FT: Iran – swamped by corruption

Here is the analysis by FT:

The young Iranian businessman was tempted when government officials put the deal in front of him. An importer, he had seen his business dwindle as US banking sanctions choked off access to credit – a situation that was unlikely to improve any time soon. But the officials at Iran’s ministry of industry, mining and trade had a proposal that could change all that.

It was a simple idea: buy oil from the government, sell it privately and receive a commission, then use the dollars from the sale to import the commodities Iran desperately needs. The plan would be good for him – and good for his country.

The EU had imposed new sanctions on Iran just a few months earlier, in July 2012, cutting the regime’s oil revenues almost in half. What Tehran could still earn in foreign exchange, meanwhile, was blocked in overseas banks that were subject to US banking sanctions.

Why not? he asked himself.

“Selling oil could earn me huge amounts of money,” said the importer, who has dual nationality.

He flew to neighbouring Dubai to find out how to get started. First, he needed buyers for the unofficial oil transaction. One of the potential customers was an Omani man in his thirties wearing gold chains and flanked by Russian models, “just like a Hollywood movie”.

He also made contact with a German oil trader but by then he was growing uncomfortable. “This could be a trap,” he thought. “Western intelligence services play such games. I told myself: ‘What if my [western] passport was at risk?’” In the end, he decided against the murky deal.

But senior figures in the government of Mahmoud Ahmadi-Nejad, the former fundamentalist president, and the elite Revolutionary Guards, found other Iranians to implement their scheme – and turned them into billionaires almost overnight, according to businessmen and former officials.

The secret oil deals were only one example of the widespread corruption that reformists say characterised the regime of Mr Ahmadi-Nejad, whose second term came to an end last year.

The corruption, along with western sanctions, brought the Iranian economy to its knees. Deep concern over the weak economy was a main driver behind Iran’s attempt to reach an agreement over its nuclear programme and end international sanctions.

In the trading scheme, the government granted oil allocations to its accomplices at big discounts. They earned high commissions as long as they could bring cash or basic commodities back into the country.

Thanks to their anonymity – the recruits were not known businessmen or politicians – they could use information from back channels to sell crude to new customers, or even previous importers of Iran’s oil, by changing transport routes.

The crude could first be shipped to Asian countries such as Malaysia, where it would either be reloaded on to other tankers or put in storage before being sold labelled as another country’s oil. Iran’s oil could also be taken directly to Iraq or Oman to be sold as those countries’ crude.

Or there could be discounted spot sales conducted on tankers at sea. The buyers, which sources say could have included Asian armies or navies that did not necessarily have to account for their expenses to their governments, paid in cash.

Although the policy was disguised as an economic necessity to preserve national security, not all revenues from the oil sales made it back into the state coffers. While the exact total is unknown, the amount of lost revenue could be staggering: some knowledgeable Iranian economists say it could be as high as $20bn. Much of this money is thought to have ended up in foreign accounts held by participants in the scheme.

Some of the traders have disappeared. Others contend they cannot access the money because their accounts were frozen by banking sanctions, or that the money was lost in the inter-banking transactions used to circumvent sanctions, according to businessmen, politicians and economists.

The attempt to circumvent the crippling sanctions imposed over Iran’s nuclear defiance led to widespread and devastating corruption. It represents the most difficult domestic challenge facing Hassan Rouhani, Mr Ahmadi-Nejad’s more moderate successor.

Mr Rouhani took office to find, as he said last October, the Treasury “empty”, corruption “shocking” and an economy saddled with debt. Inflation stood at about 40 per cent and youth unemployment was 24.3 per cent – conditions unseen in 50 years.

“Some individuals claimed they could circumvent sanctions but in fact they circumvented the nation,” Mr Rouhani said this year.

Estimates of how many people were involved in oil scams vary from a handful to as many as 100. But economists and former officials reckon about two dozen people participated, most either acquaintances or relatives of senior politicians and members of the military.

There are suggestions that Iran’s intelligence agents have been looking for some of these individuals in neighbouring countries such as Turkey and Dubai as well as Malaysia. There have also been rumours that Iran has kidnapped some of those involved in the scam and has tricked others into returning to the country.

