June 22, 2019

FATF on Pakistan: Excerpt of the Report



Since June 2018, when Pakistan made a high-level political commitment to work with the FATF and APG to strengthen its AML/CFT regime and to address its strategic counter-terrorist financing-related deficiencies, Pakistan has taken steps towards improving its AML/CFT regime, including the recent development of its TF risk assessment addendum; however, it does not demonstrate a proper understanding of Pakistan’s transnational TF risk.. Pakistan should continue to work on implementing its action plan to address its strategic deficiencies, including by: (1) adequately demonstrating its proper understanding of the TF risks posed by the terrorist groups , and conducting supervision on a risk-sensitive basis; (2) demonstrating that remedial actions and sanctions are applied in cases of AML/CFT violations, and that these actions have an effect on AML/CFT compliance by financial institutions; (3) demonstrating that competent authorities are cooperating and taking action to identify and take enforcement action against illegal money or value transfer services (MVTS); (4) demonstrating that authorities are identifying cash couriers and enforcing controls on illicit movement of currency and understanding the risk of cash couriers being used for TF; (5) improving inter-agency coordination including between provincial and federal authorities on combating TF risks; (6) demonstrating that law enforcement agencies (LEAs) are identifying and investigating the widest range of TF activity and that TF investigations and prosecutions target designated persons and entities, and persons and entities acting on behalf or at the direction of the designated persons or entities; (7) demonstrating that TF prosecutions result in effective, proportionate and dissuasive sanctions and enhancing the capacity and support for prosecutors and the judiciary; and (8) demonstrating effective implementation of targeted financial sanctions (supported by a comprehensive legal obligation) against all 1267 and 1373 designated terrorists and those acting for or on their behalf, including preventing the raising and moving of funds, identifying and freezing assets (movable and immovable), and prohibiting access to funds and financial services; (9) demonstrating enforcement against TFS violations including administrative and criminal penalties and provincial and federal authorities cooperating on enforcement cases; (10) demonstrating that facilities and services owned or controlled by designated person are deprived of their resources and the usage of the resources. The FATF expresses concern that not only did Pakistan fail to complete its action plan items with January deadlines, it also failed to complete its action plan items due May 2019. The FATF strongly urges Pakistan to swiftly complete its action plan by October 2019 when the last set of action plan items are set to expire. Otherwise, the FATF will decide the next step at that time for insufficient progress.

World's Biggest Lift Irrigation Project Is Flowing in India

By The Associated Press

June 21, 2019

HYDERABAD, India — Pumping stations on Friday began lifting river water toward parched land in southern India in what is said to be the world's largest such irrigation project.

Some of the 19 pumping stations on the Godavari River lifted water to a height of 618 meters (2,020 feet) to irrigate about 4 million acres (1.6 million hectares) in Telangana state, instead of allowing the floodwaters to flow to the sea.

The project was built in three years at an estimated cost of 880 billion rupees ($12.9 billion).

At its inauguration, the top elected official in Telangana state, Kalvakuntla Chandrasekhar Rao, said the project is the world's largest using lift irrigation. Experts say the Colorado River in the United States and the "Great Man-Made River" in Libya previously had the world's largest lift irrigation projects.

The Indian project comprises 20 reservoirs with canals running up to 1,530 kilometers (955 miles) and underground tunnels stretching to 200 kilometers (125 miles).


"This project will be a game changer and bring prosperity to the entire state," Rao said.

Thunga Lakshminarayana, an independent expert who writes on irrigation and power issues, said water from the Godavari River had been going to waste by flowing into the sea. "Only a lift scheme was feasible to utilize some of this water because the farming land in the state was at a higher altitude," he said.

India sending warships to the Middle East to protect shipping

India sending warships to the Middle East to protect shipping

By Brad Lendon, CNN

CNN reporter gets up-close look at attacked tanker03:02

(CNN) — The Indian Navy is sending two warships to the Gulf of Oman to protect the country's shipping in the wake of a series of attacks on tankers there in the past six weeks.

The guided-missile destroyer INS Chennai and the patrol vessel INS Sunayna "have been deployed in the Gulf of Oman and Persian Gulf to undertake maritime security operations," an Indian Navy statement said.

Surveillance aircraft are also being dispatched in what India is calling Operation Sankalp.

India announced the operation Friday, one day after Iran said it shot down a US spy droneover the Gulf of Oman.

The Indian guided-missile destroyer INS Chennai is shown ahead of its commissioning into the Indian Navy in Mumbai on November 18, 2016. The ship is heading to the Gulf of Oman to help protect Indian shipping from the attacks that have been happening there.

The US and Iran differ on whether the drone was in Iranian or international airspace, but the incident has inflamed an already tense situation that has seen six civilian ships damaged in the past six weeks.

The US has blamed Iran for those attacks and has released video of what it claims are Iranian military personnel removing an unexploded mine from one of the ships that was attacked.

Tehran denies involvement in the ship attacks.

Two tankers were damaged by what the US Navy said are mines in the Gulf of Oman on June 13, and four others were damaged in attacks off the coast of the United Arab Emirates on May 12.

None of the ships damaged in the attack were Indian-flagged, but warnings to mariners in the Middle East have said ships of all flags should be wary. The ships that have been hit do not seem to have anything in common other than location when they were attacked.

INS Chennai, a 7,500-ton, 534-foot-long guided-missile destroyer, is one of the newest and most powerful ships in the Indian Navy. Commissioned in 2106, it carries surface-to-surface and surface-to-air missiles as well as rocket launchers and torpedoes, the Indian Navy says.

The 2,200-ton INS Sunayna is also one of the countries newer ships -- entering the fleet in 2013 -- and is designed for offshore patrol and escort activities.

The India release did not give a location of the ships or say exactly when they would arrive in the Gulf of Oman.

The US has also increased its forces in the Middle East amid tensions with Iran. Earlier this week Washington announced it would add 1,000 troops to the thousands already in the region.

"Indian Navy remains committed to ensuring safety of Indian maritime trade and merchant vessels operating in the region and contributing towards maintaining a stable and peaceful Indian Ocean region," the Indian Navy's statement said.



INDIA: Modern day mango plantations: Short and sweet

Modern day mango plantations: Short and sweet

Times are changing, and so are mango trees. As unusual as it may sound, there are mango trees now that are just 6-feet tall.

By Mukesh Adhikary  

Thursday, June 22, 2017
Published in Businesstoday.in

Times are changing, and so are mango trees. As unusual as it may sound, there are mango trees now that are just 6-feet tall. The regular height of a mango tree can be anywhere between 30 to 40 feet.

This is thanks to agricultural researchers, who have developed a technology that limits the growth of mango trees. A farm in Chittoor, Andhra Pradesh, has large ripe mangoes hanging really close to the ground, some of them even brushing against the soil. The mango plantation has the look and feel of a tea garden - short plants regularly pruned. Reminder - it's not bonsai, the Japanese style of plantation which miniaturises taller plants.  

Those running the farm say disbelief is common among first-time visitors when they see the fruit grow so low. Immediate questions follow: Has something been done to these mangoes? Are they safe to eat?

Ultrahigh-Density Farming

There are two varities of mango growing in the farm - Totapuri and Alphonso. They are safe, and no different than mangoes that grow on a normal-sized tree, just slightly less sweet, vouch the team behind the technology.

The secret to the short height of these mango trees is the ultrahigh-density farming method. It significantly conserves water and land resources by using drip irrigation and high tree densities in combination with a specialized pruning process. The method also decreases the time it takes to bring new mango plantings to maturity.

"Under ultrahigh-density farming, mango trees are grown in rows at the distance of 4x2 metres from one another. The spacing is 4 metres between rows and 2 metres between plants. Comparatively, traditional mango plantations have a spacing of 10X10 metres," Velmurugan from Jain Irrigation, the company behind this agricultural technology, explains.

The yield is way higher in ultrahigh-density plantations due to tight spacing of plants as compared to traditional plantations. The all-India average yield of mangoes in traditional plantations is 2.5-3 tonnes per acre per year. In the case of ultrahigh-density plantations, this average increases to 9 to 10 acres per acre per year.

The trees are short because they are pruned every year after harvest, which usually happens in the months of April and May. The pruning targets branches that won't bear fruits.  Boon for small farmers

"The trees are supplied just the required amount of water. It takes about three years for the trees to bear fruit, unlike normal trees which take 7 to 8 years," Velmurugan says.

