Iraq 2026: The Impossible Equilibrium
Updated: 11 hours ago
Originally published Jul 31, 2026 · Updated: Sep 21, 2026
Contents
Key Takeaways
A government born of exclusion, not consensus. Ali al-Zaidi — a businessman and political newcomer with no independent base — was named prime minister-designate on April 27, 2026, approved by parliament on May 14, and immediately thrust into a crisis environment he did not create and cannot control. His selection broke a months-long deadlock only because Washington vetoed Nouri al-Maliki's candidacy and the Coordination Framework's internal factions could not agree on an alternative — and because the party that actually won the most seats in the November elections could not convert plurality into a premiership. Al-Zaidi is not a strong prime minister. He is the weakest possible figure acceptable to all external stakeholders — which is precisely what makes him vulnerable.
Two deadlines converged on September 30 — and one dissolved before it arrived. All remaining American military forces are scheduled to complete their pullback by September 30, 2026, per the timetable agreed between Washington and Baghdad in September 2024. The simultaneous disarmament deadline the al-Zaidi government announced for pro-Iran armed factions has already been walked back by the national security establishment into a gradual, dialogue-based consolidation with no fixed endpoint. The convergence of the two exits was never coordination. It was collision — and the weaker commitment broke first.
The oil economy was cut by sixty percent — then recovered most of the wound. Production collapsed from over 4.1 million barrels per day before the US-Iran war closed the Strait of Hormuz to roughly 1.39 million bpd by April; by August, output had rebounded to approximately 3.7 million bpd as a June ceasefire briefly reopened the strait, before renewed hostilities re-closed it in July. The recovery is real but structurally hostage to a single export corridor governed by a cyclical war. Meanwhile the fiscal bleeding has already occurred: a first-half deficit near $16 billion, foreign reserves down 6.3 percent, and July public salaries paid late for the first time since 2003.
The fiscal crisis has reached the payroll. A state that funds roughly ninety percent of its budget from oil receipts and spends about $70 billion a year on salaries and pensions cannot absorb a nine-month revenue shock without social consequences. The finance minister has publicly acknowledged the gap between what the payroll requires and what the treasury holds. Delayed salaries are not an accounting event in a country where public employment is the backbone of household income — they are a political timer attached to the government's survival.
ISIS is regenerating in the security vacuum. The 3-to-5-kilometre gaps along the Kurdistan Coordination Line have enabled Islamic State cells to regroup, conduct attacks, and extort local populations. The end-of-September American departure will remove the air support, intelligence assets, and logistical backbone that sustained counter-ISIS operations, and the group has resumed claimed attacks for the first time in months. The warnings are not speculative. They describe observable dynamics.
Portfolio-level. The most valuable analytical distinction for the next twelve months is between events that confirm the managed-fragmentation baseline — absorbable, hedgeable, mostly priced — and events that re-activate the attrition corridor or the disarmament confrontation. The former reward patient, milestone-keyed exposure. The latter arrive abruptly and reprice simultaneity risk across the entire Gulf energy complex, because Baghdad is the load-bearing wall of a regional system that treats its instability as a local affair. Institutions that have not pre-mapped which category each of their exposures belongs to will learn the difference in a single news cycle.
1. The Compromise Candidate: Al-Zaidi's Narrow Mandate
Ali al-Zaidi's ascent to the premiership was engineered by subtraction — and the subtraction began at the ballot box. The November 2025 parliamentary elections delivered the largest number of seats to Mohammed Shia al-Sudani's political alliance, yet the alliance could not convert plurality into a third tenure: political negotiations inside the Coordination Framework reached an impasse, and the prize fell instead to a compromise. The Framework — the coalition of Shia parties aligned with Iran that dominates parliament — initially backed Nouri al-Maliki, the two-time former prime minister whose pro-Iran credentials made him toxic to Washington. President Trump publicly announced his opposition to al-Maliki and threatened to cut off aid if he was appointed. The threat was effective. But the Framework's internal dynamics prevented a clean pivot to al-Sudani, whose tenure (2022–2026) had alienated the Maliki faction within the coalition. The stalemate consumed months. Al-Zaidi emerged as the only figure acceptable to American negotiators, tolerable to Iranian decision-makers, and non-threatening to the competing factions within the Framework itself — a premier selected despite, not because of, the electoral arithmetic.
His profile reinforced the logic. A businessman with no political organisation, no armed-group patronage network, and no electoral base, al-Zaidi promised upon nomination to make the country "a balanced country, regionally and internationally." The phrasing was carefully chosen — and carefully empty. Balance implies equidistance between Washington and Tehran. But equidistance is not a policy. Where observers see balance, the reality is a negotiating position held until circumstances force a choice.
