Iran, Dubai, and Economic Sanctions

An interesting article in The New York Times Magazine on the strategy and impact of economic sanctions against Iran.  As the article notes, the idea is to prevent a country reliant on global trade — as an ancient empire, a station on the Silk Road across Asia and a modern petroleum powerhouse — from being able to do business outside its borders

“…It has been almost 30 years since the last shah, with a small jar of Iranian soil in his hand and the empress by his side, flew into exile, ending 2,500 years of dynastic rule and a valuable American alliance. The United States vowed to “honor the will” of Iran’s people, and its ambassador to the United Nations, Andrew Young, mused that Ayatollah Khomeini might be hailed as “somewhat of a saint, when we get over the panic.” Over the next nine months, however, young zealots twice seized the American Embassy and its diplomats, a harbinger of tensions to come. Washington has struggled to figure out what to do about Tehran ever since. Fear still defines policy.

…But what tools does Washington have? Since 1979, five presidents have failed to influence, engage or outwit Iran… What remains, in one form or another, is the idea of sanctions. Over the decades, Washington has embargoed imports from Iran, forbidden visas for officials and even sanctioned the entire Revolutionary Guard Corps — the first time the United States has ever sanctioned a section of another country’s military. But each effort has fallen short. Energy-hungry China now buys Iran’s oil in huge quantities. Tehran has found other outlets for trade and travel. And sanctions are slow to take effect.

One new concept, however, has begun to get Tehran’s attention. In January 2006, Stuart Levey, the under secretary for terrorism and financial intelligence at the Treasury Department, was having breakfast in Bahrain when he noted a local newspaper article about a big Swiss bank that cut off business with Tehran. He clipped the article. It gave him an idea.

Governments traditionally focus on actions they can enforce themselves. Reading about the Swiss bank, Levey decided it was time to mobilize the private sector, starting with the world’s banks, to join the effort to sanction Iran. His idea was to prevent a country reliant on global trade — as an ancient empire, a station on the Silk Road across Asia and a modern petroleum powerhouse — from being able to do business outside its borders. “That could spark the right internal debate in Iran,” Levey told me when we met in his spacious Washington office, which was painted hunter green and decorated with collections of vintage American currency. Since that breakfast in Bahrain, he has managed to persuade the U.S. government to back his project; he has also made a lot of enemies in Tehran and created a policy legacy that the next president will have to deal with.

The best place to get a feeling for the challenge Iran poses to any sanctions program is Dubai, where Levey spent a great deal of time refining his approach. The cosmopolitan emirate, situated near the mouth of the Persian Gulf, is famed for an indoor ski slope and a man-made island in the shape of a palm tree, with villas for the superrich on each frond. But Dubai has also become the latest battleground for Iran and the United States, so in the late summer heat, I walked the concrete path along Dubai Creek, a grimy inlet that winds through a section of town long predating today’s slick skyscrapers. Old wooden dhows, each painted the traditional baby blue and white, were moored four and five abreast for more than a mile along the wharf. Crews using carts were hustling to load televisions and appliances, food and toys, tires and even cars to ferry to Iran.

Dubai’s citizens, unlike Iranians, are mostly Sunni and Arab. Yet trade across the gulf has gone on so long that many of Dubai’s elite, including members of the emir’s inner circle, are of Iranian descent. Each major change in Iran creates a new wave of migrants: merchants left in the 19th century to avoid Persia’s new tariffs; traditional families fled in the 1930s after the modernizing monarchy banned the chador; modern-minded Iranians left after the 1979 Islamic revolution forced women back into the chador.

The biggest migration, however, began five years ago, in anticipation of sanctions and other U.S. pressures. Thousands of Iranian businesses simply set up local offices, opened bank accounts and imported goods from abroad to Dubai. When wares arrived, they were turned around and sent to Iran by dhow, container ship or air. “The best place to do business in Iran,” an Iranian businessman quipped, “is in Dubai.” Dubai now has as many Iranians as it does its own citizens. Trade has steadily grown; according to Nasser Hashempour, vice president of the Iranian Business Council in Dubai, it topped $14 billion last year.

