IRANIAN TEA PARTY: A FOREIGN INVESTOR'S

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000983

NOFORN
SIPDIS

E.O. 12958: DECL: 10/09/2018
TAGS: ECON EAGR PGOV EINV IZ IR
SUBJECT: IRANIAN TEA PARTY: A FOREIGN INVESTOR'S
EXPERIENCES IN THE IRANIAN WONDERLAND

Classified By: Robert Garverick, Reasons 1.4 (b) and (d)


1. (C/NOFORN) A leading Azerbaijan-based businessman with
Iranian roots described his experiences attempting to invest
in the Iranian tea sector in 2004-2006. Invited in by
Iranian officials, he described how two of his ventures were
torpedoed by Teheran authorities after they were underway,
and related the lessons he ultimately learned about the
destruction of the Iranian tea industry due to greed,
corruption, and politics. During his two-year venture he
observed massive smuggling, and its apparent use by the
Iranian regime as a tool for controlling restive border areas
and crony enrichment; a changing commercial distribution
system that is weakening bazaaris; and corrosive hypocrisy,
dishonesty, and cutthroat practices that he alleged typify
many Iranian agro-businessmen, distributors, and senior
officials. He concluded his devastating dissection of part
of the Iranian commercial and economic scene by vowing that,
"no matter what happens there in future, I will never invest
in Iran again." Omar's story is interesting in its own
right, and potentially very revealing as a microcosm of
aspects of the "real world" economic and commercial picture
in Iran. End Summary.


2. (C/NOFORN) Omar, a naturalized Azerbaijan citizen of
Iranian Kurdish ethnicity (strictly protect),confided to
Iran Watcher his Alice-in-Wonderland-like experience
attempting to establish a tea packaging plant and a "world
class" tea processing factory and laboratory in Northern
Iran. Omar's company, a large agricultural and energy
conglomerate headed by his Dubai-based father, has operations
in over 50 countries around the world, including significant
sugar and tea production operations in Azerbaijan and
overseas. Omar got his start running their tea production
and marketing subsidiary, has developed tea operations in
several countries, and is a certified tea taster.

Pilot Project in Tabriz...
--------------


3. (C/NOFORN) Omar related that from 2004-2006 he made many
trips to Iran in connection with commercial ventures
involving the Iranian tea industry. He related that these
efforts started after he was initially contacted in Baku by
the then-mayor of Tabriz ("a lovely man"),a Khatami ally,
about establishing a tea packaging plant in Tabriz as a
possible first step in larger potential business investments
by his company in that region (Note: Tabriz is the capital of
province and the unofficial cultural and business capital of
Iranian Azerbaijan. End Note.)

Blown Out of the Water by Teheran
--------------


4. (C/NOFORN) After a visit to Tabriz Omar agreed to
establish as an initial project a modest tea packaging
factory that would put into teabags tea being grown across
the border in Azerbaijan, with planned follow on sale in the
domestic Iranian market as well as re-export abroad. Omar
related that a new factory with modern equipment was built
and a large inauguration ceremony planned, when two days
before the opening, "without any prior warning," the Iranian
government announced a total ban on the import of tea to
Iran, thereby apparently scotching the whole project. Omar
said that the official reason for the ban was trumpeted
bombastically in Teheran as a "patriotic" measure to support
Iranian domestic tea production.


5. (C/NOFORN) Omar said that the Tabriz authorities were as
"shocked as I was" about the ban, and blamed it on "politics"
and the influence of "seven or eight" ultra-conservative tea
factory owners with connections to the Basiji organization,
whom Omar claimed completely monopolize Iranian tea
production. In the wake of the Tabriz fiasco, Omar developed
a plan for blending Iranian tea with high quality Sri Lanka
tea and marketing the product internationally through his
firm's large distribution network. He added that his company
also planned to fund a "world-class" tea laboratory and
agro-research center for the Iranians as part of this
project.

Iranian Tea Sector - Destroyed by Greedy Basijis?
-------------- ---


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6. (C/NOFORN) Omar said that, with substantial official
encouragement, he undertook several investigative and
lobbying efforts within Iran, traveling frequently to Iran
tea production centers and lobbying key figures in the
Teheran government. As part of this effort, participated in
several meetings with the tea factory cabal, whom he
described as universally "bearded, dirty, and hideous."
According to Omar, his research revealed that over time the
corrosive corruption of this clique and its Teheran allies
has devastated the domestic Iranian tea industry, which he
claimed formerly employed several hundred thousand farmers,
mainly centered in the Lahijan area of Gilan province. He
alleged that the clique used its conservative connections
during the Khomeini period to force the government to buy
most of their tea production at the near-market price of
approximately $2.50 per ton regardless of quality, then
pressured local farmers to supply them with bulk production
including non-tea fillers to optimize their profits.


7. (C/NOFORN) According to Omar, this practice rapidly led
to the collapse of domestic demand for Iranian tea (which he
described as "undrinkable" in terms of the high standards of
Iranians),and the amassing of unsellable "tea mountains" in
government warehouses, which are periodically burnt (he
personally witnessed one of these massive warehoused tea
burnings). He claimed that by 2005, no more than 20 percent
of tea production was ever sold, and that at a knockdown
price of approximately twenty-five cents a ton. He said that
independent tea farmers found themselves unable to market
their product, and over time even those servicing the clique
had their income slashed by the greedy clique members,
leading many of them to seek other employment and/or sell
their property to land speculators, most of whom he claimed
were also members of the conservative Islamic faction.