Those circumstances arrived within weeks. On July 14, al-Zaidi met President Trump in the Oval Office, where he confirmed the end-of-September departure date and presided over $60 billion in American energy deals. Eight days later, on July 22, he was in Tehran, meeting President Masoud Pezeshkian and promising that Iraqi territory would not be used for attacks on Iran. The itinerary was a performance of balance. The substance was less reassuring. Trump wants militia disarmament. Pezeshkian wants militia preservation. Al-Zaidi cannot deliver both. It is now likely that his government's survival strategy will consist of delaying the moment this contradiction becomes operational — running the negotiation in both capitals on parallel clocks that the salary crisis has shortened rather than lengthened. A prime minister who cannot guarantee the payroll on time holds one asset Washington and Tehran both still need: his signature.
Some Republican lawmakers have already signalled scepticism. Politico reported on July 22 that key GOP figures are pressing al-Zaidi for "major changes, including the disarming of Iran-backed militias," before offering full embrace. The message from Capitol Hill is direct: the exit timeline is firm, but American political support for the new government is conditional on demonstrable progress against the armed groups Washington considers a threat to its regional posture.
For organisations with diplomatic, development or government-linked exposure: model al-Zaidi as a signaling variable, not a decision-maker. Baseline: a signature that is tradable but a writ that narrows with every deferred salary payment; fiscal room of months, not years; Washington's endorsement conditioned on militia conduct, Tehran's on pipeline and border behavior.
2. The September Deadline: Two Exits, One Day
The 2026 crisis turns on a single convergence — the defining variable of this Iraq 2026 geopolitical risk assessment: September 30 brings two incompatible deadlines simultaneously. On that date, two processes terminate: the American military presence and the government's amnesty-or-disarmament window for Iran-aligned armed factions. The coincidence was not accidental. Washington agreed to the troop departure schedule in September 2024 as part of a phased drawdown that would transition the country from a counter-terrorism partnership to a bilateral security relationship. The disarmament deadline — announced by the al-Zaidi government in 2026 — was framed as the quid pro quo: Baghdad demonstrates sovereign control over armed groups, and the Americans depart having achieved their residual counter-ISIS objective.
The logic was sound on paper. It collapsed on contact with Iraqi reality — and on the evidence of August, it has already collapsed. National Security Advisor Qasim al-Araji told state broadcaster Al Iraqiya in late August that "September 30 is the date for the international coalition to depart, not the deadline to hand over weapons," with weapons consolidation proceeding gradually through dialogue rather than by fixed ultimatum. The concession is structural. The Iraqi Resistance Coordination Committee — an umbrella of six Iran-backed groups including Kata'ib Hezbollah, Harakat Hezbollah al-Nujaba, Kata'ib Sayyid al-Shuhada, and Harakat Ansar Allah al-Awfiya — stated on January 4, 2026, that "the weapons of the resistance are sacred, especially in a country where occupation still exists… any dialogue on this matter, even with the government, can only take place after full sovereignty is achieved." The Middle East Council on Global Affairs assessed on September 10 that compliance is already fractured along a visible seam: parliamentary-linked factions like Asaib Ahl al-Haq signalling willingness to disarm, US-designated groups like Kata'ib Hezbollah flatly refusing. Iran International reported on September 20 that Tehran is actively pressuring factions not to hand over weapons. It is now almost certain that September 30 will pass with the departure executed and the disarmament not — a political marker honored on one side, dissolving on the other.
The Critical Threats Project documented on July 13 that armed factions are already handing "scrap" missiles and inoperable drones to the government while retaining functional heavy weapons. The federal government has historically lacked accurate information on the number and types of militia weapons — a blind spot that is structural, not incidental. The PMF's integration into the formal security apparatus after 2014 created parallel command structures, dual loyalties, and budget streams that no prime minister has successfully consolidated. Al-Zaidi will not be the first.
What changes on September 30 is not the arsenal. It is the visibility of the contradiction — and the likelihood that competing PMF factions will use the post-departure period to contest turf, settle scores, and position themselves for the next phase of the country's permanent shadow competition between official and non-state armed actors. Both sides now calculate that outright confrontation costs more than continued ambiguity, which is precisely what makes the ambiguity durable.
For governance and political-risk teams: treat September 30 as a media event with operational tails, not a discontinuity. Baseline: departure executes on schedule; disarmament reframed as gradual consolidation with no fixed endpoint; faction-by-faction compliance divergence defining the file through 2027; a year-end "national sovereignty conference" as the next symbolic waypoint.
3. The Militia Architecture: Weapons as Political Currency
The PMF is not an army. It is a political economy. Iran-aligned factions within the PMF operate revenue streams from smuggling, customs fraud, real estate, and oil-sector protection rackets that fund their military capacity independent of the state budget. The CES Intelligence Sahel assessment documented an analogous model — Russia's self-financing security loop where mining revenues fund operations and operations protect mining revenues. Here, the architecture is older, more embedded, and more resistant to dismantlement.
