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    Middle East
     Jan 11, 2012


Iran sanctions bite
By Robert M Cutler

MONTREAL - The financial sanctions against Iran signed into law by United States President Barack Obama 10 days ago are having deeper financial effects than previous measures and highlight the regime's domestic political weakness.

Senior US officials will seek to implement the sanctions without damaging the global economy. A speculative rise in the price of oil could not only damage the tepid global economic recovery but also benefit Teheran's revenues in the short term.

The sanctions package in effect gives non-US firms the choice between doing business with the Iranian or with the American financial sector. If its provisions were to be implemented fully, any foreign financial institution (including even foreign central banks)

 
that transacted or facilitated purchases of Iranian oil would also be at risk of penalty.

Iran has responded by accepting what it said was a Russian proposal to use the rouble in place of the US dollar, the Iranian state-run Fars news agency reported on Monday, citing Teheran's ambassador in Moscow, Seyed e Reza Sajjadi. The ambassador said Russian President Dmitry Medvedev made the suggestion to his Iranian counterpart, Mahmud Ahmadinejad, at a meeting of the Shanghai Cooperation Organization in Astana, Kazakhstan.

The Fars agency says Iran has already replaced the dollar in oil trade with China, India and Japan, and some press reports refer to this as "retaliation" for the new US sanctions. There is rather less to this than meets the eye. Iran has had in place for some time bilateral clearing arrangements with China, India and Russia, intended to balance trade in local currencies as much as possible.

Also, Russia is always keen to play Iran's anti-Westernism to the hilt while assigning to itself an intermediary and palliative role. In the line of this strategy, Moscow has long proposed itself as the internationally designated fuel reprocessor for Iran's nuclear industry, indeed for all countries supposedly needing a fair broker under international supervision. Teheran has always refused this idea and has now moved beyond it with its own capabilities.

It is little surprise that Moscow seeks to take financial advantage of the present situation, given the precipitous fall in the value of the Iranian rial. After trading in December at an official level of roughly 10,700 to the US dollar, the rial opened January by falling within two days on the open market to 17,000 to the dollar.

There are multiple exchange rates in Iran, and the open-market value was down 27% from December and down 10% in two days. It is now over 18,000 to the dollar. The official level now fluctuates in the 11,000-12,000 to 1 range. It was the mass public's rush to exchange rials for dollars following the announcement of sanctions that led to the steep decline in the open-market rate.

That is a significant development because one of the frequent arguments against the use of force against the Iranian nuclear program is that any attack would automatically lead to a groundswell of popular support for the unpopular regime. However, the population's rush to the dollar in response to the new US sanctions obliged the Teheran regime to suspend without warning all foreign-exchange operations for the Iranian public two days into the New Year.

Coupled with the absence of mass protests in Teheran against the new American move, the Iranian public's rush to the dollar must be considered a vote of economic no-confidence in the government. This leaves rather weak the argument that a military attack on the country's nuclear facilities would merely increase the public's esteem for the regime. It is evidence, indeed, to the contrary.

The latest sanctions mean finding foreign buyers for Iranian oil will only become harder. The European Union, which purchases 18% of Iran's oil exports, has not only agreed in principle to respect the new sanctions but, in light of Iran's non-compliance with a raft of UN Security Council resolutions over its nuclear program, called for such sanctions in advance of their being formulated.

It seems unlikely that China, which takes 22% of Teheran's oil exports (equivalent to 9% of its own imports), will help out Iran by buying more of its oil, despite the statement made to Reuters by S M Qamsari, head of the international department of the National Iranian Oil Company's international department, that Iran "could very easily replace" European and other customers with increased sales to China and other countries in Africa as well as Asia.

China has already cut January purchases to bring pressure to bear on Iran in a pricing dispute as it renegotiates its contracts for 2012 with Iran, which insists on higher rates and faster payment. Beijing, by contrast, is only lowering its offer in light of Teheran's difficulty in finding buyers.

Increased sales to other Asian countries do not appear to be in the cards. The US sanctions bill grants Obama the power to extend waivers of 120 days in the US national security interest. It is likely that Japan and South Korea will seek such waivers while searching for means to decrease their oil imports from Iran.

In addition, a number of Turkish banks have informed Indian companies that they will likely be unable to process payments for Iranian oil in the future, as they have done until recently.

It is only reasonable, and very possible, that Arab oil producers will increase exports to Asia as well as the West, to make up for any shortfall resulting from enforcement of the new sanctions against Iran.

Dr Robert M Cutler (http://www.robertcutler.org), educated at the Massachusetts Institute of Technology and The University of Michigan, has researched and taught at universities in the United States, Canada, France, Switzerland, and Russia. Now senior research fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada, he also consults privately in a variety of fields.

(Copyright 2012 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)


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