Iranian traders smuggle more than $1 billion worth of fuel into neighboring Pakistan annually, according to a new report that an observer said could foreshadow a crackdown on the black market.

The 44-page investigation was conducted by a pair of Pakistani intelligence agencies and leaked to local media. Nikkei Asia obtained a copy that official sources have verified as authentic.

“Smuggling of Iranian Oil” is the first major probe released publicly on the longstanding trade, which got a boost a decade ago after U.S.-led sanctions on Iranian oil exports forced Tehran to find new markets for its petroleum products.

Last year, some $1.02 billion in Iranian petrol and diesel was smuggled across the 900-kilometer-long Iran-Pakistan border. That accounted for about 14% of Pakistan’s yearly consumption, and resulted in losses “to the exchequer” of about $820 million, the report said.

It did not elaborate on the nature of those losses, but much of it was likely estimates of lost tax and duties along with damage to the businesses of Pakistani finished petroleum product suppliers.

The illegal smuggling route involves some 2,000 vehicles daily carrying barrels across the border, according to the report. This is despite longstanding tensions between the two neighbors that led to tit-for-tat military strikes earlier this year.

Ending the trade could be devastating for millions living in the border province of Balochistan, however. It has been gripped by violent separatist insurgency for years, and Pakistan’s southwestern region is the country’s poorest. Three out of four people there live below the poverty line, according to government figures.

“Almost 2.4 million people in Balochistan depend on this oil trade for their livelihood and otherwise have scarce economic opportunities,” the report said .

Balochistan resident Abdullah Baloch is among those who depend on oil smuggling, which locals regard as an “informal trade.”

“If oil smuggling from Iran is shut down, then people in districts bordering Balochistan will have nothing to eat,” the 32-year-old told Nikkei, calling on the government to regulate the trade.

The report named more than 200 oil smugglers as well as government and security officials benefiting from a lucrative business that thrives on corruption at all levels.

“The culture of bribes and connivance of [security] officials with smugglers continues at almost all [border checkpoints],” it said.

The government has yet to respond publicly to the report. But an official, speaking on condition of anonymity because of not being authorized to talk to the media, said the report was deliberately leaked to establish grounds for a crackdown on the Iranian smuggling pipeline.

Observers are skeptical given Islamabad’s previous efforts to rein in the trade.

“Sometimes the government starts action against smuggling and then the action is stopped abruptly,” said Shahzada Zulfiqar, a Pakistan-based political analyst. “The only way to completely end this oil smuggling is to seal the Iranian border with Pakistan, which is not possible.”

Tackling the oil racket also means butting heads with politically powerful figures, Zulfiqar said.

“If the government only cracks down on the small players and the drivers, who barely make a living out of this trade, then it won’t work,” he said.

Shutting down the pipeline could also give Balochistan’s separatist militants an opening to lure new recruits to carry out attacks on security forces and regional economic interests, which largely rely on Chinese investment.

“Cracking down on Iranian oil smuggling will push the people in the border regions of Balochistan towards crime, the drug trade and the Baloch separatist militancy,” said Zulfiqar.

However, allowing the trade to continue risks drawing unwanted attention from international bodies, including the International Monetary Fund.

The IMF, which is supplying cash-strapped Pakistan with a multi-billion-dollar bailout, raised the issue last year and called for an explanation from the government. Pakistan was also on global money laundering watchlist of the Paris-based Financial Action Task Force (FATF) until it was removed two years ago.

“The IMF has been providing Pakistan with financing even when this smuggling is rampant,” said Aadil Nakhoda, an assistant economics professor at the Institute of Business Administration in Karachi. “I would be more concerned about … financial watchdogs such as FATF, especially as the situation with Iran and the Middle East escalates.”

Source » nikkei