The US-Iran war has sharpened the contradiction. On July 29, American forces struck a Popular Mobilization Forces base in Mosul — a direct attack on an entity formally part of the state security apparatus. The strike followed Saudi accusations that proxy factions had fired drones against Aramco facilities at Abqaiq on July 27, with satellite imagery from Planet Labs showing smoke rising from the processing plant, and the US-Saudi joint strikes reportedly killed 20 IRGC operatives and Iranian advisors embedded with militia units. Al-Zaidi's office condemned the strikes, stating that "it is the Iraqi government's responsibility to deal with security concerns originating within its borders."
The condemnation was obligatory. A prime minister cannot publicly endorse foreign strikes on his own territory — regardless of his private views. But the gap between Baghdad's stated position and Baghdad's actual capacity defines the operational reality here. Al-Zaidi cannot prevent armed factions from launching attacks from Iraqi soil. He cannot prevent the United States from striking those groups in response. He cannot prevent Iran from directing its proxies to escalate when Tehran calculates that such escalation serves its negotiating position. And the projection capability has since been demonstrated twice more: on September 12, a drone attack on Saudi Arabia's East-West Pipeline was launched from Maysan province, prompting Baghdad to fire the provincial operations commander and admit the attack's origin; Associated Press reporting on September 9 documented that Houthi forces helped the factions execute the July strikes. The militias now operate as one node in a distributed, cooperative strike network — a geometry consistent with the inverted strike-surface dynamic CES Intelligence assessed in its drone attack cost analysis, where cheap platforms born in one theatre bleed into neighbouring ones, and consistent with the attrition logic of our Yemen 2026 and Gulf States assessments. The July 10 reaffirmation by the Islamic Resistance in Iraq of its commitment to armed resistance against the United States and Israel signals that the proxy networks intend to frame the departure of US troops as a victory for armed resistance rather than a negotiated transition. That framing contest will determine the internal balance of power for the next political cycle.
The termination of active Iranian direction does not neutralise this architecture; it privatises it. It is now highly likely that armed factions will retain their arsenals and autonomous revenue streams well into 2027, whatever the September sequencing produces — the factions' weapons are their negotiating capital in the post-American political market, and no external guarantor remains with either the leverage or the incentive to force surrender.
For organisations with regional energy or logistics exposure: model militia strike capability as a persistent variable, not a contingent threat. Baseline: demonstrated reach from launch points in the country to Gulf processing infrastructure hundreds of kilometres away; Houthi operational cooperation documented by coalition reporting; one verified pipeline interdiction (East-West, September 12) since the July Abqaiq episode; US-Saudi retaliation cycles recurring at roughly monthly intervals.
4. The Oil Strangulation: Collapse, Recovery, and the Single Corridor
The oil economy has been compressed by geography and geopolitics — and the compression has proven cyclical rather than terminal. Of the major export terminals, the southern Basrah ports depend on passage through the Strait of Hormuz. When the US-Iran war effectively closed the strait in late February, production collapsed from over 4.1 million bpd in the three months before February 28 to approximately 1.39 million bpd by April — a reduction of nearly 2.7 million bpd that eliminated the revenue stream funding approximately 90% of the federal budget. The June 14 agreement between Washington and Tehran, the lifting of the US naval blockade on June 18, and the resumption of transit on June 19 reversed the collapse: Reuters reported southern-field output of around 1.75 million bpd by mid-June, Oil Minister Basim Mohammed Khudair stated on August 8 that production stood at 2.75 million bpd with exports of 1.75 million, and EIA data show August production near 3.75 million bpd, with the State Oil Marketing Organisation recording roughly 2.35 million bpd of exports in August against a combined 526,000 bpd for May and June.
The recovery, however, has been hostage to the same geography that caused the collapse. The June reopening broke down in early July after renewed attacks on commercial shipping. As of mid-September, Iran's parliament speaker insists the strait stays closed until US commitments are met, the newly-formed Persian Gulf Strait Authority demands passage permits, IMF PortWatch recorded just 8 transits on September 13 against a pre-crisis baseline near 85 daily, and Brent trades above $100 — even as CENTCOM claims to have escorted more than 900 million barrels through the waterway since May. There is a realistic possibility that the corridor will alternate between escorted-transit and effective-closure regimes through mid-2027, with each rotation repricing export volumes the treasury has already learned to spend. The dynamics are those CES Intelligence mapped in its US-Iran Strait of Hormuz conflict analysis: a war nobody can end, priced by the barrel.