Beyond the sanctions-busting oil scheme, as much as $200bn in petrodollars is believed to have disappeared during the eight years of Mr Ahmadi-Nejad’s rule – or 30 per cent of the country’s total oil revenues of $650bn, according to estimates by economists and analysts. During his tenure, oil income almost equalled the total earned in Iran since oil was discovered in the country a century ago.

In February, the Supreme Audit Court took the rare step of acknowledging that $53bn of oil revenues were not transferred to the Treasury between March 2012 to March 2013 alone. The fate of $1bn between March 2006 to March 2007 was also unclear.

Iran has a long history of cronyism and corruption under its monarchies and the Islamic Republic. But the scale of corruption under Mr Ahmadi-Nejad was of a different order, according to both reform-minded and conservative politicians.

Iran entered one of its most repressive periods after the 2009 re-election of Mr Ahmadi-Nejad. Widespread protests broke out in response to alleged vote-rigging, prompting a government crackdown. Reformist politicians were purged and pro-democracy activists and journalists were jailed, tightening the fundamentalists’ grip on power. The moves ensured that there would be no checks and balances on those in power.

The government of Mr Rouhani is still trying to figure out the extent of the damage, with some economists estimating as much as $500bn was lost through corruption in the past decade.

Beyond the oil sales, there were, they say, various methods developed to skim revenues from the state. More than $120bn worth of stakes in state-run companies were given to loyalists at dramatically depressed rates.

An extreme example of this was in 2009 when the Telecom Company of Iran was given to a consortium affiliated with the Guards for $7.8bn – a rate described by reformists as far lower than the real price. Many consider the company to be a cash cow to help fund the force and its cronies.

Meanwhile, fraud involving the over-invoicing of imports became common practice.

Bank loans were given at rates that were substantially lower than the inflation rate, ostensibly to generate jobs. But in reality these loans were used for other purposes, such as importing sports cars or buying land in big cities at low prices that was then traded for astronomical sums.

“Iran has never seen corruption so massive which covers so many layers [of the society and the regime] and so deep in terms of the amounts of money misused,” says Hossein Raghfar, an economist.

It is still unclear whether there was an orchestrated campaign of corruption. Some say it simply flowed from a desire to keep Mr Ahmadi-Nejad in power, which required bribing various power centres or involving people in corruption so that they could be blackmailed if necessary.

There is little doubt, however, that the imposition of sanctions accelerated corruption, which was justified as essential to protect the nation.

According to Iranian economists, Iran’s gross domestic product growth could easily have reached 8 per cent under the Ahmadi-Nejad government were it not for corruption.

Despite relatively sluggish oil income under Mohammad Khatami, the reformist president from 1997 to 2005, GDP growth rates reached as high as 7.4 per cent. Yet the rate was nearly minus 6 per cent in the last year of Mr Ahmadi-Nejad’s administration even though oil revenue was higher – despite sanctions.

A symbol of cronyism

For many Iranians, Babak Zanjani, a mysterious businessman with a modest background, has become the symbol of this corruption. The extent of his wealth – some of which was held in an account with the First Investment Islamic Bank in Malaysia, which he said he set up about three years ago to help avoid sanctions – remains a mystery.

Before being arrested in December on accusations of “fraud and disruption of the country’s monetary system”, he claimed he was worth $10bn. Attempts to reach him or his attorney for comment were unsuccessful.

The oil ministry contends Mr Zanjani owes the ministry $2.7bn for oil he sold in 2012. He has said he transferred $17bn of the oil money back to Iran but some transactions were stuck in his foreign accounts because of the sanctions.

“About €3bn in stolen oil money [in one case] for an economy as big as €300bn indicates total contamination of the system,” says a former economic official. “This level of corruption means that the system has imploded.”

Akbar Torkan, a senior adviser to Iran’s president, told the Financial Times that Mr Zanjani was one of the most prolific sellers of oil. “But probably there are some more like him. I do not know how many there might be and do not know how much oil money they have to return to the Treasury,” he said.

Walking a tightrope

Mr Rouhani and his allies are walking a tightrope in their anti-corruption campaign. Should the president over-reach, the pillars of the regime could be rocked, exposing some of the country’s most senior figures and politicians. Many believe Mr Rouhani’s government could gradually undermine the corrupt segments of the economy. Yet they note that sanctions – notably banking restrictions – limit his room to manoeuvre.