Hypocrisy in Teheran
--------------


8. (C/NOFORN) Omar then described a Teheran meeting with the
head of Iranian Tea Board and the Deputy Minister of
Agriculture, during which he lobbied for a loosening of the
tea import ban for the purposes of his tea blending project.
He related that when he observed that Iranian tea by itself
is unmarketable, the Deputy Minister launched into a pompous
lecture about the need to support the "glorious ancient
Iranian tea industry." Omar said that he responded by asking
the Ministry tea server to provide the tea box for the tea
they were currently drinking. The tea was imported.
According to Omar, "without batting an eye," the Deputy
Minister observed that "you are a clever man - I'm sure you
will quickly find your own solution to your tea (import)
problem." He then suggested that Omar visit the Teheran
bazaar.

"Welfare - Iranian Style"
--------------


9. (C/NOFORN) Taking the hint, the (self-professed) "naive"
Omar went to the bazaar, where he saw large stocks of
illegal, imported tea openly for sale at reasonable prices,
and had no problem in obtaining purchase receipts from local
vendors, who told him that much of the illegal tea was
smuggled in large shipments via Iraqi Kurdistan. The
intrigued Omar then recounted how he visited the Iran-Iraqi
Western border area, where he witnessed "massive caravans of
trucks carrying tea and other products and dozens of young
boys with refrigerators on their backs" proceeding unhindered
over a makeshift road no more than 200 meters from an
official border post. "For the first time I realized what
was really going on (with the tea ban)," he said, "it was
welfare Iranian-style!"

Paying Off Several Birds with One Stone
--------------


10. (C/NOFORN) He explained that the border region is
extremely poor with little government investment or services,
and populated primarily by potentially restive Sunni Kurds.
"They have no economic alternatives of their own there except
smuggling," he asserted, "so the government is allowing them
to have this 'industry.'" He added that artificial import
bans serve several purposes: payoffs to politically-connected
domestic cliques, such as the tea cabal; provision of income
to depressed border areas; and national security leverage

BAKU 00000983 003 OF 003


based on the principle "what we give we can take away." He
elaborated on the latter point by observing that troublesome
tribes can be deprived of access to lucrative smuggling
routes, or dealt with indirectly by temporarily denying other
tribes access to such routes, who then pressure the
troublemaker.

Contract Problems, Changing Commercial Distribution Picture
-------------- --------------


11. (C/NOFORN) Omar then related that he set up his tea
factory in the Tabriz area and began buying imported tea from
merchants in Teheran and blending it with some domestic tea.
He said that a complicating factor was that "with the
exception of five or six big businessmen and their companies,
"no one respects contractual obligations in Iran unless you
have the right connections to compel them." He added that
even the few reliable businessmen could only be counted on to
honor contracts so long as one does business with them - "if
they lose your business, they often won't pay or deliver what
they owe you," he claimed. He added that the emergence of
large distribution companies with national networks is
increasingly diminshing the commercial position/leverage of
the traditional bazaari merchants. He explained that new
companies "with hundreds of trucks" are bypassing traditional
bazaari-dominated consumer supply networks and delivering
goods directly to neighborhood shops and large food stores.

Conclusion: All Business is Politics
--------------


12. (C/NOFORN) Resuming his story, Omar said that about six
months after he began his blending business he was visited by
Iranian intelligence officers who accused him of breaking
Iranian law by smuggling illegal tea (despite his Teheran
purchase receipts) and demanding that he shut down his
operation. Omar claimed to be taken aback by this, as he
claimed that some Iranian businessmen had established similar
factories and were operating without problems. Omar
concluded that internal Iranian politics were as much
responsible for his problems as corruption and government
inefficiency.


13. (C/NOFORN) Noting that he had invested in Iran under the
sponsorship of local politicians (such as the then-Mayor of
Tabriz) close to then-President Khatami, Omar opined that he
apparently became a target of local conservatives and others
opposed with that faction, and said that he was warned that
the (anti-Khatami) intelligence were preparing to accuse him
of doing illegal his business in order to discredit the local
moderates who initially assisted him. For Omar, this
incident was the straw that broke the camel's back: he
quickly departed Iran and has not returned since. He also
immediately closed down his business, removing some machinery
to Azerbaijan.

"Never Again"
--------------


14. (C/NOFORN) Omar called his two-year effort in Iran
"painful but educational." No matter what happens there in
future, "I'm never investing in Iran again," he asserted.
Note and Comment: While the Iranian government partially
lifted its tea import ban in 2006, recent FAO and trade press
reports suggest that tea smuggling into Iran remains massive,
and that Iranian factory owners are still receiving state
subsidies, despite the fact that most domestic tea production
continues to end up in government warehouses before being
burnt.


15. (C/NOFORN) In addition to shedding light on tea and
agribusiness issues, Omar's story provides potential food for
thought on many important issues relating to how Iran's
economy, government, and politics may "really" work. Omar is
a major, internationally active Baku business figure, and we
attach significant credibility to his comments as a
reflection of his personal impressions and experiences. Post
Iran watcher will continue efforts to assemble a mosaic of
such insights from knowledgeable and experienced sources
here. End Note and Comment.
DERSE