Index trend
Previous quarterly editions
Expropriation risk: 67 67 73 73 ► Political violence risk:57 60 57 57 ►Terrorism risk:38 38 38 38 ►Exchange transfer and trade sanction risk: 63 73 63 63 ►Sovereign default risk:73 74 74 73 ►
Overall Risk Temperature: 67 (Medium high) TREND ►
Special topic: Gray zone aggression
Degree to which the country relies on outbound gray zone action to achieve its strategic objectives1 = Not at all5 = Gray zone action is a core tactic
4
Impact of inbound gray zone attacks on the country1 = Negligible impact5 = Significant impact on economic growth and/or political stability
3
Baghdad has been trying to maintain the fragile stability that it has achieved since the defeat of Islamic State (IS). The U.S. is shifting its focus away from Iraq, while Iran continues to see its militia allies as a safeguard against a resurgent Iraq on its border. The increased regional tensions since the outbreak of war in Gaza last year has led to Iraq being more regularly used as a place for gray zone aggression.
The members of the Coordination Framework — the core of the country’s ruling bloc — are self-confessed members of the transnational front known as the “axis of resistance,” who aim to expand the Islamic Revolution that began in Iran in 1979. Their control of Iraq and its budget are a game-changer and cash cow for the partnership with Iran. For example, one of the factions, Kataib Hezbollah, conducts import customs evasion and dollar diversion to Iran. They also have conducted numerous anti-U.S. attacks in Iraq, Syria and Jordan. Their capture of intelligence and drone directorates in the government has played an important role in attacks on assets held by the U.S. and Arab Gulf states.
This comes as Baghdad pursues more autonomy within a changed regional dynamic. Prime Minister Mohammad Shia al-Sudani has taken steps to end several international missions. He announced that he would begin talks with the U.S.-led coalition created in 2014 to fight IS to end its mission. The Iraqi government also requested the United Nations (U.N.) terminate a mission to promote accountability for IS crimes as well as the U.N. Assistance Mission for Iraq mandate by the end of 2025. These requests are seen as steps to reduce international involvement in the country’s domestic political affairs.
On top of Iran, there are also growing signs of collusion between these Iraqi government factions and Russia and China. For example, a March 2023 attack in Syria led to the death of one U.S. citizen, and there is some evidence of Russian support as a response to the U.S. provision of weaponry to Ukraine. China has also developed strong relations with these factions, who have been rewarded with lucrative infrastructure projects in Iraq. In return, Chinese companies have been granted preferential access to energy contracts in Iraq. As China expands its involvement in the Iraqi economy, Beijing is using its economic clout to influence Iraqi politics.
The new Iranian president visited Iraq in September 2024, which led to the signing of agreements that aim to prevent acts of aggression against Iran from Iraqi soil. During the visit, the U.S. embassy’s logistical support center in Baghdad came under attack — a sign that gray zone aggression will likely continue.
TREND ►
In the latest licensing round in May 2023, Iraq’s oil ministry initiated 13 new contracts for oil field exploration. Western energy companies avoided bidding despite better contractual terms offered by Baghdad, a signal that Iraq’s upstream sector has been seen as increasingly risky. Nonetheless, in August, the oil ministry said that these new contracts would add 750,000 barrels per day of oil and 850 million cubic feet per day of gas. These developments have added to China’s dominance over Iraq’s oil and gas sector. Chinese investments have also gone toward the development of Iraq’s upstream sector.
Iraq continues to pay international oil company investors as regularly as possible despite facing significant payment challenges. Baghdad also strictly enforces the contracts of international pipeline projects.
The outbreak of hostilities in Gaza in October 2023 has only intensified political violence in Iraq. In early January 2024, ballistic missiles and drones struck several locations in Erbil Governorate, including two U.S. bases, a U.S. consulate building currently under construction and the private residence of a prominent businessman. Iran claimed responsibility and alleged that the targeted sites were linked to the Israeli government.
