WASHINGTON: The latest developments around the Strait of Hormuz suggest that the Iran crisis is entering a more complicated phase: military confrontation may have eased from its peak, but the economic contest is intensifying. Iran and Oman have resumed discussions over a temporary navigational corridor through the Strait of Hormuz and the clearance of mines, while maritime traffic remains disrupted and security risks persist. At the same time, Washington is preparing to broaden economic pressure on Iran by warning countries and financial institutions that continue facilitating trade with Tehran that they could face U.S. sanctions. The significance of this shift extends well beyond Iran. It raises a much larger question: how far can the United States pressure Iran by targeting the countries that keep its economy connected to global markets?
Iraq is likely to be one of the most revealing cases. On August 25, U.S. Treasury Secretary Scott Bessent announced a wider campaign against Iran’s economic networks, describing it as an “economic onslaught,” while Washington indicated that countries continuing to provide Tehran with an economic lifeline could face consequences. The administration has not publicly identified every country or institution that could be targeted. That ambiguity is deliberate. It allows banks, companies and governments to reassess their exposure before Washington imposes additional penalties. In practical terms, the strategy seeks to make the cost of maintaining commercial relationships with Iran sufficiently high that third-country institutions voluntarily restrict those relationships.
Iraq is particularly vulnerable because its economic relationship with Iran intersects directly with its dependence on the U.S.-led financial system. The United States has significant influence over Iraq’s access to dollars and has previously imposed restrictions on Iraqi banks over concerns about illicit financial flows and sanctions evasion. In February 2025, the U.S. Treasury Department took action against several Iraqi banks by restricting their access to dollar transactions, citing concerns related to money laundering and misuse of the international financial system. Such measures demonstrate an important feature of Washington’s approach: the United States does not necessarily need to impose comprehensive sanctions on Iraq itself. It can target individual institutions whose access to the dollar is considered problematic.
That leverage matters because Iraq remains deeply economically connected to Iran. Official Iraqi figures put bilateral trade at more than $10 billion in 2025, although the precise composition of that trade varies considerably across commodities and reporting periods. Iranian food products, consumer goods and other exports are important to Iraqi markets, particularly in border provinces. More strategically significant is energy. Iraq has historically depended on Iranian natural gas and electricity imports to support its power sector. Iraqi officials have repeatedly acknowledged the importance of Iranian gas supplies, while Baghdad has simultaneously sought to reduce that dependence through domestic gas development, associated-gas capture and alternative energy arrangements.
This energy relationship makes Iraq different from countries that can more easily reduce their commercial exposure to Tehran. Baghdad cannot simply sever Iranian energy links without considering the consequences for its electricity system. At the same time, Washington has its own reasons to pressure Iraq. The United States has long sought to limit the financial and logistical networks associated with Iranian-backed armed groups operating in Iraq. The challenge for Washington is therefore to distinguish between targeting illicit financial activity and imposing pressure that unintentionally damages Iraq’s broader economy.
The importance of the Iraqi case becomes clearer when viewed against the continuing uncertainty surrounding the Strait of Hormuz. Before the current crisis, the waterway carried roughly one-fifth of global petroleum consumption, according to the U.S. Energy Information Administration, making it one of the world’s most consequential energy chokepoints. Iran and Oman discussing a temporary navigation mechanism is therefore significant not only for bilateral relations but for global energy markets. Any sustained restoration of commercial traffic could reduce pressure on oil and LNG markets, but the reported attack on a tanker near the entrance to the strait demonstrates why shipping companies and insurers remain cautious.
The Strait also illustrates why economic pressure on Iran cannot be separated from energy security. Iran is both the target of U.S. sanctions and a state located alongside one of the world’s most important energy corridors. If pressure on Tehran contributes to renewed disruption in Hormuz, the economic consequences can spread rapidly to countries that have little direct involvement in the conflict. Higher freight rates, insurance premiums and energy prices can eventually affect inflation and industrial costs far beyond the Middle East.
Washington’s challenge is even greater because Iran’s trading partners are not economically interchangeable. China is Iran’s most important major economic partner and has significantly greater capacity than Iraq to withstand external pressure. Turkey has extensive commercial and energy links with Iran and shares a long land border with it. The United Arab Emirates is a major regional commercial hub with extensive historical trade connections to Iran but is also deeply integrated into the U.S.-dominated international financial system. India has important strategic interests involving connectivity through Iran, particularly the Chabahar corridor, while simultaneously maintaining a broad strategic partnership with the United States. Pakistan and Oman have their own geographic and economic considerations.
