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Iraqi oil evades sanctions; Smuggling: A sharp rise in prices has spurred illicit trade that is allowing Saddam Hussein to rebuild his military, the U.S. says.

WASHINGTON — WASHINGTON -- On a still night earlier this month, a Navy Seahawk helicopter sped across the dark waters of the Gulf of Oman and hovered above the Russian-flag commercial oil tanker Volganeft, anchored just off the United Arab Emirates. Suddenly 10 SEALs -- black-clad commandos carrying M-16 rifles and machine guns -- clambered up to the deck and rounded up the crew.

Scrambling up to the bridge, the commandos found documents claiming that the 4,000 metric tons of oil on board -- the equivalent of 29,200 barrels -- had been pumped in Iran. But satellite-based navigation records revealed that the tanker's route began in Iraq and that charts of the voyage had been erased, said U.S. government officials. Commandos interrogated crew members, who told different stories about their route and where they stopped in Iran.

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Evidence seized aboard the Volganeft on Feb. 2 included a sample of the oil. A U.S. laboratory tested the sample. Several days later Defense Secretary William S. Cohen announced the results: The oil came from Iraqi wells, a flagrant violation of United Nations sanctions.

The story of the Volganeft is a common one these days in the Persian Gulf, where a sharp increase in oil prices has spurred a smuggling business that is making millions of dollars for Iraqi leader Saddam Hussein, allowing him to rebuild his military and maintain his security apparatus, U.S. officials say.

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One official, who like most others interviewed for this article asked not to be identified by name, called the smuggling of Iraqi oil through the gulf the "main hole" in the tough U.N. trade sanctions imposed on Iraq after the Persian Gulf war of 1991. He estimated that more than 90 percent of the illicit oil is getting through the allied net.

Russia insisted that the oil on the Volganeft came from Iran, not Iraq, and asked a Swiss laboratory to provide another analysis. No results have been announced.

Through a spokesman at its mission to the United Nations in New York, Iraq denied that it sells oil in violation of international sanctions. Iran acknowledges that smuggling occurs but "rejects allegations of complicity" on its part, said Hossein Nosrat, press secretary in Iran's U.N. mission.

But U.S. officials and Western diplomats say that Iranian officials, at least including the country's elite Islamic Revolutionary Guard, receive a large portion of the smuggling dollar for providing ships with forged documents and safe passage through Iran's territorial waters -- out of reach of allied warships that are enforcing the decade-old oil embargo against Iraq.

"Clearly Iran is involved. They come out and help with the forged papers and such," said P. J. Crowley, a Pentagon spokesman. "Iran is very complicit in this." The historical enmity between the two countries, which fought to a stalemate in a war in the 1980s, is being set aside for a "business deal," said a Pentagon intelligence report.

United Arab Emirates

The Iraqi and Iranian middlemen in the trade are operating out of the United Arab Emirates, a U.S. friend in the region, bringing together the smugglers and officials of the Iraqi state oil company and arranging for the illicit traders to obtain the forged documents and transit papers from Iran's Revolutionary Guard, U.S. officials say.

After cruising southeast through Iranian waters, the ships must run a 30-mile stretch of international water where allied ships patrol and are empowered to stop and board them.

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Once they reach the ports or territorial waters of the United Arab Emirates, which does not permit seizure and boarding in its waters, they face few if any restraints on selling their cargo.

"The U.A.E. is part of the problem," said one Western diplomat, adding that officials in the emirates have been approached by the United States and its allies.

Hamadi al-Habsi, charge d'affaires in the United Arab Emirates' Washington embassy, declined to comment, saying that U.S. officials who are unhappy with United Arab Emirate policies should communicate through diplomatic channels, not the media.

The State Department, mindful that a United Arab Emirates smuggling crackdown might trigger reprisals against the tiny emirate from Iran, officially plays down the United Arab Emirates' ability to block illegal trafficking. The Persian Gulf is broad, it says, the smugglers legion, the illegal traffic increasing. And on any given day, the United Arab Emirates' waters are congested by scores of ships carrying legal cargo that inadvertently lend cover to the smugglers.

"We have no information that the government of the U.A.E. is involved in the smuggling activity," said State Department spokesman James B. Foley, who said the United Arab Emirates has been "very supportive" of control efforts. "Smuggling of Iraqi oil through the gulf involves a number of countries and is an issue that needs to be addressed in a variety of ways: through the U.N. sanctions committee, the multinational interception force and at offloading points."

One administration official said part of the problem is that the United Arab Emirates is a loose collection of "city states," where some officials might agree to cooperate with the allied force, while others allow smuggling to go on. Smuggling has "gotten into some of the inter-U.A.E. politics," said the official. "Also it's gotten so profitable there's a real incentive to keep it going. It's the same thing for the Iranians."

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Most of the estimated 150 ships that make the trip each month are flying the United Arab Emirates flag and include everything from coastal tankers to aging barges and tugs. Even the traditional Arabic dhow, a low-slung motorized sailing vessel, gets involved, its sloping frame crammed with barrels of oil.

"There's so much going on they basically use anything they can to move the oil," a U.S. official said.

With the price of oil rising to $215 per metric ton last month, an estimated 415,000 metric tons of oil was smuggled from Iraq in January, officials said. That was an increase from 6,000 metric tons smuggled in August when the price was $165 per metric ton. One metric ton equals 7.3 barrels of oil.

