Wall Street Journal: Tough sanctions haven’t brought Iran to its knees, but they’re rewriting how business is done in the Middle East’s second-largest economy. After several rounds of United Nations and U.S. economic and banking restrictions, Iranian businesses are starting to feel the pain. The Wall Street Journal
CAT AND MOUSE
By FARNAZ FASSIHI in Beirut and CHIP CUMMINS in Tehran
February 13, 2008; Page A1
Tough sanctions haven’t brought Iran to its knees, but they’re rewriting how business is done in the Middle East’s second-largest economy.
After several rounds of United Nations and U.S. economic and banking restrictions, Iranian businesses are starting to feel the pain. The measures are complicating how they finance operations, pay bills and export everything from pistachio nuts to Persian carpets.
But the measures also are having unintended consequences, some not necessarily in American interests: They are strengthening business ties between Iran and some of its neighbors at a time when Washington wants to weaken them. They are providing China and other Asian giants with an opening to win big oil projects in Iran, as Western oil majors scramble for new reserves.
They also are rerouting money flows between Iranian businesses and their overseas customers and suppliers, pushing them outside of the regulated global banking system. Businesses are using cash, informal money transfers and banks that aren’t monitored by international authorities. That has some economists, banking experts and businessmen wondering whether sanctions are making it more difficult to trace money laundering, drug smuggling and terror financing in the region.
“It’s now back to a suitcase economy for many transactions,” says Hassan Alaghband, managing director of London-based Balli Group PLC, a family-owned commodities trader active in Iran. “And one of the dangers of a suitcase economy is that you have no idea where the money is going.”
In December 2006, the U.N. Security Council, concerned about Iran’s nuclear ambitions, imposed sanctions that banned the import of certain nuclear materiel and equipment and froze the assets of people it said were involved in proliferation activities. Last March, it toughened those measures, imposing an international ban on Iranian arms exports.
The U.S. and its allies are pushing for a third round of U.N. sanctions, which they hope will pass the Security Council by the end of the month. Western diplomats say the proposed new ones include the blacklisting of Iranian companies and individuals, and greater monitoring of funds entering Iran.
Tehran says it is developing a peaceful, domestic nuclear-energy program; U.S. officials and some allies worry about its weapon-making capabilities. Yesterday, Israel’s Prime Minister Ehud Olmert said he was convinced Iran was moving forward with a weapons program. In a comprehensive intelligence assessment last year, U.S. agencies said Iran had ceased its weapons program in 2003.
The U.S. already has its own tight restrictions in place. American efforts to pressure Iran with sanctions date to the hostage crisis at the U.S. Embassy in Tehran. Last October, the U.S. designated a handful of Iranian banks and companies as aiding the proliferation of weapons of mass destruction or helping finance terrorism, and prohibited American citizens from doing business with them. The aim was to freeze the Iranian entities out of the global banking system.
Although the American sanctions don’t apply to foreign companies, U.S. officials have pressured other nations to stop doing business with the blacklisted entities. Many foreign firms are complying, worried about getting shut out of the U.S. financial system.
Goltab Sabz Co., an Iranian manufacturer and exporter of plastic dishes, used to receive payments from its clients in Asia and Africa through bank transfers. Some of those clients no longer want to send money to Iran. They can still use small, informal money-transfer outfits, but fees for these services have been rising.
So Goltab co-owner Mehrdad Shojaee gets on a plane and collects payments himself. He and his brother recently returned from a business trip to Bangladesh and Sri Lanka, toting $40,000 from customers in his carry-on.
Iranian President Mahmoud Ahmadinejad has downplayed the effect of sanctions. “This weapon is not even effective against small and deprived countries, let alone the great people of Iran,” he said in a rally in November in southern Iran.
Government officials, including a spokesman for Mr. Ahmadinejad and officials at Iran’s central bank, didn’t respond to requests for interviews.
Impact of Oil Prices
High oil prices have allowed Iran, one of the world’s biggest oil producers, to boost government spending, partially insulating the economy from sanctions. The country of 70 million enjoys a relatively diversified economy and the second-largest gross domestic product in the Middle East, after Saudi Arabia. Iran’s economy grew at a 6% clip last year, according to the International Monetary Fund.
But the sanctions appear to be contributing to inflation, which Iranian economists put at about 18%. The government has boosted spending, lowered interest rates and loosened credit, leading to price increases. Economists say the sanctions have led to higher banking costs, tougher customs procedures and bank delays, which together have slowed delivery of raw materials for domestically produced goods.
The U.S. has long employed economic sanctions against its adversaries, including Cuba, North Korea and Saddam Hussein’s Iraq, and the effectiveness of such measures has long been debated. Washington defends the Iranian sanctions. “The measures are designed to have minimal impact on innocent citizens and a maximum impact on the people who could potentially influence regime thinking in Iran,” says Stuart Levey, the U.S. Treasury’s undersecretary for terrorism and financial intelligence.
Iranian businesses are finding ways around them. Many are looking in the United Arab Emirates and other Persian Gulf commercial hubs for business partners to help them skirt the sanctions. That’s drawing Persian Gulf businessmen closer to Iran, even as American officials are asking local banks and merchants to sever ties.
