Sanctioning Iran: Implications and Consequences (part 2)
8 Nov 2012
By Eskandar Sadeghi-Boroujerdi for Oxford Research Group (ORG)
Revolutionary Guards’ Economic Consolidation
Before the most recent sanctions, Iran’s energy sector had long been in a state of limbo. Southern Pars Gas field has remained undeveloped, despite the pledge of Iran’s oil minister, Rostam Qassemi to undertake a major overhaul of its extracting capacity, which is embarrassingly outstripped by the rate at which Qatar is extracting gas, from the shared gas field. external page[49] Not a single phase of this huge gas field has been developed to completion during Ahmadinejad’s presidency. Iran’s ability to extract gas has been a longstanding problem, but in the immediate present, with U.S. sanctions on the energy sector, Tehran will struggle on figuring out how and to whom to sell its gas, given its loss of the European market and the constraints on its primary oil purchasers.
A $25bn contract for the development of South Pars is presently in the hands of Khatam al-Anbia, the Revolutionary Guards’ engineering arm, and is reported to have made little progress. Shell and Total were forced to withdraw under U.S. pressure several years ago. external page[50] The Ministry of Oil has stated that it requires approximately $200 billion for the development of the gas and oil industry. This level of investment is unlikely to be forthcoming in light of sanctions and the IRGC’s dislike of foreign competitors.
Contracts continue to be signed with companies affiliated to the IRGC, or to the Ministry of Defence, external page[51] which suggests that rather than pressuring the Islamic Republic to open up, sanctions are consolidating the “praetorian regime”, which has overtly taken root since the late 1990s. external page[52] This increasing penetration of the Iranian economy, in particular the energy sector is only reinforced by the fact that the incumbent Oil Minister is a former head of Khatam al-Anbia and a Major General in the IRGC. external page[53] In this way, the IRGC widens its net over the Iranian economy, and is emboldened to use its military muscle to strong arm both political and economic rivals. Also, given the fact that statements issued by members of the IRGC are the most severe and condemnatory of the Reformists and the Green Movement leadership, external page[54] its further economic consolidation, will no doubt further weaken prospects of a revival of the Reform movement and/or glasnost of any description.
Due to the dive in Iranian oil exports, Iraq has now overtaken Iran in August 2012, reaching its highest level of crude exports for thirty years. external page[55] This goes to further undermine Iran’s reputation as a regional hegemon and Iran’s bargaining power in OPEC. Iran dropped to third among OPEC’s biggest exporters, having held the No. 2 spot since May 2000. external page[56] It is highly doubtful Iraq will place Iran’s national interest over its own, and cut back on oil production, when it is in need of crucial revenue itself. external page[57]
Meanwhile, Iran is reluctant to cut production because of its symbolic significance for its status as a regional power and the difficulty of increasing it once again further down the line. Consequently, The New York Times in July 2012 reported that some 65 tankers were docked in the Persian Gulf containing Iranian oil yet to find buyers. external page[58] In order to solve the storage issue Iran has bought 12 super tankers from China. external page[59] However, Chinese super tankers only solve part of the equation if Iran continues to face difficulties over P&I insurance.
In sum, Iran has seen a dramatic loss in revenue, and in the short and medium term is attempting to find temporary solutions to prevent oil revenues from sliding even further, and despite its rhetoric to the contrary. At the Non-Aligned Movement (NAM) summit, Iran’s oil minister Rostam Qassemi, was busy on the side lines trying to wrangle buyers for its oil. This conveys well the dichotomy between Tehran’s public rhetoric in the face of Western pressure, and its private endeavours for damage control. external page[60] The National Iranian Oil Company also has now started to offer to transport oil to buyers using its own fully-insured vessels, but only time will tell how the market will react to the Iranian initiative. There would appear to be no real way through which Iran might restore lost oil sales. The main question is whether it can arrest a further slide. external page[61]
Tehran will also continue to search for means to circumvent sanctions. In the short-term, Iranian tankers have sought to fly other nations’ flags and change the names of its vessels. This ultimately solved little because tankers bear a serial number which doesn’t change, and so vessels can be easily identified. The Majles has also passed a law allowing a fifth of Iranian oil to be sold privately. This way, payments will be deposited in private accounts, which have not yet been blacklisted unlike Iran’s Central Bank and several other smaller Iranian banks. external page[62]
The blows to Iran’s regional prowess, one which it sought to reassert by means of the NAM Summit in Tehran, do not mean the Islamic Republic will be prepared to forgo nuclear enrichment or meet Western demands as they stand. Virtually every Iranian leader who spoke at THE NAM Summit including Ayatollah Khamenei, Ali Akbar Salehi, Ali Asghar Soltanieh, and Mahmoud Ahmadinejad, strenuously reaffirmed Iran’s right to enrich uranium for peaceful purposes, and insisted Iran would not be pressured into forgoing such a right under pressure of sanctions. external page[63]
Sanctions Targeting Iranian Financial and Banking Sector
Sanctions have already dealt a major blow to one of the most important achievements of the Rafsanjani and Khatami administrations, which was to unify the multiple exchange rates, which had emerged in the course of the eight year conflict with Iraq. As of July 2012, the government stated it will supply dollars at the official rate to import “basic goods” and a rate of 15,000 rials to the dollar for “capital and intermediate goods”. external page[64] With the rial’s on-going plummet in value throughout September and early October, the currency crisis has entered unchartered territory and at present the government is at a loss on how to respond.
