Iraq in Limbo

Iraq’s post-election paralysis, combined with the Iran war and fragmented militia politics, has exposed the fragility of its post-2003 order. With oil exports disrupted by the Strait of Hormuz crisis and state authority diluted by competing armed actors, Iraq faces simultaneous economic contraction and political disintegration, making short-term stabilisation highly uncertain.

The ongoing Iran War has shattered any impressions of Iraq’s political stabilisation after the protracted fallout of the US invasion and ISIS insurgency. Iraq’s economic output is expected to slump by 6.8% this year as the closure of the Strait of Hormuz halts most of its oil exports and Iran-backed militias (the Popular Mobilisation Units, or PMU) use the country as a launchpad for strikes on American military assets and energy infrastructure (IMF, 2026). This slump comes during Iraq’s post-election deadlock: with a cabinet yet to be formed the government is impotent in the face of growing concern over the country’s internal fragmentation.

Conflict Outlook

Sectarian violence, a lingering ISIS insurgency, internal strife in the Kurdistan region and Turkish interventions against Kurdish militias have confounded Iraq following the American invasion in 2003. Recent developments have complicated this picture. The fall of Syria’s Assad regime to the militant Hayat Tahrir al-Sham prompted fears of renewed Sunni extremism in Iraq. In addition, the PMU have attacked Israel and American bases in Iraq since the onset of the Israel-Hamas War (IISS, 2025, 149). Iraq and its PMU are indispensable to the forward defences of Iran’s battered Axis of Resistance and Iranian efforts to bypass US sanctions (Plakoudas and Sofitis, 2025).

Iran and the US have attempted to exploit Iraq’s armed groups to support their military objectives. Iraq’s autonomous Kurdistan Regional Government was pressured by the US and Israel to support an incursion into Kurdish-populated western Iran, whilst Iran preemptively struck Kurdish militant targets in Iraq (KRG, 2026). Nominally under the Iraqi prime minister’s command, PMU militias such as Kataib Hezbollah have operated independently and attacked American targets in Iraq since the outbreak of hostilities (Abdul and Kullab, 2026). Drones launched from Iraq at energy infrastructure in the Gulf Cooperation Council (GCC) states demonstrate the government’s inability to control its fragmented security forces and could sour GCC-Iraq relations (Reuters, 2026).

Political Outlook

Political wrangling followed the November 2025 parliamentary election. The 2021 election was won by Shiite cleric Muqtada al-Sadr’s Sadrist Movement, which resigned from parliament in 2022 after post-electoral negotiations became deadlocked. The Shia Coordination Framework (SCF) – the largest grouping in parliament – and incumbent Prime Minister Mohammed Shia al-Sudani’s Reconstruction and Development Coalition bloc increased their vote shares in 2025 because of Sadr’s boycott of the election (Badawi, 2025). Unable to form a government without the SCF’s blessing, and having met Iraq’s informal one-term limit, in January al-Sudani appeared set to be replaced by SCF candidate and controversial former prime minister Nouri al-Maliki.

US president Donald Trump’s public rejection of al-Maliki later that month rocked Iraq’s fractious post-election negotiations (Higel, 2026). Following US threats to cease economic and security cooperation with Iraq, the SCF eventually nominated the political novice and businessman Ali al-Zaidi as a compromise candidate (Mansour, 2026). Whilst al-Zaidi appeases Iran and the Iraqi elite’s desire for a weak consensus candidate, unlike al-Maliki he lacks the ability to broker power within the SCF or coordinate the fragmented PMU to Iran’s liking (Mansour, 2026). Al-Zaidi must maintain a fragile status quo: the Iraqi Armed Forces’ capabilities would be undermined and Iraq dragged further into the Iran War if he accedes to nationalist demands to expel American forces or clamp down on the PMU (Laipson and Ollivant, 2024).

Economic Outlook

Iraq’s undiversified economy is particularly exposed to insecurity in the Persian Gulf: in 2024 crude petroleum accounted for $97.9 billion and refined petroleum $8.85 billion of its total exports of $109 billion (OEC, 2024). Its oil output fell from 4.4 million to below 1.3 million barrels per day (bpd) as tankers can no longer export 3.3 million bpd from Basra through the Strait of Hormuz, with storage facilities rapidly filling as a result. Political fragmentation has hindered Iraq’s ability to manage its energy sector – only under US pressure did Baghdad and the KRG reach an agreement to export 170,000 bpd through Iraqi Kurdistan’s Iraq-Türkiye Pipeline (Al-Maleki, 2026).

Moderate progress has been made to diversify Iraq’s economy. The government’s manageable budget deficit and $13 billion foreign debt are overshadowed by its reliance on oil revenues for 90% of public spending, high domestic borrowing, and a bloated public sector (Menmy, 2025). Although low productivity and investment are constraining the non-oil economy, select industries such real estate, expected to grow at 6% per annum, will benefit from rising demand and generate employment opportunities (IMF, 2025; Shihab, 2025). Crucial to Iraq’s economic diversification is the Iraq-Europe Development Road. The high-speed rail and al-Faw Grand Port projects key to this $17 billion initiative will link Iraq to Türkiye and Europe and transform the country into a regional transport hub bypassing the Suez Canal and Bab el-Mandeb Strait (MEE, 2023).

Forecast

Despite large drops in production and revenues as storage has filled, the government has stated exports could return to pre-war levels within one week of a ceasefire in the Strait of Hormuz (MEE, 2026). As well as the aforementioned Iraq-Türkiye Pipeline, Iraq began exporting oil through Syria via road in April and has mulled building the long-delayed Basra-Aqaba pipeline through Jordan to reduce its dependence on the Strait of Hormuz (Al-Junaidi, 2026; Walla, 2026). As Israel’s involvement in regional conflicts has rendered planned transport connections to Haifa Port politically unpalatable, the GCC states have expressed interest in using Iraq to bypass maritime chokepoints (Hussain, 2026).

Continued American security cooperation with Iraq is necessary to maintain US credibility in the region and prevent Iran using a hardline SCF-nominated prime minister to gain political control over the country. Given the Iraqi government’s lack of monopoly on violence within its territory, the activities of the fragmented PMU will continue to undermine Iraq’s efforts to improve its international credibility and attract foreign investment to diversify its exports (Al-Maleki, 2026). Under constant American diplomatic pressure, a fragmented security environment, and Turkish ground operations and Iranian strikes in Iraqi Kurdistan, Al-Zaidi will be unable to stabilise the country unless he quickly breaks Iraq’s post-electoral deadlock by forming a consensus government capable of liaising effectively with the KRG and PMU.

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