This presentation examines the relationship between the Iranian state and Kurdish smugglers, locally known as Qaçaqçi, highlighting the paradoxical collusion and coercion strategies that define state responses to these illicit trade practices. Relying on ethnographic research in Iranian Kurdistan, complemented by a critical analysis of anti-smuggling policies, this study explores the rhetorical and material contradictions reflected in the Islamic Republic's dual approach, which oscillates between border militarisation and punitive policing on one hand, and a complicity partially due to economic pragmatism amidst sanctions on the other. I argue that these contradictory formations are a product of smugglers' involvement in negotiations and contestations of power, challenging and re-affirming the state's sovereignty and authority in these border spaces, which the Islamic Republic seeks to mediate and manage. Despite their marginalised and criminalised status, Kurdish smugglers present a challenge to state-imposed spatial orders, influencing governmental policies and spatial interventions, such as the establishment of roadblocks. Nevertheless, rather than constant direct confrontation, Qaçaqçi and the state often reach tacit agreements and brokered settlements whereby illicit trade flows generate informal revenues for government forces on the ground. These activities also inadvertently become an indispensable tool for the Islamic Republic to bypass sanctions, enable access to global market commodities essential to middle-class lifestyles, and, most importantly, legitimise its vividly militarised presence in Kurdish borderlands. This analysis therefore contributes to our understanding of the dynamics of resistance and compliance as reflected through the influence of illicit trade networks in Iran's contested borderlands. Through a detailed examination of state-smuggler dynamics, my presentation proposes a framework for understanding the significance of illicit economies in the region's politics.