Federal cohesion under strain: Baghdad-Erbil relations

Relations between Baghdad and the Kurdi­stan Regional Government (KRG) remain one of Iraq’s most persistent structural chal­lenges, with recurring disputes over revenue, sovereignty, and security undermining fed­eral cohesion. The tensions revolve around disagreements over budgetary matters and oil revenues. Under a 2025 arrangement, the Kurdish Region agreed to deliver at least 230,000 barrels per day of crude oil to the State Organization for Marketing of Oil (SOMO), with the federal Ministry of Finance paying the Kurdish regional government its budget share in return. Although this frame­work enabled a resumption of oil exports, it represents a fragile compromise rather than a definitive settlement of com­peting claims over control and commercial­ization of hydrocarbons.

Fiscal tensions have escalated sharply at times, including disputes over monthly transfers and public sector salaries, when Baghdad temporarily suspended payments citing non-compliance with revenue-shar­ing obligations. Kurdish officials decried this as unconstitutional, illustrating how budget politics intersect with legal and political contestation.

The larger question of a comprehensive hydrocarbons law and clearly defined con­stitutional authority over natural resources remains unresolved, leaving the legal foun­dation of revenue arrangements inherently unstable and turning the Federal Supreme Court into a political power broker facing allegations of politicization. Arbitration rulings have added complexity. The Inter­national Chamber of Commerce ruling of 2023, obliging Turkey to pay Baghdad for past independent exports, further complicated negotiations over pipeline use and economic leverage.

The Peshmerga remain institutionally separate from Iraq’s federal security forces. Past clashes with the Iraqi Armed Forces have given way to operational agreements, yet formal integration and command unity remain unresolved and point to divergent visions of the Kurdish region’s sovereignty.

Finally, Kurdish leverage in the federal cabinet persists through strategic coalition bargaining. Kurdish parties hold key minis­tries and can act as kingmakers. Yet grow­ing intra-Kurdish rivalry could blunt their collective bargaining power and expose their reliance on federal patronage.

The unresolved Sunni question

The political marginalization and fragmentation of the Sunni Arabs, whose limited strategic influence since 2003 has had long-lasting ramifications for national cohesion, remains a central unresolved fault line in Iraqi politics. The de-Baathification policy implemented after the US-led invasion dis­mantled the Ba’ath Party’s structures and removed large numbers of Sunnis from gov­ernment positions and security forces, con­tributing to deep distrust in state institutions and weakening Sunni confidence in the post-2003 political order. Even in 2025, pre- and post-election disqualification of can­didates continued under the de-Baathifi­cation policy. Although these measures did not exclusively target Sunnis, they were widely perceived within the Sunni political arena as a political instrument aimed at weakening Sunni representation and influ­ence.

These long-standing grievances, compounded by uneven reconstruction and weak local governance in Sunni-majority provinces, have created conditions in which securitization often supplants full political inclusion as the dominant mode of state engagement with Sunni populations. This reinforces feelings of alienation and mar­ginalization.

The trauma of ISIS territorial conquest and rule (2014–2017) continues to shape Sunni politics. Although ISIS was defeated, its legacy persists in fractured social fabrics, prosecutions, and administrative measures that often amount to discrimination or col­lective punishment, and the continuing displacement of thousands of predominantly Sunni Iraqis. These dynamics are further compounded by the ongoing reactivation of ISIS remnants, which exploit socio-eco­nomic grievances and porous borders to sus­tain underground networks despite counterterrorism efforts.

The fall of the Assad regime in December 2024 also altered sectarian perceptions with­in Iraq. For parts of Iraq’s Sunni community, the ascent of a Sunni-led authority in Da­mas­cus under Ahmad al-Sharaa car­ried strong symbolic resonance, generating a sense of regional momentum after years of mar­gin­alization. By contrast, some among the Shia political forces and armed groups still refer to al-Sharaa as a “jihadist,” and Syria’s trans­formation has heightened threat per­ceptions and fears of cross-border militant infiltration, Sunni resurgence, and regional realignment. These diverging readings risk hardening sectarian perceptions at a moment when Sunni political engagement needs to be normalized rather than securitized.

The future status of the PMF

The recent regional reconfigurations have intensified long-standing domestic debates regarding the status of armed groups within the state. Having derived significant legiti­macy from their role in the defeat of ISIS, these predominantly Shia groups – some of which maintain close ties to Iran – have consolidated under the umbrella of Al-Hashd al-Sha’bi (Popular Mobilization Forces, PMF) and continue to function as influential power brokers. The Hashd receives state funding and has been formally under the authority of the prime minister since 2016. In practice, however, the most powerful of its roughly sixty constituent armed factions – including some Christian, Sunni, and Yazidi units – operate largely beyond the effective control of the central government. They have sometimes even clashed with other state security actors, as occurred during a dispute over an appointment in the Min­istry of Agriculture in the summer of 2025.