On my first day in Dubai, I had lunch at the Iranian Club, a compound with a sports facility, stadium, theater and hotel. The stadium is where President Mahmoud Ahmadinejad spoke last year. The hotel’s lobby had separate clocks for Tehran and Dubai, a half-hour apart. A manager’s office was decorated with pictures of Ayatollah Khomeini and Hassan Nasrallah, Hezbollah’s leader.

I later stopped at the Iranian mosque, now being expanded, across from the Iranian Hospital, which has tended to many of Dubai’s royals. I visited the Spice Market and chatted with Iranian merchants. At American University, I was told, Iranians are the second-largest group in the student body. They’re also among the biggest buyers and flippers of Dubai real estate. My hotel overlooking Dubai Creek had an Iranian clientele, an Iranian sports channel available in the rooms and an annex with Iranian-run businesses. It was within two blocks of Tehran Restaurant, Iranian shops where Farsi was more common than Arabic and several Iranian banks.

“There are so many Iranians here,” Hashempour said with a chuckle, “that we tell a joke: When people in Dubai are asked to pray for rain, it ends up raining in Iran.” Since 2003, the number of Iranians in the United Arab Emirates has doubled to more than 450,000, he told me, and the number of Iranian businesses quadrupled to almost 10,000. Most are in Dubai, giving it the world’s second-largest concentration of Iranian expatriates (after California).

Because Dubai has no oil, unlike the United Arab Emirates’ other sheikdoms, it has survived on trade — from its old wharf on the creek to the high-tech Jebel Ali, one of the world’s largest ports. Most traffic — including Israeli cargo — is for re-export elsewhere. At least 20 percent goes to Iran. So, despite sanctions, Iran’s shelves are well stocked, even with American goods. Maytag refrigerators, Diesel clothing and Victoria’s Secret lingerie are quite popular. Legal American exports to Iran — from clothing and cigarettes to musical instruments and bull semen, all considered agricultural, educational or humanitarian goods and thus exempt from sanctions — increased tenfold during the Bush administration.

“The easiest thing to do in the world today is trade,” the Iranian foreign minister, Manouchehr Mottaki, told me over the summer when I met him in New York City. “Economic advantages attract partners. Right now, a number of American companies are working with Iran. But because of their conditions, I can’t give their names.”

Iranians now have an estimated $300 billion in assets in tiny Dubai alone. Emiratis profit handsomely from these ties: outside Dubai’s new free-trade zone, entrepreneurial foreigners need local partners, who must hold 51 percent of any business. Citizens of Dubai can earn up to $100,000 annually just by putting their names on a license, leaving the work to the Iranians. Iranian money is not alone in driving Dubai’s growth, one U.S. official told me, but there’s so much Iranian money in property, investment and trade that it’s hard to cut off. “Dubai,” he said, “is not going to shoot itself in the foot financially” for the sake of sanctions. Dubai and Iran are now so economically interdependent, local analysts told me, that the city-state has become to Iran something like what Hong Kong is to China. Sanctions seem only to strengthen such ties.

Stuart Levey says he thought his new sanctions could succeed where so many had failed. But he knew his idea might be a tough sell. He was not part of the Bush administration’s inner circle. Some officials still mispronounce his name. (It rhymes with “Chevy,” a Treasury official advised me.) In February 2006, his colleagues in the Treasury Department persuaded Secretary of State Condoleezza Rice to let him travel with her to the Middle East, and he hoped to make his pitch at some point along the way. He waited, stop after stop; he spent most flights chatting with his seatmate, Gen. Raymond Odierno, the current commander of U.S. forces in Iraq who was then the Pentagon liaison with the State Department. “I did, often, feel like a fifth wheel,” Levey recalled. Finally, on the way home, he was summoned to Rice’s private cabin to lay out his seven-point proposal.

