Source: Dinar Daddy’s Tidbits
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Iran exerts considerable influence over Iraq’s prime minister, Nouri al-Maliki. Photograph: Khalid Mohammed/AP
The US and EU have announced new sanctions in the hope of persuading Iran to abandon its alleged nuclear weapons programme, though how effective these will be is questionable. China, India, Russia, Turkey, Japan, and South Korea have already refused to go along with the new measures. Iran also has the means to evade the sanctions – through its proximity to Iraq.
Iran has often been singled out as the main beneficiary of the US-led invasion of Iraq, as well as the biggest threat to Iraq’s stability in the post-Saddam era. Iran’s uninterrupted support for Shia militia groups in southern Iraq, particularly the Mahdi army, is seen as one indication of its involvement in Iraqi politics and its ability to cause problems for adversaries.
And yet Iran’s key interest in Iraq is less about realpolitik than about trade. Iran is one of Iraq’s most important regional economic partners, with an annual trade volume between the two sides standing at $ 8bn to $ 10bn (£5bn to £6.4bn). However, it is Iraq’s 910-mile border with Iran, and therefore its geographical suitability as a smuggling hub for sanctioned goods, which is of paramount importance to Iran at present.
Until 2010, most of the sanctioned goods smuggled into Iran came through the UAE and Oman. Backed by the Iranian government and the Revolutionary Guards (IRGC), “small-size” strategic goods, including aircraft components and sophisticated electronic equipment, were smuggled into the Iranian islands of Kish and Qeshm from Dubai, Ras al-Khaimah and Madha. Since the beginning of 2010, however, the US government has put immense pressure on the Emirati and Omani governments to curb smuggling, threatening that failure to do so would cost them access to US markets and technology.
Wary of this, the UAE and Oman have both made the obvious choice and cracked down on smuggling between the southern and northern edges of the Gulf. In response, the Iranian government has turned its attention to Iraq in order to bypass western sanctions, and has imposed restrictions on Iranian businesses in the Gulf.
So far, most of the smuggling through Iraq has taken place in the mountainous Kurdish regions. For instance, since June 2010, when the US and EU imposed tougher sanctions on Iran’s gasoline imports, hundreds of millions of dollars in crude oil and refined products from the Kurdish region, Kirkuk, and Baiji have been smuggled to Iran on a daily basis.
As direct smuggling from Oman and the UAE becomes more and more difficult and sanctions become more comprehensive, the Iranian government is now seeking to further utilise its long border with Iraq and create a UAE-Iraq-Iran smuggling network by, among other things, establishing a free-trade zone in the southern Iraqi city of Basra, only 10 miles from the Iranian border.
Iran is also supporting these smuggling activities by opening private banks in Iraq and front companies in the UAE and Iraq – some of which are owned by Lebanese, Iraqi, and Syrian citizens – which purchase banned goods on the market, legally ship them from the UAE to Iraq, and then smuggle them through various land routes into Iran.
It is also interesting that as the Iranian currency has come under pressure, some of the front companies in Iraq have entered the currency trade by purchasing US dollars from Iraq’s central bank and selling them to both Iran and Syria. This is why there has been a “sharp spike” in demand for US dollars in Iraq in recent weeks.
This new initiative, in turn, is facilitated by a number of factors. First of all, Iran not only exerts considerable influence over Iraq’s prime minister, Nouri al-Maliki, and his government, but it also has good relations with the Kurdistan’s ruling clans, especially the Talibani family, and many Shia factions based in central and southern Iraq.
Secondly, illicit trade with Iran brings considerable financial benefits to the participants and, in the case of Kurdistan regional government, political benefits too. For example, the Kurdish region’s illegal oil trade with Iran provides the regional government with an income that it does not need to share with Baghdad, thereby reducing Kurds’ dependence on the central government.
Finally and most importantly, years of excessive focus on internal defence at the expense of external defence have led to a situation where Iraqi armed forces are proving incapable of defending Iraq’s borders. Corruption at ports of entry is widespread, the Iraqi border police are poorly trained and badly equipped, and suffer from poor leadership. Iranian forces effectively control the border on both sides and thus the flow of goods is largely unimpeded.
It is therefore no exaggeration to say that Iran has more to gain from preserving the current status quo in Iraq than from overturning it. Put differently, Iran prefers manageable instability in Iraq, since such a state of affairs keeps Iraq within its sphere of influence, which it can then use as leverage against the United States.
It may seem obvious that countries wanting sanctions against Iran to be effective should spend more time persuading the Iraqi government to co-operate and strengthen its border security forces, but it is not at all clear how they can achieve this. With so much goodwill towards Iran and immense financial benefits embedded in illegal activities, the Maliki government is unlikely to help.
In the overall scheme of the west’s standoff with Iran, this probably means that neither war nor sanctions can stop the nuclear programme. Direct negotiations, on the other hand, could encourage Iran to make compromises, provided that western governments too are prepared to address its strategic concerns.

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