Tag Archives: Dubai

Gold and the Monetary Blockade on Iran

This blog post is a guest post on BullionStar's Blog by the renowned blogger JP Koning who will be writing about monetary economics, central banking and gold. BullionStar does not endorse or oppose the opinions presented but encourage a healthy debate.

With Donald Trump close to re-instituting economic sanctions on Iran, it's worth remembering that gold served as a tool for skirting the the last round of Iranian sanctions. If a blockade were to be re-imposed on Iran, might this role be resuscitated?

The 2010-2015 Monetary Blockade

The set of sanctions that the U.S. began placing on Iran back in 2010 can be best thought of as a monetary blockade. It relied on deputizing U.S. banks to act as snitches. Any U.S. bank that was caught providing correspondent accounts to a foreign bank that itself helped Iran engage in sanctioned activities would be fined. To avoid being penalized, U.S. banks threatened their foreign bank customers to stop enabling Iranian payments or lose their accounts. And of course the foreign banks (mostly) complied. Being cut off from the U.S. payment system would have meant losing a big chunk of business, whereas losing Iranian businesses was small fry.

One of the sanctioned activities was helping Iran to sell oil. By proving that they had significantly reduced their Iranian oil imports, large importers like Japan, Korea, Turkey, India, and China managed to secure for their banks a temporary exemption from U.S. banking sanctions. So banks could keep facilitating oil-related payments for Iran without being cut off from the dollar-based payments system. The result was that Iran's oil exports fell, but never ground to a halt. This was a fairly balanced approach. While the U.S. wanted to deprive Iran of oil revenue - which might be used to build nuclear weapons - it didn't want to force allies to do entirely without necessary crude oil.

The U.S. Iran Threat Reduction & Syria Human Rights Act of 2012 (TRA) further tightened the noose. The TRA prevented Iran from repatriating any of the oil & gas funds that were accumulating in foreign escrow accounts maintained in Turkey, Japan, and elsewhere. To enforce this restriction, any bank proven to repatriate Iranian oil money would be cut off by its U.S. correspondent bank, thus losing its connection to the U.S. banking system.

The inability to unlock funds was inconvenient for Iran. There was no useful purpose to which the pariah nation could put all the Japanese yen, Indian rupees, Chinese yuan, or Turkish lira that was piling up in its overseas escrow accounts. Iran could still buy non-sanctioned goods and services in these countries and bring them back to Iran, say food, medicine, and whatnot. But none of the oil-importing nations provided Iran with enough importable stuff that it could draw its account balances down to zero. The funds held in escrow were dead money.

Gold Enters the Scene

This is where gold was recruited as a useful payments rail for evading the sanctions. The scheme was carried out primarily through Turkey. Gold dealer Reza Zarrab, one of the most well-known expediters of the scheme, designed an escape hatch for Iranian funds along with bank officials at Halkbank, a Turkish state-owned bank. Iranian funds frozen in a Halkbank escrow accounts (denominated in Turkish lira) were transferred to accounts held at Halkbank by Zarrab's shell companies and used to buy gold in the Turkish gold market.

This technically was not illegal. While an earlier set of sanctions had prohibited banks from directly helping the Iranian government to deal in gold, it was still legal for them to help “private” persons to access gold, as long as the gold was sent to Iran and not elsewhere. Zarrab sent some of this gold directly to Iran. The rest was exported to Dubai where it was sold for dollars, the cash being returned to Turkey where Zarrab laundered it back into the banking system. Now the Iranian government could finally make use of it. Below is a chart that Zarrab made at his 2017 court trial that illustrates the complexity of the gold trade.

"Iranian gold transaction," an illustration of Zarrab and Halbank's method for moving Iran's frozen funds (source)

This size of this loophole was significant. According to Reuters, Turkish gold exports to Iran exploded from one tonne in 2011 to 125.8 tonnes in 2012, worth $6.5 billion. Another $4.6 billion was sent to Dubai, most of this ultimately destined for Iran. Below I've charted Turkish gold exports from 2008 to present. You can see the big bulge in 2012-13.

The large inflow of Turkish gold helped keep Iran afloat. It was only in mid-2013 that the "private person" loophole was finally cut off. Banks like Halkbank, which before could only be penalized for engaging in gold dealings with the Iranian government, were now prohibited from enabling gold payments for private Iranian entities as well. Gold shipments out of Turkey slowed to a trickle.