Levey’s pitch was simple: Banks were only as reputable as their clients’ practices. And the reputations of banks that did business with Iran were at risk as long as Iran financed extremists and pursued missile and nuclear technology. More basically, he argued, Iran had bad banking habits, with little oversight to prevent money laundering. It had even begun asking foreign banks to remove traces of a transaction’s ties to Iran, a practice known as “stripping.”

Levey’s idea was to press banks not to do business with Iran until it complied with international standards. Rice bought in. “She was thrilled,” Levey wrote in an e-mail message to his staff from the plane. “She especially liked options 1, 2, 6 and, if necessary, 7. . . . Truly, this one hour made the whole trip worthwhile.”

“It gave us a new lever,” Rice later told me. “It’s not sanctions in the traditional sense.” Levey has since made more than 80 foreign visits of his own to talk to more than five dozen banks. Several countries required multiple trips to reassure suspicious (or just annoyed) governments about American intentions — and then to persuade the banks. Levey offered specifics. U.S. intelligence, he told them, had traced $50 million transmitted by Iran’s Bank Saderat through a London subsidiary to a charity affiliated with Hezbollah in Lebanon. Saderat, which has 3,400 offices worldwide, is Iran’s equivalent of Citibank. Its Lebanon branch, Levey said, also supposedly sent millions of dollars to Palestinian extremists.

The Treasury Department then started blacklisting Iran’s biggest banks, urging other nations to follow suit. In 2006, Saderat was barred from direct or indirect business with U.S. banks. In early 2007, the department sanctioned Bank Sepah for financing projects to develop missiles that could carry nuclear weapons. (Sepah, meaning “army,” was established with money from Iran’s military pension fund and is now associated with Revolutionary Guard projects.) The Treasury Department then blacklisted Bank Melli, Iran’s largest bank, for supposedly helping to finance defense industries under U.N. sanctions.

Iran has angrily denied illicit activity. Its banks pledged compliance with international practices. Tehran complained to the International Monetary Fund. Some banks even wrote to the Treasury Department to protest. Iran’s Central Bank governor spoke of “financial terrorism.” Yet the innovative efforts have spread. Actions against Iranian banks became a feature of Security Council sanctions resolutions, beginning in 2006. Last June, the European Union blacklisted Melli and froze its assets. Last month, Australia sanctioned Melli and Saderat, while the U.S. blacklisted the Export Development Bank of Iran, which it claimed had taken over many of Sepah’s accounts and provided services for missile programs. The Treasury Department is also scrutinizing Iran’s Central Bank and considering blacklisting it too, which could undermine not only the country’s banking system but also international support for the U.S. campaign.

The momentum has surprised even Levey, a Harvard-educated lawyer who once specialized in white-collar criminal defense. Big banks in Britain, France, Germany, Japan and Italy curbed business with Iran, even with longstanding clients. Only a few would admit it; most prefer to silently go along and keep their options open. “They’re not happy with what’s happening,” a European diplomat told me. “They complain about U.S. pressure, but accept it. They hope it will pass soon.”

Even banks in Muslim countries, from Bahrain to Malaysia, have cut back their Iran business, bankers told me. Most surprising has been the shift by several Chinese banks. “We haven’t had Chinese banks tell me that they won’t do deals with Iran,” Levey told me. “They just stop.”

So far, more than 80 banks have curtailed business with Iran. A European bank official told me its business dropped from hundreds of millions of dollars annually to zero. A Middle East banker said his institution no longer did business with the sanctioned banks. Gulf bankers said medium- and long-term credit for development and trade was drying up. Banks Saderat, Melli and Sepah — which together serviced 80 percent of Iran’s international trade — were losing customers and struggling to find new banking relationships, despite many offices abroad. (None of these sources wanted to be identified as cooperating with the U.S. Treasury Department.) The private sector has proved “quicker to respond” than governments, Rice said. “This really relies on the kind of self-interest — to protect their reputation and protect their investment.”

