Iran sanctions could distort region’s economy for years: report

(Reuters) - Sanctions on Iran are so intricately woven that they will be very hard to untangle, while their impact in swelling Iran's black economy could undermine regional stability for years to come, the International Crisis Group says in a new report.

Describing the "unintended consequences" of sanctions, the report noted that those with the best access to state resources, including the elite Revolutionary Guards (IRGC), had been best placed to circumvent the sanctions, while smuggling networks had become an integral part of the economy.

"This does not necessarily harm the regime. To the contrary, it has facilitated a symbiosis between state-affiliated organizations such as the IRGC and transnational smuggling networks," it said.

"Over time, organized crime networks likely will become more sophisticated, enabling them to survive even after sanctions have been lifted. Iran's proximity to two countries rating highest on the corruption scale - Iraq and Afghanistan - likely contributes to cross-border criminality, undermining longer-term stability."

Increasingly tough sanctions imposed on Iran's oil and banking sectors over its nuclear program have put enormous pressure on Iran's economy and forced it to seek innovative ways around them.

The West says Iran's nuclear activities conceal a drive towards a weapons capability, an allegation Tehran denies.

The ICG's recommendations are broadly similar to those of many other Iran experts. It calls for a gradual easing of sanctions in return for Iranian concessions on its nuclear program, accompanied by direct talks between Iran and the United States.

But the report, "Spider Web: The Making and Unmaking of Iran Sanctions", is unusual in underscoring the difficulties of easing sanctions, despite the limited progress made this week in talks between Iran and major world powers on Tehran's nuclear program.

Sanctions have become so extensive and complex, and subject to so many different laws worldwide, that it will be hard to find the flexibility needed for diplomacy, the ICG said.

It quoted an unnamed sanctions expert in Washington as saying easing the sanctions was "like dancing in a minefield".

"There are tripwires everywhere," the expert said.

As Iran has adapted its economy to sanctions, the introduction of another tier of exchange rates, the use of barter, front companies and the informal "hawala" system for financial transactions have all contributed to the rise of the informal or black economy, the ICG said.

"Crime rates and corruption have been rising; and smuggling is booming as clandestine networks replace commercial ones. Indeed, smuggling networks are becoming an integral part of the shadow economy that reportedly accounts for 21 percent of GDP."

The growth of the informal economy in the region has been a particular worry in Afghanistan, where the United States has been unable to convince the government in Kabul to crack down on corruption as part of efforts to restore peace before most foreign combat troops are withdrawn at the end of 2014.

In Iran's other neighbor, Pakistan, the black economy has created space for militant groups to flourish, often funded by money from the Gulf, also routed through the hawala network.