US sanctions see Iranian consumer demand fall

The Iranian souk in Khasab, an Omani port on the Strait of Hormuz, is deserted.

Just four months ago, this network of low-rise trading posts, only 100km from the Iranian mainland, was a vibrant hub of commerce with Iran.

Late last year tougher US sanctions tightened Iranian access to international finance, restricting Tehran’s ability to convert crude oil exports into hard currency. Since then, the Iranian rial has collapsed.

Its 60 per cent decline in value against the dollar on unofficial currency markets has staunched Iranian demand for consumer goods. For traders in Khasab, on the Musandam peninsula, the impact has been disastrous. Mohammed Sharif, a trader in consumer goods, says his business has plummeted to a fifth of what it was four months ago.

“This place was busy, but now look at it,” says another Omani trader, hoping to sell televisions from Dubai to customers in Iran. “Who can tell what will happen if there is a war.”

Khasab’s dormant souk is a vivid illustration of the ripple effect that US sanctions are having on Iran trade, as well as the broader deterioration in the centuries-old links between the Gulf and Iran amid rising concern over the Islamic republic’s nuclear programme. The problems are not unique to Khasab; traders in Dubai and elsewhere in the Gulf are also feeling the impact of the US sanctions and a weak and volatile rial.

Global banks have stopped financing Iranian trade as US sanctions threaten to cut off any institution that does not carry out sufficient due diligence on its Iranian counterparts. “The sanctions have obviously not completely shut Iran off from the flow of international trade but have done much to limit it,” said Farhad Alavi, a Washington-based lawyer.

Iran, struggling to do business in dollars, now advocates a mix of barter deals and non-dollar transactions, bankers say. “Limitations placed on Iranian banks by the tightening of sanctions are arguably cornering Iran into alternative payment arrangements,” says Mr Alavi.

Iran now swaps crude oil for staples with China and Russia. This weekend, it confirmed it had agreed with India to use rupees instead of US dollars in bilateral transactions. “The commercial trade between Iran and India will be in rupees, according to agreements between the two governments,” said Ahmad Sobhani, the Iran foreign ministry’s director-general for west Asian affairs on Saturday, according to the official IRNA news agency. At the same time, Turkey, has reported a sharp increase in corporate registrations from Iranian-backed companies over the past year.

Meanwhile, the trade between Iran and Dubai and Oman is declining fast as demand for consumer goods falls.

Traders in Dubai, whose Iranian forefathers helped turn a sleepy fishing village into the Gulf’s commercial heart, say the currency’s decline is hitting them hard. “The currency is broken,” says Mohammed Reza from the bow of his old dhow moored off the wharf on Dubai’s creek.

The value of re-exports – goods shipped via Dubai – to Iran rose 22 per cent between the second and third quarters of 2011, according to the latest statistics from Dubai. This could reflect the fact that ships’ manifests can be changed in Dubai to avoid international censure. The effect of the rial’s collapse will be reflected when the following two quarters’ statistics are published, officials say.

Volatility in the Iranian currency, triggered by intermittent government attempts to prop up the rial, has also caused havoc. One Dubai-based financier stopped financing the trade in white goods across the straits to Iran as the volatility of the rial forced him out of business, a Khasab port official said.

Meanwhile, it is not only trade with Iran that is under threat in Dubai, but the role that the city has played as Iranians’ window on the world.

Iranian expatriates say they feel less welcome in the city, which, as part of the United Arab Emirates, is increasingly wary of Iranians.

Iranians are shifting businesses out to more welcoming locations, such as Turkey, as residents and visitors, from traders to students, say procuring visas is becoming increasingly difficult.

“Each time we apply, there is one answer: no, and we cannot question it, as it is on the grounds of ‘national security’,” says one businessman. “It’s becoming harder to stay here.”

Additional reporting by Monavar Khalaj in Tehran

Copyright The Financial Times Limited 2012.