Wheat starts to reach Syria as frozen funds unlocked

Reuters

* Country faces worst wheat harvest in decades

* Commercial deals still complex to conclude

By Jonathan Saul and Michael Hogan

LONDON/HAMBURG, Oct 11 (Reuters) - Deliveries of wheat arestarting to reach Syria's ports as its bank accounts abroad aregradually being freed from sanctions, with grain tradersdetecting a greater willingness from European governments toallow deals to go ahead on humanitarian grounds.

As civil war grinds on, Syria is facing its worst wheatharvest in three decades. President Bashar al-Assad, who hasalready escaped air strikes as punishment for chemical weaponsattacks, will now be able to bolster depleted food supplies.

Trade sources familiar with commercial deals said at least500,000 tonnes of bread-making wheat that Syria had tried toobtain months ago, but which could not be paid for because itsforeign bank accounts were frozen, were now starting to bedelivered.

"What we are seeing at the moment is Syrian governmentbusiness that was done in the past -- between four to six monthsago -- that is only now being executed," a Middle East basedtrade source involved in deals said. "It looks like the paymentissues are being resolved."

A source with Syria's state wheat buyer, the GeneralEstablishment for Cereal Processing and Trade, (Hoboob),confirmed deals were struck months ago for 500,000 tonnes ofwheat, adding that 150,000 tonnes had recently been deliveredusing previously frozen funds.

"The willingness amongst governments that have frozen Syrianassets to offer waivers allowing the regime to tap into thesefunds in order to buy food staples is likely to increase in theshort term," said Torbjorn Soltvedt of risk consultancyMaplecroft.

"Following the U.S. administration's decision to forgo airstrikes - at least in the short term - the conflict remains astalemate in which the humanitarian situation will continue todeteriorate."

Foodstuffs are not covered by international sanctions, butbanking sanctions and asset freezes imposed by Washington andBrussels created a climate that had made it difficult for sometrading houses to do business with Damascus.

Syria has struggled for several months to conclude deals tobuy sugar, wheat and rice in international tenders using frozenfunds, partly because of difficulties in securing permissionfrom governments to free those funds.

UNLOCKING FUNDS

Unlocking the bank accounts is up to member states in theEuropean Union and trade sources familiar with deals said themoves were due to concerns over the worsening humanitariansituation and attempts to free up funds were aimed atalleviating it. An EU spokesman has confirmed that such tradesare not subject to restrictions, but it was up to authorities inmember states where the banks are located to authorise thetransactions.

Banking sources pointed to several Middle Eastern banks withoperations in Europe that had frozen funds. One trade sourcesaid Syria had paid for the wheat using funds in some of theArab owned banks.

Banking sources said banks had pooled previously blockedfunds to close some of the deals.

"We have always been very strong in doing business withSyria. Of course under today's difficult circumstances, onetries to do the doable," said a source at one of the Arab banks,who declined to be identified due to the sensitivities of thetrade.

"The Syrian government continues to heavily restrict thedistribution of aid. This exposes any countries that unfreezeSyrian assets to criticism that they are strengthening theposition of the regime, which relies on the distribution of foodin the areas it controls to boost support," Maplecroft'sSoltvedt said.

Before the conflict, banks with large Syrian activitiesincluded Germany's Commerzbank. Asked about humanitarian deals,a Commerzbank spokesman said, "we are currently not doing anysuch transactions".

France has cleared the use of frozen Syrian bank assets topay for exports of food as part of a European Union system thatallows such funds to be used for humanitarian ends, a tradeministry spokeswoman said last month.

Trade sources said the wheat had been sourced from Franceand Black Sea producers especially Ukraine and Romania.

Around 250,000 to 300,000 tonnes of French wheat is expectedto load for Syria, some of which shortly, sources said.

"We are not in a similar situation to Egypt, where sales arewell organised. This is a country at war with everything thisimplies in terms of disruptions," a trader close to the mattersaid.

MIDDLE MEN

Deals had been concluded using private companies includingmiddle men in Syria.

The Middle East source said Syria was opting to concludesome business outside of formal tenders. "Non-tender businessalso allows them more channels including some involvement fromthe private sector."

A separate trade source said there was talk of a furtherpurchase this week of up to 150,000 tonnes of grains comprisingwheat and corn, although others could not confirm details.

"Although Russia and Iran will remain the main lifeline forthe Syrian regime, the increasingly fragmented war economycontinues allow a wide range of local and international actorsto conclude ad-hoc commodity deals," Maplecroft's Soltvedt said.

Despite signs of business emerging, Syria is still behind onpurchases. The conflict has taken its toll on Syria's vitalsea-borne trade, which has dropped despite efforts to keepcommercial supply lines open.

Agribusiness group Cargill said it aimed to sellagricultural commodities to places such as Iran and Syria asfood is specifically excluded from sanctions.

"Obviously this is not an easy thing because when we do thisbusiness our thinking is first and foremost for the safety ofthe people involved in making these deliveries," Roger Janson,Cargill's head of ocean transportation, said in a recentinterview.

Commodity traders say it is impossible to accuratelyestimate Syria's wheat needs.

Estimates collated by Reuters from over a dozen grainofficials and local traders in late July after the harvestsuggested Syria would need to import 2 million tonnes of wheatin the coming year to meet normal needs after a crop of 1.5million tonnes, under half the prewar norm.

Syria's peacetime import needs varied greatly according toits harvest, with imports of about 400,000 tonnes needed in theyear before the war began in 2011.

"No one really has an accurate picture of Syria's actualcrop as the country is a war zone and independent crop analystscannot visit the grain areas and see for themselves how the cropdeveloped and how much was actually harvested," a Europeantrader said.

"It must be assumed the fighting will have damaged peacetimefarming patterns."

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