BAGHDAD — Iraq's delicate balancing act between Washington and Tehran has reached a breaking point as the United States escalates military operations against Iran-aligned groups operating from Iraqi soil.

The targeting of proxy militias has thrust Baghdad into an unwelcome spotlight, forcing Prime Minister Mohammed Shia al-Sudani's government to navigate between protecting national sovereignty and maintaining crucial economic ties with both superpowers.

Economic Leverage at Stake

Iraq's energy sector remains deeply intertwined with Iranian infrastructure, with electricity imports from Tehran accounting for nearly 40 percent of the country's power supply. Trade between the neighbors reached $12 billion in 2025, making Iran Iraq's second-largest trading partner after China.

"Iraq cannot afford to completely alienate either Washington or Tehran," said Dr. Renad Mansour, a Middle East analyst at Chatham House. "The economic costs of choosing sides would be catastrophic for a country still rebuilding from decades of conflict."

US sanctions waivers allowing Iraqi payments to Iran for electricity have become a monthly negotiation point, creating perpetual uncertainty for Baghdad's energy planning.

Sovereignty Under Pressure

The presence of Iranian-backed Popular Mobilization Forces within Iraq's official security apparatus complicates any government response to US operations. These groups, formally integrated into Iraqi forces in 2016, maintain independent command structures and loyalty to Tehran.

Washington's strikes against these militias effectively target elements of Iraq's own military establishment, creating a sovereignty crisis that Baghdad cannot easily resolve through diplomatic channels.

"The Iraqi government is caught between its constitutional obligation to protect all forces under its command and the practical reality of US military superiority," explained former Iraqi Foreign Ministry official Lukman Faily.

Regional Realignment Accelerates

The intensifying proxy conflict has accelerated broader regional realignment, with Gulf states reassessing their relationships with Baghdad. Saudi Arabia and the UAE, traditional US allies, view Iraq's Iranian connections with growing suspicion.

This regional isolation threatens Iraq's efforts to diversify its economy beyond oil exports, particularly in reconstruction and infrastructure development where Gulf investment had shown promise.

What Comes Next

Baghdad faces three unpalatable options: formally request US withdrawal and risk economic isolation, actively suppress Iranian-aligned groups and face internal rebellion, or maintain the current precarious balance while regional tensions escalate.

The Iraqi parliament's previous attempts to expel US forces in 2020 failed due to American economic pressure and Sunni-Kurdish opposition. Similar dynamics would likely play out in any renewed confrontation.

Each US strike against Iranian proxies in Iraq further erodes the government's legitimacy while demonstrating its inability to control sovereign territory, potentially triggering the political instability that both Washington and Tehran claim to want to avoid.

This crisis highlights the broader challenge facing middle powers caught between competing spheres of influence in an increasingly multipolar world.