Why Sanctions Won't Hurt the Revolutionary Guards

Iranian boats loaded with goods in Dubai Creek, United Arab Emirates, on July 12. Anne de Henning / ANA

The grizzled Iranian skipper strides barefoot along his wooden ship's bulwarks, taking inventory of his cargo. There are crates of blankets and canned pineapple slices, Chinese tires, even a stack of water-purification machines waiting to be loaded, all bound for the Iranian port of Bandar Genaveh, roughly 500 miles away near the north end of the Gulf. His dhow is hauling other goods, too, but they're best kept out of sight, whether they're taxed or forbidden under Iranian law or banned under U.N. sanctions. The skipper doesn't worry either way. "We can take almost anything to Iran," he says with a grin. Cell phones and other electronics are his most profitable contraband these days, he adds. What happens if the Revolutionary Guards catch him? "They charge a 'fee,' " he says—about $3,000 or $4,000—but they won't confiscate his goods. They just want their cut.

He's hardly an isolated case: dozens of wooden ships like his are bobbing in Dubai Creek's waters, just across the Gulf from Iran. Thanks to the dwindling traffic of big container ships from Dubai to the Islamic Republic, business is booming for the Iranian skipper and a whole fleet of smugglers like him—as well as for the group that dominates Iran's black market: the Islamic Revolutionary Guard Corps. The latest U.N. sanctions were designed to punish the Revolutionary Guards for running Tehran's covert nuclear program. But the trouble with sanctions is that they squeeze out legitimate businesses and leave the field wide open for the IRGC, which has spent decades mastering the art of sanctions-busting. "You're using pinpoint sanctions against the very entity that's best positioned to evade those sanctions," says Matthew Levitt, a counterterrorism expert at the Washington Institute for Near East Policy. An Iranian businessman in Dubai, asking not to be named because of the subject's sensitivity, puts it succinctly: "You're enriching the people the sanctions are trying to target."

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The size of Iran's smuggling industry has been estimated at $12 billion a year, and the IRGC is believed to control much, if not all, of it. The charge is impossible to confirm, of course, but only the Revolutionary Guards have the resources to run such a massive operation—and the influence to keep it from being shut down. Analysts say the organization has the structure of a mafia network, with dozens of seemingly legitimate front businesses that mask illicit enterprises or serve as money laundries. "[They're] extremely creative [with] front organizations, which they'll open and shut regularly," says Levitt. The IRGC's business operations began more than 20 years ago, at the end of the Iran-Iraq War. Fearful of potential unrest among newly unemployed young men flooding back from the front lines, then president Ali Akbar Hashemi Rafsanjani approved a plan for the IRGC to open companies and bid on government contracts.

The IRGC's involvement in smuggling began about the same time, when Rafsanjani established free-trade areas in Kish and Qeshm, two islands across the Gulf from Dubai. On paper, the islands' duty-free goods were tightly controlled; to thwart profiteers, a national ID was required for each purchase. But the IRGC gamed the system using a list of its members' ID numbers to import scarce household appliances and resell them on the black market. The IRGC had its own private jetties, recalls Mohsen Sazegara, one of the group's founders, who now lives in exile in Virginia: "I saw the Qeshm one personally. The Customs officer wouldn't dare go near them. All the years [when] importing household goods—like radios, TVs, refrigerators—was prohibited, the shops in [Tehran's] Jomhouri Street were stocked full. [Shop owners] would say that travelers had brought the items in from duty-free, but in reality the Revolutionary Guards were bringing it all in from Qeshm."

Traffic only expanded from there. In 2002 Parliament Speaker Mehdi Karrubi revealed the existence of illegal ports in southern Iran. One of his aides later estimated that more than half the country's black-market trade passedthrough some 60 "invisible jetties," as they came to be known. He also claimed that 25 gates at Tehran's airport were handled by the Guards, outside of Customs' control. "They have their hands in everything," says Sazegara. "There were Kurds who helped them smuggle things from Iraq. They even used to buy Saddam's oil during the days of sanctions." (The New York Times reported last week that tanker trucks are hauling huge quantities of oil into Iran from Iraqi Kurdistan.)

The IRGC's smuggling infuriates legitimate traders, who say they're being punished while the sanctions' real targets easily sidestep the obstacles. "Sanctions have affected us in a profound way," says shipping-company owner Morteza Masoumzadeh,the deputy president of the Iranian Business Council in Dubai. "In the past two years we've lost almost 70 percent of our commercial business." He estimates that nearly 400 legitimate Iranian businesses have closed down in Dubai since Washington imposed unilateral sanctions in 2007.

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German businessman John Schneider-Merck, 70, is likewise frustrated. He's done business in Iran for 30 years, and his company still makes upward of $20 million a year there, but he fears it may not last much longer. One of his regular exports to Iran was a synthetic rubber O-ring used in Mercedes and Volvo cars. But it could also be used in military rockets so now it's listed as a dual-use item, and the German government demands an end-user certificate for every one he sells. "How can I ask some bazaari in Tehran for an end-user certificate?" he asks. "Even toilet paper can be classified as dual-use if it's headed for the Army."

That's an exaggeration,but not by much. And as Schneider-Merck points out, shady IRGC companies can easily fake the paperwork they need. One Iranian in Dubai, who asked for anonymity because he ships Xboxes and other supposedly banned goods to Iran, pulls out a cargo manifest listing a woman in Iran as his official importer. She lives in a small coastal town, he says with a chuckle, "and before her we used another lady for about six months."

As Western firms pull out in disgust, even the IRGC's legitimate companies are benefiting. Royal Dutch Shell and Spain's Repsol withdrew from negotiations to develop the giant South Pars gas field in May, after nearly a decade of talks. The Iranian government then handed $21 billion worth of development contracts to a consortium of local firms, including the Guards' construction wing.

Iran's neighbors are worried that the standoff could ultimately spin out of control. In response to the latest U.N. sanctions, which call for the boarding and inspection of ships in the Gulf, the IRGC's naval chief threatened to block its mouth, the Strait of Hormuz. "The Persian Gulf is the center and the most sensitive place in the world," Adm. Ali Fadavi warned. "And we can, at any time, and as much as we want, squeeze this strait." There's one consolation: that would probably hurt Iran even worse than it would the United States.