Iran sees boom in cross-border fuel and goods smuggling

FT.com

As the US and European Union tighten sanctions on Iran, a lucrative cross-border industry of smuggling fuel and goods has emerged, bolstered by a sharp drop in the value of the Iranian currency.

Fuel, especially diesel, is being moved illegally out of the country through cities bordering Afghanistan, Pakistan and Turkey, says Alireza Zeighami, deputy oil minister for refining and distribution.

Illegal trade is blossoming in both directions. Iran’s neighbours export basic electrical appliances and the latest fashions at a mark-up, while oil-rich Iran offers diesel and other products that it can sell at a higher price just across the border.

Between 7m-10m litres of petrol and diesel are smuggled out every day, according to Iranian state media. Analysts are attributing a 7 per cent rise in fuel consumption to an increase in smuggling activity.

Diesel is priced at 3,500 rials (14 cents) a litre but smugglers can sell it at about seven to 10 times more to Iran’s neighbours.

In an attempt to end the illegal business that experts say has recently become more profitable than drug-trafficking, the government of President Mahmoud Ahmadi-Nejad is pushing for an increase in petrol prices.

“Smuggling will decline if prices change,” says Mr Zeighami.

But fuel is not the only commodity taken out of the country.

Esmail Ahmadi-Moqaddam, national police chief, said in March that subsidised basic foods such as wheat, flour and meat were also channelled out of the country because of the drop in the value of the rial, which fell 50 per cent in the past year. The Iranian government has announced that it will “gradually” cut subsidies on essential goods.

“Some border residents have got used to earning a meagre income through a business [smuggling] that is against production and construction,” said Mr Ahmadi-Moqaddam.

However, even merchants are increasingly relying on smuggled home appliances and cloth to bypass stringent import rules and avoid losses sustained because of the changing value of the rial.

Iranian border areas – home to different ethnic minorities – are largely under-developed. Hence, youth unemployment – which is officially at 28.6 per cent – is believed to be higher in border provinces, forcing many people to resort to smuggling to make ends meet.

Payam, an Iranian-Kurd in the northwestern town of Baneh, who works both at a state-run entity and is involved in illegal imports of clothing, attributed the smuggling to economic woes, notably inflation of about 30 per cent, which have been intensified by sanctions.

“My annual income from the state job was IR60m ($2,423.8) last year which was not sufficient to pay for rent and the bills but my income from illegal imports of jeans in the same year was IR1,800m ($72,715.5),” he says, adding that the smuggled goods find their way to the main shops in Tehran and the northwestern city of Tabriz.

Some Tehran residents do not buy household goods from the capital city markets any more. Instead, they order smugglers to bring them televisions, air conditioners and other home appliances through Kurdistan and hence pay far less. A smuggled Sony LCD television is sold at IR66m, 25 per cent less than the rate in Tehran.

“Iran’s economy would be brought down to its knees if smuggling [into the country] is stopped,” says Hamid-Reza, a shopkeeper, who sells audio-visual devices in Jomhouri Street, downtown Tehran.

Copyright The Financial Times Limited 2013.