S E C R E T SECTION 01 OF 02 IRAN RPO DUBAI 000041

SIPDIS

SIPDIS

E.O. 12958: DECL: 6/5/2017
TAGS: ECON EFIN EINV PTER IR
SUBJECT: IRAN: MAKING ITSELF UNATTRACTIVE TO FOREIGN INVESTMENT

REF: RPO DUBAI 0035

RPO DUBAI 00000041 001.2 OF 002


CLASSIFIED BY: Jillian Burns, Director, Iran Regional Presence
Office - Dubai, Department of State.
REASON: 1.4 (d)

1.(S) Summary. An Iranian businessman who was involved in
Dubai-based Al Aqili Group's tobacco distribution network in
Iran discussed how it lost distribution rights with IRPOffs.
The businessman said Al Aqili lost its $300 million/annual
tobacco distribution network in Iran after a bid to purchase
Iran Khodro's shares of Parsian bank went sour. The businessman
predicted that international banks would not invest in Iran due
to the government's forced lowering of interest rates. He said
there is currently a run on private banks in Tehran by account
holders who believe the banks will not survive with the lower
rates. The businessman said Al Aqili's tobacco business in Iran
has gone to JTI (Note: JTI is a Japan Tobacco and RJRI - the
international operation of RJ Reynolds - conglomerate. Endnote)
He claimed that JTI's operations in Iran are controlled by the
"Lebanese mafia" and that its tobacco profits are funding
terrorism in Iraq. He did not offer any proof to back up this
claim, only advising that we should follow the network of JTI's
distributors, claiming they were all Iraqis. In general, the
businessman claimed that corruption is on the rise in Iran in
response to political uncertainty. While this is an unconfirmed
single source cable -- from an individual who would naturally
have an axe to grind with JTI -- Al Aqili's saga demonstrates
that the Iranian government continues to deter foreign
investment through its own actions. End Summary.

Al Aqili's business in Iran
--------------

2.(S) IRPOffs met June 3 with an Iranian businessman who said
that he was involved in managing UAE-based Al Aqili Group's
tobacco distribution network in Iran for six years. The
businessman said Al Aqili faced multiple challenges when it
initially began distributing tobacco in Iran as it was the first

foreign distributor in the IRI. In the beginning, police
regularly arrested the company's local distributors and seized
Al Aqili shipments, as it was not widely known that a foreign
operator could legally distribute cigarettes. After a few rough
years, the businessman said tobacco distribution in Iran turned
into an annual $300 million industry for Al Aqili.

3.(S) The company's prospects in Iran took a negative turn
roughly six months ago. According to the businessman, Al Aqili
apparently alienated itself when it purchased Iran Khodro's 25%
share of Parsian Bank, a private Iranian bank. The businessman
claimed that while Al Aqili was in negotiations to buy the
shares, former Intelligence Minister Mohammad Reshahri
approached Parsian Bank about purchasing the shares. The
managing director of Parsian Bank reportedly told Reshahri to
"go away," saying he should have approached Iran Khodro and not
the bank if he had wanted to negotiate the price of the shares.
The businessman inferred that Reshahri must have used his
influence against Al Aqili, since soon thereafter; Ahmadi-Nejad
publicly criticized foreign investment in Parsian Bank.

4.(S) After Ahmadi-Nejad's criticism, Al Aqili was forced to
return its shares of Parsian Bank to Iran Khodro, according to
the businessman, although it is still waiting for its initial
$60 million investment to be returned. In addition, Al Aqili
reportedly lost its license to distribute tobacco in Iran. An
April 16, 2007 Baztab article referred to the annulment of the
"biggest private sector transaction at Tehran Stock Exchange" to
date in which 28.8% of Parsian shares - a $320 million
investment -- were transferred from a "government affiliated
auto-making company" to private-buyer Mohammad Rostami Safa and
a "Dubai-based Iranian partner." According to the Baztab
article, "a stock exchange official told the press that the
transaction had been annulled because of administrative
irregularities."

5.(S) When asked if Al Aqili spoke to Ahmadi-Nejad about the
issue during his May 13 visit to Dubai (reftel), the businessman
said Al Aqili did not get the meeting it requested with
Ahmadi-Nejad. He believed, however, that UAE officials likely
raised Al Aqili's case in their own bilateral discussions with
Ahmadi-Nejad.

6.(S) According to the businessman, Al Aqili still retains a
presence in Iran -- two tobacco manufacturing facilities, a
cement factory, and a smaller-scale foodstuff and consumable
distribution network -- although the foodstuff and distribution
network is operating at a loss. The businessman said Al Aqili

RPO DUBAI 00000041 002.2 OF 002


hopes to eventually export out of Iran, but he did not specify
which products. He also mentioned that Al-Aqili does
significant business distributing tobacco in Iraq and has a
presence in 22 cities.

JTI's business profits funding terrorism?
-------------- ---

7.(S) When asked who made up for the tobacco demand previously
met by Al Aqili, the businessman said "JTI." (Note: JTI was
created in 1999 when Japan Tobacco purchased RJRI - the
international operation of RJ Reynolds. Endnote) The
businessman claimed that JTI in Iran is controlled by "Lebanese
mafia;" he alleged that the company's Iraqi directors in Iran
are funneling the company's profits to support terrorism in
Iraq. When asked to specify which groups JTI was allegedly
funding in Iraq, the businessman merely said "trace the history
of their distributors." He acknowledged that the IRGC likely
also had a hand in smuggling cigarettes into Iran but indicated
that JTI controlled a much more significant share of the tobacco
market.

Iran's investment climate
--------------

8.(S) When asked by IRPoffs about the contradictory nature of
Ahmadi-Nejad's condemnation of foreign investment in Parsian
Bank, and other more recent statements by Iran's Money and
Credit Council encouraging foreign investment in the banking
sector, the businessman snidely remarked that with the lowering
of interest rates, foreign banks "would not invest in Iran
anyway." (Note: Ahmadi-Nejad recently forced all public and
private banks to set borrowing rates at 12%. State banks had
been set at 14% and private banks were offering rates of 17-28%.
End note) He said that the government order to lower interest
rates has scared the customers of private banks, who worry that
the banks won't remain solvent. This has reportedly led to a
real "run" on the banks. The businessman also predicted another
spike in real estate prices as individuals pull their money out
of banks. He maintained that corruption is on the rise in Iran,
due to the current uncertainty in Iran. He said that because
people do not know if they will still have their jobs tomorrow,
they are "looking to get the most of their positions today."

9.(S) Comment. This is a single source cable from a new IRPO
contact and the veracity of the statements cannot be verified.
His comments about JTI are noteworthy but should be caveated as
coming from the company's direct business competitor. What Al
Aqili's saga does demonstrate, however, is that the Iranian
government is often more effective than any kind of external
pressure in scaring off foreign investment.
BURNS