The System

Iraq is a rentier state in the strict sense: oil sales provide the overwhelming majority of federal revenue, and those sales are settled in dollars. The State Organisation for Marketing of Oil (SOMO) sells crude to refiners abroad. Buyers pay in dollars into Iraqi government accounts held at the Federal Reserve Bank of New York — historically the account known as IRAQ2, successor to the Development Fund for Iraq arrangements created under UN Security Council Resolution 1483 in 2003 and protected from creditor attachment by US Executive Order 13303.

Those dollars belong to the Ministry of Finance, but the state pays salaries, pensions and contracts in dinars. The Ministry therefore sells dollars to the Central Bank of Iraq and receives newly issued dinars in return. The Central Bank now holds the dollars and must place them into the economy in an orderly way. It does so through a daily sale, universally called the auction or, more accurately, the window: licensed banks submit requests, either for cash notes or for transfers abroad on behalf of importers, and the Central Bank supplies dollars at a published official rate.

The design is defensible in theory. A central bank with large foreign reserves sells them at a fixed price to defend the currency, and the fixed price is the anchor of monetary stability. The vulnerability is elsewhere: access. Only licensed banks may buy at the official rate, the volume any bank receives depends on the Central Bank's allocation and on the documentation it accepts, and the market price outside the window is set by conditions the window does not control.

When those two prices diverge — because sanctions constrain dollar supply, because demand for hard currency rises, or because the Central Bank tightens compliance — the gap becomes a transferable value. It accrues to the holder of the allocation at the instant of purchase. A transfer request supported by an invoice for goods that never arrive converts the allocation into dollars abroad; the dinars stay in Iraq, the dollars do not, and the difference between the two prices is realised as profit.

In 2014 the Federal Reserve and the Iraqi Ministry of Finance formalised the account relationship in a memorandum of understanding; from November 2022 the Federal Reserve applied advance-screening requirements to wire transfers out of the Iraqi account, and rejection rates rose sharply. That single procedural change is the clearest evidence of what the window had become: when the paperwork was checked before the money moved, a large share of the requests stopped.