Imports into Iran from the UAE jumped by as much as 20% in 2006, according to the Iranian Business Council, a trade group of Iranian businessmen in Dubai, UAE. Last year, they rose 25%. “If sanctions continue…it will benefit the UAE even more,” says Hadi Motameni, the council’s president.
The banking restrictions have forced Iranian companies that previously exported and imported directly with European and Asian suppliers to open affiliates in the UAE, or to work through front companies and middlemen.
In the face of U.S. pressure, some Gulf nations, including Bahrain and the UAE, have moved to restrict ties to some Iranian businesses. They have tightened customs procedures and have put some pressure on banks. But officials are only prepared to go so far. “At the end of the day, Iran is a neighbor,” says Sheikha Lubna al Qasimi, the UAE’s minister of economy.
Tehran-based Al Qadeer Co. exports dry fruits and nuts to the rest of the Middle East and Asia. Before the banking restrictions, the company shipped directly to customers and received payments through its long-time bank, Bank Saderat. It’s one of Iran’s largest, with more than 3,000 branches.
The U.S. government alleges that Iran uses Saderat to channel funds to U.S.-designated terrorist organizations such as Hezbollah in Lebanon and Hamas in the Palestinian territories. Saderat has denied wrongdoing. Washington has prohibited American citizens from doing business with it.
Al Qadeer’s customers said they won’t do business through the bank anymore, says Mohammad Husseini, a marketing executive at the company. So now, the company ships its nuts through a middleman in Dubai. Customers send payments there. The Dubai middleman then sends the cash to Tehran using a money-transfer service. All that is expensive. The company already has jacked up pistachio prices by 30%.
“Everything has turned upside down for Iranian businesses,” Mr. Husseini says.
Entities backed by the Iranian government have found alternatives to Western companies for some state-funded projects. In the oil sector, Iran had long turned to Western companies for cash and technology. But plans by France’s Total SA and Royal Dutch Shell PLC of the Netherlands for big projects in Iran have stalled amid the sanctions and international pressure. Late last year, Tehran signed a $2 billion deal with China to develop a big oil field.
“There are countries out there that are newly industrialized,” says Hojatollah Ghanimi Fard, head of international business at Iran’s state oil company. His Tehran office is adorned with Chinese porcelain and art, gifts from recent visits to the Far East. “They have huge amounts of money” and are happy to invest in Iran, he says.
“Money runs after good projects,” says Frank Mahdavi, a U.S.-educated adviser to the chairman of Stratus Group, an Iranian conglomerate that includes construction, banking and oil interests. The group, a big government contractor, has had to establish new banking relationships and stomach higher costs. But it’s an inconvenience, not a show-stopper, executives say.
“If you have a sound, kosher project, money comes to it,” Mr. Mahdavi says.
Second and third-tier banks in places such as Pakistan are competing to provide financing to Iranians frozen out of the Western banking system, says Bijan Khajehpour, an international business consultant in Tehran. Many of these banks don’t scrutinize transactions with an eye toward reporting fishy ones to international regulators. The sanctions “are empowering a number of banks from third-world countries, and it could backfire,” Mr. Khajehpour says. “You are suddenly propelling small institutions at least into regional trade, and these transactions are opaque.”
To move money in and out of Iran, businesses increasingly are turning to informal money transfers and cash couriers. Money-laundering experts say that makes transactions difficult to trace.
The owner of an electronics-goods store in affluent North Tehran, who asked to be identified only by his first name, Borhan, recently stopped using bank-to-bank wire transfers to pay for goods because of the restrictions. U.S. companies can’t ship most products into Iran. Borhan says he orders iPod accessories online from Griffin Technology in Nashville, Tenn., and has them shipped to a middleman — a UAE-registered company in Dubai that operates out of a post-office box.
Paying the Middleman
A typical $10,000 order, packed in 10 boxes, costs as much as $800 to ship to Dubai, he says. He pays another $500 to the middleman to unpack the goods in Dubai and reship them to Tehran. To pay for the shipment, he says, he gives cash to an acquaintance in Tehran who sends the money to his brother in Dubai through an informal money-transfer service, or “hawala.” The brother then pays the middleman.
Commissions for the middlemen and for the hawala transfer come out to about $1,000. The payment system takes three days, instead of the 12 hours a bank-to-bank transfer would take. (A spokeswoman for Griffin says it is “unable to control where products end up in the marketplace.”)
Hawala brokers are largely unregulated merchants who arrange with counterparts in other countries to deliver money across borders quickly, usually for a fee. Such brokers are used across the developing world, mostly to handle remittances payments from expatriate workers to families back home.
As Iranians use hawala more, it has become more difficult for regulators in the region to track suspicious transactions, says Terry Douglas, a former compliance officer in London for the United Bank of Kuwait and now an anti-money-laundering consultant.
Majid Jalali, a carpet seller at Tehran’s sprawling covered bazaar, now lets customers walk out of his shop with his handwoven wool and silk pieces — worth between $100 and $800 apiece — without any money changing hands. Foreigners can’t wire money into his account anymore, he says. So he tells them to take the carpets and send the money to his sister in Canada. He’s been stiffed twice so far. A bigger problem: European and Asian businessmen aren’t coming by anymore.
“At this time, people don’t come to Iran,” he says. “I haven’t had a customer in a month.”