Jain Irrigation supplies pulp of the mangoes to juice makers, including big companies such as Coca-Cola to use in the popular mango drink Maaza. The farming method is part of a joint project, titled Project Unnati, between the two companies. Coca-Cola India says the project aims to harness the higher productivity potential of mango farms and allow owners of small-sized farms to increase crop yields and improve their livelihoods.  Under the project, farmers are assured guarantee returns after three years of plantation on their land. Since the yield is higher due to ultrahigh-density farming, farmers get greater returns, claims Jain Irrigation.   Maaza  connect

However, it's early days. So far, about 350-400 farmers are part of the Project Unnati in Chittoor. Jain Irrigation and Coca-Cola are trying to reach out to more small farmers. With Coca-Cola's aggressive plan for Maaza in India, the project is likely to get further boost. The Unnati project team plans to reach out to about 25,000 farmers and cultivate 50,000 acres of mango trees in the next few years. The idea is to increase mango production and also double the sales of Maaza by 2023. "The Coca-Cola Company and its bottlers in India annually procure 70,000 metric tonnes of mango pulp worth Rs. 500 crores. In 2023, if Maaza becomes the first $ 1 billion juice drink brand from India, the Coca-Cola system in India will end up procuring 2 lakh metric tonnes of mango pulp annually, worth nearly Rs. 1100 crores, thereby helping 100,000 farmers," Coca-Cola India says.

June 21, 2019

American Friends of Balochistan's Weisner appeals to Oman and UAE to help Balochistan

American Friends of Balochistan's Weisner appeals to Oman and UAE to help Balochistan

An American woman who has been a fighter for the rights of the voiceless people all her life has written to the governments of Oman and United Arab Emirates to step in to keep Gwadar in Baloch hands and help with creation of a sovereign Balochistan for their own long-term national interests.

Jane Eastwood Weisner, American political activist and General Secretary
of the American Friends of Balochistan, in her letter to Hunaina bint Sultan Al Mughairy and Yousef Al Otaiba, ambassadors of Oman and the UAE in Washington DC, said her support for independence of Balochistan is also in Oman’s and UAE’s interests. “I see this cause as imperative to the security of America and your countries, United Arab Emirates and Oman. Pakistan's occupation of Balochistan has put the strategic Gwadar port in the precarious situation of possible terrorist control?"

Weisner's letter to the governments of Oman and UAE comes in the wake of Chinese President Xi Jinping vision to connect Gwadar with Kashgar as part of his Maritime Silk Road plans and China's ambition to augment its "string of pearls" naval bases by developing a naval base in Gwadar.

She said Pakistan's cozy relationship with the Al Qaeda and ISIS could be problematic for the port's security. “At present, the port's operations are in the hands of China. The Chinese continue to grow more powerful in Central Asia as they expand their sphere of influence,” Weisner pointed out. “Is Islamabad a satellite of Beijing? Has the balance of power already shifted in favor of a Chinese government whose ever growing political and economic power is swallowing up Central Asia?” she asked.

Weisner said the economies of the UAE and Oman depend on free access to the Straits of Hormuz. “Your tankers of oil are the lifeblood of your countries' economies and must never be jeopardized. China's control might appear to be stabilizing in the short run. But never forget the goals of China's Navy to be more of a presence in the area,” she said.

Weisner said the Gwadar Port is a deep water port capable of docking a battleship. “Could China's sphere of influence include a battleship within miles of the UAE's and Oman's shores? At this time, not a possibility, but what about 20 years from now? The world must look beyond the present,” she said.

She emphasized economic growth and stability in the region must be autonomous to the nations of the Arabian Gulf of Central Asia. “Foreign control of strategic waterways cannot be left in the hands of China. Pakistan has chosen to let China suck the economic marrow of the Gwadar Port into her coffers, ever enriching the economic power of China against Baloch wishes.”

She said the question remains, do the UAE and Oman leave their countries' economies at the mercy of an ever growing, greedy China or support sovereignty for Balochistan? “As much as I understand the history of the region, the Baloch have centuries old ties with your countries as they have served your military and in police and have also contributed to business and commerce as loyal citizens,” she said.

Oman king Sultan Qaboos has always held Baloch, who are nearly 40 percent of Oman, in high esteem. Commander of the Royal Oman army is a Baloch named Maj.Gen Mattar bin Salim Al Balushi, while noted Omani businessman Yahya Nasib, chairman of the Yahya Group Holding and owner of the prestigious Dolphin Village, a distant relative of this scribe, was awarded the Order of the British Empire last year by Prince Harry. Tens of thousands of Baloch serve Oman army and police.

Gwadar was part of Oman for nearly two centuries and Pakistan claims it "purchased" it from Oman in September 1958. However, the Baloch are asking Oman to have the sale declared null and void.

Likewise, Baloch have long served in the UAE police, army and palaces of the different sheikhs as caretakers of their camels. One of the prominent families is called the Sharaf family who hold high position in banking and business. A noted member of the family is retired Maj. Gen. Sharafuddin Sharaf, who serves as the Chairman of MAC Sharaf Securities (U.A.E) and is former Dubai intelligence chief.

Weisner emphasized a free and sovereign Balochistan would be an ally not an adversary. “Gwadar must remain a commercial, free trade port. It must not be allowed to be part of China's strategic growth plans,” she concluded..

June 19, 2019

China's caution about loosening cross-border capital flows

China's caution about loosening cross-border capital flows

Fear of financial instability will continue to slow the liberalization of the capital account

By Max J. Zenglein and Maximilian Kärnfelt

Download as PDF1.14 MB

Main findings and conclusions

China is adjusting its management of cross-border capital flows in response to changing economic conditions. Increasing capital outflows and a shrinking current account surplus have spurred Beijing to adjust the ways in which capital can move in and out of the country. It has opened new investment channels for institutional investors and more sectors of the economy to investment by foreign companies.China will continue to closely manage its capital account to prevent financial crises. Despite moves towards integration with the global financial system, China’s leadership has no interest in complete liberalization, which it considers incompatible with the country’s economic system. In its view, rising debts and risks to financial stability make capital controls crucial to prevent capital flight and financial crisis.The careful liberalization of China’s capital account comes with safeguards to prevent financial instability caused by a volatile Yuan (CNY). Worried about capital flight and influence of global financial markets, Beijing wants to maintain its power to intervene and control financial markets if need be. One result is that new investment channels are being restricted in size and come with safety mechanisms to limit negative impacts in the event of a crisis.China’s greater integration with the global financial system does not mean a fully convertible capital account is imminent. Foreign capital has never had better access to China’s financial market and Chinese investors’ access to global financial markets has also improved. Despite new interlinkages, Beijing’s desire for control and dislike of market-induced volatility make full capital account liberalization unlikely.International views on China’s capital account liberalization should be shaped by actions not words. China’s pledges need to be measured against actual steps. The International Monetary Fund has made the Yuan a reserve currency and global financial indices now include Chinese stocks – likely premature rewards for a financial system that remains tightly controlled and limits liquidity of investments.

1. Changing economic needs are nudging China towards capital account liberalization

Since China’s reforms began 40 years ago, international partners have hoped it would fully liberalize its capital account. Western economists see it as a benchmark for reform and Chinese economists have endorsed it as a long-term goal. Five-Year Plans – including the current 13th – have endorsed the goal, and a series of policy changes can be seen as steps towards it. But there is no reason to believe full capital account liberalization is imminent.

China’s integration with global financial markets is already deeper than ever before. China is the world’s second largest economy, its policy decisions about its financial system have effects all over the globe. China’s goal of becoming a global manufacturing powerhouse shook the world economy after its WTO-accession in 2001. Now its growing financial footprint could radically alter the global financial order – and its domestic financial system.

In response to changing domestic and foreign needs, China’s leadership in recent years has reduced restrictions on cross-border financial transactions. But these moves towards full capital account convertibility have seen the country’s leaders balance new economic realities and growing aspirations in global finance with the demands of domestic economic stability.

China’s leadership is keenly aware of the threat that uncontrolled capital movements pose to its ability to control the economy. Yet it also regards as vital for China’s economic development new mechanisms to encourage international institutional investors, to link China’s stock and bond markets with global markets, to help foreign financial institutions do more business in China.

This China Monitor explores this dual perspective and asks how we should understand China’s 2018 financial-sector liberalization. It examines pressure for change, potential benefits of capital account liberalization, and recent changes to China’s financial mechanisms that are meant to expand its global role and preserve control over capital flows.

