A sophisticated fuel oil smuggling network, which experts estimate generates at least $1 billion annually for Iran and its proxies, has flourished in Iraq since Prime Minister Mohammed Shia al-Sudani took office in 2022. This illicit operation exploits a government policy that heavily subsidizes fuel oil allocated to asphalt plants, making it an ideal target for diversion. The smuggling network involves a complex web of companies, groups, and individuals across Iraq, Iran, and Gulf states, according to multiple sources with knowledge of the matter, including three Western intelligence reports from August this year and one undated.
Each month, an estimated 500,000 to 750,000 metric tons of heavy fuel oil (HFO), including high sulphur fuel oil (HSFO), is diverted from the subsidized supply and exported, mostly to Asia. This amount is equivalent to 3.4 million to 5 million barrels of oil. The scale of the operation and the involvement of various Iraqi entities have not been reported previously, shedding new light on the extent of this illicit trade.
Iran’s involvement in this smuggling scheme is significant. The country uses Iraq as an economic lifeline, benefiting from the subsidized fuel oil and circumventing U.S. sanctions through its close ties with Shiite militias and political factions in Iraq. The operation also helps Iran earn hard currency and avoid the sanctions that have crippled its energy exports. Iraqi officials did not respond to detailed inquiries about the findings of the Reuters report, and Iranian officials similarly declined to comment.
The scheme operates through two primary routes. The first involves blending Iraqi fuel oil with Iranian fuel to pass it off as entirely Iraqi-origin oil. This method allows Iran to sell its discounted oil at a higher price by masking its true origin, thus benefiting from higher market rates. The second route involves directly exporting fuel oil meant for Iraq’s subsidized asphalt plants, but using forged documentation to disguise its origins and facilitate the export. This method benefits Iranian-backed militias in Iraq, who control much of the smuggling operation, generating significant profits.
Experts estimate that these two routes could generate anywhere from $1 billion to over $3 billion annually, based on assumptions about the volumes traded and their relative market prices. The smuggling operation poses a serious risk to Iraqi institutions and officials, as it potentially exposes them to U.S. sanctions for aiding Iran in evading the sanctions regime. Some Iraqi officials are worried that the Trump administration could target them for their role in this illicit activity, especially given the growing scrutiny on Iraq’s role in assisting Iran.
Despite the risk of sanctions, Iraqi leaders face a delicate balancing act. They rely heavily on the support of Iran-backed Shiite militias to maintain their grip on power, which makes it difficult for the government to take decisive action against the smuggling network. These militias, some of which are political forces in Iraq, wield significant influence over the country’s security and political landscape, making it challenging for al-Sudani’s government to crack down on activities like fuel oil smuggling.
The situation has also drawn attention from Washington. U.S. officials have raised concerns about the smuggling operation during discussions with Prime Minister Sudani, particularly when he visited the United States in September. While a State Department official declined to comment on specific discussions, they affirmed that the U.S. had emphasized the negative impacts of illicit trade to Iraqi counterparts and expressed support for bringing oil markets into compliance with transparency standards. However, the U.S. Treasury did not respond to inquiries regarding the potential for sanctions against Iraqi officials or entities involved in the trade.
In light of this, the situation presents a complex challenge for Iraq. On the one hand, it faces the risk of international sanctions that could harm its economy, while on the other, the influence of Iran-backed militias complicates any efforts to stop the smuggling operations. As the political and economic relationship between Iraq, Iran, and the U.S. continues to evolve, the issue of fuel oil smuggling is likely to remain a significant point of contention. The smuggling operation’s growing scale and profitability indicate that this problem will not be easily solved, and Iraq’s government may face increasing pressure both domestically and internationally to take stronger action against this illicit trade.
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