The gas paradox compounds the fiscal crisis. The country is OPEC's second-largest producer, yet it imported $6–8 billion in gas annually from Iran to keep power plants operating while simultaneously flaring associated gas at the wellhead that could otherwise reduce this dependence. The war weaponised that paradox: after Israeli strikes on Iran's South Pars field on March 18, gas flows halted entirely, knocking 4,000–4,500 megawatts off the national grid, and Attaqa assesses supply at roughly 29 GW against demand near 40 GW. Since late May, Baghdad has been purchasing electricity from Türkiye and the Kurdistan region to shore up provincial supply. Forbes reported in April that engineer Ali Jabbar, described as one of the country's most respected crisis management experts, framed the situation in stark terms: a nation sitting on world-class hydrocarbon reserves depends on receiving gas from Iran and electricity from neighbours.
The $60 billion in US-Iraq energy agreements signed on July 17 at the US-Iraq Business Summit in Washington represent the structural pivot. The package includes new pipeline networks designed to carry approximately 2 million bpd through routes bypassing Hormuz — notably through rehabilitation of the Iraq-Syria crude pipeline, a project the State Department welcomed as "a priority infrastructure project" and which Reuters-linked reporting identifies as a signing priority from al-Zaidi's July visit. Separately, the minister disclosed on August 8 an agreement with a Chevron-led consortium to build a $15 billion, 2-million-bpd pipeline from Basra to the far north, and American firms including KBR, Baker Hughes, GE, Honeywell/UOP, and Emerson continue working with RASEP, a Baghdad-based developer, on the Nahr Bin Umar field — all aligned with the declared objective of energy independence from Iran by 2030, and with the prime minister's August ambition of 8–10 million bpd within six years, an aspiration that our Syria 2026 assessment suggests depends heavily on corridor politics far beyond Baghdad's control.
For risk committees, the oil picture contains a timeline mismatch that defines the investment thesis. The pipeline networks capable of liberating the country from Hormuz dependency will take years to operationalise. The fiscal crisis is measured in months: a first-half deficit of 21.2 trillion dinars (about $16 billion, against a 5.3-trillion-dinar surplus a year earlier), July public salaries paid late for the first time since 2003 — Finance Minister Faleh al-Sari acknowledged 8 trillion dinars needed against 3 trillion available — and reserves of $91 billion, down 6.3 percent since year-end, with no budget passed in sixteen months and spending administered under the one-twelfth emergency rule, the operating condition our Hormuz capex trade-risk analysis now treats as standard for Gulf-adjacent exporters. Iraq's push for a higher OPEC quota — driven by what Reuters described as "mounting economic pressures" and new multi-billion-dollar deals with oil majors — reflects the attempt to accelerate revenue within existing facilities. The risk is that quota expansion accelerates production without resolving the structural dependence on a single export corridor that a single geopolitical event can close, reopen, and close again.
5. The Kirkuk Fault Line: Baghdad, Erbil, and the Turkey Lever
Kirkuk is where sovereignty disputes, oil politics, and ethnic competition converge. The city and its surrounding oil fields lie along the internal boundary between the Kurdistan Regional Government's jurisdiction and federal Iraq's — a line that has never been formally demarcated because demarcation would require resolving claims that Kirkuk's Arab, Kurdish, and Turkmen populations and their political patrons cannot reconcile.
The 2017 Kurdish independence referendum triggered Baghdad's military reclamation of Kirkuk, displacing Peshmerga units that had held the area since the Iraqi army's collapse against ISIS in 2014. The security vacuum that followed — the 3-to-5-kilometre gaps along the Kurdistan Coordination Line where neither federal forces nor Peshmerga maintain effective presence — became the operational space for ISIS cells. The Crisis Group documented this dynamic extensively: the absence of coordinated military presence in ungoverned zones allowed the group to regroup and conduct attacks, exploiting the seam between two security forces that coordinate only intermittently and distrust each other systematically.
2026 has made the corridor real estate rather than cartography. The Iraq-Turkey Crude Oil Pipeline Agreement of 1973 — the intergovernmental constitution of the Kirkuk-Ceyhan system — terminated on July 27, and Ankara let it lapse deliberately, negotiating from strength. During al-Zaidi's visit to Türkiye at end-July, the parties signed a one-year extension with a stated minimum throughput of 750,000 bpd to Ceyhan; in parallel, Turkey's state oil company TPAO secured a 15% equity stake in BP Energy Company of Kirkuk Limited, joining the operator bp (43%) and ConocoPhillips (42%) in a consortium targeting more than 3 billion barrels of oil equivalent across the Baba and Avanah domes and the adjacent Bai Hassan, Jambur and Khabbaz fields. Forbes' analysis of the transaction is blunt: the "one million barrels a day" headline is politics until flows materialise. Current throughput runs at roughly 170,000–200,000 bpd against 1.5 million of capacity — the corridor is optionality, not yet supply. It is now likely that the pipeline will operate persistently below its contracted minimum through 2027, because its feedstock traverses exactly the disputed territory where governance is weakest and drone and militia interdiction is cheapest — the vulnerability our Turkey 2026 assessment identified as Ankara's principal instrument of leverage over both Baghdad and Erbil.