2. Cautious capital account liberalization is global integration with a Chinese twist

Aware of the pros and cons of current account convertibility, China’s leadership is pursuing limited liberalization. It is learning about the dynamics and effects of capital flows, while remaining deeply skeptical about market mechanisms. The result has been an expanding system of loops that confines capital within a controlled system, for example, the investment channel Shanghai-Hong Kong Stock Connect, and circuit breakers designed to manage the speed of capital flows in portfolio investments.

The template for this learning-by-doing is the system of Special Economic Zones, used early in China’s opening up, in the 1980s. These experimental zones enabled Beijing to test policies on a small scale apart from rest of the economy. This ensured innovations were compatible with China’s economic system and would enable the government to retain control.

Beijing is using China’s financial market regulators to minimize the risks of capital account liberalization and push forward with reform and internationalization. Regulators appear to be pursuing the following guiding principles to keep China in its economic comfort zone:

The Yuan must stay within the exchange-rate band of CNY 6.2-7 to the US Dollar, and China must maintain at least 3 trillion USD in foreign-exchange reserves.China must maintain a variety of investment channels through which capital flows can be controlled separately, for example, by suspension or reversal of transactions. These new global linkages are small, discrete, and highly regulated, allowing the government to reassert control over market mechanisms when needed.China must preserve its ability to intervene if market outcomes run counter to government targets. If the exchange-rate band is endangered or capital outflows risk becoming too big, the government reacts to control capital flows and their effects.

The exchange-rate movements of the CNY against the USD over the past decade show these principles in action. Since 2008, the USD-rate has moved between CNY 6.2 and 7.0, suggesting a politically defined “comfort zone”. As soon as the exchange rate nears one of the limits of this band, the People’s Bank of China (PBOC) and other regulators intervene. 

When the exchange rate lingered near the upper limit for an extended period in 2013 and 2015, the PBOC surprised markets with a one-off devaluation. In mid- 2016, pressure from capital outflows saw the exchange rate touch 7.0. This led the central bank to introduce an opaque “counter cyclical factor” for setting the CNY’s daily reference rate.

In parallel, authorities fine tuned capital controls. Late 2016, foreign-exchange reserves dipped below the symbolic level of 3 trillion USD as the PBOC intervened to support the CNY. Authorities bolstered oversight of capital outflows and closed loopholes. This included efforts to stop private individuals moving funds via established channels in Hong Kong and Macao.

Our research identified around 75 multifaceted capital control adjustments between June 2016 and January 2018. Chinese regulators focused on investment channels to take targeted action against rapid capital outflow as foreign exchange reserves shrank. It proved a powerful and effective tool in responding to changing market sentiment by preventing rapid capital outflow as foreign exchange reserves began to dwindle. Policies were relaxed after the CNY stabilized – only to be reactivated in August 2018, when the CNY fell again.

3. China still views capital controls as a key element of its economic model

Controlled capital flows have been key to China’s economic stability – they protected the economy during the 1997 East Asian financial crisis and the 2008 global financial meltdown. After a rapid build-up of debt, China’s financial system is today even more vulnerable. An open capital account would give markets substantial control over the financial system. Policy makers would have to heed to market sentiment, as investors could move capital around at will.

This scenario makes the CCP uncomfortable. It considers capital controls vital for defending China’s economic model and its control of the economy. But the CCP also wants to optimize cross-border capital flows to reach economic and geopolitical goals. In pursuing these goals, the CCP is deliberately taking a gradual, strategic approach: it is wary of changing a policy that has been very successful in maintaining stability.

Under a more globally ambitious President Xi Jinping, stability and control of resource allocation remain guiding principles But policy makers are seeking to maximize the benefits of limited liberalization as China’s role as a net lender to the world is about to change. New channels for institutional investment to drive China’s global financial integration are likely. Yet new mechanisms opening China’s capital account will have safeguards to maintain CCP control. China’s leadership is far from a structural break capital account liberalization would induce on the economy.

China is willing to accept the price for this – slower progress in establishing its financial system and currency as keystones of the global order. Much of China’s rapid economic growth hinged on a predictable exchange rate, pegged to the USD, and on a sovereign monetary policy that gave the People’s Bank of China (PBOC) control over interest rates.

The Asian Financial Crisis 1997 – an important lesson for China

The Asian Financial Crisis showed how seemingly healthy economies can suffer severe damage through the combination of large-scale foreign inflows and an inefficient banking system. The Chinese leadership learned important lessons from the crisis, which hurt a number of fast growing East Asian economies that had opened their capital accounts. China’s defense of its currency peg to the US dollar and its maintenance of strict capital controls ensured it was largely unaffected by the crisis. 

When the crisis struck, South Korea, Thailand, Malaysia, Indonesia, and the Philippines largely had open capital accounts with fixed exchange rate regimes. While GDP grew strongly, these countries had profited from large and sustained inflows of capital. However, these funds were invested mainly in more liquid portfolio investments, rather than more productive fixed assets such as factories. The boom years also saw a rapid accumulation of debt, denominated both in USD and the domestic currencies. 

From 1993 to 1995, a series of rapid interest-rate increases by the US Federal Reserve and deteriorating market sentiment left many East Asian economies exposed as capital flows reversed and flowed out of these markets. To defend their currencies, central banks raised interest rates significantly. Depreciating currencies and high interest rates forced many domestic debtors to default, unleashing an economic crisis. Booming economies were hit hard as jobs, savings and personal wealth evaporated.

This pair of policy goals enabled a form of “financial repression” that fueled China’s investment and export-led growth model. With strict capital controls keeping capital inside the country, interest rates on deposits could be “repressed” to levels equal to or lower than the inflation rate. This in turn enabled the government to allocate cheap credit to government bodies and state-owned enterprises (SOEs), spurring swathes of domestic investment.

But capital controls have isolated China’s financial system from global markets, and left it dominated by domestic bank lending. The bountiful availability of funding led to stellar GDP growth, but also had negative side effects: rapidly rising debt and non-performing loans, industrial overcapacities, zombie companies, unregulated shadow banking, and asset bubbles. Continued restrictions on free capital flow shield the exchange rate and monetary policy from these vulnerabilities.

There are difficult trade-offs to be made in liberalizing the capital account. A country cannot simultaneously have a fixed exchange rate regime, free capital flow, and maintain a sovereign monetary policy. This is known as the “impossible trinity” in macroeconomic theory, as central banks can only achieve two of these three policy targets simultaneously.

Once capital controls are loosened, a stable currency requires the central bank to manage interest rates to prevent investors seeking higher returns abroad. The outcome is often a more volatile exchange rate – an effect emerging markets faced as the US Federal Reserve raised interest rates in 2018. Capital controls have enabled the PBOC to keep its rates low.

Japan, Denmark, Thailand, and South Korea are reminders that capital account liberalization often pitches a country into a financial or exchange-rate crisis.1 It is a major shift that can entail unknown consequences. The severity and duration of knock-on effects can be kept down by ensuring favorable conditions at the time the capital account is opened – a stable economic environment, robust banks, developed financial markets, a fairly valued currency.2 

China lacks most of these factors and has even openly conceded the vulnerability of its financial system by launching a deleveraging campaign. Xi recently warned CCP officials to be on guard against “black swans”, or unexpected events that could hurt the economy, as well as “grey rhinoceroses”, known risks that are ignored too long. He pledged to close over-indebted zombie companies, help businesses stabilize jobs, and support property prices.3 

To open its capital account, China’s leadership would also have to be confident about the strength of the political system in the face of greater economic volatility. A financial crisis could lead to social unrest – the 1997 Asian Financial Crisis is still seen as a stark warning (see box).

4. China also recognizes the need for closer links to global financial markets

China’s restrictive capital account policy provided a foundation for its stable economic development. But Beijing recognizes four imperatives for reducing limits on free capital flows:

Falling current account surplus requires policy adjustmentChinese companies have started investing overseasIts financial markets would profit from more outside scrutiny and pressure to reformPressure to reform, its global influence goes hand in hand with internationalizing its currency

Firstly, China’s economy has expanded more than tenfold since 2000 and its financial system even more – from 2000 to 2018, M2 money supply, the broad money aggregate, increased more than 12 times. China’s large trade surplus led to huge foreign exchange reserves. Mainly in USD, these reserves have allowed the PBOC to defend the CNY.

