U.S. Support for the KRG Amid Iraq’s Fiscal and Security Strains

The relationship between the Kurdistan Regional Government (KRG) and Iraq’s federal government appears to have entered a renewed phase of friction. The Kurdistan Region has recently come to face a renewed dual pressure campaign—on both the economic and security fronts—driven by the government in Baghdad and powerful Iran-aligned Shia militias. This escalatory period follows several months of political and security relative calm, during which Baghdad regularly transferred the KRG’s share of the federal budget and drone attacks had largely subsided. Baghdad’s decision to cut off the KRG’s funding in June following the KRG’s signing of gas development agreements with U.S.-based companies HKN Energy and Western Zagros has raised new questions about whether the relationship will enter into a new era of hostility.

Coercive Tactics

At the core of the central government’s pressure campaign against the KRG is a combination of financial strangulation and targeted insecurity, each reinforcing the other to erode Erbil’s autonomy and economic base. For over a decade, Baghdad has sporadically withheld funds from Kurdistan after the KRG decided to begin exporting oil internationally. For nearly three months starting in May, Baghdad withheld public sector salaries, pensions, and social benefits for approximately 1.2 million people in Iraqi Kurdistan, nearly one-fifth of the region’s total population—effectively undercutting the backbone of the Kurdish economy. The Iraqi Ministry of Finance justified its decision by asserting that the KRG had already exceeded its allocated share of the national budget for 2025. However, the KRG said Baghdad had delivered only around one-third of the agreed-upon $10 billion budget, as Kurdish parliamentary blocs accused Baghdad of pursuing a “policy of starvation” toward Kurdistan. Baghdad ultimately relented on July 24 after U.S. Secretary of State Marco Rubio made a direct appeal to Iraqi Prime Minister Mohammed Shia al-Sudani on July 22. But it has yet to pay KRG’s June salaries by mid-August.

Simultaneously, the Kurdistan Region has come under increasing military pressure from Iran-aligned militia groups. These factions, many of which are officially part of the Popular Mobilization Forces (PMF) and on the Iraqi government’s payroll, have conducted at least 22 drone strikes against the KRG in July. These attacks have largely targeted critical energy infrastructure, threatening foreign investment and the region’s long-term economic stability. In many cases, the attacks were carried out using Iranian-manufactured drones. The KRG Ministry of Interior has publicly blamed groups within the PMF for the attacks, prompting denials from PMF officials and affiliated commentators—some of whom have floated unsubstantiated theories implicating actors located within the KRG. The Iraqi government has likewise denounced the KRG’s accusations and initiated an investigation into the attacks.

The attacks themselves were extremely effective, having reduced the KRG’s oil production from nearly 300,000 barrels per day (bpd) to an initial 80,000 bpd. Current production figures stand around 130,000 bpd. As a result, the fate of the KRG’s budget and salary allocations remains uncertain, in light of a recent agreement that obligates the Kurdish government to hand over 230,000 barrels of produced oil—representing 60% to 75% of its total output—to Baghdad. The KRG has stated that it will transfer the largest amount it can to Baghdad based on its current oil production capacity. A deal to that effect was reached on August 13 between the two sides, whereby the KRG would keep 50,000 barrels for domestic use and hand over the rest, with the amount progressively increasing.

The coincidence of Baghdad’s decision to freeze the KRG budget amid drone strikes against its oil production facilities has fueled speculation about an implicit alignment of interests between the government and pro-Iran armed factions whose political wings play an important role in the ruling coalition. Though there is no evidence of formal coordination between the two, the general lack of accountability Iraqi politicians have shown for the attacks and the strategic utility they offer the central government—by weakening the KRG’s bargaining position vis-à-vis the federal government—suggests a permissive environment.

A Familiar Geopolitical Tug-of-War

The recent escalation is unfolding as Iran recalibrates its broader regional strategy. As Tehran recoils from Israeli and U.S. airstrikes, as well as growing diplomatic isolation, it continues to rely on its proxy groups to project regional influence. Iraq, and pro-Iran militias there, remain central to this strategy, not only for geopolitical reasons but also for the Islamic Republic’s energy interests. Iran is a key gas supplier to Iraq, and the KRG’s growing gas production—especially in partnership with American firms—could gradually reduce Baghdad’s dependence on Iranian imports. Undermining these developments through asymmetric means allows Tehran to preserve Iraq’s role as an energy client while countering an expansion of U.S. commercial interests in Iraqi Kurdistan.

In this context, the United States’ involvement in Iraqi domestic politics is becoming more assertive. After years of maintaining a non-confrontational posture toward Baghdad, the Trump administration has fiercely advocated for the gas deals signed in May. Indeed, during Rubio’s late-July call with Iraqi PM Sudani, he expressed concern over attacks against Kurdish energy infrastructure and “stressed the importance of the Iraqi government holding the perpetrators accountable and preventing future attacks.” Rubio also urged Baghdad to ensure “consistent” payment of salaries to KRG employees. The message marked a shift from the United States’ more hands-off approach, making it clear to Baghdad that attacks on U.S.-affiliated commercial interests would not be ignored. Nevertheless, Iran-aligned armed factions appeared to ignore the warning, carrying out at least one drone attack on July 30.

It remains to be seen whether this emerging posture will evolve into a more sustained and institutionalized U.S. policy toward Iraq. Washington has considerable leverage, and employing that leverage judiciously to push back against Baghdad does not necessarily require public confrontation. The broader question is whether the United States will seek to anchor this assertiveness in a strategic framework that safeguards its interests in Iraq through a more stable and economically viable Iraqi Kurdistan. Such a policy would not have to entail choosing Erbil over Baghdad, but would instead reinforce the federal principles enshrined in Iraq’s constitution. The KRG is constitutionally entitled to a share of national revenue, and should be allowed to develop its natural resources within a clear and legally defined framework. The central government’s toleration of violence against the KRG undermines Iraq’s federal structure and raises broader concerns about the state’s long-term ability to manage pluralism and decentralization.

For Washington, the stakes are twofold. First, protecting U.S. commercial investments in Iraqi Kurdistan requires a degree of stability and predictability that cannot be achieved if the KRG is subjected to unrestrained political and military pressure from hostile regional actors. Second, ensuring that Iraq remains a balanced and federal state—rather than drifting toward centralized authoritarianism dominated by Iran-aligned forces—aligns with broader U.S. strategic objectives in the wider region.

Thus, the current situation presents both a challenge and an opportunity for American policymakers. Washington must counter a sustained campaign that threatens to destabilize Iraq’s most pro-Western region, while recalibrating U.S. policy in a way that reinforces constitutional norms and ensures that American economic engagement yields long-term strategic dividends for all sides. In this context, it must promote the development of the KRG’s energy sector through partnerships with U.S. and other Western companies, accelerating Iraq’s path toward energy self-sufficiency.