Washington’s threat comes as Iraq struggles to meet the basic needs of its people.
US President Donald Trump is facing criticism from a wide range of figures for threatening to freeze Iraq’s account at the New York Fed.
Critics of the threat, who include former government officials and Washington insiders, said the move amounted to ‘blackmail’, ‘extortion’ and ‘imperialism’.
The controversy follows an Iraqi parliamentary resolution that asked foreign troops, including US soldiers, to leave the country.
Trump has warned he’ll impose sanctions on Baghdad if it follows through on the resolution, which was spearheaded by lawmakers angry over the US assassination of a top Iranian commander Qasem Soleimani, in Iraq.
The outgoing Iraqi Prime Minister Adil Abdul Mahdi has already asked US officials to prepare for the withdrawal of American soldiers.
The Wall Street Journal on Saturday reported that the US State Department has warned that Iraq’s central bank could be stopped from accessing its account at the Federal Reserve Bank of New York.
Developing countries, such as Iraq prefer keeping some of their foreign exchange reserves with the Fed to access the US dollar and make international payments.
I would hope everyone who, like me, has favored a muscular U.S. presence overseas in partnership with friendly nations would be willing to call this sort of hegemonic bullying for what it is: imperialism of precisely the sort that traditional US interventionism does not smack of. pic.twitter.com/FJHCbamoH9— Benjamin Wittes (@benjaminwittes) January 11, 2020
The money that Iraq keeps at the Fed largely comes from the sale of oil. While the exact amount remains unclear, AFP, citing an unnamed Iraqi official, reported that the balance stands at $35bn.
The money is flown to Iraq in dollar bills on a monthly basis.
Central banks and governments from around the world keep trillions of dollars at the Fed as it allows them access to the US dollar, the world’s most dominant currency.
Information about the accounts and transactions is confidential but the US government has in the past used its leverage to gain access to it.
In theory, the Fed functions independently of the US government’s foreign policy. But that’s not always the case.
In 2015, the Fed temporarily suspended the flow of the US dollar to Iraq citing concerns the funds were ending up in the hands of Iranian banks and Daesh.
#US state department threatened #Iraq to loose access to its 35 billion $ oil revenues at NY Fed account if it insists that US withdraws its troops from Iraq.— Somaya Saad (@somayasaaad) January 12, 2020
Then US target is not to fight ISIS but to drain Iraq oil.
This is pure imperialism. pic.twitter.com/ilvmmGE6Ye
Linking the Fed account with US foreign policy objectives is also not uncommon. In 2008, the US arm-twisted Iraq into agreeing to its military strategy by threatening to freeze the account.
Any disruption in the flow of the dollars would have a devastating impact on the government budget, which drives 90 percent of its revenue from oil.
The Iraqi government is struggling to pacify a burgeoning young population, which is competing for limited public sector jobs, after last year’s violent protests.
Washington can block individuals and entities from accessing the US financial system on the pretext of violation of its sanctions such as those on Iran or the like with which Trump has threatened Iraq.
The US has time and again used the dominant position of the dollar as a preferred currency and medium of exchange to force other countries to toe the line on its policies.
Sanctions can cut an entity - individual or business - from the global financial system as banks refuse to process transactions in fear of US penalties.