The Iran Primer

 

 

 

The financial conglomerate Amir Mansour Arya Investment Development Company allegedly procured several letters of credit from domestic banks totaling $2.8 billion--far above the company’s available collateral.  The Arya Group, founded by Amir Mansour Khosravi and now controlled by his son Mah-Afarid, controlled around $3.8 billion in assets, including 52 companies with 20,000 workers.

 

After obtaining falsified letters of credit from a branch of Saderat (Export) Bank in Ahvaz, the Arya Group allegedly used them to obtain even more financing from several other banks including Saman, Sepah, and Melli Bank; Melli is Iran’s oldest national bank.  Arya Group is also accused of using its own companies as shell organizations to misrepresent the value of the entire Group.  It reportedly then used the promised loans from multiple banks to bid on recently privatized companies as well as set up its own financial institution, Arya Bank. 

 

There are several layers of alleged corruption, embezzlement and fraud in this case.  The original letters of credit from Saderat Bank were issued without a required waiting and evaluation period; bank officials allegedly may have been taking bribes.  Melli Bank and other banks reportedly did not check the validity of the letters when issuing their own loans to the Arya Group.  The government’s Money and Credit Council was either lax in oversight or overtly supportive of the loans. Critics of President Mahmoud Ahmadinejad claim the council was packed with supporters of the president’s closest aide, Rashim Esfandiar Mashaei. Finally, the Central Bank allegedly failed to monitor these transactions and prevent abuse.

 

The government took possession of Arya Group’s assets and companies in September, which at least temporarily prevented the layoff of 20,000 workers. But full recovery of the $2.8 billion, just under one percent of Iran’s annual GDP, is still uncertain.

 

 

The political fallout increases almost daily.  The directors of Saderat Bank and Melli Bank resigned in late September.  Melli’s director, who has dual citizenship, fled to Canada.  Dozens of banking officials have been arrested and questioned.  Members of parliament discussed the possible impeachment of Minister of Economy Shamsoddin Hosseini.  Central Bank Governor Mahmoud Bahmani cannot be impeached since he has a presidential appointment, but members of parliament have called for his resignation.

 

But even if Ahmadinejad contains the short-term damage, the scale of this scandal dwarfs all earlier corruption scandals during the presidencies of Akbar Hashemi Rafsanjani and Mohammad Khatami. It also stains the president’s attempt to portray himself as an incorruptible politician fighting a crooked system. 

 

 

Ayatollah Khamenei is once again stuck arbitrating deep factional strife among Iran’s political elite.  He has publicly vowed that the perpetrators would be tracked down and severely punished.  But he has also demanded an end to the mud-slinging among conservative critics and the president’s supporters.

 

Since the presidential election in 2009, Iranian has been plagued by an unrelenting cycle: clashes among conservatives, Khamenei calls for unity, temporary lulls in the battle, and then renewed discord at more intense levels.  For all the supreme leader’s powers, he has been unable to get supposedly loyal followers to fall into line.

 

The Arya Group’s purported scam is a perfect storm for Iran’s economy for two reasons:

 

First, Ahmadinejad forced domestic banks to offer certain types of loans at interest rates lower than the rate of inflation—an unusual but not unwarranted practice under some circumstances for developing countries. But without oversight, the practice can produce speculation and fraud, since people with connections can procure money essentially for free and spend it on profitable activities outside the formal banking system.

 

Banks were eager to lend money to the Arya Group without much oversight because it promised higher profits in an economic climate where banks are forced to hand out loans that are technically guaranteed to lose money.  As a result, Ahmadinejad’s recent loan policy has indirectly produced usury and wasteful speculation by middlemen – both supposedly illegal in the Islamic Republic.

 

Second, Iran’s government has been selling off public enterprises at fire-sale prices over the past four years.  Profitable companies have often been sold to big pension funds, conglomerates with government ties, and other institutional investors.  Ahmadinejad boasts that his privatization program succeeded in shrinking government, but the practice has actually increased corruption through murky transfer of these companies.

 

Corruption linked to privatization is not unique to Iran.  In the 1990s, Russia and China transferred many public companies to former government officials.  Similarly, Iran’s privatization program under Ahmadinejad is producing a new class of owners who, while often dependent on government connections, pursue profit largely by gaming the system.  The Arya Group would not have been able to build up 52 companies so quickly over the past several years if not for these opportunities.

 

The Islamic Republic will pay a price whatever course the government takes. If the Iranian judiciary actually exposes the full details of high-level corruption, the government stands to lose further legitimacy even among loyal cadres.  Yet if the state does nothing, strife among political factions could deepen, undermining attempts to implement policy changes that could address the country’s many social and economic ills.

 

Kevan Harris, who last visited Iran in June, is a 2011-12 Jennings Randolph Peace Scholar at the U.S. Institute of Peace.  He also blogs at “The Thirsty Fish."