship with the Iraqi state and with Washington. Alternatively, Iran and its allied factions may interpret the agreement as a strategic victory and emerge more confident and assertive.

Among many members of Iraq’s Iran-aligned factions, there appears to be a sense of optimism—even triumphalism—about the outcome. They view the Islamic Republic as having survived intense American and Israeli military campaign while securing major concessions, including commitments to respect Iran’s sovereignty and territorial integrity, a $300 billion reconstruction fund, and the lifting of sanctions. They also can see that the agreement places no immediate explicit restrictions on Iran’s ballistic missile program, drone capabilities, or support for allied armed groups across the region.

Equally important from their perspective is that Iraqi factions that carried out attacks in support of Iran do not appear to have faced direct consequences under the current settlement. While there were military exchanges during the conflict, these groups may conclude that their strategy was successful and that they have emerged from the confrontation in a stronger political position.

Iran-aligned factions may interpret the agreement not as a reason for restraint, but as evidence that pressure and escalation worked.

This raises another important question: how will the agreement affect U.S. policy toward Iraq, particularly Washington’s recent emphasis on the disarmament and restructuring of Iran-backed armed groups? It remains unclear whether the reduction in U.S.-Iran tensions will cause Washington to deprioritize this issue or whether it will continue to press Baghdad to limit the influence of armed factions outside state control.

Ultimately, the answer depends not only on the intentions of Washington but also on how Iran and its Iraqi allies interpret the agreement. Will they behave as pragmatic actors seeking to capitalize on a new period of stability, or will ideological and zero-sum strategic considerations continue to drive confrontation? And even within Iran and its network of allied groups, it is unclear whether there is a single coherent strategy or a more complex set of competing interests.

For Baghdad, the immediate priority should be to press for any follow-on negotiations to include explicit guarantees against the use of Iraqi territory by external powers or allied armed groups, as well as mechanisms to address the economic and energy-sector damage caused by the conflict.

For now, the situation remains fluid. The memorandum is only days old, negotiations over a more comprehensive settlement are just starting, and the long-term consequences are uncertain. What is already clear, however, is that Iraq was one of the countries most harmed by the conflict, yet it appears that the combatants gave very little consideration for Iraq’s sovereignty and interests in shaping the agreement intended to bring that conflict to an end.

Omar Al-Nidawi is the director of programs at the Enabling Peace in Iraq Center and editor of EPIC’s weekly Iraq Security and Humanitarian Monitor (ISHM). His work focuses on governance, peacebuilding, climate action, and Iraqi political and security affairs.