Efforts to integrate these groups into the Iraqi security forces have to date produced limited results. Proposed legislation aimed at further institutionalizing the PMF with­in the state, while preserving a degree of autonomy, was opposed by Sunni and Kurd­ish actors and ultimately withdrawn in 2025, reportedly following US pressure. Assessments of the bill diverged sharply: pro­ponents viewed it as a potential path­way toward integration, whereas critics warned that it would entrench Iranian in­fluence within state institutions.

In the post-election period, these debates have been fueled by explicit US demands for the disarmament of PMF factions and their exclusion from cabinet positions. Several of the larger groups, including the strong electoral performer Asa’ib Ahl al-Haq, have begun to publicly endorse the principle that all weapons should fall under state control, although some have suggested that light arms could be retained.

Various motivations could be behind these shifts: tactical maneuvering to secure cabinet representation despite US pressure, efforts to avert potential US or Israeli mili­tary action, fear of losing backing from an increasingly weakened Iranian leadership, and/or a broader recognition that Iraq is entering a new phase in which armed groups perceive greater advantage in pur­suing their objectives as political and eco­nomic actors. The pursuit of formal politi­cal influence was illustrated by the election of an influential Asa’ib member as first deputy speaker of parliament, possibly in a move to circumvent US opposition to armed groups holding government posi­tions. His appointment also reflects sub­stan­tial parliamentary representation of these groups. On the economic side, the PMF’s official budget lacks accountability and the various groups’ growing involvement in economic activity has given rise to allegations of financial impropriety, such as money laundering and oil smuggling, as well as targeted US sanctions against per­sons, banks, and businesses

Forging a sustainable arrangement with the armed groups that grants the state an exclusive monopoly over the legitimate use of force and disincentivizes illicit economic activity is one of the central challenges facing Iraq’s political leaders.

Transversal challenges: Financial fragility, state output, climate change

The new government’s ability to safeguard the fragile social stability will depend largely on its fiscal space and its success in diversifying the economy away from oil. Over recent years, the government has begun strengthening the weak banking sector and the regulatory framework more generally, and Iraq has experienced an investment boom, particularly in infrastructure. That said, ventures such the ambitious Develop­ment Road Project – seeking to link the Persian Gulf and Turkey by rail and road to create an Asia-Europe trade corridor – still exist largely only on paper.

As one of the world’s most oil-dependent economies, with rapidly expanding public expenditure, Iraq exhibits pronounced fis­cal vulnerability. The impact of oil market volatility is compounded by patronage struc­tures and oil smuggling, as well as struc­tural inefficiencies in the energy sector that necessitate energy imports – particularly gas from Iran – to sustain domestic elec­tricity generation. Rising domestic energy demand, driven in part by climate change-induced temperature increases, places addi­tional strain on the state budget.

Oil-related ecological crises and severe water scarcity are also exacerbating internal displacement, public health challenges, rural impoverishment, and social unrest. In 2025, protests fueled by grievances over in­adequate infrastructure, deteriorating water quality, unreliable electricity supplies, and oil-related ecological disaster persisted, and were compounded by frustration over high youth unemployment and unpaid wages. Perceptions of (elite) corruption – although improving – are still at staggering levels.

These interlinked challenges are increas­ingly emerging as major drivers of internal tension. How the government addresses them will be as consequential for state sta­bility as political settlements themselves.

Iran: Dependency reversed?

Iranian influence in Iraq continues to rest on three main pillars: close ties with Shia political parties embedded in the post-2003 order, the existence of Iran-aligned armed groups operating under the umbrella of the PMF, and deep economic interdependence, particularly in the fields of energy, trade, and cross-border financial activities. Yet, this influence faces clearer limits than in pre­vious years. Under al-Sudani, Iraqi politi­cal discourse has increasingly empha­sized sovereignty, national interest, and insu­lation from regional confrontation. While this nationalist framing does not amount to strategic realignment, it does reflect growing elite unease with the costs of alignment, especially amid widespread public fatigue with Iraq’s role as a battleground for proxy conflict. The risk of being drawn into a direct confrontation with either Israel or the United States has sharp­ened concerns among Iraqi decision-makers, including the Shia, about the sustainability of Iran’s regional playbook. In this context, the SCF functions less as an instrument of Iranian control than as a vehicle through which Iranian interests are negotiated, diluted, and sometimes resisted. Over the past year, the asymmetry has subtly shifted: Iran needs Iraq more than it did a decade ago, while Iraq has more alternatives than Iran would like. The principal risk for Bagh­dad is therefore not overt domination, but a gradual erosion of autonomy through infor­mal pressure, economic leverage, and secu­rity entanglements that remain difficult to unwind.

At the same time, ongoing unrest inside Iran and the potential weakening of the Islamic Republic could have a dual effect on Iraqi politics. It can create additional room for maneuver and agency for Baghdad while simultaneously heightening anxiety among Shia political forces about their re­gional position. In a more adverse scenario involving external intervention against Iran, it may expose Iraq to renewed destabiliza­tion through conflict spillover and engage­ment of Shia militias in support of Iran.