Turkish commercial involvement in Kirkuk's production introduces a new variable with two edges. It gives Ankara direct economic interest in the stability of disputed territory — territory Turkish forces have periodically entered to conduct operations against the PKK. The interaction between Turkish commercial stakes, Kurdish sovereignty claims, Baghdad's administrative control, and the PMF's security presence creates a multi-actor competition where the interests align only on the surface. Below it, each actor's definition of "stability" is different and largely incompatible.
For organisations with exposure to northern oil: the Kirkuk corridor cannot be assessed as a straightforward production or logistics variable. Baseline: contractual floor of 750,000 bpd agreed August 1; physical flows near 170,000–200,000 bpd; consortium capital committed but delivery hostage to demarcation politics — treat renegotiation-by-force of commercial rights as a standing scenario, not a tail event.
6. The ISIS Vacuum: Ungoverned Space Returns
The American military departure on September 30 removes the last external actor capable of projecting counter-terrorism capability across the disputed territories. The New Lines Institute assessed that the coalition's second-phase drawdown will leave former coalition members operating from Iraqi bases without the full logistical support that previously sustained counter-terrorism operations. President Masoud Barzani's public warning — that the drawdown will trigger an ISIS resurgence — reflects the assessment of a leader whose forces bear the frontline consequences.
The threat is not theoretical, and the late-summer record confirms the trendline. Islamic State cells in the Hamrin Mountains, the Jazeera desert, and the coordination-line gaps have maintained a steady operational tempo since 2018 — the CSIS documented how the lack of official military presence throughout ungoverned space in Kirkuk and Salah ad-Din provinces enabled militants to operate freely, conducting kidnappings, extortion, roadside bombings, and targeted assassinations of local officials and tribal leaders who cooperate with either the federal government or the KRG. Since August 26, the group's Iraq Province has claimed three attacks against the army and Tribal Mobilization Forces in Al-Anbar and Kirkuk — its first formal claims since May, per MEMRI's September 20 compilation. In September alone, the Iraqi Air Force struck multiple ISIS hideouts in Kirkuk and Salah ad-Din under the third phase of the "Iraq's Heroes" operation, an officer was killed in July clashes in Kirkuk, and a deadly attack on the Kakai Kurdish minority in disputed Khanaqin drew warnings from Kurdistan Region President Nechirvan Barzani about rising terrorism in the contested belt. It is now highly likely that the group will sustain or increase its insurgent tempo through 2027, because the inputs that constrained it — American ISR, air support, and logistical backbone — are the specific capacities the departure removes.
Iraqi forces, stretched between border security, militia management, and internal political tensions, cannot backfill this capacity. The PMF, nominally integrated into the official security structure, has demonstrated neither the discipline nor the territorial reach to conduct sustained counter-ISIS operations in disputed areas — and its presence in Sunni-majority territory generates the sectarian resentment that the group exploits for recruitment.
For organisations operating in the northern and western provinces: the post-September environment requires a fundamental recalibration of security threat models. Baseline: first formal attack claims since May already logged; Iraqi Air Force strike tempo of roughly weekly sorties against hideouts in Kirkuk and Salah ad-Din; the operative risk is not territorial recapture but sustained insurgent pressure that destabilises local governance, disrupts logistics corridors, and drives displacement.
7. The Corruption Battleground: Green Zone Raids as Signal
On June 28, Iraqi security forces — including elite Counter-Terrorism Service units — conducted dawn raids inside Baghdad's fortified Green Zone, sealing all entrances to the district and detaining 47 officials, among them Ali Maarej, the deputy oil minister for distribution affairs, in what Al Jazeera called one of the most visible anti-corruption operations in years and an early test of the new government. The Jerusalem Post reported on July 2 that the operation was launched following testimony by former deputy oil minister Adnan al-Jumaili, arrested the previous month. Even Nouri al-Maliki publicly endorsed the operation on X, congratulating al-Zaidi on "launching the operation to pursue those who have squandered the Iraqi people's wealth."
The Green Zone is the physical embodiment of the post-2003 political order: a protected enclave housing the institutions, embassies, and political networks that mediate between Baghdad, Washington, and Tehran. The raids raise a structural question: do they represent a genuine confrontation with corruption networks — including those connected to armed factions and Iran-linked political interests — or are they a controlled spectacle designed to satisfy public anger and external pressure while leaving the real centres of power untouched?
