* U.S. sanctions cut off FX trade via banks
* Then Tehran clamped down on free rial market
* Liquidity, rate-setting process are problems
* But Dubai dealers keeping trading ties open
* Demand for non-government channel likely to persist
By Marcus George
DUBAI, Jan 9 In a drab, neon-lit office deep
inside Dubai's old downtown area of Deira, a middle-aged Iranian
barks into one of six telephones on his desk and taps numbers
into a calculator.
In the space of a few minutes, he juggles multiple
conversations with callers wanting to buy, sell and transfer
Iranian rials. It's a tense, unpredictable job, especially given
the political turbulence surrounding Iran.
The informal currency dealers of Dubai have emerged as an
important link between Iran's economy and the rest of the world,
maintaining flows of money into and out of the country even as
foreign governments and Tehran itself act to constrict them.
After the United States and Europe tightened financial
sanctions against Iran in late 2011, essentially freezing the
country out of the international banking system, the Dubai
dealers' business boomed.
Since businessmen trading with Iran could no longer transfer
their money through normal banking channels, they turned to the
dealers. Iranian savers moving their wealth out of the country
were another source of business.
"Trading went crazy after those sanctions," the dealer in
the Deira office said in a snatched conversation between endless
calls and cups of tea. On one day, he recalled, he handled about
1 billion United Arab Emirates dirhams ($270 million).
But last October, as the rial plunged in value, the
government in Tehran clamped down on the supply of hard
currency. That hit the Dubai dealers hard - both by restricting
the amount of funds they handled and making it harder to gauge
prices acceptable to both them and their customers.
"Now it's different. The government is fixing rates.
Everything is grinding to a halt," said the Deira dealer. He,
like other currency dealers, declined to be named because of the
political sensitivity of his business.
On some days, the dealer said, he doesn't trade at all. On
others, he handles around 10 to 15 million dirhams worth of
businesss - and only with trusted clients.
Nevertheless, Dubai's currency dealers are keeping their
trading ties with Iran alive, providing an important conduit for
Iranians to do business with the rest of the world outside
channels controlled by their government.
"Dubai is the crucial point through which most financial
transactions regarding Iran are facilitated," said Iranian-born
economist Mehrdad Emadi of the British-based Betamatrix
"Informal dealers are the only means of providing currency
for ordinary Iranian businessmen to import commodities."
The introduction of financial sanctions, imposed over
Tehran's disputed nuclear programme, threatened Dubai's status
as a top centre handling trade and investment for Iran.
Most international banks halted business with Iran because
of concern their U.S. interests could suffer. In March 2012, the
global SWIFT interbank network said it was cutting links with
Iran's main financial institutions.
Dubai's dealers were quick to fill the void through hawala,
an informal trading system based on trust and personal ties. It
was first used in the Gulf and the Indian subcontinent centuries
ago, but has successfully been adapted to the modern age.
The dealer in Deira co-owns another dealership in Tehran,
though the two are not formally linked. The set-up allows him to
take in payments in Dubai while paying out in Tehran.
"It's a small trade," the dealer said of a 700,000 dirham
deal he was concluding on a recent day. The client faxed over
details of an Iranian bank account where he wanted rials
deposited; the dealer faxed the details to the Tehran office,
which made the transfer via Iran's nationwide electronic system.
The hawala trade does not appear to violate any regulations
in the UAE. The dealer owns his Dubai currency dealing business,
which is licensed by UAE authorities, along with a silent
partner, a UAE citizen. His office also feeds small traders
across Iran with dirhams, which are welcomed as hard currency by
Iranians as the dirham is pegged to the U.S. dollar.
Comprehensive figures for the number of rial dealers in
Dubai and the size of their business are not available. But the
business is believed to play a major role in sustaining
merchandise trade between the UAE and Iran, which has been
reduced sharply by the sanctions.
Goods exported through the UAE to Iran totalled $3.6 billion
in the first half of 2012, down 32 percent from a year earlier,
according to Reuters calculations based on data from UAE
authorities. Iran's imports from all sources in that period
totalled $26 billion, according to official Iranian data.
Last September, the Dubai currency trade was threatened not
by Western governments but by Iranian authorities.
As the sanctions hurt Iran's economy, ordinary Iranians
scrambled to sell their rials for dollars and gold to protect
themselves against a depreciating currency. This caused the rial
to lose a third of its value within 10 days, hitting an all-time
low of around 37,500 to the dollar in the free market.
Almost all of Iran's hard currency earnings come from its
oil exports, which are run by the government. Aiming to preserve
its foreign exchange reserves, Tehran slashed the amount of hard
currency it provided to the free market and began rationing
dollar supplies to licensed importers at state-set rates.
At the same time it unleashed security forces against the
free market, arresting 50 currency dealers in Iran and freezing
their bank accounts, on charges they were manipulating the rial.
"The government wanted to intimidate the market because it
was no longer in their control," said Emadi. He estimated the
free market rate, now around 32,500, would have dropped as far
as around 45,000 without government interference.
The authorities said a dealer named Jamshid Bismillah was
the ringleader of the manipulation - although other dealers in
Tehran and Dubai told Reuters they had not heard of him.
The fate of Bismillah is not known. Several traders
suggested he was a make-believe figure created as a reminder to
free-market dealers that the government was now in control.
The crackdown has forced many of the Dubai dealers'
counterparties in Tehran to stop trading; those that continue
risk arrest and imprisonment as well as losses because of swings
in the market rate. "Trading has become so volatile there," said
a second dealer in Dubai.
Negotiating deals has become harder without a reliable
reference rate. Iranian authorities offer dollars to registered
importers of priority goods at a rate of around 25,000 rials,
but private traders distrust that because it is state-set.
Despite the difficulties, demand for the Dubai currency
dealers looks set to persist. Some Iranian businessmen are
reluctant to deal with the government's foreign exchange centre
as they believe authorities will use it to track their business
and hit them with taxes.
"If you use the official routes, deal with Iranian banks,
your customer will be subjected to full customs duties," said a
Dubai-based Iranian businessman who exports goods to Iran and
has used hawala dealers for the last 15 years.
A Western businessman in Dubai, who said his company was
owed millions of dollars by an Iranian ministry for services
that it had provided, said he was exploring the use of hawala
dealers and barter arrangements to get paid.
It took months to arrange the last payment from the
ministry, for hundreds of thousands of dollars, he said. At
first, the ministry tried to pay into a company account in the
UAE, but that was blocked; a second attempt succeeded after the
payment passed through an intermediary bank, he said.
Pulling out of Iran because of the payment problems is not
an option, given the country's size and oil wealth, he added.
"We're well-connected with the Iranians and it's worth us
trying to keep in with them in their moment of need. If we don't
continue to support them, they'll never forgive us and we can
kiss goodbye to our investments."