The Media Line: Iraq’s Shadow Trade Gives Iran a Lifeline

Iraq’s Shadow Trade Gives Iran a Lifeline

Dollar flows, commercial ties, and cross-border networks offer Tehran economic channels as US pressure intensifies

By Hudhaifa Ibrahim / The Media Line

[MANAMA] Iraq remains one of Iran’s most important regional economic and financial links as Washington expands pressure on Tehran and entities accused of supporting it. Iraq’s close political and commercial ties with Iran, along with the influence of Iran-backed armed groups in parts of the economy, give Tehran access to trade routes, currency markets, and commercial networks that are difficult for US authorities to monitor.

The issue has gained urgency as Iraqi Prime Minister Ali al-Zaidi has pledged to bring the weapons of Iran-backed armed groups under state control by a Sept. 30 deadline. Iraqi officials and analysts have said progress has been slow, while Washington has continued pressing Baghdad to strengthen oversight of dollar transactions and the banking system.

Iraq and Iran share a roughly 1,600-kilometer border, with multiple formal crossings as well as longstanding informal trade routes. US authorities have documented the use of Iraqi banks and currency-exchange mechanisms to move dollars to Iran and Iran-aligned armed groups.

In December 2023, the US Treasury said Al-Huda Bank had used access to US dollars to support the Islamic Revolutionary Guard Corps-Qods Force and Iran-aligned Iraqi armed groups, including Kata’ib Hizballah and Asa’ib Ahl al-Haq. Treasury also accused the bank’s owner of using front companies and forged documents to circumvent restrictions on currency purchases and international transfers.

US restrictions on dollar transactions have narrowed the formal channels available to some Iraqi banks since 2023. The measures have reduced access to dollars for institutions targeted by the restrictions, though they have not eliminated incentives for illicit currency trading.

The Central Bank of Iraq has set the official exchange rate at 1,300 Iraqi dinars per dollar. The parallel-market rate has remained higher, reflecting continued demand for hard currency outside formal channels.

Ali Hamza, a former Iraqi banker, told The Media Line that the volume of money smuggled from Iraq to Iran is difficult to establish. “Daily shipments of dollars go to Iran through several border crossings, most notably the Shalamcheh border crossing between Basra and Iran, which is clearly controlled by Shia militias,” he said.

Hamza said the funds being moved had declined following US restrictions on Iraqi banks but had not stopped. “There is still a network of smuggled funds whose amounts are unknown,” he said.

He said one method involved accounts opened at Iraqi, Lebanese, and other banks in the names of Iranian nationals or figures whose beneficial ownership was difficult to trace. “These accounts are used by the Iranian Revolutionary Guard, or even some agencies of the Iranian regime, and it is impossible to trace who benefits from these accounts,” he said.

Iraqi markets carry a wide range of Iranian products, including agricultural goods, dairy products, iron and steel, household goods, ceramics, and other consumer and industrial items. Iranian customs data put Iran’s non-oil trade with Iraq at more than $7 billion in the first seven months of 2024, while Iraqi official statistics recorded about $3.1 billion in non-oil imports from Iran for all of 2024. The differing figures reflect the use of separate national reporting systems and trade classifications.

Sanjabi Shirazi, secretary general of the Iran-Iraq Joint Chamber of Commerce, told Iraqi and Iranian media outlets that “despite the decrease in the value of exports between Iraq and Iran, trade in non-energy goods is growing and active.”

Iraq exported goods worth approximately $2.2 billion annually to Iran, according to Trade Map.

“Trade between the two countries cannot be stopped for several reasons, most notably that the current government is loyal to Iran, and there are militias working for Iran as well,” Abdulrahman al-Sheikh, an Iraqi economist, told The Media Line. “Furthermore, some families living near the border between the two countries have shared ancestry and work together for each other’s benefit.”

Al-Sheikh said Iraqi exports to Iran could increase and that Iraq could be used to obtain goods restricted by US sanctions. “Iran will obtain all the goods it lacks through the Iraqi market, especially since transporting them is easy through several border crossings between the two countries, most notably the Shalamcheh crossing in Basra,” he said.

The economist also said Iran pays for some goods in Iraqi dinars and that the Iranian toman is used in some southern Iraqi provinces with Shia-majority populations. He argued that these arrangements reduce Iran’s need for dollars in bilateral trade while increasing the economic burden on Iraq.

He said Iranian goods retain a strong market in Iraq because of their price and established distribution networks. Al-Sheikh alleged that Iran-backed armed groups use their political and economic influence to favor Iranian goods.

A source familiar with the matter at the Iraqi Ministry of Industry and Minerals said repackaging operations had increased in industrial areas of Karbala and Najaf. The source, who requested anonymity because he was not authorized to speak publicly for the ministry, said some facilities might be repackaging Iranian goods for export under Iraqi labels.

Ali al-Badri, an Iraqi businessman, told The Media Line that Iranian goods could increasingly be sold with “Made in Iraq” labels to facilitate exports to other countries. He said armed groups with economic interests in manufacturing could exploit factories to repackage and relabel goods, harming Iraqi producers.

Al-Badri also said access to several industrial areas in Iraqi governorates had been restricted, though he could not identify the authority imposing those restrictions. He said he believed Iran-backed armed groups were responsible.

Iraq has also faced allegations that its oil-export system has been used to help disguise Iranian oil or fuel-oil sales and circumvent US sanctions. A source familiar with oil export operations at the Iraqi Ministry of Oil told The Media Line that “the mixing of Iraqi oil exported by the government with Iranian oil exported by other parties outside Iraq” made it difficult to determine the full volume of Iraqi oil shipped abroad.

The Ministry of Oil did not respond to a request for comment.

That allegation is consistent with a May 2026 US Treasury action against Deputy Oil Minister Ali Maarij al-Bahadly. Treasury accused al-Bahadly of facilitating the diversion of Iraqi oil products and the blending of Iranian and Iraqi oil to disguise its origin before export. The deputy minister’s designation, along with sanctions against Iran-aligned armed-group figures, pointed to the continuing risk that official and informal networks could be used to evade sanctions.

Iranian business activity is also visible in Iraq, including in Baghdad and Erbil, the capital of the Kurdistan Region. In August 2025, the Erbil Chamber of Commerce and Industry said 395 Iranian companies were operating across the Kurdistan Region, including 200 in Erbil. No comparable, current official figure was available for Baghdad.

These companies operate in many Iraqi sectors, including construction, trade, import-export, food, and energy. Contracting remains especially important because of Iraq’s extensive construction and housing needs.

“Iraqi militias backed by Iran are jeopardizing Iraq’s economy for the benefit of Iran,” Hatem al-Sulaimani, an Iraqi economist, told The Media Line.

Al-Sulaimani said illicit currency transfers, alleged trade fraud, and preferential treatment for Iranian goods could expose Iraq to further financial restrictions and increase pressure on the dinar. “All of this poses a threat to the Iraqi economy and could subject Iraq to sanctions, in addition to the risk of a dollar shortage,” he said.

He called on Baghdad to strengthen oversight of armed groups’ economic activities and protect Iraq’s recovering economy. He said the two countries’ stated goal of expanding annual trade to $20 billion, together with increased activity at border crossings, could complicate enforcement as US sanctions on Iran tighten.