Iran Regime Profiting From Sanctions: U.S.

By Indira A.R. Lakshmanan and Ladane Nasseri - Dec 27, 2011 11:00 AM GMT+0700

The Obama administration is accusing the elite of Iran’s regime and the Islamic Revolutionary Guard Corps of profiting “on the back of the average Iranian” as the nation’s currency plunges under pressure from international sanctions.

The new allegation coincides with the decline in the market value of the Iranian rial, which has dropped about 15 percent against the dollar in the past five weeks and 35 percent since March, according to Tehran’s independent Donya-e-Eqtesad newspaper. The 39 percent difference between the central bank’s official rate and market rates on Dec. 21 was the largest in almost two decades, economists in Tehran and Washington said in interviews.

U.S. Treasury Undersecretary David Cohen said the gap between the two rates has provided an arbitrage opportunity exploited by officials and businesses affiliated with the IRGC, the elite military arm that’s under international sanctions for suspected nuclear weapons work and terrorism. They are among regime elements able to obtain foreign currency at the favorable official exchange rate and sell it for a profit in exchange bureaus at the market rate, he told the Senate Foreign Relations Committee in written testimony Dec. 1.

“Ordinary Iranians are urgently seeking out foreign currency such as dollars or euros for safety, yet they are having trouble accessing hard currency, and when they can, they have to pay the unofficial market rate,” said Cohen, the Treasury undersecretary for terrorism and financial intelligence.

‘Profitable Arbitrage’

“At the same time, senior government officials and preferred businesses, including IRGC-owned and controlled operations, are able to access foreign exchange at the official rate, essentially engaging in profitable arbitrage on the back of the average Iranian,” according to Cohen.

The market value of the rial has been dropping for months. Iranians are reacting to the prospect that their government may be incapable of slowing the 19.8 percent inflation rate or improving the domestic economy, as the U.S. and Europe approved new sanctions on the banking system and discuss a possible European embargo of Iranian oil, Hossein Raghfar, an economist at Al Zahra University in Tehran, said in a telephone interview.

The official rial-to-dollar rate was 11,030 on Dec. 21, while the market rate at currency bureaus soared to 15,300 the same day. That gap narrowed yesterday to 11,100 and 15,150, a 36 percent difference, according to Donya-e-Eqtesad. The 39 percent gap last week was the widest in about 20 years and it underscores that Iranians don’t trust politicians and finance officials to stabilize the economy, said Raghfar.

Iranian Media

U.S. Treasury officials declined to provide Bloomberg News with documentation backing up Cohen’s allegation. Treasury spokesman John Sullivan did point to reports in the Iranian media citing central bank of Iran officials and a prominent researcher with Iran’s parliament warning about currency profiteering. Those reports do not explicitly refer to regime officials and the IRGC benefiting as Cohen did.

The Alef news website linked to Ahmad Tavakoli, an economist who runs the Iranian parliament’s research center, cited him as saying that the gap between the rates “will lead to massive undue incomes at the expense of the nation’s assets.”

That will result in the “emergence of a new class of people who will have reached a certain structure through the economy’s muddy waters and the blessings of the CBI,” the central bank of Iran, said Tavakoli, who has frequently criticized President Mahmoud Ahmadinejad’s economic policies.

‘Domestic Discontent’

Cohen told Congress that for a decade, until September 2010, Iran successfully supported a single, official exchange rate using hard currency earned from oil sales. He credited United Nations sanctions imposed in June, 2010, with making it hard for the central bank to access foreign currency to defend the rial. The plunging currency was “fueling serious inflation, high unemployment and domestic discontent,” he said.

Iranian Foreign Ministry spokesman Ramin Mehmanparast was not immediately available to comment when called at his office in Tehran yesterday.

The assertion that the IRGC and senior regime members are profiting from the rial’s fall raises questions about whether sanctions are having the unintended effect of enriching entities involved in nuclear and missile proliferation, said Ken Katzman of the non-partisan Congressional Research Service in Washington and author of a book on the IRGC.

“Clearly sanctions are hurting the economy, but are the sanctions putting pressure on the key institutions they are intended to pressure, or could it be making the government more powerful relative to the population than it was before?” Katzman said in an interview.

Current Sanctions

Iran is under sanctions targeting the IRGC, finance, shipping, transport, missile and nuclear procurement and energy, in a concerted effort by the United Nations, the U.S., Europe and other nations to press Iran to abandon its suspected nuclear weapons program. Iran insists its nuclear program is for peaceful use.

The UN’s International Atomic Energy Agency on Nov. 8 detailed nuclear work that inspectors said could only be for military purposes. The latest report prompted additional sanctions last month in Washington, London and Ottawa, and is driving discussions in Europe on imposing an oil embargo.

Oil is Iran’s main source of income, earning the country $73 billion in 2010 and supplying more than 50 percent of the national budget, according to the U.S. Energy Department and the International Monetary Fund.

Oil Revenue

The second-largest producer in the Organization of Petroleum Exporting Countries after Saudi Arabia, Iran exported an average of 2.58 million barrels a day in 2010, according to OPEC. Iran expects to earn $110 billion from crude oil production in the Iranian calendar year that ends March 19, the state-run Mehr news agency said, citing a member of the parliament’s economic committee, Gholamreza Mesbahi-Moghadam.

Ali Alfoneh, an Iran researcher and IRGC specialist at the American Enterprise Institute in Washington, said government institutions, including the IRGC, benefited from a similar currency situation during the Iran-Iraq War in the 1980s. They were given preferential access to foreign currency at an official rate, which they used both to buy weapons overseas and to sell currency on the black market, he said.

‘More Corrupt’

It would “make sense” that the IRGC now is trying to do what it did in the 1980s, Alfoneh said in an interview. “In every single profitable industry in Iran, you see the IRGC. They are becoming more and more corrupt every day.”

“The wrong people are benefiting,” while ordinary Iranians suffer inflation, feeble economic growth and a decline in the rial brought on by sanctions, he said.

Growing public anger over the falling rial and growing opportunities for corruption are also feeding divisions within Iran’s leadership. President Mahmoud Ahmadinejad’s political rivals accuse him and his loyalists of economic mismanagement. The president and the central bank governor have disavowed blame for the fall of the rial.

As state television last week showed lines of people camped out with blankets overnight in front of state banks waiting to buy gold, Ahmadinejad accused unnamed culprits of seeking to drive down the rial and portray Iran “in a state of crisis,” the business paper Donya-e-Eqtesad reported.

Losing Defense

Ahmadinejad pledged the government would bring currency and gold markets under control, and asserted on Dec. 21 that Iran has huge reserves of both and could use them “for 15 years and still have gold” to defend the rial.

A few months ago, the central bank of Iran tried to stabilize the price of gold by auctioning gold reserves, Alfoneh said. “After two weeks, they abandoned the strategy because they could no longer defend the currency. The price of gold was still going up, because there’s no public confidence in the CBI.”

Central bank Governor Mahmoud Bahmani has acknowledged the bank is struggling to restore stability to the currency, and had limited ability to defend the rial. Iran’s economy needs to be managed as if it were under siege by western countries, Bahmani said Dec. 11, according to the Mehr news agency.

Anyone with preferential access to cheaper dollars “will try to make profit out of this,” Scott Lucas, an Iran specialist at the University of Birmingham in England, said in an interview. “Whether it’s Ahmadinejad or the Guards, we’re talking about people making short term gains to the detriment of the long term.”

To contact the reporters on this story: Indira A.R. Lakshmanan in Washington at ilakshmanan@bloomberg.net; Ladane Nasseri in Tehran at lnasseri@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net