“Can Rouhani keep saying individuals are not allowed to be involved in the oil business if wheat does not arrive on time [because of banking sanctions]?” asks one economist. “No. Then you’ll give it to anyone just to meet basic needs.”

Nonetheless Mr Rouhani has so far managed to bring professionals back to the oil ministry and central bank, replacing cronies installed by the previous administration. This has helped stop oil trading by individuals and halt the practice of handing out new projects without tender to the Revolutionary Guards.

In late December, he appointed Es’haq Jahangiri, first vice-president, as head of the Headquarters to Fight Economic Corruption. The unit’s brief is to “detect” those who earned “unjustifiable income” through “misusing special advantages” and “exploiting sanctions” and refer them to the judiciary.

Two days after the appointment Mr Zanjani was arrested. Mohammad-Reza Rahimi, former first vice-president, was indicted in March, apparently on allegations of embezzlement.

Under government pressure, Mah-Afarid Khosravi, a little-known businessman who was charged with $2.8bn embezzlement three years ago, was hanged last month. Mr Torkan said the execution “gives a signal to others that there is no tolerance toward corruption”.

Organisations including the oil ministry, central bank, the State Inspectorate Organisation affiliated to the judiciary and the Supreme Audit Court affiliated to the parliament – refused to comment. Mr Ahmadi-Nejad also refused to comment, as did Mr Jahangiri, who is leading the corruption investigation.

Fighting corruption in Iran’s power centres may cost Mr Rouhani dearly.

Yet endemic corruption also threatens the regime. “Social conditions are ripe for an explosion like what happened in Egypt and Tunisia where people were fed up with unemployment, injustice and corruption,” says a university professor of economics.

“[But] those who benefited from corruption attack Rouhani over so many issues behind which you can see fears for economic interests. They will do their best to prevent Rouhani’s re-election” in 2017, he adds.

To read the full FT story, click here.



About yavuzbaydar

Yavuz Baydar has been an award-winning Turkish journalist, whose professional activity spans nearly four decades. In December 2013, Baydar co-founded the independent media platform, P24, Punto24, to monitor the media sector of Turkey, as well as organizing surveys, and training workshops. Baydar wrote opinion columns, in Turkish, liberal daily Ozgur Dusunce and news site Haberdar, and in English, daily Today's Zaman, on domestic and foreign policy issues related to Turkey, and media matters, until all had to cease publications due to growing political oppression. Currently, he writes regular chronicles for Die Süddeutsche Zeitung, and opinion columns for the Arab Weekly, as well as analysis for Index on Censorship. Baydar blogs with the Huffington Post, sharing his his analysis and views on Turkish politics, the Middle East, Balkans, Europe, U.S-Turkish relations, human rights, free speech, press freedom, history, etc. His opinion articles appeared at the New York Times, the Guardian, El Pais, Svenska Dagbladet, and Al Jazeera English online. Turkey’s first news ombudsman, beginning at Milliyet daily in 1999, Baydar worked in the same role as reader representative until 2014. His work included reader complaints with content, and commentary on media ethics. Working in a tough professional climate had its costs: he was twice forced to leave his job, after his self-critical columns on journalistic flaws and fabricated news stories. Baydar worked as producer and news presenter in Swedish Radio &TV Corp. (SR) Stockholm, Sweden between 1979-1991; as correspondent for Scandinavia and Baltics for Turkish daily Cumhuriyet between 1980-1992, and the BBC World Service, in early 1990's. Returning to Turkey in 1994, he worked as reporter and ediytor for various outlets in print, as well as hosting debate porogrammes in public and private TV channels. Baydar studied informatics, cybernetics and, later, had his journalism ediucatiob in the University of Stockholm. Baydar served as president of the U.S. based International Organizaton of News Ombudsmen (ONO) in 2003. He was a Knight-Wallace Fellow at University of Michigan in 2004. Baydar was given the Special Award of the European Press Prize (EPP), for 'excellence in journalism', along with the Guardian and Der Spiegel in 2014. He won the Umbria Journalism Award in March 2014 and Caravella/Mare Nostrum Prize in 2015; both in Italy. Baydar completed an extensive research on self-censorship, corruption in media, and growing threats over journalism in Turkey as a Shorenstein Fellow at the Kennedy School of Government at Harvard.
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