For that reason, an American strategy designed around secondary sanctions will face very different calculations in each country. Washington may possess substantial leverage over individual banks and companies, but converting that leverage into a complete economic isolation of Iran is considerably more difficult. Large economies can absorb some sanctions-related costs, governments can establish alternative settlement arrangements, and companies can restructure supply chains. The effectiveness of U.S. pressure therefore depends not simply on Washington’s ability to impose sanctions but on how much economic value Iran’s partners place on maintaining their relationship with Tehran.
There is also a broader strategic problem. The dollar remains the dominant currency in international trade and finance, and U.S. control over access to its financial system gives Washington an extraordinary instrument of economic statecraft. But every expansion of secondary sanctions also creates incentives for countries to reduce their exposure to U.S.-controlled financial channels. That does not mean the dollar’s dominance is about to disappear; it remains deeply entrenched in global reserves, payments, trade finance and capital markets. But repeated geopolitical use of financial access can encourage diversification at the margins, particularly among countries that have experienced or anticipate sanctions.
This is where Iraq could become a critical test. Baghdad has fewer financial alternatives than larger economies and remains heavily integrated with Western financial institutions. Its dependence on the U.S.-linked financial system gives Washington greater leverage than it possesses over China or Turkey. But Iraq also has powerful reasons to maintain economic ties with Iran. The result is likely to be a process of financial tightening rather than an immediate economic rupture: greater scrutiny of banks, more stringent compliance procedures, restrictions on particular transactions and increasing pressure to separate legitimate Iraqi commerce from Iranian-linked financial networks.
Such a strategy could be effective if it reduces Iran’s access to hard currency and makes sanctions evasion more difficult without destabilising Iraq. But it could also produce unintended consequences. If formal financial channels become excessively restricted, businesses may shift toward informal markets and alternative payment mechanisms. That could make transactions less transparent rather than eliminating them. The history of sanctions on Iran demonstrates that economic pressure can alter trade routes and payment systems without necessarily eliminating commercial activity.
There is therefore a limit to what financial coercion can accomplish. Sanctions are most effective when countries have few alternatives and when international partners cooperate in enforcement. They become less effective when targeted states have strong regional networks, alternative financial channels or major economic partners willing to continue trading with them. Iran possesses all three to varying degrees, although the extent to which those networks can withstand the current level of pressure remains uncertain.
The United States also has to consider the diplomatic consequences of applying secondary sanctions to major partners. Punishing a small Iraqi bank is fundamentally different from threatening a major Chinese financial institution, a Turkish company, an Emirati trading hub or an Indian strategic project. The economic and diplomatic consequences would be far greater, and Washington would have to weigh them against the expected impact on Iran.
That may explain why the latest U.S. warnings have focused on the possibility of future penalties rather than immediately imposing sweeping sanctions on every country trading with Tehran. The threat itself can change corporate behaviour. Banks frequently withdraw from transactions simply because the compliance risk is too high, even when a particular transaction may technically remain permissible. This phenomenon often described as over-compliance or de-risking can be almost as consequential as formal sanctions.
Iraq therefore offers Washington an unusually useful test. If the United States can use targeted financial pressure to restrict Iran-linked activity while helping Baghdad maintain energy security and economic stability, it will demonstrate that secondary sanctions can be calibrated rather than indiscriminate. If the strategy instead produces financial disruption, political resistance and a migration of trade into less transparent channels, it will expose the limits of economic coercion.
The larger issue is no longer whether Washington can impose pain on Iran. It clearly can. The harder question is whether it can translate financial pressure into lasting strategic concessions without imposing unacceptable costs on its partners, global energy markets or the international financial system itself.
Iraq sits directly at that intersection. Its dependence on Iranian energy and trade collides with its dependence on the U.S.-linked financial architecture. Washington has leverage; Tehran has geography, commercial networks and political influence. Baghdad therefore faces a balancing act that is likely to become more difficult as the U.S. campaign expands.
The next stage of the Iran confrontation may consequently be measured less by the number of sanctions announced in Washington than by what happens inside banks in Baghdad, shipping offices in the Gulf, trading companies in Dubai, energy markets in Asia and payment systems across the region. The Iraq test will reveal whether America’s financial power can isolate Iran or whether pressure on Tehran ultimately accelerates the creation of alternative channels around it.
-Andy Georgy
