Iraq enters mid-2026 in one of its most vulnerable positions since the defeat of the Islamic State, caught between a fragile new government, a collapsing revenue base, and a regional war that has turned its territory into a battleground.
On 14 May, six months after the November 2025 elections, parliament approved a still-incomplete government led by Ali al-Zaidi, a young billionaire businessman with no political or government experience who emerged as an unconventional compromise candidate after months of deadlock within Iraq’s Shiite ruling coalition, the Coordination Framework.  His appointment, the International Crisis Group argues, reflects less a coherent strategy than the deepening fragmentation of Iraq’s political class.
Zaidi inherits a state under siege. The U.S.-Israeli war with Iran that began on 28 February has turned Iraq into a battleground where the government can neither protect its sovereignty nor enforce the state’s monopoly on the use of force.  All three of the main warring parties have struck targets in Iraq, and Iran-aligned armed groups have defied Baghdad’s official policy of neutrality by staging attacks from Iraqi territory  — straining relations with Washington and the Gulf states alike.
The economic blow has been severe. Iran’s closure of the Strait of Hormuz halted most oil exports, depriving the state of its primary source of revenue.  This is no marginal loss in a country where oil accounts for more than 90 percent of government income.  Since Iranian forces declared the Strait “closed” on 4 March, threatening and attacking transiting ships,  traffic has collapsed to roughly 5 percent of its pre-conflict level of around 3,000 vessels per month.  Even before the war, the IMF had downgraded its 2026 growth forecast to 1.4 percent on lower oil prices and rising debt. 
The stakes for stability are existential. As the Crisis Group warns, because Iraq’s political order is sustained by rent distribution, a fiscal crisis would not merely generate economic hardship; it would threaten elite cohesion and risk social unrest.  Compounding the strain are unresolved disputes between Baghdad and the Kurdistan Regional Government over oil revenue-sharing and exports, which are exacerbating internal instability. 
For Iraq’s Shiite-majority population, the war’s trajectory is doubly consequential. Iran’s supreme leader Ali Khamenei was killed in the February strikes, with his son appointed successor,  shaking the patronage and ideological networks that have long tied Iraqi Shiite factions to Tehran. Yet a weakened Iran also creates space: analysts note that Iran’s diminished regional power has prompted Iraq to increasingly balance its ties with Tehran against the need to assert more independence. 
A fragile April ceasefire has given way to renewed brinkmanship, with fresh U.S. strikes reported in early June. Whether Zaidi can steer Iraq through depends on forces largely beyond Baghdad’s control.
Graphic: ChatGPT