A big profit to be made

Smugglers paid the Iraqis at least $13 per metric ton in December, say U.S. government officials, meaning that Hussein made about $4.2 million in the illicit trade during that month. Iran adds $30 to $50 per ton for forged papers and use of its waters, while it costs the smuggler $20 per ton in transit costs. Thus, in December a smuggled ton of oil cost between $63 and $83 per ton. The cost has risen with the price of oil. Even so, the profit margin is remarkable. The oil can be sold in the United Arab Emirates for about $180 to $206 per ton, officials estimate.

U.S. officials say the United Arab Emirates has fostered a climate in which the illicit oil trade can flourish. "The business of the U.A.E. is business," said one U.S. government official with a shrug, adding that the United Arab Emirates as a haven for smugglers is "certainly a problem."

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The United Arab Emirates occasionally offers help in combating the illegal trade, U.S. officials say, but only occasionally. The United Arab Emirates coast guard was instrumental in the seizure of the Volganeft by forcing it back into international waters. "They're playing both sides of the fence," said a Pentagon official.

Some agencies, notably the Pentagon, say the State Department and its diplomatic concerns have become a stumbling block in enforcement of the oil embargo.

For example, it wasn't until the Volganeft's third known smuggling trip between Iraq and the United Arab Emirates that the Navy obtained State Department approval to seize it, one official said. Officials say another Russian commercial tanker completed two smuggling trips without allied interference because of State Department qualms.

Secretary of State Madeleine K. Albright was completing a three-day trip to Moscow the day of the Volganeft seizure, which has produced new tensions with the Russians. She discussed oil smuggling with Russian officials and left just hours before the Navy commandos stormed the ship.

"We had to wait for approval on this one," said one Pentagon official. "We could have taken them down before. Why aren't we stopping more? A lot of it has to do with politics."

And some has to do with the limited number of ships set aside to patrol the gulf, U.S. officials said. Three to five allied ships are assigned to the Maritime Intercept Force at any one time, said officials. Gen. Henry H. Shelton, chairman of the Joint Chiefs of Staff, said last week that though additional ships are sometimes added to the force, no plans have been made to beef it up.

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"We can't afford to maintain a large presence out there," he said.

Two U.S. ships, the cruiser USS Monterey and the frigate USS Taylor, were part of the force that seized the Volganeft.

Besides the United States, Britain, Canada, Belgium, New Zealand, Italy, the Netherlands and Austria provide warships for embargo enforcement on a rotating basis.

In 1999, the allies boarded 700 ships and diverted 19 to friendly ports to offload oil that had been seized. Last month, 64 ships were boarded and none diverted. This month, 27 ships have been boarded, but only one, the Volganeft, has been diverted.

But one administration official said that if the "entire [U.S.] 5th Fleet" was put to work on anti-smuggling operations, it would be difficult to stop it, given the narrow wedge of international water and the sheer volume of legal and illegal shipping.

If a ship is found to have engaged in smuggling, its contents -- and sometimes the vessel itself -- are sold. The proceeds are used to support the naval force. The oil from the Volganeft was taken off this past week in Muscat, the port city and capital of Oman, which borders the United Arab Emirates.

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Hussein said to benefit

U.S. officials estimate that more than 90 percent of the smuggled oil is getting through and enriching Saddam Hussein. Those dollars go directly to the regime, in contrast to the funds obtained through the U.N.-administered oil-for-food program, under which Iraq sells oil under international supervision on the condition that it devote the proceeds to food, medicine and other humanitarian purposes.

Iraq has complained that its ability to pump oil and generate revenue under the program has been hurt by continued U.S. bombing and sanctions on Iraqi equipment purchases. But U.S. officials say the recent increase in smuggling proves that Iraq has sufficient capacity to increase oil-for-food sales.

The ships involved in the oil smuggling begin by sailing north up the Persian Gulf and into the Shatt al Arab inland waterway, which curves about 60 miles to the Iraqi petroleum production terminal at Abu Flus. After taking on the illegal oil, the ships head back down the waterway to a checkpoint on the Iranian side of the Shatt al Arab known as Arvand 1, a Revolutionary Guard facility. U.S. officials are uncertain whether forged travel documents are obtained there or earlier in the United Arab Emirates.

Once the ships clear the checkpoint, they cruise into Iranian waters, hugging the coastline as they sail south inside the 12-mile limit that the allied interceptor force is forbidden from entering.

U.S. spy satellites and Navy P-3 Orion surveillance planes keep an eye on the smugglers as they make their way down through the gulf, officials said.

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To disguise their cargo, the smugglers at times transfer oil from one ship to another or blend it with oil from other nations. This usually occurs off the southern Iranian island of Qeshm. Some ships use smaller, nearby islands as cover.

The ships then dash across the narrowest part of the gulf, near the Strait of Hormuz, to United Arab Emirates ports, including Hamriyah, just north of Dubai, and Fujairah, a busy port on the Gulf of Oman. This leg of the journey is generally the only portion where the ships must traverse international waters, where they are vulnerable to allied enforcers. It was in international waters off Fujairah that the Volganeft was seized by Navy SEALs, officials said.

Some ships sell their oil in the United Arab Emirates. Others sail farther south into the Arabian Sea and beyond to markets in India, Pakistan and elsewhere following sea-trade routes as old as time. They then head back toward Iraq to take on another load and begin the process again. Often the smuggled oil is handled by United Arab Emirates-based companies controlled by Iraqis, including Hussein and his sons Uday and Kusay, one State Department official said.

"[Smuggling oil] is probably one of the main holes in the sanctions regime," said one U.S. official. "Literally hundreds of vessels can make this trip in a month. It's an embarrassment."


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