Navigating US pressure

Washington’s priorities in Iraq have shifted from fighting ISIS to containing Iran, and Iraq has come to be viewed as a problematic security partner. In October 2025 the US senate voted to repeal laws enabling mili­tary action in Iraq. Although the step was welcomed by the Iraqi government, it does not alter the complexity of US-Iraqi rela­tions. Post-election statements by US offi­cials, including the newly appointed special envoy Mark Savaya, underline Washington’s priorities: federal state stability and Iraqi sovereignty – albeit with conditions including disarming of armed groups, their exclusion from government, and no circum­vention of Iran sanctions. This is likely to impact and possibly delay the formation of a new government, despite vocal rejection of interference by Iraqi political and legal elites. At the same time, there is acute awareness in Iraq that, unlike in the past, US demands may now be backed by con­crete action, including renewed military measures.

Even if such signals may resonate well in parts of Iraqi society, the implicit threat of US or Israeli military action represents a sub­stantial challenge for the politically dominant SCF. More broadly, it conflicts with the political elites’ aspirations for sov­ereignty and agency in a context of multi-alignment.

The upcoming negotiations over the presence and number of coalition forces and the redefinition of the US mission may prove less problematic for the new govern­ment than US calls for separation of powers and respect for the constitution – which are directed at those parts of the entrench­ed elite who maintain close ties to Iran. This also reflects broad Iraqi sentiment that Washington’s priority is not Iraqi reform but deterrence of Iran-aligned groups and weakening of Iranian influence, and that the United States is ignoring changes in Iran’s patterns of influence.

Dealing with Iraq principally through the military and Iranian lens could have negative effects on the country’s fragile social and political fabric and bears the risk that future conflict – be it confrontation between Iran and the United States or an Iran-Israeli escalation – could have domes­tic repercussions that spiral beyond the control of the Iraqi state.

In a positive scenario, strong fears of such a development could incentivize Iraqi leaders – regardless of their background – to settle their domestic conflicts and assume a stabilizing regional role.

Turkey: The ambivalent neighbour

Turkey remains a dominant external actor in northern Iraq, where its engagement combines security measures with expanding economic and infrastructural reach. Ankara’s core justification for its military interventions is the ongoing presence of the Kurdistan Workers’ Party (PKK) in the Qandil Mountains and adjacent border areas, which Turkey designates as a terrorist threat meriting cross-border operations and a persistent military footprint. Turkish forces continue to operate from bases inside Iraqi territory under longstanding agreements allowing for PKK pursuit. Baghdad frequently protests this presence as a vio­lation of sovereignty even though formal coordination mechanisms for pursuits have been agreed on.

Turkey’s leverage in Iraq also extends into economic interdependence and resource politics. Iraq’s water crisis, which is rooted in upstream damming of the Tigris and Euphrates in Turkey, has become a central issue in bilateral talks, culminating in a 2025 framework agreement to finance Iraqi water infrastructure projects through oil revenues. Turkey is also one of Iraq’s major trading partner, and Turkish firms are deeply involved in construction and infrastructure across the Kurdistan Region, reinforcing Ankara’s influence through commercial ties.

The Turkish-Iraqi Development Road Project represents another key element of Ankara’s Iraq strategy. Framed by Turkish leaders as a driver of regional stability and prosperity, the project de facto relegates Baghdad to a junior partner and strengthens Turkey’s claim to centrality in Iraqi economic development, even as it binds Baghdad to Ankara’s geopolitical orbit.

Despite these layers of engagement, Iraq’s negotiating position remains weak. Ankara’s approach is “security first, sover­eignty later”; it prioritizes counter-insur­gency and infrastructural access over mutually agreed procedures or full respect for Iraqi territorial integrity. The substantive risk is not overt conquest but federal Iraqi state erosion through expanding Turk­ish operating space, in which strategic lev­erage – in water, trade, security coopera­tion, and infrastructure – incrementally reshapes Iraqi decision-making in ways that outpace Baghdad’s institutional capacity to regulate such foreign footprints.

Deepening ties with the GCC

Iraq’s quest to diversify its external rela­tions is also reflected in growing economic and diplomatic ties with Gulf states, follow­ing years of relative estrangement due to the security situation, the GCC’s qualms about Baghdad’s closeness with Iran, and Iraqi objections to Gulf support for radical Sunni groups. Iraq’s facilitation of talks between Iran and Saudi Arabia in 2021/22, which led to the China-brokered restoration of Saudi-Iran ties in 2023, opened new doors. Saudi Arabia, Qatar and the UAE have since committed billions of dollars in investment in Iraq, notably in real estate, energy infrastructure, and grid integration.

Yet, Gulf leaders remained conspicuously absent from the 2025 Arab League Summit in Baghdad, reflecting a broader posture of cautious re-engagement without a firm po­litical commitment. Iraq is not (yet) viewed as an ally, but rather as a hedge. For its part, Baghdad seeks to tread the fine line between rapprochement with the Gulf states and avoiding alienating Iran.