Mounting US pressure on the financing channels of armed groups in Iraq may not weaken their influence as much as it pushes them to restructure their economy. As sanctions and other restrictions tighten on banks, individuals and companies linked to these groups, they are increasingly inclined to deepen their reliance on domestic sources of revenue and networks of influence within state institutions.
From political power to institutional control
The response of Iraq’s armed groups to increasing US pressure has not been limited to seeking alternative sources of revenue. Instead, they have sought to expand their influence across state institutions and high-revenue economic sectors. Their growing integration into the political process – reflected in increased parliamentary representation and a larger share of positions within state institutions, most notably following the 2025 elections – has strengthened their ability to shape the allocation of public offices and resources, while directing economic activity in ways that serve their interests. This marks a shift from benefiting indirectly from the domestic economy to playing a more direct role in managing and exploiting its resources.
The same pattern extends to other sectors, particularly the oil industry, which occupies a central position in Iraq’s economy and offers lucrative opportunities at various stages of the supply chain. Oil smuggling – long a key source of revenue for armed groups – once relied on commercial fronts and intermediary networks, including asphalt plants through which heavy fuel oil was marketed. However, reports suggest that these have evolved into more direct arrangements, supported by growing influence within state institutions and control over certain refineries and oil fields.
Allegations and decisions issued by the Iraqi authorities and the US Treasury suggest that some networks linked to armed groups have exploited institutional positions to facilitate oil-smuggling operations or benefit from their proceeds. If substantiated, the allegations reflect a broader dynamic in which institutional influence is used to facilitate illicit economic activities, rather than merely shielding them from the outside. According to some estimates, these activities generate revenues of up to $1 billion annually, underscoring the central role that oil has come to play in the economic structure of Iraq’s armed groups.
Profiting from public contracts, businesses and borders
Political and institutional influence has enabled some armed groups to expand their control over public projects, government procurement and public investment. Whereas these groups once limited themselves to extracting commissions ranging from 5 to 30 per cent on contracts awarded to private companies, in many cases they are now able to direct those contracts to companies they own or to firms operating as their commercial fronts. As a result, government contracts have themselves become a source of sustainable financing.
That same dynamic also extends into the local economy through the extortion of vulnerable private-sector businesses, such as liquor stores and nightclubs that lack adequate legal protection, particularly after the Iraqi authorities prohibited the import of alcoholic beverages pursuant to Article 14 of the Municipal Imports Law No. 1 of 2023. Armed groups also derive revenue from control over some border crossings, generating an estimated $12 billion annually from smuggling goods and extorting fees from truck drivers, according to widely cited estimates.
These revenue streams are significant not only for their scale, but also for what they reveal about the economy of armed groups. As previous studies have found, the groups are shifting from a reliance on external financing networks to a model rooted in exercising institutional influence, directing public contracts and resources, and controlling key sectors of the domestic economy. This makes curbing their influence considerably more complex than simply targeting their traditional sources of finance.
From coercion to institutional leverage
The implications of this shift extend beyond the economic sphere to the nature of influence itself. The use of military force to maintain control and secure economic gains has not entirely disappeared from armed groups’ strategy; however, it has become one of the tools used to protect the institutional networks that sustain their political and economic position. As a result, it is increasingly difficult to separate armed groups’ interests from the institutions themselves.
This does not necessarily reduce the likelihood of armed conflict between these groups, or mean they have abandoned the use of force. Rather, force now serves primarily to protect or redistribute political and economic influence as the balance of power shifts. Confrontations similar to those witnessed in Iraq in August 2022 or July 2025 cannot therefore be ruled out, particularly when networks of influence or resource-sharing arrangements come under threat – though such clashes are likely to be more contained as competition increasingly plays out within state institutions.
Beyond sanctions: policy for an economy of influence
The transformation of the economic model of armed groups requires a corresponding shift in policy. Tightening financial sanctions or targeting traditional sources of finance alone is unlikely to be sufficient. The challenge increasingly lies in the institutional structures that enable these groups to use state resources and economic mechanisms to advance their interests. Policy should therefore focus on limiting opportunities to exploit public institutions while also curbing the illicit economy that provides alternative sources of revenue.
This requires strengthening transparency in the management of public resources, particularly by reforming government procurement processes and adopting electronic procurement platforms that ensure the publication of projects, their costs and their technical specifications, while requiring companies to disclose their beneficial owners in order to limit the use of front companies. It also requires limiting the use of state institutions to serve networks of influence, by ensuring that appointments in the public sector are subject to merit-based criteria and institutional oversight – reducing the influence of patronage and political loyalty in the allocation of public positions and resources.
At the same time, curbing the economy of influence requires strengthening oversight of border crossings, protecting the sectors most vulnerable to extortion, and restoring the state’s monopoly over the provision of security as part of a broader programme of institutional reform. The new government, headed by Prime Minister Ali al-Zaidi, has pursued a series of measures aimed at reducing the influence of armed groups. Alongside efforts to advance their disarmament, the government launched an anti-corruption campaign on 28 June 2026, which has focused on disrupting the financial networks that sustain these groups, targeting sectors associated with corruption and patronage, including the oil and electricity ministries. Authorities have also moved to shut down offices allegedly affiliated with the Popular Mobilization Forces (PMF) and operating without official authorisation.
However, as armed groups have become more deeply embedded in the state’s political economy, addressing their influence increasingly requires policies that target the structures that produce that influence, rather than merely the resources that finance it. Without addressing this structural transformation, financial pressure may succeed in changing the form of armed groups’ economy, but it will not necessarily succeed in curbing their influence.