UPDATE 2-Syria tenders to buy wheat, pay with funds frozen abroad

Mon Jul 1, 2013 5:45am EDT

* Rare tender issued by Syria for flour

* To use new system of frozen bank funds for payment (Adds details on new payment system and comments)

By Michael Hogan and Maha El Dahan

HAMBURG, July 1 (Reuters) - A Syrian state buyer has issued a tender to buy 200,000 tonnes of wheat flour on the international market and plans to pay with funds from bank accounts frozen by trade sanctions.

The tender, from Syria's General Company for Mills, said payment would be made from Syrian money frozen in European and Arab bank accounts.

"Bidders should present a document from the relevant body in the country that has frozen Syrian money, which would allow for the finance of these imports from the frozen money," the tender said.

Food is excluded from Western trade sanctions imposed on President Bashar al-Assad's government, which is fighting to suppress a two-year uprising, but banking sanctions have made it difficult for traders doing business with Damascus.

"The Syrian government has a lot of money held up in banks in Europe and elsewhere, and this is a new method to pay for the imports. We will see whether it works or not," one observer in Damascus said. "If this makes the transactions easier, then for sure it will be a method we will use again."

Under the tender, supply should take place within 180 days after the opening of a letter of credit on the purchase. The tender deadline is July 10.

A Middle Eastern trader said funds in the state-owned Commercial Bank of Syria that have been frozen by European Union and Arab League sanctions will be used for the flour imports.

"The Commercial Bank of Syria has branches in Europe, but its assets are frozen due to the sanctions, and as food is not covered by sanctions, you can get approvals to use part of its assets to fund the purchases," the trader said.

After difficulties securing grain supplies last year, Syria has been more successful at purchasing grain this year through middlemen setting up deals, traders say.

The Syrian government also tapped the international market for rice and sugar in late June, issuing two tenders.

"The system of using frozen bank account funds as payment for food imports has apparently given the Syrians the hope that they can purchase through large international tenders," one trader said.

One trader said he believed the new system had already been used to pay for some state Syrian sugar imports

Syria's state grains agency said on June 27 it had bought around 550,000 tonnes of domestically produced wheat this season and did not expect to buy from foreign markets.

But a United Nations food agency, the Food and Agriculture Organisation (FAO), has said Syria's wheat output is expected to fall further this year after last year's harvest was 37 percent below average.

The FAO said Syria's wheat harvest had fallen to 2.3 million tonnes in 2012 from 3.6 million in an average year. (Reporting by Michael Hogan in Hamburg and Maha El Dahan in Abu Dhabi; editing by Jane Baird)