The pool of individuals eligible for the official currency rate is rapidly shrinking, and this is exacerbating the dearth of confidence which already exists amongst people, who regard the Central Bank of Iran’s (CBI) assurances of its possession of plentiful foreign currency reserves, with a great deal of scepticism. Because of this scepticism, Iranians have continued to buy foreign currency and gold, in order to pre-empt the further erosion of their savings. This in turn has perpetuated a vicious cycle, which acts as an obstacle to the rial’s stabilisation.
Moreover, despite claims by Oil Minister, Rostam Qassemi that Iran has $150 billion in foreign currency reserves, so-called ‘travel currency’ which Iranians could previously purchase at the official government rate has been scrapped. Foreign currency for travel has been limited exclusively to religious pilgrimage to Saudi Arabia, and the shrine cities of Iraq. external page[65] Parents wishing to send their children studying abroad money are forced to send cash through friends, or via wire transfer, and in the process are forced to pay hefty commissions. external page[66] Students studying abroad on scholarships have also been requested by the Ministry of Education to return to the country. external page[67]
Such restrictions, it has been argued, save Iran some $5 billion annually, even if they are not exactly an action which bespeaks of brimming confidence. Whether such policies have been enacted because Iran is planning ahead, or because its claims regarding its foreign currency reserves are more bravado than reality is not clear, since the IMF has testified to Iran’s possession of substantial foreign currency reserves. The most recent IMF report stated Iran had $80 billion in foreign reserves and some $20 billion in gold, which are said to have accumulated over the years and as a result of the windfall in oil revenues. external page[68]
Iran has also been purchasing large amounts of gold from Turkey, suggesting that the Islamic Republic has possibly been exchanging gold for energy, so as to build up reserves in the advent of a future conflict. Also, due to the devaluation and fluctuations in the rial, some parties with privileged access to official currency have been making a killing, buying Turkish gold on the cheap, and then importing it back to Iran to sell at a healthy profit. The marked increase in gold purchases since the effective emergence of Iran’s multiple exchange rates has seen Turkey’s gold and precious stones exports to Iran reach $8 billion in the first seven months of this year, in comparison to $2 billion during the same period in 2011. external page[69] As a result of a 395% increase in the purchase of gold and precious stones in July, Iran became Turkey’s biggest trading partner. external page[70] Thus, apart from the state’s need to ensure it has sufficient gold reserves going into the future, the multiple exchange rates have seriously exacerbated corruption. Until the government is able to quell unease over the rial, Iranians will continue to exchange their savings for a safer and more assured option.
The Weak Rial
The Iranian currency had lost half of its value in early 2011, and before the impact of sanctions had been on shaky ground, in part because it has been overvalued for many years. external page[71] On14 March the Central Bank of Iran (CBI) permitted private money changers to handle imports for ‘non-essentials’, and by the end of March Iran’s currency had lost 55% of its 2002-2011 value. external page[72] The downward spiral has continued unabated and on 1 October the rial was trading on the black market at 36,000 rial to the dollar.
Veteran Iranian economist Jahangir Amuzegar has outlined four key reasons why the Iranian rial has gone into free fall.
- The misconception that a high currency is economically desirable.
- Wrong-headed policies of the Ahmadinejad administration in tackling inflation and unemployment.
- Western economic sanctions as a result of the on-going nuclear deadlock.
- Loss of public confidence in the Iranian government’s ability to support the official currency rate. external page[73]
While the rial’s overvaluation is the product of deeper and systemic issues in Iran’s economy, the latest sanctions enveloping the Central Bank beginning in December 2011-January 2012 have acted as a catalyst. external page[74] Amuzegar deems it highly unlikely that Iran’s on-going economic crisis will be abated until the nuclear crisis is also solved, since the current sanctions against Iran’s energy sector, which directly impacts the value of the Iranian rial, will not be lifted without a conclusion to the decade long impasse.
Mounting Difficulties
- Health Sector
An independent report has yet to be written on the impact of financial sanctions on the availability and prices of pharmaceuticals in Iran, but some analyses have been ringing alarm bells regarding the negative impact of sanctions on civilians in this regard. external page[75] Rahbar Mozhdehi Azar, the Head of the Society for Pharmacists of Iran, in an interview with Mehr News, has stated that the “majority of pharmacies are up for sale” due to a four-fold increase in taxation on pharmacies and serious delays in insurance payments. As a result, around 100 pharmacies have been put up for sale in recent months.