In areas reclaimed from IS, Iraqi Shia militias with Iranian backing have taken key responsibilities in the security sector as well as in post-IS reconstruction and governance. These militias also continue to block the return of groups displaced during the war with IS, which has led to festering grievances.
Turkey has also sought to assume a more ambitious role to curb the abilities of the Kurdistan Workers Party, or PKK, a separatist terrorist organization that operates on Iraqi soil. In April, Turkish President Recep Tayyip Erdogan visited Iraq, his first visit in over a decade, vowing to stop any PKK infiltration into Turkey. This has led to an intensification of Turkish drone attacks in Iraq’s border areas, prompting further displacement of Iraqi residents. The anticipation of an eventual U.S. withdrawal from Iraq will likely lead to further Turkish encroachment into northern Iraq.
In August, the Iraqi parliament held its first review of a bill to amend the country’s personal status law. The proposed amendments are seen as efforts by conservative Islamist parties to strengthen sectarian identity while potentially legalizing child marriage. The law risks establishing a legal basis for sectarianism and division, which will lead to new social tensions.
Total deaths from terrorism have fallen since 2007, and the risk of a significant IS resurgence is low. The army and security services have partly raised their capacity by cooperating with local militias. However, recent IS activity in the second half of 2024 comes as the Iraqi government pushes for U.S. troops to withdraw from the country. The Pentagon released a report in July and predicted that attacks claimed by IS in Iraq and Syria are on track to double from last year.
The Iraqi government maintains that the U.S.-led coalition is no longer necessary, but U.S. officials cite this uptick in IS activity to highlight that the terrorist organization remains a threat. While there is no single reason for the increase in attacks, core issues persist, including ongoing disenchantment with the government and the diversion of U.S. assets toward Shia militias since the Israeli invasion into Gaza and the uptick in regional hostilities.
Nonetheless, Iraq’s prime minister seeks to end any reference to terrorism, pursuing measures to end several international missions in order to curb international accountability in domestic affairs. While this may shore up domestic support, the ongoing poor economy and pervasiveness of corruption remain and are key to the continuation of terrorism in the country.
In July, the U.S. government granted another four-month sanctions waiver for Iraq to purchase Iranian electricity. This continues a trend of U.S. action since 2018 to enable Iraq to meet its short-term energy needs.
Turkey has continued its cessation of oil exports from the Kurdistan region, after a French arbitration court 2023 decision found that Ankara had breached legal agreements with Baghdad. Media investigations have found a growing black market of oil smuggling from the Kurdistan region into Iran, which could create tensions with its close ally, the U.S.
The Iraqi dinar continues to experience exchange rate fluctuations and depreciate against the U.S. dollar. However, the government has put forth financial and economic reforms, pushing forward the use of electronic payment systems by the government and private sectors. Yet this faces several obstacles, including reliable internet connectivity and point-of-sale terminals.
Fitch Ratings continues to grade Iraq’s long-term foreign-currency issuer default rating at B–. While increased Chinese investment has improved certain credit metrics, the country continues to experience political risk; corruption; and a lack of structural, economic or fiscal reforms. Most significantly for Iraq, the current slump in oil prices will lead to a 2025 budget crunch. The country’s huge reliance on oil makes it extremely vulnerable to fluctuations in global crude prices. The International Monetary Fund expects that the country’s fiscal deficit will increase to 7.6% of GDP in 2024 from 1.3% in 2023.
While the Iraqi government has said that financial discipline will be needed, the country’s patronage system will likely continue to add additional state employees into an extremely bloated public sector. The government’s capital-intensive national infrastructure plans, namely the Development Road project, will add to the deficit, although the government is trying to improve its tax collection to expand non-oil revenues. Still, given that oil prices continue on a downward trend, the Iraqi government will eventually need to implement long-overdue structural reforms, including combating corruption and removing hurdles to private sector development.