The evidence cuts both ways, and August deepened the ambiguity. Arab News reported on August 18 that the campaign has since expanded into a nationwide sweep that has arrested sitting MPs, former MPs, current and former ministers — a breadth no predecessor government attempted. Yet the Critical Threats Project noted that early rounds mainly detained Sunnis and political allies of former prime minister al-Sudani, while "anti-corruption has broad public support" and the arrests "have not affected Iranian-backed politicians and officials." Analysts quoted by the Jerusalem Post — the scholar Alfadhel Ahmad and the researcher known as Jiyad — converge on the same caution: the operation's theatrical elements (tanks in the Green Zone, deployments that initially read as a coup) project state control precisely over figures who mostly lack militia protection, while the militia-linked economic structure remains the state's core architecture. There is a realistic possibility that the campaign's next tranche reaches armed-faction-linked interests, if internal political competition — notably Sadrist pressure — forces an expansion of scope, as the Middle East Council on Global Affairs assesses. Until then, the pattern functions less as a reform programme than as a factional instrument — consolidating the new government's position by weakening the old government's clientele while redistributing, not dismantling, the patronage through which corruption operates.
This mirrors the dynamic CES Intelligence identified in the Turkey 2026 assessment: fragmentation serving the incumbent's interests in the short term while creating the conditions for broader institutional decay.
For organisations with procurement, licensing or joint-venture exposure: treat the campaign as a counterparty-risk variable. Baseline: 47-plus senior arrests to date, including a sitting deputy oil minister; asset seizures beginning but conviction rates untested; the fastest churn of officials in the sectors with the densest state interface — oil distribution, customs, electricity. Re-verify signatories and counterparties quarterly.
8. The Iran Variable: Influence Receding, Architecture Remaining
The Doha Institute assessed in July 2026 that Iran's influence is on the wane, citing Tehran's preoccupation with its direct conflict with the US and Israel, alongside the Trump administration's hardline posture toward militia leaders through targeted strikes and economic pressure. The observation is accurate at the surface, and the data confirm it: the February 28 strikes that opened the war killed Supreme Leader Ali Khamenei alongside senior commanders, decapitating the command layer that once managed the proxy network, and Iranian gas deliveries to Iraq have fallen from roughly 20 million to around 15 million cubic metres per day as Tehran's energy system buckles under strikes and blockade. Iran's capacity to actively manage its proxy network has degraded as its attention and resources are absorbed by the direct military campaign.
But the distinction between active influence and embedded architecture is critical — and the same data set proves it. On January 27, three weeks before the first bomb fell, the PMF released a statement pledging full support for Iran if the Islamic republic were attacked by the US and Israel. The pledge required no direction from Tehran to be honoured: it was embedded reflex, not standing order. Iran's relationship with the country's Shia political organisations, militia commanders, religious networks, and commercial intermediaries is not a dial that Tehran turns up or down. It is architecture — physical, institutional, and human — built over two decades and embedded within the state at a depth that the current reduction in Iranian bandwidth does not eliminate, the persistence our Iran 2026 assessment tracks across the entire proxy belt from the Levant to the Arabian Sea, where the Lebanon 2026 file shows the same decapitation-without-disarmament pattern. The IRGC's Quds Force presence has been degraded by targeted killings and operational disruption. But the commanders who received Iranian training, the political parties that coordinate with Iranian counterparts, the commercial networks that route goods through Iranian territory, and the religious institutions that maintain transnational ties — all of this persists.
The cessation of active Iranian direction does not convert Iran-aligned factions into neutral actors. It converts them into autonomous actors with their own interests, their own revenue streams, and their own incentives to preserve the weapons and territory that constitute their political leverage. Autonomy from Tehran may reduce the sophistication of external coordination, but it increases the unpredictability of local action — and locally motivated armed-group behaviour is harder to model, deter, or negotiate than externally directed activity. Iran International's September 20 reporting that Tehran is now pressuring factions to retain their weapons inverts the old problem: the patron is no longer struggling to activate its proxies but to restrain them, against the proxies' own institutional interest in permanence. It is now likely that faction behaviour through 2027 will be driven more by internal turf economics than by Iranian tasking — a dispersion of trigger fingers that complicates both deterrence and de-escalation.
Al-Zaidi's visit to Tehran on July 22, where he met President Pezeshkian and pledged that the country's territory would not be used for attacks on Iran, was the diplomatic complement to his Washington visit. The promise cannot be kept — not because al-Zaidi is insincere, but because the proxy factions that would conduct such attacks do not answer to the prime minister. Tehran knows this. Washington knows this. The diplomatic theatre serves its immediate purpose: it allows all parties to maintain the fiction that the government exercises sovereign control over its territory, while the reality of fragmented authority persists beneath.
For organisations with sanctions, banking or dual-use exposure: stop treating Iran-aligned entanglement as a bilateral file managed between capitals. Baseline: militia revenue streams autonomous of the state budget and of Tehran's immediate direction; documented Iranian pressure toward weapon retention; enforcement risk attaching to commercial networks — customs, fuel distribution, construction — rather than headline entities. Screen counterparties for faction-linked ownership chains.