But current account surplus and foreign exchange reserves have peaked. Both are now declining in relation to GDP, making it harder for the PBOC to defend the exchange rate and react to shocks. The shift to consumption-driven growth and possibly a current account deficit will hamper China’s economic-policy flexibility and its ability to manage the CNY.

The growth of the financial system has raised the volume of capital flowing in and out of the country to levels that make it difficult for authorities to react to shocks. In a piece for MERICS, Victor Shih (2017)4 calculated that if 10 percent of China’s money supply were moved abroad, the country’s foreign currency reserves would be used up. Limits on capital flows will become less effective and possibly cause volatility as the current account surplus shrinks further.

It is unlikely China will be able to maintain foreign currency reserves large enough to defend its economic model. Instead, managing capital flows will become increasingly important. By easing restrictions on the capital account, foreign capital would be able to enter the country’s financial system and help make up for the outflow of capital from a capital account in deficit.

Secondly, increases in outbound investment by Chinese companies and their need for external financing have reversed the pattern of China’s investment of the last 40 years. Traditionally, foreign direct investment (FDI) was funneled into manufacturing, while Chinese companies invested little beyond China’s borders, resulting in a net inflow of capital.

This began to change around 2010 as the Chinese leadership set out more global ambitions for the country and its companies. Outbound investment surged, driven by rising cross-border mergers and acquisitions (M&A) by Chinese companies. In 2016, there was a net outflow of capital as Chinese companies acquired a string of technology assets around the globe.

Despite recent efforts by the EU and the USA to screen Chinese overseas investments, Chinese companies are set to continue their global expansion. The ambitious Belt and Road Initiative (BRI), for one, will need considerable capital outflow to finance overseas infrastructure. Also, wealthy private individuals will increasingly demand to diversify their investments internationally – and their spending on foreign travel will also continue to rise.

Crucially, limits on capital movements have resulted in routine illegality as investors exploit loopholes to move money abroad, for example, by mis-invoicing imports. To make up for an increasing outflow of capital, China will need to open up more legal channels connecting its economy to global capital markets, both to legalize outflows and encourage more inflows.

Thirdly, capital account liberalization would subject China’s financial system to increased scrutiny from global investors. This could potentially spur China’s financial system to become more sophisticated, with more efficient capital allocation. The current regime favors bank lending to SOEs through state banks, while financing through bonds and stocks is less developed. But state banks are failing to lend sufficiently to the private sector, although it makes up more than half of China’s economy. Institutional arrangements and state influence have also contributed to a massive build-up of debt.

Capital account opening could see the private sector’s needs better met, helping China’s transition to a more sustainable growth model. Far-reaching economic effects mean capital account opening could act as a catalyst for deeper economic reforms. Much like China’s WTO entry in 2001, a reduction of restrictions on capital flows and a liberalization of the financial system could reduce the influence of vested interests in the state-dominated sector.

Lastly, although shielding its financial system and controlling its capital account has served the CCPs domestic agenda well, the present arrangement will limit China’s global leadership role.

Liberalization would stimulate the international use of the CNY, a key step for expanding China’s currently under-leveraged position in global finance. Internationalization of its currency would also spur foreign demand for a wider range and scope of CNY-denominated financial products. A bigger role for the CNY and for China in international finance would provide the foundation for eventually challenging the dominance of the US and its USD.

It gives the US control of global financial flows and power beyond the realm of economics. With over 40 percent of international payments conducted in USD, the currency and its financial infrastructure are also used for transactions between non-American partners. This allows the US to use sanctions or disrupting financial flows to project power globally.

Capital account opening would eventually give China equivalent reach. With the CNY as an alternative reserve currency to the USD, China’s leaders could limit the United States’ ability to affect China economically while increasing its ability to project financial power. To develop in economic and geopolitical terms, China needs to integrate further into the global financial system.

5. China’s leadership has reached no consensus about paths towards full liberalization

Given the radical implications for China, capital account liberalization is a sensitive political and economic issue. There are different views on the approach, scope, timing, and speed of further steps towards liberalization, both within the leadership and the financial sector.

Steps towards full convertibility of the capital account have long been part of official policy. The current 13th Five Year Plan (2016 – 2020), for instance, promises “systemic steps to realize CNY capital account convertibility, making the CNY more convertible and freely usable, so as to steadily promote the currency’s internationalization and see Chinese capital go global”. However, this consensus has not led to specific targets or a timeframe being set. Reform advocates in the CCP leadership have typically favored capital account liberalization. This is opposed by conservatives in favor of strengthening government control over large parts of the economy − for them the risk of losing control and the ability to react to a potential crisis trumps the benefits of the changes that capital account liberalization would bring.

Despite the differences in opinion between reformist and conservative camps, there is common ground in that both sides recognize the changing economic and geopolitical context. Chinese leaders seem to continue to operate with adjustable targets and flexible implementation. The result has been careful but continuous progress towards greater capital account liberalization.

The removal of some restrictions on foreign investment and trade were followed by greater liberalization of capital flows and changes to the exchange-rate regime. The current policy suits the leadership’s desire to continue capital account liberalization as and when it sees fit.

6. Unwillingness to liberalize capital flow will limit China’s global ambitions

The measures China has taken to loosen controls on its capital account are far from radical. A key feature has been to increase the variety of investment channels, allowing greater flexibility in capital movements. Regulators have been cautious about taking steps that could expose the economy to rapid capital flow reversals and financial-market volatility. But the expanding scope of investment channels has made control over capital flows harder.

Investments by foreigners in equities are highly liquid, unlike their traditional investments in fixed assets like factories. Fast moving portfolio investments by foreigners and pressure from Chinese investors looking for the same type of opportunities abroad are the main challenges for China’s liberalization efforts. Managing capital flows would become more difficult if these channels for capital flows were also opened to Chinese corporations and individuals.

Nevertheless, Chinese authorities have allowed investment channels, reduced regulatory requirements, and relaxed quotas. The highly regulated Qualified Foreign Institutional Investors (QFII) and RMB Qualified Foreign Institutional Investor (RQFII) schemes were a first step in 2002. The Stock Connect framework followed in 2014, giving more freedom to foreign and Chinese investors – even if the latter get their returns paid out in CNY in China. The overall impact of steps over the last 20 years remains small. Foreign ownership of Chinese stocks was 2.8 percent of market capitalization and 2.2 percent of domestic bond issues in 2018. Small steps are often celebrated as big ones by China and the financial world.

They were enough for the International Monetary Fund (IMF) to elevate the CNY to an official reserve currency in 2016, even though it is not fully convertible. Another premature-seeming accolade was MSCI’s inclusion of China-listed A-shares into its Emerging Markets Index, triggering a substantial re-allocation of capital as investment funds continue to adjust their portfolios.

China’s approach to greater integration into the global financial system is carefully engineered. It wants to maintain domestic financial stability while developing unique financial mechanisms to facilitate its global role. Despite rhetorical commitments, this means China will not move towards fully fledged capital account liberalization in the foreseeable future.

The price for maintaining control of domestic financial stability will be a significant hindrance to China’s global leadership ambitions and slow reforms of its domestic financial system. But even with these limitations, it is already clear that China’s deepening financial integration will have far-reaching consequences for the global financial system. The choices Chinese leaders will have to make over the next few years will no longer affect only China’s future.

The inclusion of the CNY in the IMF’s SDR basket and the MSCI Emerging Market Index has forced central banks to hold more Chinese currency and institutional investors to raise their holdings. Such linkages mean China’s decisions about monetary-policy and capital-flow management could become a factor in determining global interest rates and credit supply.

But It is highly likely that China will disappoint international expectations about speed and scope of financial integration. China has been rewarded for its intention to reform − rather than for actual implementation. There is a spiral of wishful misinterpretation in the West that casts China’s reform efforts as proof that it wants to transform itself into a liberal market economy. China’s leaders continually reaffirm their commitment − but always set their own pace.

China will continue with the cautious opening of its capital account which will increase the mismatch between its growing share of the world economy and its limited role in international finance. For the forseeable future, the CNY as a trading currency and offshore CNY-denominated financial products won’t fulfill their potential, and Shanghai and Shenzhen will remain primarily domestic financial centers, with Hong Kong serving as a restricted portal to the global financial system.

Seen from Beijing’s perspective, a critical downside of a limited global role for the CNY is that China will remain vulnerable to the power of the United States to enforce sanctions through its financial-system dominance − the arrest of Huawei’s CFO over Iran sanctions is a striking example. China’s fast increasing outbound investments will largely have to be priced in USD. Its internationalization will require more foreign debt and so incur higher costs, making these projects riskier.