“Stuart Levey’s war is like ‘Charlie Wilson’s War,’ ” a U.S. official said over coffee in the State Department cafeteria, referring to a former Texas congressman’s campaign to change policy on Afghanistan, a saga made into a movie. “It’s the most direct and aggressive stuff we’ve got going. It delivers.”

The Treasury Department also galvanized global groups. The Financial Action Task Force — the world’s financial watchdog representing the 34 biggest economies — warned that Iran poses a “significant vulnerability” for the world’s financial system. And the Organization for Economic Cooperation and Development, including 30 of the world’s richest nations, has twice lowered Iran’s credit risk — to a 6 on a 7-point scale.

Iran has noticed. On his final day in office, last April, the ousted finance minister, Davoud Danesh Jaffari, complained bitterly about Levey. “We had embarked on a serious and breathtaking game of chess with America’s Treasury Department,” he told his staff. “They had assigned one of their Zionist deputies to halt the Iranian economy. This person would personally travel to many countries around the world. He would use incentives and encouragement to request cooperation against Iran, and if he failed to get any results he would use threats to pursue his goal.”

Treasury officials deny foreign banks were warned that their access to the U.S. financial system was in peril if they didn’t cooperate on Iran. “We never threaten,” Treasury Secretary Henry M. Paulson Jr. told me. “We talk about how important it is not to violate the rules and engage in illicit transactions.” Foreign bankers, however, insisted that threats were always implicit.

The financial squeeze on Iran has had a ripple effect. Iran has the world’s second-largest natural-gas reserves, after Russia. The world’s largest natural-gas field is shared by Iran and Qatar. Development of Iran’s share has been dragging on for years. “Qatar cut a deal quickly and was on its merry way,” said Fareed Mohamedi, an executive in the Washington offices of PFC Energy. “But Tehran never had the funding or technology to develop the gas field independently.” Iran played hardball with foreign firms over development contracts. It wanted to pay them in oil rather than cash. Then came banking pullouts. “We’ve been extremely effective at dissuading multinational oil companies from going into Iran,” said Cliff Kupchan, a former State Department official now at the Eurasia Group who has visited Iran. “Like with the international banks, we’ve invoked reputation risks. That really cramped the Iranian energy sector and could, more or less, impair the gas sector for the foreseeable future. They say they will do a lot of it themselves, but their technological capabilities are uncertain, at best.’

Ordinary businesses have been hard hit, too, according to Western officials and Iranians. Big companies and small bazaaris — as traditional merchants are called in Iran — are increasingly forced to pay for imports in advance, in cash. Exporters are losing clients; raw materials for nonoil industries are harder to pay for. Boutique banks in Europe and Asia have filled some of the vacuum, at hefty costs, although U.S. officials suggest the global economic crisis may scare them away from Iran, too.

Levey’s campaign has coincided with Iran’s own crisis. In his 2005 presidential campaign, Mahmoud Ahmadinejad vowed to put Iran’s oil wealth on every dinner table. But his populist policies have flopped. Calling interest rates “the root cause of injustice,” Ahmadinejad twice ordered banks to lower them, first to 12 percent and then to 10 percent — while inflation has gone as high as 30 percent. The dollar, worth 70 rials at the revolution, is today worth 9,600. Iranians gripe that produce prices have tripled over the past two years while housing prices have doubled.

Ahmadinejad has faced unusual public criticism from senior clerics, former chief nuclear negotiators, former speakers of Parliament and several economists. The finance minister who called Levey a Zionist deputy chastised his own leadership in the same speech for having “no plan for the future.” The president retorted that Iran needed a “culture of martyrdom” to solve its economic problems. He has fired six cabinet ministers with economic portfolios and two Central Bank governors. Since June, his government has temporarily banned two newspapers for publishing articles “harmful to the economy.” And last month, Iran’s bazaaris shuttered their shops to protest against new tariffs, forcing the regime to back down.

For the first time in 30 years, U.S. officials contend, Washington has found a tangible way to pressure Iran. Whatever happens with the Bush administration’s diplomatic or intelligence efforts, this is the program most likely to be continued by the next administration because it has bipartisan support.

