Sidestepping Sanctions

A picture taken on February 3, 2014, shows low-income Iranians lining up to receive food supplies in southern Tehran. (DAVOUD GHAHRDAR/AFP/Getty Images) A picture taken on February 3, 2014, shows low-income Iranians lining up to receive food supplies in southern Tehran. The Iranian government has been using handouts, in part, to mitigate the effects of Western sanctions. (DAVOUD GHAHRDAR/AFP/Getty Images)

A picture taken on February 3, 2014, shows low-income Iranians lining up to receive food supplies in southern Tehran. The Iranian government has been using handouts, in part, to mitigate the effects of Western sanctions. (DAVOUD GHAHRDAR/AFP/Getty Images)

As diplomats scrabble to draw up a final nuclear deal with Iran by July 20, sanctions remain in place and are likely to only be gradually eased even if a deal is agreed. In a significant turnaround at talks in Vienna last week, Iran's Deputy Foreign Minister Abbas Araqchi accepted that sanctions would not be lifted immediately. It appears that Iran may have to put up with the blockade for a while longer—one it has become very good at circumventing in the past few years.

While the sanctions adopted by the US, the EU and their partners between 2010 and 2012 have dealt a serious blow to the Iranian economy, they did not lead to its expected collapse. Much to the ire of leaders in Western capitals, diplomats and businessmen who have traveled to Iran in the last two years have described it as a fast-developing country. That is not what the sanctions were meant to achieve. During the last four years, Iran has clearly demonstrated that a country can survive even when its GDP is shrinking by 1.3–2 percent a year, inflation is hovering at or above 20 percent, and the national currency is severely depreciated.

It is true that the expensive boutiques and high-end restaurants popping up on the streets of northern and central Tehran are to a large extent just a facade hiding the socioeconomic strain caused or aggravated by the sanctions. But even the maintenance of this facade costs a lot of money: The Iranian authorities have spent up to 14 billion dollars annually buying the loyalty of the poorer segments of society through government handouts. The sanctions were designed to limit the Iranian government’s sources of income, thereby undermining the leadership’s capacity to dole out cash and goods to keep its citizens content. But they were able, at least initially, to sidestep this particular problem.

True, the measures adopted did slash Iran’s oil production and exports from 3.8–4 billion barrels per day (bpd) in January 2012 to 0.7–1.3 million bpd. In fact, total production dropped to below pre-sanction export levels, to only about 2.6–2.7 billion barrels per day. Then further sanctions were introduced, preventing Tehran from accessing the international banking system and insurance services.

Yet even with all these restrictions and a foreign currency deficit, Iran managed—and is still managing—to balance its budget. This has largely been achieved through an intricate system of sanctions-evasion tactics.

Ships passing in the night

After the implementation of the EU oil embargo in 2012, Iran offered the remaining buyers of its hydrocarbons substantial discounts to guarantee their custom. The counter-measure worked: India’s then-oil minister, Veerappa Moily, confessed in June 2013 that cheap prices meant the Indian state-owned oil companies continued to trade with Iran in spite of the sanctions.

In certain cases, the very conditions under which the sanctions can and cannot be applied created a number of opportunities to bypass them: the punitive measures are mostly related to sea and air transport, but road haulage is left unchecked. Iran’s impressive road infrastructure, with multiple intersections with the transportation systems of neighboring countries, allowed Tehran to deliver goods to every point in Eurasia without using sea or air routes. Following the sanctions in 2010, there were reports of increased numbers of petrol trucks crossing the Turkish and Iraqi borders with Iran, as well as Iranian hydrocarbons being ferried across the Caspian Sea to some Central Asian countries.

The Islamic Republic’s authorities are also periodically accused of trying to sell Iranian oil covertly. Experts argue that the easiest way for Tehran to do this is to falsify documents and sell their oil as being of Iraqi origin. Another scheme reportedly entailed the use of front companies established in neighboring countries, whose oil tankers were periodically reported as “accidentally” floating near the Iranian coast, eventually arriving to their destination ports loaded with Iranian oil.

One of the most extreme methods used to conduct secret trade operations was that of ship-to-ship transfers of oil on the high seas. During the period between 2010 and 2014, Tehran increased its tanker fleet—not only by building new ships but by buying old oil tankers, some of which would have otherwise been destined for the scrapyard. It is believed these ships periodically left Iranian ports without stating their destination and would stay out at sea for some time. If an oil deal was concluded, the tanker would turn off its tracking beacons to hide its position and move to an agreed point where it met a ship hired by a buyer and the load was transferred.

Banking on foreign currencies

Iranian methods used to evade banking sanctions have been no less complicated than those pertaining to oil. Initially, Tehran approached friendly governments with an initiative to establish joint banks, with offices to be opened in both countries to allow direct transactions between them and the Islamic Republic—and without the involvement of Western banks. Between 2006 and 2010, such offers were reportedly received by the governments of Russia, India, China and Turkey.