China could find this position difficult to maintain once capital outflows push the current account into deficit. Stricter controls could lead to restrictions on capital outflows that obviate strategic goals. Economic developments look set to force China to undertake further adjustments to manage capital flows adequately.

This will add to the complexity of finding an adequate policy response without jeopardizing stability or the Chinese economic development mode. Confronted with a new economic reality, China’s leadership may no longer have the luxury of setting its own timeframe for liberalization. The need to get the domestic financial system in order will only become more pressing.


1 | https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Do-Inflows-or-Outflows-Dominate-Global-Implications-of-Capital-Account-Liberalization-in-40901
2 | https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp091997
3 | https://news.cgtn.com/news/3d3d414d3459544d32457a6333566d54/index.htmland https://www.reuters.com/article/us-china-economy-xi/xi-keeps-china-on-high-alert-forblack-swan-events-xinhua-idUSKCN1PF0XL
4 | Victor Shih (2017). Financial instability in China: Possible pathways and their likelihood. MERICS China Monitor, October 2017. https://www.merics.org/sites/default/files/201710/191017_merics_ChinaMonitor_42.pdf


Max J. Zenglein

Head of Program Economic Research


Maximilian Kärnfelt





1 big thing: The U.S. cyber offensive

Illustration: Rebecca Zisser/Axios


After years of bitter complaints about cyberattacks from foreign adversaries, a new report describes an aggressive U.S. cyber plan against Russia, a show of long-understood American prowess on the leading edge of warfare.

What’s happening: Experts tell Axios that the leak, published Sunday in the New York Times, may intend to signal the damage that Russia could suffer in its confrontation with the U.S. But the disclosure also risks exacerbating already-fraught relations.

The big picture: Over the last half-dozen years, the U.S. has been on the receiving end of some of the most damaging hacks in history, climaxing with Russia's interference in the 2016 presidential election.

But now, in a high-profile story, the U.S., under tremendous military, economic and diplomatic pressure globally amid the multi-front brinkmanship of the Trump administration, has been depicted as a formidable cyber actor:

In its piece, the NYT reported that the U.S. has placed “potentially crippling malware inside the Russian [electric] system at a depth and with an aggressiveness that had never been tried before.”In another report, in 2016, the NYT described a plan called Nitro Zeus, in which American personnel would use vast U.S. cyber capabilities to “disable Iran’s air defense, communications systems and crucial parts of its power grid,” in addition to the Fordo nuclear enrichment site. The lead byline on both stories is David Sanger, a national security correspondent.

Both reports resemble a lower-level 21st century version of the “mutually assured destruction” policy between the U.S. and the Soviets that prevailed during the Cold War. “With the 2020 election heating up, and Russia's cyber offensive continuing, I can well imagine policymakers wishing Americans to know what their government is doing in response," Richard Fontaine, CEO of the Center for a New American Security, tells Axios.

Previously, U.S. officials have described Russia inserting malware to sabotage U.S. infrastructure like power plants, water supplies and energy pipelines.While neither nation is known to have actually flipped off the power switch in the other country, Russia did shut off the electricity in Ukraine in December 2015.And in August, the U.S. attacked the Internet Research Agency, the group responsible for much of Russia’s hacking of the 2016 U.S. election.

Speaking by email, James Lewis, director of CSIS’s Technology Policy Program, said that the leaks may in part reflect unhappiness by some U.S. officials with Trump’s Russia stance, and “a desire to lock in a more confrontational policy.”

Chris Meserole, a fellow at the Brookings Institution, agrees. "The White House and intelligence community don’t see eye to eye on the threat Putin poses, particularly in cyberspace, so the leaks are designed to tie Trump’s hands while also communicating to the Kremlin that Russia is even more vulnerable to cyber attacks than we are.     2. A robot for scrubbing dishes

Video courtesy Dishcraft Robotics

Like an automated carwash for plates, a new commercial-grade robot dish-scrubber takes in dirty dishes in tall stacks and spits clean ones out the other side — potentially cutting dishwashing staffs by more than half, Kaveh reports.

But in a concession to the limitations of today's robots, the machines can only handle specially made plates and bowls with magnetic inserts, and their cost lands them out of reach of all but the biggest restaurants and cafeterias.

Why it matters: Dishwashing, a longstanding entry point for restaurant workers, is an unpleasant and potentially dangerous job. Add in low pay and restaurants face a near-constant churn: The average tenure for dishwashing staff is under a month and a half.

What's happening: The robotic dish-scrubber from Dishcraft Robotics, a Silicon Valley startup, is the latest in a boom in food robotics that we've been covering. It takes the place of the manual scrub most dishes undergo before heading to a commercial dishwasher, which sanitizes them with chemicals or very hot water.

How it works:

Restaurant workers stack plates and bowls into carts, sorting items into separate slots. When a cart is full with 70 or so items, it's wheeled into the mouth of the machine.As seen above, a magnetic arm picks up individual dishes and sticks them onto a rotating wheel, which brings them to a scrubber designed specially for Dishcraft's own plates and bowls.After a good scrubbing, the machine's cameras and sensors check for remaining gunk, and scrubs a second time if needed. Finally, clean dishes are racked and sent out the door, to be sent into a sanitizing machine.

The scrubber, by Dishcraft's account, is fast and uses water and energy more efficiently than people. But it's inflexible.

Its process is "standardized as much as possible," says Dishcraft cofounder Paul Birkmeyer. That helps file off what roboticists call "edge cases" — unusual scenarios that can trip up machines.To use it, restaurants have to switch to custom bowls and plates. The machine needs the embedded magnets to move them around, and its scrubbing and inspection mechanisms have been built specifically for these dishes.It can't clean cups, glasses and silverware. (Birkmeyer says 90% of dishwashing time is currently spent on plates and bowls.)

Only the biggest kitchens, like hospital or hotel cafeterias serving many hundreds of diners a day, might benefit from the robotic scrubber.

Dishcraft won't say how expensive its machines are, but claims they can save big operations money by cutting down on dishwashing staff.They are already deployed in a few big restaurants, and Dishcraft is marketing them to more, backed with its $25 million in venture capital.     3. Mega-funds without mega-returns

Illustration: Sarah Grillo/Axios


Private equity firms are raising record money, but the returns on these mega-funds aren't outpacing the S&P 500.

Erica writes: Blackstone is the latest to go big, capping its new fund at $25 billion, reports WSJ. That would best Apollo Global Management's previous record of $24.6 billion.

The big picture: These superstar funds are ballooning due to rising demand from investors with deep pockets. "With interest rates still persistently low, the industry’s historical reputation for 20%-plus returns, is appealing — even if it means paying higher fees and having money locked up for long periods," writes WSJ's Miriam Gottfried.

But, but, but: They yield middling returns. Over 3 years, mega-funds netted 15% in returns compared to the S&P 500's 17%. And over about 13 years, both mega-funds and the index netted 10%.



Life insurance for as little as $36 per month. No joke  

Life insurance costs are getting so low it’s hard to justify not getting on a plan. Health IQ is the only life insurance company that can reward healthy lifestyles with up to 41% lower rates.* (That means life insurance from $36/month — less than a gym membership.)

Learn more by visiting Health IQ.

  4. Worthy of your time

Plastic that washed up on the UK coast, 1994-2019. Photo: Steve McPherson


Questioning the zoning gospel (Emily Badger, Quoctrung Bui — NYT)

Our plastic planet (Andrew Freedman — Axios)

Iceland's booming data centers (Tryggvi Adalbjornsson — MIT Tech Review)

Why Big Tech is raiding animal research labs (Sarah McBride, Ashlee Vance — Bloomberg)

The biggest winners against poverty (GZERO Media)

     5. 1 fun thing: Poop on the moon

Photo: Owen Humphreys/PA Images/Getty


Since humans first set foot on the moon, astronauts have been leaving poopy diapers there. We should go and get 'em, reports Vox's Brian Resnick in a video.

Erica writes: It's not a question of cleaning up after ourselves. Rather, studying all that poop could tell us a lot about the moon and Mars and how life might fare outside of Earth. Across six moon landings, Apollo astronauts left 96 bags of poop, pee, vomit and other human waste on the moon.

That poop could be "teeming with life," Resnick says. Poop is 55% live bacteria, and although those diapers have now spent around 50 years in totally inhospitable conditions — without any protection from cosmic radiation and with crazy hot-to-cold-hot temperature swings — if any of that bacteria is alive or revivable from a dormant state, scientists want to know.