And Levey is continuing to pick new battlefronts. In September, the Treasury Department sanctioned Iran’s national shipping company and affiliates in 10 countries for falsifying documents and for transporting cargo on behalf of entities tied to weapons of mass destruction by the United Nations. Treasury officials say the insurance industry is next. “This is one of the most powerful actions that can be taken, short of military action,” Paulson told me. “It’s not a knockout punch, but it is effective.”

It’s no coincidence that Levey has visited Dubai eight times, or that President Bush and Vice President Cheney have both stopped there over the past 18 months, or that Bush hosted Dubai’s emir, Sheik Mohammed bin Rashid al-Maktoum, at Camp David this summer. The ultimate success of Levey’s scheme — and the precedent it could set — depend heavily on Dubai.

In its quest to be a global financial center, Dubai has pledged to honor U.N. sanctions. It’s trying to shed the image of a way station for arms merchants and extremists. A. Q. Khan, the father of Pakistan’s nuclear program, ran a black market through Dubai, funneling sensitive technology to Iran, North Korea and Libya. Dubai was a money-transfer center for Al Qaeda, and 11 of the 19 Sept. 11 hijackers traveled via Dubai.

Despite the strong Iranian presence in Dubai, new restrictions are taking a toll. Of the 48 international, local and family banks in Dubai, all but a handful have cut off new business with Iranian banks cited in U.N. resolutions, said Hamad Buamim, director general of the Dubai Chamber of Commerce. Potential risks are too high. “It’s psychological,” he told me. The emirates have also set up a joint task force with the United States to sift through Iranian-run businesses in Dubai to uncover front companies for Iranian military, government or business entities sanctioned in U.N. resolutions, officials said. At least 30 have been shut down and dozens put on a watch list.

Visas and work permits for Iranians have dried up. “Registering a new company with an Iranian partnership is almost impossible,” said Hashempour, the Iranian Business Council vice president. When Iranian-run companies import goods, the wait in customs has gone from hours to days, even weeks. Passengers on hundreds of weekly flights between Iran and Dubai go through Terminal 2, where iris scans are taken — a practice not used at Terminal 1 for flights from Europe and the United States. Iran formally complained recently that its citizens were being mistreated, “obstructed” and detained in Dubai.

The emirates do not, however, want to be the pioneer in a new “sanctions of the willing,” I was often told. They have not adopted Washington’s blacklist. Several officials expressed frustration with American strong-arming. “Sometimes, yes, we feel that the United States is asking too much,” said Sultan bin Nasser al-Suwaidi, governor of the Central Bank. “They want results to happen immediately, yesterday instead of today or tomorrow. They are demanding. This is what I said to Stuart Levey: ‘You shouldn’t expect it can produce miracles in a short time.’ ”

The Achilles’ heel of U.S. strategy, of course, is oil. It has provided Iran with a huge cushion to absorb financial shocks. Iran’s budget is pegged to a per-barrel oil price of about $60 (though actual spending is somewhat higher), at a time when oil has gone as high as $147. Gary Hufbauer, co-author of “Economic Sanctions Reconsidered” and a fellow at the Peterson Institute for International Economics, told me that banking sanctions are effective, but the odds are still against current sanctions convincing Tehran to change its behavior or cooperate on its nuclear program. The Peterson report concluded: “It is hard to bully a bully with economic measures,” especially against “large targets that are strong, stable, hostile and autocratic.”

It is also possible that the Levey strategy could backfire. Iranians carp at their government over the economy, but such is the Iranian way. “If the Prophet Muhammad were to govern Iran, people would be critical,” said an Iranian businessman who commutes to Dubai. “We are a very demanding people.” The clampdown is uniting many disaffected Iranians around their government, just as they rallied when Saddam Hussein invaded in 1980, said Hashempour. Small-businesses owners have been hit hardest. Meanwhile the state, the Revolutionary Guard’s growing business empire and quasi-government foundations dominate up to 80 percent of business in Iran and are most able to weather the financial storm.