But aside from the establishment of the Iran–Venezuela Joint Bank in 2009, the initiative didn’t go anywhere. Tehran then tried to pursue another strategy: using the national currencies of its main trading partners as legal tender in foreign economic activities, instead of dollars and euros. This tactic became extremely important after the adoption of the US sanctions of 2010, which seriously limited Tehran’s capacity to use dollars. Currently, Iranian banks conduct transactions in the Korean won, Turkish lira, Chinese yuan, Japanese yen, Indian rupee and Emirati dirham. The Iranian authorities have even regularly discussed the possibility of using the Russian ruble in their trade operations with Moscow.

After 2010, Tehran made a push to boost the expansion of unsanctioned private banks, encouraging them to open branches abroad. Iran’s sanctioned banks could also establish banks in third countries and use them as a cover for their activities. In October 2010, American analysts and government experts said that at least two banks had been established by the Iranians in Iraq to service Tehran’s international financial transactions. Allegedly, one of them is related to the sanctioned Melli Bank.

Similar banks have reportedly been opened in other countries such as Malaysia and Afghanistan. Despite the seeming economic insignificance of such countries, it is likely they were deliberately selected by the Iranians. The absence of political and administrative transparency there would have created plenty of opportunities for conducting grey and illegal operations. Their national banks could also be used as part of the scheme—to funnel Iranian funds into the EU or even the US.

There are a number of countries—China, Venezuela, Ecuador, Turkey and Lebanon, as well as Syria before the war broke out and some Central Asian and Caucasian states such as Armenia and, allegedly, Georgia—whose banks are still open to Iran. It is significant that a number of European and American banks have operating branches in the majority of these countries.

Financial crime consultant Kenneth Rijock outlines one scenario by which the Iranian regime could evade financial sanctions through such countries. Funds could be sent “from Iran to a cooperating bank in Southeast Asia, and then into a Central Asian bank in an ECO [Economic Cooperation Organization] member country. The final act would be to transfer the funds to an American or EU bank branch in that country.” Rijock explains how funds could then enter the US “through a transfer between a wholly owned branch or subsidiary and the onshore US parent.”

Suitcases stuffed with cash and old-fashioned bartering

To avoid all this complexity, the Iranian businessmen involved in activities that break the sanctions sometimes choose not to have their export earnings wired from a foreign country into accounts in the Islamic Republic.

After the adoption of the 2010 sanctions, the South Korean government allowed Iranians to keep financial resources earned from the export of oil to Korea in accounts in the Industrial Bank of Korea and Woori Bank. The plan was that this money could later be used to buy Korean products and import them into Iran, a decision which led to the establishment of direct links between the countries and made foreign exchange operations in dollars unnecessary.

Roughly the same method is applied with Turkish–Iranian trade. Part of the money received by Iranian companies for the exports of oil and gas to Ankara is left in Turkish banks. These funds are either spent on financing the imports of consumer goods to Iran or on buying Turkey’s precious metals and stones. These resources then replenish Iran’s gold and foreign currency reserves, or are used as legal tender to pay for import commodities.

This system of paying for goods bought abroad with gold and silver is just one example of Tehran’s tendency to choose the simplest solution to a complex problem. Ever since the Iranians have been cut off from the international banking system, they have tried to find ways to operate their economy without having to go through banks. Iranian businessmen have previously said that while conducting business trips abroad during the sanctions they have often traveled with suitcases full of cash—dollars or euros bought in Iraq or Afghanistan. Alternatively, they used hawala, an informal money transfer system that relies on a huge unofficial network of money brokers in various Muslim countries.

If hawala or cash payments do not work, the Iranian authorities may try to conduct barter deals. Since 2012 India has been paying for part of its oil imports from Iran with agricultural products: oil was offered in exchange for wheat, tea and rice. Probably the largest barter contract in the history of modern Iran was signed recently between the Islamic Republic and Russia, agreeing the export of up to 500,000 barrels of Iranian oil daily in exchange for Russian consumer goods, machinery and investments.

What’s the point of the sanctions, then?

All this doesn’t mean the sanctions have been useless. Even putting aside the fact that sanctions were the only viable alternative to military action—that is, at least until the negotiating process over Iran’s disputed nuclear program began—they are not as ineffective as they may seem.

Tehran’s methods of evasion may alleviate the negative effects of sanctions, but they do not completely compensate for the losses. Besides, getting around the sanctions is expensive and inconvenient—and it only works when the sanctioned country is ready to pay for it in the form of extra premiums on services or discounts to buyers. With the drop in the volume of oil exports and obvious Western attempts to shatter the non-oil sector of the Iranian economy, Tehran’s sources of income have become extremely limited. The negative influence of sanctions has also become more palpable to ordinary Iranians the longer they drag on.

Iranian President Hassan Rouhani’s promise to ease tensions with the West shows clearly how concerned the Islamic Republic’s authorities are about the economic and social impact of the sanctions. As the negotiations enter their final stage, the Iranians must keep in mind that, if the US and EU decided to resume full-scale pressure on Iran, the only thing they would need to be successful in undermining the Iranian regime is time.

Subscribe to the discussion