Watch Resnick break it down.



Cyclist, runner or swimmer? Cut your life insurance costs by up to a third  

Health IQ spent years establishing how active lifestyles correlate with positive health outcomes. Now, Health IQ is the only life insurance company that can reward healthy lifestyles with up to 41% lower rates. (So your summer body gets you insurance savings.)

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Evading Trump: How Iran circumvents sanctions


Evading Trump: How Iran circumvents sanctions

Iran experts have been taken aback at the rapidity with which new rounds of sanctions have impacted the Iranian economy, even before major oil and financial sanctions kick in from 4 November. Within a month of 7 August sanctions taking effect (outlawing dollar purchases, precious metals, and trade in certain industrial materials), the riyal plunged by 60 percent. With oil accounting for around 70% of Iran’s exports and 80% of tax revenue, recorded exports fell by around 900,000bpd, from around 2.5mbpd in April. However, as we shall see below, a significant proportion of this shortfall is already being offset by off-the-books exports.

Following the money: This is my Middle East-focused blog series focusing on my areas of specialisation: Money laundering, financial crime, sanctions evasion and funding for terrorist and militant groups. Barry Marston, Senior Consultant, Aperio Intelligence

(Article published in the 31 October edition of Aperio’s Financial Crime Digest)


As the world gears up for these November sanctions, European imports of Iranian oil fell by 46% between May and August to 226,000bpd, while exports to South Korea plunged to zero. In contrast, it took significantly longer for previous rounds of the UN Security Council-centred sanctions process to have a comparable effect; with a steady fall in Iran’s oil exports occurring between 2011 and 2014, from 2.4mbpd to 1mbpd.[2]While the scale of this assault against Iran’s economy is perhaps unprecedented, Iran is accustomed to periodic bouts of isolation and has numerous options available to weather the storm.

A successful sanctions evasion strategy for Tehran means maximizing its ability to derive revenue from oil exports and other major income sources; finding ways to plug into the international financial system; while continuing to bankroll its expansive overseas agenda. In this report we draw lessons from Iran’s previous efforts at circumventing sanctions in order to contextualize measures which Iran’s leadership is already beginning to implement in response to the Trump Administration’s efforts to ratchet up the pressure.

Invisible ships and ghost companies

Between 2010 and 2015, as international sanctions intensified, Iranian tankers continued shipping millions of barrels of oil through the remarkably simple gambit of turning off their tracking beacon to efface any record of their voyage. In recent weeks, monitors have indeed observed Iranian tankers turning off their transponder signals to evade detection.[3] Iranian oil was previously also diverted onto foreign tankers or registered under foreign flags using appropriate forged documentation. Discounted prices tempted purchasers to ask few questions, with smaller Chinese refineries being a notable destination. As of mid-October, the monitoring organization, TankerTrackers, estimated that Iran was actually sustaining exports of 2.2mbpd. This higher-than-expected statistic factored in satellite images of departing oil tankers which had disabled their signals. This may partly explain why oil prices for the month were significantly lower than expected.[4]

Iranian businesses and exporters improvised a plethora of tricks to continue operations. Significant volumes of Iraqi oil are exported overland through Iran, and Iranian oil exporters were thus able to fake documentation so their own convoys appeared to be of Iraqi origin. The owner of an Iranian mining business in 2013 reported how he obtained equipment from Europe by agreeing with Western companies to export these products to Dubai. From there, middlemen arranged for the equipment to be diverted to the Iranian port of Bandar Abbas. He paid foreign suppliers via Iranian traders based in South Africa and Malaysia.[5]  Some businessmen resorted to the risky approach of travelling to-and-fro from the Emirates with suitcases of cash. Nevertheless, such activities significantly increased costs of doing business. In 2016 internal paperwork from the Chinese telecommunications conglomerate, ZTE Corp, showcased this company advising clients from Iran and other blacklisted states on how to circumvent sanctions through establishing front companies and other dubious methods.[6]

In the pre-2015 phase of sanctions, Iran exploited a fluid network of front companies in diverse locations like China, the UAE, Iraq and Lichtenstein; giving rise to an endless game of cat-and-mouse by US agencies trying to identify these entities and apply pressure for their closure. As one compliance attorney explained: “Fifteen years ago some guy would set up a company in Dubai’s Jebel Ali port and load stuff from wherever and ship it to Iran and no one would notice. Now the detection systems and knowledge are leaps and bounds ahead.”[7]

A cluster of businesses in a Hong Kong tower block had been given deliberately innocuous names like “True Honour Holdings” and “Alpha Effort Limited.” Yet according to the US Treasury in 2011, which simultaneously designated over 20 other Iran-linked entities, these were Iranian front companies surreptitiously purchasing military equipment.[8]

Keeping oil and revenues flowing

Many states and importers previously operated in a grey area between passive defiance of US demands, and willingness to cast a blind eye to oil imports with forged documentation or circuitous payments regimes; tempted by Iran’s steeply-discounted black-market offerings.

India’s readiness to comply will be a major determinant of success for Trump’s punitive measures. To retain customers Iran has been offering sharp discounts, extended credit terms, free cargo insurance, and cheap shipping. Despite recent cuts in India’s oil imports from Iran (from an average of 773,00bpt in early 2018, to 523,000bpd by August) this was still 56% higher than for August 2017.[9] States like Italy, Greece and Turkey likewise temporarily boosted imports of Iranian oil to capitalise on these discounts. The US and GCC states may try weaning India away from Iranian oil with discounted rates of their own. The current India-Iran trade in Euros via the SWIFT system provides some insulation from US pressures, with talk of an imminent shift to trading in rupees and riyals. However, India’s Central Bank is set to halt processing Iranian oil payments from November.[10]

In 2013 around 45% of India’s payments to Tehran were made through the Kolkata-based USO Bank which lacked significant US exposure; the remaining 55% of payments were transacted via the Turkish Halkbank.[11] Halkbank was furthermore at the centre of an “gold-for-oil” laundering scheme which between 2012 and 2014 allowed Iran to repatriate $13bn of frozen funds through the Turkish banking system.[12]Over the past two years the US authorities have implemented measures against several East Asian banks whose imperfect compliance procedures were exploited by Iran to illegally launder revenues and frozen funds.[13] The Kunlun bank in China’s semiautonomous Xinjiang region was earmarked as an entity exploited by Iranian banks to launder hundreds of millions of dollars. Given that Kunlun bank is covered by US Treasury sanctions and has already modified its business model to mitigate these pressures, it is increasingly difficult for US officials to craft new penalties to target such institutions, whose appeal to certain clients is precisely that they act as a shadowy parallel network to the mainstream global financial system.[14]

Western banks have fared little better, with a succession of well-known high-street outlets facing stiff penalties for transactions which infringed sanctions, often for unintentional due diligence failures. BNP Paribas in 2015 was hit with an eye-watering $8.9bn fine after prosecutors claimed that information had been deliberately stripped from wire transfers to expedite their movement through the US financial system without raising red flags.[15]

China, the biggest importer of Iranian oil (800,000bpd in July[16]), has reduced its dependence on Tehran over the past couple of months; but will only comply reluctantly with US sanctions which Beijing claims lack the legitimacy conferred by the UN. Given the fractious nature of China and Turkey’s current relationship with the US, they are readying themselves for renewed threats and pressures, and perhaps American offers to soften tariffs and other economic measures targeting them both in the event of full cooperation.

With the devalued Iranian riyal increasingly unattractive to traders and obstacles to dealing in dollars, Iran may negotiate barter deals, or trade in gold and local currencies. Prior to 2015, Iran used around $50bn of frozen oil revenues held in East Asian banks as security or down-payments for goods purchased from China, South Korea, Japan and India. Between 2012 and 2016, India agreed to buy Iranian oil with rupees, allowing Iran to use the proceeds to import goods from India.

Barter economies and shifts into local currencies may be challenging for the US to outlaw. Furthermore, the risk of a protracted sanctions regime without a clear endgame is that over time, through a shift towards non-dollar payments and networks of institutions resilient to US pressure, Iran evolves a diminished but sustainable economic equilibrium, leaving it relatively immune to future attempts to influence its behaviour.