Turkish Gold Exports: 2008 to Present (millions US$)

While Zarrab continued to illegally export small amounts of gold, he focused on a different form of sanctions busting: moving Iranian funds locked in Turkey to Dubai by using fake invoices for food and medicine as cover. But this too came to an end. During a visit to Disney World with his family in 2016, Zarrab was arrested and accused of helping Iran evade U.S. sanctions. In late 2017, he accepted a plea agreement and became the key witness against a number of Halkbank officials and Turkish government officials. Only one of them, Mehmet Atilla, has been convicted to date, the rest remain at large.

The Advantage of a High Value-to-Weight Ratio

In theory, the funds held in Iran's escrow accounts at Halkbank could have been used to buy any sort of commodity, say copper, and then the copper shipped to Iran (or Dubai). The reason that gold was probably chosen as the in-between commodity is because it has a higher value-to-weight ratio than most commodities. Whereas an ounce of gold conveys $1300 in value, it would have required around 6,500 ounces of copper to convey $1300 in value. The extra bulk involved would have been very costly to ship.

Value-to-weight ratios (source)

Another advantage of gold relative to other commodities is that it is highly liquid. There are markets for the yellow metal all over the world that attract the participation of a wide range of buyers from consumers to industrial users to jewelers. Copper is much less marketable. Because Iran needed to on-sell whatever commodity was being used as the in-between commodity in order to get hard currency like euros and dollars, gold would have been the most convenient option.

A Monetary Blockade in 2018?

The monetary blockade that began in 2010 was eventually successful. Iran was forced to come to the negotiating table and in 2015 the Iran nuclear deal was signed. Zoom forward to today. Trump has left the nuclear deal and is threatening to reimpose sanctions against Iran. Could gold once again become a player in the game played between sanctioner and sanctioned?

One major difference between then and now is that there was significant global buy-in during the last round of sanctions. Prior to setting up the monetary blockade, the U.S. gained support from the United Nations Security Council, including China and Russia. So while certain loopholes were exploited, a broad consensus meant that evasion was not prevalent enough to bring the whole edifice down.

In exiting the Iran deal last month, Trump has done so alone. Presumably this lack of consensus will make any ensuing round of sanctions much more leaky than the initial ones. India, for instance, has already said that it won't comply with the sanctions because they are not UN-mandated. Now, in actuality there probably isn't much India can do to escape the sanctions. The majority of Indian banks will comply because they will be wary about the threat of being cutoff from the dollar-based payments system.

But with a wink and a nod from their national governments, a few banks who don't do much U.S. business may decide to take Iran on as a customer. They will need some sort of popular medium for expediting payments to and from Iran, say gold, euros, bitcoin, or an up-and-coming national currency such as the Chinese yuan. It remains to be seen which one would be selected, but gold certainly has a number of useful properties, as evidenced by the last round of sanctions. Whatever the case, the U.S. dollar's dominant role as a global medium of exchange can only be weakened by another round of Iran sanctions.

Sources used to write this post:

  1. Iran’s Turkish connection, Reuters, 2014 (pdf)
  2. Aggressive U.S. Monetary Policy... in Iran, 2012 (Moneyness blog)
  3. United States of America vs Reza Zarrab et al, 2017 (pdf)
  4. United States of America vs Mehmet Hakan Attila, 2018 (pdf)
  5. Iran's Gold Loophole, 2013 (pdf)
  6. Sanctions Against Iran: A Guide to Targets, Terms, and Timetables, 2015 (pdf)
  7. The Beauty of TRA Section 504, 2015 (Sanctions Law blog)
  8. OFAC FAQs: Iran Sanctions (US Treasury website)
  9. Exiting the Iran deal is a blow to financial transparency and US control, 2018 (Interfluidity blog)

The Most Outlandish Gold Products You Can Buy

BullionStar would like to thank all our friends and customers for supporting us during 2017, and to wish all of you a Merry Christmas and a Happy New Year! To wrap up the year, we have published this light-hearted article about outlandish products made from gold.

Throughout the world, many luxury good companies vie for attention in producing luxury products made from gold, plated with gold, or with substantial gold content. These products tend to be very opulent and usually very expensive because of the gold content and workmanship that goes into them. It seems that nothing is off-limits for receiving the gold treatment.

While a lot of these products may be considered slightly ridiculous, what they have in common is that they are well-designed, mostly customized, and on the whole very valuable. The limited edition nature of the products and the fact that in some cases they are made to order also adds to their rarity value and collectability. Below we profile some of the more outlandish products made from gold, all of which, apart from some one-off customized designs, are available for purchase.

