Iran's influence in Iraq has been one of the most talked about but least understood aspects of the post-war situation. Tehran has been variously accused by Washington of undue and nefarious interference, by Arab leaders of seeking to establish an Islamic Republic, and by prominent Iraqi officials of an array of illegitimate meddling (manipulating elections, supporting the insurgency, infiltrating the country). In reality, as Crisis Group discovered during months of extensive research in Iran and Iraq, the evidence of attempted destabilising Iranian intervention is far less extensive and clear than is alleged; the evidence of successful destabilising intervention less extensive and clear still.

That Iran has vital interests in what happens in Iraq is beyond dispute. That it so far has exercised its influence with considerable restraint also is apparent, as is the fact that it has the capacity to do far more, and far worse. To maximise the chance that Iraq emerges successfully from its political transition, it will be critical for Tehran and Baghdad to work together on common security issues, and for the U.S. at least to prevent a further deterioration of its relations with the Islamic Republic.

Muqtada al-Sadr's uprising in April 2004 heightened fears that Iran might be backing anti-coalition violence. Iran also has been accused of facilitating the movement of groups such as Ansar al-Islam, and of being responsible for the assassination of Iraqi security officials. More recently, the triumph in the January 2005 elections for Iraq's transitional national assembly of the Shiite-based United Iraqi Alliance (UIA) and, in particular, of three parties within it with long-standing ties to the Iranian regime -- the Supreme Council for the Islamic Revolution in Iraq (SCIRI), Al-Da'wa and Al-Da'wa - Tanzim al-Iraq -- appeared to vindicate the views of those who suspect an Iranian effort to install a loyal, theocratic government.

The notion is widely accepted in Iraq, the Arab world and the U.S. that Iran is intent on destabilising Iraq, moulding its politics decisively (via money or the dispatch of hundreds of thousands of its nationals), or establishing a like-minded, compliant government. Already, this has had the insidious effect of shaping perceptions; if it continues unchallenged, it clearly runs the risk of determining policy. In fact, there is no indication that Iranian electoral manipulation is anything more than speculation or that the Shiites' victory was anything other than the political translation of their demographic predominance. Nor has any concrete evidence been presented to bolster the claim that Iran is either actively promoting the insurgency or seeking to maximise instability.

Iran's strength lies elsewhere. Having fought a brutal eight-year war with Iraq in the 1980s, its security agencies are highly familiar with Iraq's physical and political terrain and are able to sustain an active intelligence presence in southern Iraq, Baghdad and Kurdistan. Iranian levers of influence include a widespread network of paid informers, the increasingly assertive Iranian Revolutionary Guard Corps (IRGC, or Pasdaran), and petro-dollar funded religious propaganda and social welfare campaigns. Most importantly, Tehran has tried to influence Iraq's political process by giving support, in particular, to SCIRI. Even then, and while the record of the past two years suggests a solid Iranian motive to interfere in Iraq and plenty of Iranian activity, it also suggests little resonance, and, therefore, a negligible impact, on Iraqi society. This is because of a deep suspicion and resentment on the part of many Iraqis toward their neighbour.

The starting point to understand Iran's role must be a proper assessment of its interests. These are relatively clear and, for the most part, openly acknowledged. Tehran's priority is to prevent Iraq from re-emerging as a threat, whether of a military, political or ideological nature, and whether deriving from its failure (its collapse into civil war or the emergence of an independent Iraqi Kurdistan with huge implications for Iran's disaffected Kurdish minority) or success (its consolidation as an alternative democratic or religious model appealing to Iran's disaffected citizens). Iran consequently is intent on preserving Iraq's territorial integrity, avoiding all-out instability, encouraging a Shiite-dominated, friendly government, and, importantly, keeping the U.S. preoccupied and at bay. This has entailed a complex three-pronged strategy: encouraging electoral democracy (as a means of producing Shiite rule); promoting a degree of chaos but of a manageable kind (in order to generate protracted but controllable disorder); and investing in a wide array of diverse, often competing Iraqi actors (to minimise risks in any conceivable outcome).

These interests and this strategy, more than a purported attempt to mould Iraq in its own image, explain Iran's involvement, its intelligence collection, its provision of funds (and possibly weapons), and perhaps its occasional decision to back armed movements. They explain, too, the paradox of Iran's simultaneous ties to Iraq's political elite, which is hoping to stabilise the country, to Shiite clerics, who aim to Islamicise it, and to some rebellious political activists or insurgents, bent on fuelling unrest.

Finally, they explain why Iran so far has held back rather than try to undermine any chance of success. But this relatively cautious attitude may not last forever. Above all, it will depend on the nature of relations between Washington and Tehran: so long as these remain unchanged, Iran is likely to view events in Iraq as part of its broader rivalry with -- and heightened fears of -- the U.S. Highly suspicious of a large U.S. presence on its borders, concerned about Washington's rhetoric, and fearing its appetite for regime change, Tehran holds in reserve the option of far greater interference to produce far greater instability.

In basing its Iraq policy on cooperation with Shiites and its Iran policy on pressure against the regime, the Bush administration is simultaneously pursuing two paths that risk proving increasingly difficult to straddle. As Crisis Group has argued, the preferred way forward involves an accommodation between Tehran and Washington in which both sides' concerns are addressed: on the one hand Iran's nuclear program, its policies toward the Arab-Israeli peace process, and support for Hizbollah; and on the other, U.S. military presence in the region, its economic sanctions, and frozen pre-revolutionary Iranian assets. For now, however, such a grand bargain appears out of reach.

Some steps nonetheless should be taken to avert the most destabilising scenarios. Washington should avoid resorting to inflammatory rhetoric and take its newfound and welcome willingness to work with the European Union on a joint Iran policy a step further. To be credible, U.S. carrots must include more than lifting opposition to Iran's membership in the World Trade Organisation and to its obtaining aircraft spare parts -- and European sticks should include more than the already announced support for UN Security Council action in the event Iran does not verifiably renounce any military nuclear effort -- if the goal is to encourage constructive Iranian behaviour on the nuclear file. It also is vital for Iraq and Iran to work cooperatively on their respective security concerns, in particular by strengthening border controls and ceasing any support for or harbouring of groups that threaten their neighbour. For its part, and particularly in the aftermath of the January elections, the international community should urgently assist Iraq in rebuilding its intelligence and customs control capabilities.

Amman/Brussels, 21 March 2005