“Yes, they can stop a guy in the Spice Market from getting a letter of credit,” said an Iranian-American investment banker in Dubai who met with Levey. “That’s not fomenting opposition. The guys who are hurting are in the business community. Yes, they hate Ahmadinejad, but they hated him from the beginning. The basic flaw is [the idea] that people who are unhappy with the government can do anything. If the goal is to stop Iran from developing a nuclear capability, nothing that has happened here will achieve that objective.”

Tradition also provides alternatives for those pressed by the lack of access to international credit. Hawala, Arabic for “transfer,” is an informal version of Western Union dating back to the eighth century; it was used initially to avoid bandits. The system is based on trust. To get money to a relative in another city or country, one person gives money to a local hawala. For a small fee, he gets a code word or password to give the relative. The hawala then contacts a trusted friend or agent in the other city. The relative picks up the money upon providing the correct code word. At year’s end, hawalas settle their own accounts. Hawalas are making a big comeback among traders doing business with Iran.

On two scorched mornings in August, I wandered Dubai Creek to talk to dhow crews and check their cargo to Iran. I was on the creek in the 1980s during the Iran-Iraq war, when the world was trying to squeeze Iran into a cease-fire. Dhows then carried vast amounts of American goods. Many still do, but the biggest share of cargo now is Chinese. Economists and dhow captains told me Iranian trade is increasingly looking East.

Dhows thrive off sanctions. But the sun-wizened seafarers thought Washington was making a political mistake. “I may look dirty, but I watch TV and read,” said an engineer on the Ramseh Shams. He was a burly man with disheveled hair, a sweat-stained T-shirt and shorts with an image of Bozo the Clown on them. “The Yankees don’t know who we are,” he declared, as crewmates listened. “Ahmadinejad is not Iran. We are people who love our country even if we’re against our government. It’s the soil we love. Ahmadinejad will be gone in four years. We will not. The United States has lost its sanity in the Middle East. The bully who strong-arms in this region does not last.”

Levey’s campaign may have had a broader punitive impact than any other action against Iran. But sanctions take time. International sanctions on the illegal white-minority government in Rhodesia took 15 years to really bite; and only when South Africa cut Rhodesia off, in its own political self-interest, did the regime begin to collapse.

There is probably not that much time in the case of Iran. The clock on Iran’s nuclear program is ticking faster. Rival projections suggest Tehran might be able to develop a nuclear capacity between 2010 and 2015. The clock on sanctions is moving much more slowly. Levey acknowledged huge hurdles. “But sitting in my place, we have an obligation to use every tool available to us to solve this problem peacefully, and that’s what we’re doing,” he told me.

A senior U.S. official acknowledged as much. “This is not a two- or three- or four-year plan,” he said. “If people are realistic, it’s a 10- or 15-year plan. Of all available options, it seems to me the most sensible thing to do. In the meantime you try to do other things and just hope you can head them off at the pass.”

The ultimate glitch in Levey’s campaign, however, may be that the hard-liners now in power flourish under siege. “I call them weeds who grow in the dark because they thrive in isolation,” reflected Karim Sadjadpour of the Carnegie Endowment for International Peace. “You want to send a signal to the Iranians that belligerence only isolates them and reaps no rewards. But they’re like Fidel Castro; they don’t want a U.S. presence or to open up to the world. It would open up the floodgates against them.”

Because Stuart Levey’s war may result in only limited victories, a growing array of voices — from a former general in the U.S. military’s Central Command to former Bush administration staff members — is calling on the next president to reach out to Iran in direct dialogue. Some support the so-called “grand bargain”: negotiating over all diplomatic, economic and security issues and eventually re-establishing U.S.-Iran ties. A robust rapprochement with Iran still seems unlikely any time soon. But to advance American interests in the region, the next president will have to think more imaginatively than the five presidents whose policies have fallen short for three decades.”

This entry was posted on Sunday, November 2nd, 2008 at 5:43 am and is filed under Dubai, Iran.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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