Gold Fidget Spinner

By now, nearly everyone will have heard of fidget spinners, the spinning toy which gained worldwide popularity in 2017. Tapping into this trend, Russian luxury gift specialist ‘Caviar’ released a limited-edition fidget spinner in mid-2017, made from 100 grams of 18-karat gold. As the world’s most expensive fidget spinner, Caviar’s gold fidget spinner model retails for nearly RUB 1m (US $17,000), but is now sold out on the company’s website.

The World's most expensive Fidget Spinner

Golden Tricycle

Toy manufacturer Wisa Gloria is famous in Switzerland for producing a traditional tricycle for young children. However in 2010, Wisa Gloria collaborated with designer Werner Harerer in producing a 24-karat gold-plated version of its classic tricycle, complete with gold-plated wheel bearings.

Wisa Gloria's Gold-Plated Tricycle for 3 - 5 year holds. Source: WikiMedia Commons

Gold Nikon Camera

Nikon is one of the top names in high-end cameras, and its products are synonymous with quality and used widely by professional photographers. Now luxury technology company Brikk, based in California, has gone one step further and created a limited-edition gold Lux Nikon DF camera with matching lens. Both camera and lens are finished in pure 24-karat gold, and only 77 units of this edition have been produced, each costing US $58,000.

Nikon Camera plated in 24-karat Gold. Source: Company website

Gold Shirts

Some readers will be familiar with the story of a customized gold shirt produced for a man in India a few years ago. However, there were actually 2 shirts made for two different Indian men at about the same time. The first famous Indian gold shirt was made in 2012 for a money-lender in Pune called Datta Phuge. This shirt was stitched from 22-karat gold strands, weighed 3.32 kgs, and at the time was said to be worth US$ 240,000.

Pankaj Parakh in a gold shirt, flanked by bodyguards

The second famous shirt made entirely of gold was commissioned in 2014 for a politician / textile businessman named Pankaj Parakh from near Mumbai. This shirt weighed 4 kgs, was made from 18-22 karat gold and cost about US$ 210,000.

Gold staples

These 14-karat gold-plated staples are available from Dutch design company Oooms. Deisgned to be used either as a form of jewelry stapled to clothes or even as luxury conventional staples, they come in a pack of 24, and can be purchased for Euro 59 (about US$ 69). This works out at just under US$ 3 per staple.

Gold-Plated Staples. Source: Company website

Gold Dumbbells

Those who like to work out while being surrounded by gold and opulence might want to consider gold dumbbells. One such company that products gold weights is UK-based Custom Gym Equipment, a specialist in luxury fitness. According to its website, its client-base comes from “the super yacht world, luxury hospitality, luxury interior design and luxury private homes”.

Golden Dumbells. Source: Company website

Gold Table Football (Foosball)

There are a number of high-end table football (foosball) designs on the market, but one of the more luxurious offerings is a gold limited edition foosball table from Italian company Teckell. The table casing, legs and playing field are made from crystal glass, with one of the teams of players is plated with 24k gold, while the other team is decked in chrome. This table retails for around US $24,400.

Luxury Table Football with gold-plated players. Source: YLiving website

Gold Vacuum Cleaner

US company Go Vacuum hit the news in 2012 when it created a limited edition gold-plated vacuum cleaner which retailed for US$ 1 million. Made using 24-karat gold, the gold-plated model GV62711 was limited to 100 units and was a fully functional working vacuum cleaner. Each unit also came with its own engraved serial number and certificate of authenticity.

Gold-Plated Vacuum Cleaner - One of the more ridiculous items made of Gold. Source: www.inhabitat.com

Gold-Plated Supercars

From Ferraris to Lamborghinis, and from Porsches to Mercedes, there are many gold-plated and gold painted supercars on the streets of Dubai. When an expensive sports car is not enough, then the next step is to cover it in gold, like this Ferrari 599 GTB Fiorano

Ferrari 599 GTB Fiorano

Gold Christmas Tree

In 2011, Japanese gold and jewelry company Ginza Tanaka, headquartered in Tokyo, created a pure gold Christmas tree. Containing 12 kgs of gold and standing 2.4 metres tall, the tree is also adorned with gold ornaments, and when it was made cost 150 million yen (which at the time was nearly US$ 2 million).

Ginza Tanaka Gold Christmas Tree

And there you have it folks! While the above list is a selection of some of the fairly outlandish gold laden items that are on the market, at BullionStar we still recommend that you to buy lasting gifts for your loved ones this Christmas and New Year in the form of bullion bars and bullion coins!