9. Iraq 2026 Geopolitical Risk Assessment — Three Scenarios
The window between the September American departure and the consolidation of post-departure security arrangements will determine whether the country navigates its layered crises or descends into a new cycle of internal confrontation. Three scenarios warrant board-level attention:
Scenario A — Managed Transition and Sovereignty Consolidation (likelihood: ~10–15%). Al-Zaidi secures cosmetic militia disarmament — enough to satisfy Washington's minimal reporting requirements and maintain the $60 billion energy pipeline. American forces depart on schedule. ISIS remains at the insurgency level. The Coordination Framework holds its internal truce. Oil production recovers toward pre-war levels as Hormuz stabilises. The new pipeline networks move toward construction milestones. This scenario requires every variable to resolve favourably simultaneously — al-Zaidi managing armed groups without provoking defection, Washington accepting symbolic disarmament, Iran declining to activate its assets, and the security vacuum not being exploited. The assessed chances are low and falling because the disarmament window has already been walked back publicly, the faction refusing hardest is the one Washington most wants disarmed, and the fiscal clock has shortened the government's horizon.
This scenario holds only if: the moderate faction tranche delivers a visible, filmed handover sufficient for Capitol Hill optics; the Hormuz corridor settles into a stable escorted-transit regime sustaining exports above 2.5 million bpd; and July-pattern salary disruptions do not recur after September.
Scenario B — Sustained Instability and Managed Fragmentation (likelihood: ~55–60%).
American forces withdraw. Armed factions retain weapons. The disarmament deadline dissolves into gradual, dialogue-based consolidation with no fixed endpoint — the outcome already announced by the national security establishment in August and observable in faction behaviour. Sporadic proxy attacks on Gulf energy infrastructure continue, drawing intermittent American strikes on Iraqi territory. ISIS maintains its insurgent tempo in disputed territories without territorial reconstitution. Oil production recovers partially but remains constrained by the cyclical closure regime and political risk premiums. The al-Zaidi government survives but does not consolidate, governing month to month on deferred salaries and emergency spending. The Coordination Framework's internal competition intensifies as factions position for the next political cycle. The state functions at minimum viability — sufficient to avoid collapse, insufficient to attract investment at the scale its hydrocarbon endowment warrants. This is the baseline trajectory: deterioration without rupture, managed by the structural inertia of actors who lack the capacity to win and the luxury to disengage.
This scenario holds unless: a trigger fires that neither side can absorb (mass-casualty US strike on a militia stronghold; a militia strike that disables a major Gulf export node outright; an ISIS mass-casualty attack exposing official incapacity); the fiscal crisis breaches its social floor (a second missed salary cycle triggering sustained protest mobilisation); or the Coordination Framework's Maliki-versus-al-Zaidi split fractures into open political warfare during the post-departure legitimacy contest.
Scenario C — Security Vacuum and Internal Confrontation (likelihood: ~30%).
One or more triggers fire: a PMF faction rejects even the gradual consolidation framework and confronts Iraqi security forces; American strikes on militia targets produce casualties the government cannot absorb politically; ISIS exploits the post-departure vacuum to conduct a mass-casualty attack that exposes official incapacity; or the Coordination Framework's internal split fractures into open political warfare over the spoils of the American exit. The PMF splinters along factional lines. Disputed territories in Kirkuk and Diyala become active conflict zones. Oil production drops as southern infrastructure is targeted. Internal displacement surges. The al-Zaidi government falls or is reduced to a caretaker authority governing the Green Zone while the peripheries revert to local control.
This scenario's likelihood has risen since the beginning of the US-Iran war — the external pressures compressing the country's internal contradictions have intensified, and the safety valves (American military presence, active Iranian management of proxies, functional oil revenue) are being removed simultaneously. Compressed by the salary crisis and the precedent of July's interstate exchanges on Iraqi soil, the escalation ladder is shorter than it was a year ago. This scenario holds unless: the departure executes without a mass-casualty event on either side of the ledger; the factions' turf contest stays below the threshold of direct state confrontation; and deferred salaries remain an irritant rather than a detonator.
10. Implications
The next twelve months — between the September American departure and the operationalisation of alternative export infrastructure — represent the country's highest-risk period since the ISIS collapse of 2014. The convergence of a weak prime minister, a disarmament deadline that has already dissolved, an oil economy cycling between recovery and re-closure, and a security vacuum in disputed territories creates a compound risk environment where individual components are manageable but their interaction is not.
For energy-sector organisations: treat the $60 billion American deal package as real optionality priced against unrealised timelines. Structure investments with political risk insurance, staged capital deployment keyed to security milestones, and exit provisions triggered by sovereign credit events or armed-group targeting of energy assets. Do not underwrite any project whose cash-flow model assumes sustained Hormuz transit — price the corridor as a cyclically interrupted asset, with the East-West Pipeline precedent (September 12) as the interdiction benchmark, and treat the Ceyhan corridor's contracted 750,000 bpd floor as contractual, not physical, until observed throughput exceeds 400,000 bpd.