Iran’s Oil Ministry is also planning to relaunch its domestic energy exchange (or ‘bourse’), through which it anticipates selling up to 1 million bpd of crude to local buyers who could then export the oil though private transactions.[17] However, some Iranian officials are concerned that this risks fuelling an informal black market from which the state budget would only derive limited benefit.

The imposition of sanctions may benefit entities like IRGC Quds Force, which are well-placed to profit from this shift towards clandestine sanctions circumvention activities. As of 2007 it was estimated that the IRGC was reaping around $12billion from off-the-books oil smuggling, which expanded significantly in the ensuing years as sanctions intensified.[18] To put this in context, Iran’s total military budget for 2018 was $8bn.

Lebanon, Syria and Iraq – The “axis of resistance”

Iran is also afforded significant strategic depth through its paramilitary, economic and political assets in Lebanon, Syria and Iraq; all three of which are coming under substantial pressure to resist US measures. Iranian entities and affiliated proxies are already carving out major roles in reconstruction in Syria and Iraq, with paramilitary groups which have been accused of war crimes sectarian killings capitalising on their position on the ground to diversify into various economic sectors. As one Iraqi paramilitary leader argued: “We were volunteers. We liberated these areas and now we should stay on to rebuild them.”[19]

A Russia-Israel understanding for reducing the presence of Shia paramilitaries in southern Syria, was countered by Tehran through high-profile visits by officials to Damascus to discuss defence cooperation and Iran’s role in reconstruction.[20] Iran’s Defence Minister signed a deal committing Tehran to a major role in rebuilding Syria’s armed forces.[21]Meanwhile, Iranian companies are to be involved in rehabilitating Syria’s transport infrastructure, along with rebuilding 30,000 homes and plans for a railway connection between the two states. China has been sympathetic to such efforts as a means of facilitating its own overland access to the Mediterranean.[22] While Syria is likely to remain isolated from the international system, facilitated access to Lebanon and the eastern Mediterranean offers Iran a range of additional options for circumventing sanctions.

Iran has made extensive use of Iraqi, Syrian and Lebanese financial systems.[23] In May 2018, Iraq’s Al-Bilad Islamic Bank, and its CEO Aras Habib Karim, a prominent MP, were designated by the US Treasury for facilitating the movement of funds to the IRGC and Hezbollah.[24]Financers and front companies have also been targeted to counter money laundering by entities affiliated with Iran.

Large volumes of weapons have been exported to affiliated forces in Syria, Iraq, Lebanon, Afghanistan, Yemen, Bahrain and other states in violation of international sanctions. Airlines like Mahan Air faced sanctions in 2011 (with additional measures applied in May 2018) for operating on behalf of the Revolutionary Guard to move weapons, personnel and funds for Hezbollah and forces in Syria. A US Treasury official described Mahan as the “aviation arm” of Quds Force.[25] Iranian ally Hadi al-Amiri, as Iraqi Transport Minister, is understood to have facilitated overflights of Iranian munitions to Syria.[26] Qeshm Fars Air has also been identified as flying circuitous routes to smuggle munitions into Lebanon.[27]

Over the 2010-2013 period, Iran’s payments to Iraq-based proxy militias like Asaib Ahlulhaq and Kata’ib Hezbollah decreased as sanctions intensified and US troops departed Iraq. However, Iranian spending simultaneously surged for propping up the Damascus regime; with estimated funding for Hezbollah mushrooming from around $100m to $700m.[28] Thus, although Tehran will seek to cut unnecessary expenditure to its proxy assets, past experience indicates that sanctions won’t automatically diminish its readiness to fund militancy overseas. It may indeed result in Iran’s leadership encouraging their paramilitary proxies to adopt a more aggressive posture, such as through recent transfers of missiles to Iraqi proxies.

Smuggling and sanctions evasion across Iran’s eastern borders

Afghan traders have been benefitting from a booming trade in dollars smuggled across the border from Herat province as the value of Iran’s riyal plunges, while Washington attempts to squeeze Iran out of dollar-denominated markets. Such was the scale of this trade that it contributed to a 3.5% drop in Afghanistan’s own currency this August, with an estimated $5 million in cash crossing the Afghan-Iran border every day.[29]

Iran’s less heavily-policed border with Turkmenistan is a major narcotics smuggling route from Afghanistan towards Europe, doubling-up as a conduit for sanctions evasion activity. The fact that Iran has one of the highest rates of drug use worldwide (official and NGO estimates vary between 3.5 – 6 million users) is testimony to the scale of the problem of narcotics smuggling.[30]

In the remote Baluchistan region, diesel smuggling into Pakistan has long afforded a livelihood for small-time smugglers. From 2010 onwards these fuel smuggling activities intensified as a means of evading sanctions. In 2013 it was estimated that tankers were exporting around 4 million litres per day via this route.[31] US officials even became concerned that Afghan security forces were using US funding to purchase smuggled petroleum products of Iranian origin. One expert from FGE London estimated that after 2018 around 20,000bpd could be illegally transported overland through Afghanistan, Pakistan, Iraq and Central Asia.[32] President Rouhani drew attention to the scale of smuggling of oil and other goods when he testified to the Iranian Majlis earlier this year that the authorities had reduced the annual value of such activities from $22bn to $12.5bn.[33]

Drugs, crime and money laundering

Former President Mahmoud Ahmedinejad’s outreach to Latin American states – Venezuela in particular – to consolidate a united front against US-led pressures, gave rise to a remarkable increase in economic activity by Iran and Hezbollah across the American continent. One example was massive Iranian investments in real estate, for which much of the revenue was later laundered through the US banking system. Venezuela granted large tracts of isolated land to Iranian military firms for developing missile technology, as a route to avoiding sanctions against Iran’s ballistics programme.[34] US-sanctioned Parchin Chemical Industries was just one Iranian company setting up facilities in Venezuela.[35]

Iranian and Hezbollah figures became deeply complicit in the narcotics trade.  Lebanese businessman Ayman Joumaa collaborated with Mexico’s Los Zetas cartel to move “multi-tonne loads” of cocaine into the US,[36] while laundering an estimated $200 million per month in criminal proceeds.[37] The Lebanese Canadian Bank in 2011 was accused of being at the centre of a phenomenally complex international operation which saw Colombian cocaine exported into Western markets, while revenues were laundered through the US banking system and via African car dealerships, before being used to pay East Asian suppliers of imports back into Iran.[38] In 2016 European police took action against a major Hezbollah cell involved in the narcotics trade, with revenues reportedly being fielded towards operations in Syria.[39]

On 22 September 2018 it was announced that Brazilian police had picked up Assad Ahmad Barakat, a prominent Hezbollah member and “Specially Designated Global Terrorist.”[40] Since the mid-2000s, the Barakat clan operated out of the notorious tri-border area (between Brazil, Argentina & Paraguay), laundering funds and smuggling weapons, narcotics and counterfeit US dollars. According to the RAND Corporation, this activity earnt Hezbollah around $20m annually, one of its principal sources of foreign exchange.[41]

John Kelly, the former coordinator of these cases in the US’s Drug Enforcement Administration, observed that Hezbollah was “a paramilitary organization with strategic importance in the Middle East, and we watched them become an international criminal conglomerate generating billions of dollars for the world’s most dangerous activities, including chemical and nuclear weapons programmes and armies that believe America is their sworn enemy”.[42]

Given that profits from such schemes habitually accrue to Iran’s proxy militias overseas, a paradoxical impact of Trump’s sanctions may be an uptick in such activities as a revenue-generating exercise. Large émigré Lebanese communities across the Americas, Africa and Asia have been exploited as a Trojan horse by Quds Force and Hezbollah for setting up front companies used for money laundering, drugs running, arms smuggling, terrorism and sanctions evasion.[43] These communities are themselves a source of revenue. A plane which crashed in 2003 contained $2 million in Hezbollah contributions donated by the Lebanese diaspora in West African states.[44]

Iran also evades international arms sanctions to profit from the global weapons trade. Conflict armament research identified substantial quantities of Iranian arms and ammunition being sold on the black market or in insurgent hands across Africa, including; Côte d’Ivoire, the DRC, Guinea, Kenya, Niger, Nigeria, South Sudan, Sudan and Uganda.[45]One notable example included the 2010 seizure of 13 large containers of Iranian heavy arms at a port in Nigeria.[46] Iran made common cause with other pariah states, such as North Korea, Syria, Venezuela and Sudan, for engaging in arms proliferation across continents. Iran owes much to Pyongyang and the Pakistani Abdul Qadeer Khan network for acquisition of much of its ballistic and nuclear technology.[47]


The 2005-2015 decade of escalating international pressures upon Iran were closely correlated with a remarkable expansion of illegal revenue-generating activities, such as narcotics and weapons smuggling, money laundering and organized crime. This unfortunate side-effect of sanctions has enabled entities like the IRGC to strengthen their hold on the domestic and regional economy, while increasing expenditure on transnational paramilitary forces like Hezbollah.

