Wheat starts to reach Syria as frozen funds unlocked

Fri Oct 11, 2013 11:59am EDT

* 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 are starting to reach Syria's ports as its bank accounts abroad are gradually being freed from sanctions, with grain traders detecting a greater willingness from European governments to allow deals to go ahead on humanitarian grounds.

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

Trade sources familiar with commercial deals said at least 500,000 tonnes of bread-making wheat that Syria had tried to obtain months ago, but which could not be paid for because its foreign bank accounts were frozen, were now starting to be delivered.

"What we are seeing at the moment is Syrian government business that was done in the past -- between four to six months ago -- that is only now being executed," a Middle East based trade source involved in deals said. "It looks like the payment issues are being resolved."

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

"The willingness amongst governments that have frozen Syrian assets to offer waivers allowing the regime to tap into these funds in order to buy food staples is likely to increase in the short term," said Torbjorn Soltvedt of risk consultancy Maplecroft.

"Following the U.S. administration's decision to forgo air strikes - at least in the short term - the conflict remains a stalemate in which the humanitarian situation will continue to deteriorate."

Foodstuffs are not covered by international sanctions, but banking sanctions and asset freezes imposed by Washington and Brussels created a climate that had made it difficult for some trading houses to do business with Damascus.

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

UNLOCKING FUNDS

Unlocking the bank accounts is up to member states in the European Union and trade sources familiar with deals said the moves were due to concerns over the worsening humanitarian situation and attempts to free up funds were aimed at alleviating it. An EU spokesman has confirmed that such trades are not subject to restrictions, but it was up to authorities in member states where the banks are located to authorise the transactions.

Banking sources pointed to several Middle Eastern banks with operations in Europe that had frozen funds. One trade source said Syria had paid for the wheat using funds in some of the Arab owned banks.

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

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

"The Syrian government continues to heavily restrict the distribution of aid. This exposes any countries that unfreeze Syrian assets to criticism that they are strengthening the position of the regime, which relies on the distribution of food in the areas it controls to boost support," Maplecroft's Soltvedt said.

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

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

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

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

"We are not in a similar situation to Egypt, where sales are well organised. This is a country at war with everything this implies in terms of disruptions," a trader close to the matter said.

MIDDLE MEN

Deals had been concluded using private companies including middle men in Syria.

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

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

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

Despite signs of business emerging, Syria is still behind on purchases. The conflict has taken its toll on Syria's vital sea-borne trade, which has dropped despite efforts to keep commercial supply lines open.

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

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

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

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

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

"No one really has an accurate picture of Syria's actual crop as the country is a war zone and independent crop analysts cannot visit the grain areas and see for themselves how the crop developed and how much was actually harvested," a European trader said.

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

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