By Marcus George
KHASAB, Oman (Reuters) - The fiber-glass skiffs hurtle across the water at break-neck speed, skirting the rocky cliffs on the last leg of the perilous journey from Iran to the sleepy backwaters of Oman's Musandam peninsula.
At the helm are Iran's fast-boat smugglers, an army of mostly teenagers who shuttle back and forth across the narrow Strait of Hormuz, smuggling all manner of goods into Iran's southern ports and evading import duties in the process.
Until recently the Iranian boats and their fearless young skippers escorted several cargoes a day - loaded with everything from soft drinks to mobile phones and cosmetics - bought in the flourishing trading centers of the United Arab Emirates and sold to merchants in Iran.
The proximity of Iran to the UAE and Oman and their historic trade and finance links have supported thriving trade, which in recent years has undermined the impact of economic sanctions imposed by the United States and its allies on Tehran - until now.
Iran's economy appears to be finally succumbing under the pressure of trade embargoes imposed over the country's nuclear activities, bringing this profiteering to a standstill.
The Iranian rial has lost nearly two-thirds of its value to the dollar over the last year, causing a massive haemorrhaging in the spending power of most Iranians.
"We're not picking much up today," shouted Ismael, a 17-year-old Iranian, over the sound of the 200 horsepower Yamaha outboard. The equipment costs thousands of dollars, an ostensible sign that this business has been well worth the risks posed by adverse weather, oil tankers and fierce Iranian patrols.
"Before we used to come across three times a day. Now it's only once," he said, before wheeling his craft with a hard rev, looking for a place to dock in Khasab port on the Musandam peninsula on Oman's northern tip.
Boxes of cleaning products, fabric and clothes stacked on the dock await transportation to Iran's Qeshm island just 30 miles across the Strait of Hormuz, the vital tanker route through which a third of the world's seaborne oil exports pass.
But traders, none of whom wished to be identified, say the number of boxes is substantially less than volumes seen last year.
In Oman, at least some of the exports are registered through official customs channels, businessmen say, but not all.
"There are the storms," said Hossein, a 21-year-old Iranian, who has just made the journey from the Iranian port of Bandar Abbas in under two hours in a convoy of several boats.
"And there are the Iranian police. They're so severe, so corrupt," he claimed as he stood in the middle of his boat, gesticulating towards the open sea.
Smugglers tell stories of bribery, coming under fire and having to dump their wares into the sea but Iran's growing economic plight now threatens to wipe out their risky ventures for good.
The stand-off between Tehran and the West has centered on the Strait of Hormuz. As tension over Tehran's nuclear program has escalated escalated this year, an increasing presence of U.S. naval ships in the strait has been matched by a corresponding build-up of Iranian military vessels monitoring their movements.
Washington has not ruled out military action against Iran's nuclear activities, which it believes is part of a drive to produce a nuclear weapon. Iran has repeatedly denied this.
Israel continues to threaten Iran with an attack and Tehran has said it will close the vital artery if it is subjected to any military strike.
Western diplomats say they have no desire to use sanctions to stop trade in basic goods and cite oil embargoes as the most effective weapon in trying to bring Iran to the negotiating table.
But life for Iranian people is increasingly tough: analysts say Iran's economy will shrink this year after rising 2 percent last year, inflation stands at 25 percent and unemployment could be above 20 percent. However, economists say they do not see a shortage of basic necessities in the country yet.
In Oman, at the old market in Khasab - known as the "Iranian souk" - import-export businesses dependent on re-exports to Iran have been hit hard.
"We've lost 90 percent of our business," said one veteran Indian businessman who asked not to be identified. He has operated out of Khasab for more than a decade.
"It's terrible for us. The rate of the rial is diminishing day by day and we're near to closing down," he said, waving a brick of rials, some US$100 as he made his point.
Businesses like his operate legally in Oman while the transport of many of their goods is handled by the Iran-based merchants who own the fast boats and employ the drivers. They make their orders by telephone and often pay through exchange houses based in Dubai, the businessman said.
Before the economic slowdown really began to bite around six months ago the Indian businessman's company boasted an average turnover of US$130,000 a week, selling mostly food and electronics goods, which ended up in Iranian markets.
The current situation has left his company reliant on selling its goods to the few Omani government offices in Musandam province.
RIAL LOSSES ACCELERATE
The rial's losses have accelerated in the past week despite the government's attempts to stem the slide through establishing an "exchange centre" designed to supply dollars to importers of some basic goods at a special rate, slightly cheaper than the market rate.
Instead of allaying fears about the availability of dollars, the centre seems to have intensified the race for hard currency which has resulted in the rial losing more than 30 percent of its value over the last week.
"My boss can't sell stuff in Iran at these prices," said Nader, a 32-year-old Iranian boatman, sitting in the businessman's office in Khasab, his weather-beaten face making him look much older than his years.
"I'm picking up nothing from here now," he said.
Major Iranian exporters who pack large dhows in Dubai with hundreds of tonnes of goods destined for Qeshm or Bandar Abbas face a similar problem. Iranian crewmen say they now wait 10 days for their vessels to fill up with cargo compared to one or two days a year ago.
Official statistics show that Dubai's re-exports to Iran increased by more than 25 percent in 2011, topping $8 billion dollars. No figures have been released for 2012 but anecdotal evidence from traders and businessmen point to a distinct downturn since the beginning of this year that coincides with harsh new sanctions imposed by the U.S. and its allies that target Tehran's oil exports and banking industry.
Oman's officially declared exports to Iran totalled $521 million in 2009, according to United Nations data. More recent data is not available because the governments do not regularly release statistics.
At Khasab, the Iranians still operate from a dock inside the main port, which was closed off by a high security fence around a year ago, locals told Reuters. Unlike Khasab's fishing wharf, there is no access without permission from the Omani authorities.
That doesn't stop Iranian boatmen freely entering the town during the day. But there is no intent to loiter. Despite the slump in smuggling there is another business to attend to: dropping goods off.
"Look at my sheep," boatman Ismael shouted, pointing to the 30 sheep and goats huddled in his boat. He is set to receive around 2 million rials for each one, or around US$60, although the amount fluctuates because of the volatile exchange rate. "We're making good money from this."
Along the harbor wall, hundreds of sheep and goats are being steered from the boats into waiting trucks.
Selling livestock provides a seasonal bonus for Iran's smugglers in the run-up to the Muslim celebration of Eid ul Adha this month, which among other traditions is commemorated by symbolic sacrifice and the sharing of meat.
Locals say the livestock is sent onwards to the UAE and Saudi Arabia for Eid, which falls on October 27 this year.
With the cattle unloaded, it's time to make a swift return to Iran. Today the boatmen have jobs and the exporters are still in business, but they wonder for how long.
"What should we do?" asked the Indian businessman. "Should we wait for things to get better or pack up now? I just don't know."
(Editing by Susan Fenton)