The government has been criticised due to the poor allocation of official rate currency for vital medicines and drugs. This suggests that if the Iranian government is able to bring some competent management to bear, more effective policies could help avert some of the disaster scenarios currently being aired. external page[76] Here the Iranian government is not doing itself any favours, and is thus far losing the PR campaign for ordinary people’s hearts and minds. One incident, which sparked the ire of Iranian MPs and has been criticised by the Chief of the Majles’ Economic Commission, Arsalan Fathipour, was the import of $70 million worth of Chinese dolls. He argued that the government should allocate foreign currency more appositely and efficiently.
- Private Sector
Beyond pharmacies, it seems that the private sector as a whole is being seriously squeezed and making foreign investment by even non-western companies, or the pursuit of joint ventures, a risky and unattractive proposition. external page[77] Many Iranian and even Iraqi banks have proven incapable of offering the most rudimentary of financial services such as letters of credit or cash transfers.
Another consequence of U.S. financial sanctions has been that many companies now refuse to sell auto-parts to Iranian automobile companies. As a result there has been a 36% decrease in car manufacturing, which will lead to widespread layoffs and could lead to serious labour unrest. external page[78] 10,000 workers have already signed and addressed a petition to the Minister of Labour complaining of their declining purchasing power and the general state of the economy. external page[79]
The automobile industry, moreover, is by no means an exception here, external page[80] as many other industries are finding it extremely difficult to pay foreign suppliers. The weak rial is also hurting importers, who are lobbying against a devaluation, arguing that a strong rial will keep down producers’ costs. external page[81]
Mitigating the Effects of Sanctions
The head of the CBI, Mahmood Bahmani, has stated that the bank has formed a committee for combatting “economic warfare”. external page[82] As has been mentioned, few if any comprehensive measures have materialised, and it seems for the moment the government is preoccupied with stopgap and makeshift efforts to alleviate the crisis. The Chief of the Judiciary and Chief Prosecutor have promised severe punitive measures for those found culpable of “disrupting the market”, but to little avail. external page[83] The one exception is the CBI’s establishment of a “foreign exchange centre”, in order to give preferential exchange rates to importers of priority goods, external page[84] but it has already been widely criticised as inefficient, and as evidenced by the rial’s startling fall, has failed to solve the crux of Iran’s economic tribulations.
The CBI chief has had tense relations with President Ahmadinejad in the past, and according to one source, rather than work together the president is more set on casting Bahmani aside to score points domestically, and position an appointee in his stead. external page[85] Bahmani has been vociferous in commenting on the dire state of Iran’s economy stating at different points that it is in a worse state than during the eight year conflict with Iraq, and that the country is now in the time of Ali ibn abi Taleb, the first Shi’i Imam, seen as a dark and uncertain time for the Shi’is, when they were crushed and marginalised by the Umayyad caliphate. external page[86]
These comments provoked a rebuke by Ayatollah Khamenei in January 2012, but in late August in a meeting with Ahmadinejad and the cabinet he seems to have realised that levels of discontent amongst the population are rapidly growing and that the damage to people’s real disposable income and spending power must be countered as soon as possible if a full-blown crisis is to be averted. external page[87] Khamenei had previously reiterated the imperative of resistance and the pursuit of a “resistance economy” in the face of Western pressure. external page[88] Beyond the slogans, which chime with the Shi’i Islamist ideology upon which the Islamic Republic was founded, a well-thought out and comprehensive programme to counter Iran’s economic woes is yet to materialise.
On the 27 August, the Minister of Economy, Shamseddin Hosseini, presented a report to Khamenei on the current state of the economy, which while admitting the sanctions were having an unprecedented negative effect on Iran’s economy, offered few ideas beyond austerity on how to neutralise them. external page[89] His prognosis was far from all doom and gloom, however, and the Minister sought, despite the undeniable reality, to reassure the Leader that positive developments over the last year had also occurred. For instance, he claimed foreign investment and non-oil exports had increased sizably. external page[90] Such claims, however, need independent verification and should not be taken at face-value.
Because Washington’s sanctions are extra-territorial in nature, it has also taken the step of sanctioning a Chinese and an Iraqi bank, both accused of facilitating Iranian transactions, amongst numerous other companies found to be doing business with Iran. In the case of the Chinese bank, Beijing protested firmly and refused to take the measure lying down. external page[91] If this were to become a repeated occurrence, Washington might well begin to feel the strain and limited efficacy of its extra-territorial banking sanctions, especially when applied against a power of the size of China.
Iran is bound to find various ways and methods of circumventing sanctions, even if sanctions continue to increase in breadth and scope. It has already been reported that Iran is working with various smaller banks in China, Pakistan, Malaysia and elsewhere, which do not have business relations with the United States and in many respects benefit from the vacuum left by American, external page[92] European and larger competitors at home. This practice will likely continue for the foreseeable future.