In 2018, the critical question is how successful Tehran’s international strategy will be in thwarting Trump’s aspiration to reduce oil exports to zero. Through a range of legal and illegal methods, experts and Tehran-based Western diplomats assess that Iran could continue exporting in excess of a million barrels of oil a day, well into 2019.[48] Such a scenario would certainly be crippling, without necessarily dealing the fatal blow.

The fact that these sanctions are being implemented unilaterally by the US, rather than via the UN, may limit international compliance. The EU for now is defying the US by trying to keep the nuclear deal alive through a posited mechanism for shielding companies from the impact of these sanctions. This may be a pyrrhic effort, given that leading Western companies – like Siemens, Total, Renault, Peugeot, General Electric, Boeing and Daimler – are already exiting the Iranian market in order to avoid jeopardizing their US operations. Recent tensions between Saudi Arabia and the West over the killing of Jamal Khashoggi also demonstrate how difficult it will be to retain a unity of purpose among key players in the anti-Iran alliance over a sustained period of time.

Ultimately, the impact of the latest round of sanctions may be determined by the response of the Iranian people. Will they stoically bear the consequences of sanctions in the hope that the 2020 US elections brings about a change in direction; or will the economic pain unleash forces which could overwhelm the regime or oblige it to change course?



About Barry Marston

At Aperio, Barry specialises in Iran, Saudi Arabia, the wider Gulf region; capitalising on 20 years of experience in working across the Middle East. His portfolio includes corporate intelligence, money laundering, financial crime, sanctions evasion and funding for militant and terrorist groups.

Barry spent six years working as the British Government’s Arabic and Persian Spokesman. He also held responsibility for the UK Foreign Office’s communications policy for the Middle East and Islamic world, specialising in counter-extremism, sanctions, international law and trade issues.

Between 2011 and 2018, Barry was based in the GCC region, working for Weber Shandwick and Fortune Promoseven as a media consultant and project director. His portfolios included work for some of the largest privately-held and state-owned organisations in the Middle East region. Barry also conducted political and economic forecasting and analysis for commercial clients. He is a fluent Arabic and Persian speaker and has operational capability in Hebrew, Russian and French.


[1] https://www.bloomberg.com/news/articles/2018-09-03/iran-s-rial-resumes-drop-as-oil-exports-sink-ahead-of-sanctions

[2] https://yaleglobal.yale.edu/content/why-iran-style-sanctions-worked-against-tehran-and-why-they-might-not-succeed-moscow

[3] https://www.ft.com/content/d2c7105e-bcf0-11e8-8274-55b72926558f

[4] https://www.ft.com/content/6d1510ac-d21d-11e8-a9f2-7574db66bcd5

[5] https://www.economist.com/business/2013/03/30/around-the-block

[6] https://www.wsj.com/articles/u-s-plans-to-place-restrictions-on-zte-1457337207

[7] https://www.theatlantic.com/international/archive/2018/05/iran-sanctions-trump-nuclear-turkey/560819/

[8] https://www.treasury.gov/press-center/press-releases/Pages/tg1022.aspx

[9] https://www.bloomberg.com/news/articles/2018-09-03/secret-oil-shipments-could-help-iran-cushion-u-s-sanctions-blow

[10] http://www.atimes.com/article/why-india-is-ignoring-us-sanctions-and-sticking-with-iran/

[11] https://idsa.in/idsacomments/iran-sanctions-srdadwal-120718

[12] https://www.theatlantic.com/international/archive/2018/01/iran-turkey-gold-sanctions-nuclear-zarrab-atilla/549665/

[13] https://www.bloomberg.com/news/articles/2018-02-20/iran-s-sanctions-evasion-moved-east-after-europe-crackdown

[14] https://www.treasury.gov/press-center/press-releases/Pages/tg1661.aspx

[15] https://www.reuters.com/article/us-bnp-paribas-settlement-sentencing/bnp-paribas-sentenced-in-8-9-billion-accord-over-sanctions-violations-idUSKBN0NM41K20150501

[16] https://www.forbes.com/consent/?toURL=https://www.forbes.com/sites/arielcohen/2018/08/29/irans-oil-exports-plummet-600000-bd-as-u-s-sanctions-force-key-buyers-to-seek-alternatives/#8d129a6247e8

[17] https://financialtribune.com/articles/economy-business-and-markets/94168/iran-energy-exchange-to-start-trade-in-oil-futures

[18] http://www.aei.org/publication/how-intertwined-are-the-revolutionary-guards-in-irans-economy/

[19] https://www.crisisgroup.org/middle-east-north-africa/gulf-and-arabian-peninsula/iraq/188-iraqs-paramilitary-groups-challenge-rebuilding-functioning-state

[20] http://www.irna.ir/fa/News/83004177

[21] https://www.afr.com/news/world/middle-east/iran-defence-minister-amir-hatami-signs-deal-to-rebuild-syrian-military-20180827-h14lcu

[22] https://thediplomat.com/2017/11/why-china-wants-syria-in-its-new-belt-and-road/

[23] https://www.reuters.com/article/us-usa-sanctions-iraq-iran/u-s-lifts-sanctions-on-iraq-bank-that-had-links-to-iran-idUSBRE94G0NJ20130517

[24] https://www.thenational.ae/world/mena/iraq-cuts-ties-with-us-sanctioned-bank-1.731506

[25] https://www.flightglobal.com/news/articles/us-warns-of-sanctions-on-companies-that-support-iran-450052/

[26] https://www.nytimes.com/2012/12/02/world/middleeast/us-is-stumbling-in-effort-to-cut-syria-arms-flow.html

[27] http://www.foxnews.com/world/2018/09/03/irans-secret-weapons-smuggling-air-route-to-lebanon-revealed-by-intel-sources.html

[28] https://www.thenational.ae/world/the-americas/iran-pays-hezbollah-700-million-a-year-us-official-says-1.737347

[29] https://www.bloomberg.com/news/articles/2018-09-13/trump-s-iran-sanctions-trigger-a-booming-cash-smuggling-business

[30] https://www.state.gov/j/inl/rls/nrcrpt/2016/vol1/253274.htm

[31] https://www.reuters.com/article/uk-pakistan-iran-smugglers/iran-sanctions-spur-boom-for-pakistani-diesel-smugglers-idUKBRE92U09820130331

[32] https://www.bloomberg.com/news/articles/2018-09-03/secret-oil-shipments-could-help-iran-cushion-u-s-sanctions-blow

[33] https://foreignpolicy.com/2018/10/04/irans-revolutionary-guard-corps-wont-suffer-from-stronger-u-s-sanctions-theyll-benefit-irgc-trump-sanctions/

[34] https://thehill.com/blogs/pundits-blog/international/293632-iran-looks-to-latin-america-to-revive-missile-infrastructure

[35] https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/pages/20080708.aspx

[36] https://www.politico.com/interactives/2017/obama-hezbollah-drug-trafficking-investigation/

[37] https://www.washingtoninstitute.org/policy-analysis/view/iran-and-hezbollah-remain-hyperactive-in-latin-america

[38] https://www.treasury.gov/press-center/press-releases/Pages/tg1057.aspx

[39] https://www.thedailybeast.com/trump-starts-to-put-the-squeeze-on-irans-international-terror-operations

[40] https://www.treasury.gov/press-center/press-releases/pages/hp190.aspx

[41] https://homeland.house.gov/files/Testimony%20Berman.pdf

[42] See above Politico report

[43] https://nationalinterest.org/feature/hezbollah-has-been-active-america-decades-22051?nopaging=1

[44] http://www.trackpersia.com/iran-and-hezbollahs-exploitation-of-africa/

[45] http://www.conflictarm.com/wp-content/uploads/2014/09/Iranian_Ammunition_Distribution_in_Africa.pdf

[46] https://www.reuters.com/article/us-nigeria-weapons-idUSTRE69T1YT20101030

[47] https://www.unitedagainstnucleariran.com/north-korea-iran

[48] https://www.ft.com/content/d5a39a98-cb1b-11e8-b276-b9069bde0956