For supply chain operators with Gulf exposure: incorporate militia strike capability as a persistent variable, not a contingent threat. Re-verify war-risk and kidnap-and-ransom cover on the assumption of a 2027 index above the 2025 baseline, and re-map charterparty force-majeure clauses against both Hormuz closure rotation and overland-corridor interdiction. Assume the Houthi–militia cooperation model documented in coalition reporting is replicable elsewhere in the network.
For defence and security firms: the September drawdown creates immediate demand for private security, intelligence collection, and risk advisory services — while degrading the intelligence-sharing and counter-terrorism architecture that made such services viable. Enter on contract durations of twelve months or less, with renewal keyed to observed client-servicing capacity rather than government assurances, and price the loss of coalition ISR as a permanent condition, not a transition gap.
For financial institutions: model a fiscal arithmetic that is unforgiving. A first-half deficit of $16 billion against reserves of $91 billion falling at 6.3 percent annually, a $70 billion payroll against $6.5 billion monthly outlays, no enacted budget, and local-market borrowing already past $70 billion of domestic debt: model sovereign capacity on a month-by-month liquidity basis, not an annual deficit basis. Treat a second missed salary cycle as a ratings event, and the pricing of an eventual dinar adjustment as a live tail. Screen settlement and correspondent channels with the rigour CES Intelligence applies in its cross-border payment infrastructure analysis — in a dollar-starved economy under secondary-sanctions pressure, the payment layer is where compliance exposure crystallises first.
For humanitarian and NGO operators: duty-of-care planning for the northern and western provinces should assume degraded medical evacuation and corridor security after September 30. Separate monitoring metrics from headline incidents, which lag operational reality; pre-negotiate access understandings with local authorities and non-state administrators on the Kirkuk-Diyala axis, as operators learned to do in earlier cycles.
For organisations with critical mineral and energy transition supply chains: recall the militia-controlled revenue model — autonomous financing for armed groups that operate within the state but not under it, from protection rackets, customs fraud, and smuggling. Audit supply chains for these revenue interfaces — fuel distribution, border crossings, construction aggregates, and real estate — as sanctions-enforcement exposure, and assume the architecture persists regardless of the September outcomes.
For boards: the judgment is direct. This cannot be assessed as a country risk in 2026. It is a convergence variable — a territory where US-Iran competition, Gulf energy security, Kurdish sovereignty disputes, critical hydrocarbon supply, and counter-terrorism imperatives intersect. Investment theses that treat the oil potential as separable from the political fragility will miscalculate. Risk models that treat the September departure as a binary event — either stability or collapse — will miss the more probable trajectory: a slow, managed deterioration that erodes operational viability without producing the definitive rupture that triggers exit clauses. The organisations that navigate successfully in the next twelve months will be those that calibrate exposure to the interaction of risks, not to any single risk in isolation.
11. Core Analytical Judgment
Iraq in 2026 is not collapsing. It is decompressing. The simultaneous removal of three stabilising pressures — American military presence, active Iranian management of proxy networks, and functional oil revenue — creates a structural vacuum that no single actor can fill and every actor can exploit. The al-Zaidi government's central problem is not that it faces too many threats. It is that every threat it faces is someone else's instrument. The militias are Iran's legacy architecture operating autonomously. The ISIS cells are the consequence of a security vacuum created by American departure. The fiscal crisis is the downstream effect of a US-Iran war fought over chokepoints the country cannot control. Al-Zaidi is governing a state whose trajectory is determined by forces external to its borders and by armed groups internal to its state but external to its authority.
The September 30 convergence — two deadlines, one day, structurally incompatible — has resolved itself the only way it could: the strong actor left, the armed actors stayed, and the government converted its impossibility into process. That is the equilibrium. It is impossible because it cannot hold, and equilibrium because nothing yet has the force to break it. What follows is either managed fragmentation at minimum viability or a security vacuum that regional actors, non-state armed groups, and terrorist networks will fill faster than the international community can respond. This is not a failing state. It is a state whose sovereignty has been hollowed out from the inside — and the shell is cracking under pressure it was not designed to bear.
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If your organisation operates in or has exposure to Iraqi energy markets, Gulf supply chain corridors, defence-industrial inputs sourced from Iraq or transiting Iraqi territory, or the intersection of US-Iran competition and Middle East energy security, CES Intelligence maintains 24/7 situational awareness and can provide bespoke risk assessments, scenario planning, and board-level briefings.
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Thierry Marquez — Founder & Principal Advisor, CES Intelligence
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DISCLAIMER
This analysis is provided for informational and strategic planning purposes only. It is not investment advice, financial advice, or legal advice, and it should not be treated as such. Probability assessments reflect the analyst's calibrated judgment based on available open-source intelligence as of the date of publication and are subject to revision as new information emerges. Some quantitative estimates and reported events are based on regional sourcing that may evolve as additional confirmation becomes available.
