Sanctions Don't Work Because IRAN Doesn't Feel Them

Remember that scene in the first Rocky movie, where Apollo Creed is hitting Rocky with everything he has and the Italian Stallion keeps screaming at him "YOU AIN'T SO BAD !" That is the way Iran reacts to the UN Sanctions against it. I am not suggesting that Iran is a sympathetic character like the Rocky in the movie. But I AM suggesting that we close the "Holes" in the sanctions that allow Iran to ignore them. Most of those "Holes" are in Dubai, Iran's good friend and trading partner. It is the actions of Duabi which allow Iran to avoid sanctions:

Iran's Ability to Avoid Sanctions
OLIVIER GUITTA
Published: June 23, 2008
Embarking upon what was described as his European farewell tour, U.S. President George W. Bush made a point last week of focusing on the Iranian issue with his European allies. Britain's Prime Minister Gordon Brown announced that he was ready to add more sanctions to pressure Iran to give up its nuclear program. At the same time, the Iranian media revealed that in the past few months, Iran, anticipating this move, had withdrawn close to $75 billion of deposits from European banks. This is just an example of why the international sanctions have been somewhat weak. Indeed, Iran has quickly adapted and found a way around the sanctions.

Iran's main conduit in avoiding sanctions has been Dubai in the United Arab Emirates. There are historical reasons for this: since the beginning of the 20th century, Dubai and Iran have enjoyed close trade relations. Also, Dubai welcomed several waves of Iranian immigrants.

Not a week goes by without an Iranian minister or official visiting Dubai.

The 350,000 Iranians of Dubai compose the third largest community after the Indians and the Pakistanis. The large fortunes belong to families of Iranian origin. There are 8,200 Iranian companies today in Dubai compared to 6,500 in 2005.

Dubai has become Iran's back-up base and Iranian companies that do business abroad prefer to be based in the emirate. More than 200 flights each week link Dubai to the main Iranian cities. The port ships merchandise of all kinds to Iran, from cars to electric machinery and food.

The official trade figure between the two countries is $6 billion annually, but the smuggling amounts to an estimated additional $1.2 billion a year. Out of that $1.2 billion figure about $250 million stems from U.S. goods, supposedly banned from entering Iran.

These goods are mostly transported by boat and are never controlled by U.S. warships patrolling the Gulf. Dubai authorities are very lax in enforcing any kind of trade ban and let this traffic thrive.

Dubai is not only a great trade hub for Iran but also a financial one. In recent years, Dubai has become the main place for Iranian capital. According to one economist, Dubai received 50 percent of the $20 billion that left Iran in the past 10 years. Dubai is literally the cash cow for Iran in the sense that it accepts billions of dollars of Iranian deposits in cash.

Recently a diplomat said regarding Dubai: "One can show up at a bank with $300 million in cash in a suitcase, the bank will accept the deposit without any problems."

And this is common practice even after the United States put pressure on Dubai to give up this cash transaction business. Another worrisome trend is Iran's ability to use investment funds domiciled in financial tax havens. There are rumors that Iran would like to open a huge $90 billion fund within the Dubai Financial International Center.

Apart from the U.N. sanctions, the U.S. Treasury has led an aggressive campaign to apply targeted financial sanctions. It has succeeded in getting help from various governments and more importantly from large Western banks. This had promising results and it has been tougher for instance for Iranian industrials to obtain letter of credits.

But once again, Iran is finding a way around. In fact, letter of credits are now opened by Pakistani banks, second-rate banks in China, or Arab banks in Dubai or even Western banks such as German saving banks or Swiss cantonal banks, for instance.

In fact, these banks that have no commercial interests in the United States are happy to do business with Iran by increasing their usual fees by 10 percent to 15 percent.

It just goes to show how difficult it is to impose worldwide sanctions on Iran.

Indeed there will always be firms or banks or governments for that matter that will see opportunities to do business with the Islamic republic. Since 2003, Iran signed for $20 billion worth of contracts with foreign companies.

Also a troubling statistic: from March 2007 to January 2008, non-oil exports have increased 13.8 percent. Also, China, Iran's largest trading partner, is allegedly on the verge of opening a tax-free zone in the Gulf that will primarily serve Iranian clients. Interestingly, a number of U.S. companies are always present in trade shows organized in the tax-free zone of the Iranian island of Kish.

Even though it is creating small problems for Iran, the international community must now realize that the sanctions passed have had overall a negligent effect on Iran's economy.

Unfortunately, the pressure applied to the mullah's regime in Tehran is not having the desired effect. Tehran is far from giving up its "God-given right" to a military nuclear program and on the contrary, it actually seems even more emboldened to challenge the international community. In light of this, the odds of military action is growing by the day.

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Olivier Guitta, an adjunct fellow at the Foundation for the Defense of Democracies and a foreign affairs and counterterrorism consultant, is the founder of the newsletter The Croissant (www.thecroissant.com).