The Middle East Policy Council is a tax-exempt, 501(c)(3) nonprofit, nonpartisan, educational organization founded in 1981 to provide policymakers and the public with credible, comprehensive information and analysis on political, economic, and cultural issues pertaining to U.S.-Middle East.
Nathaniel Kern, Matthew M. Reed
The secondary effects of the European Union ban of Iranian oil and new American sanctions targeting Iran’s Central Bank are still multiplying. Iran’s currency has plummeted in value these past few months and China now enjoys more leverage than ever as it negotiates new oil contracts. Imports of rice, tea, wheat, corn, palm oil and steel, among others, have ground to a halt.
Meanwhile, it looks more than likely that a small group in Iran could benefit from the currency’s collapse. Those close to Supreme Leader Khamenei also hope to benefit politically by placing the blame squarely on President Ahmadinejad. The Iranian parliament, or Majles, made an unprecedented move on February 7: the body summoned Ahmadinejad for a special inquiry where he will be forced to answer for his stewardship of an economy under stress.
The Rial Tumbles
The immediate casualty of the EU decision was the Iranian rial, the street value of which declined rapidly. On January 26, the Central Bank of Iran’s Governor, Mahmoud Bahmani, said he had given up trying to influence the rates charged by men hawking wads of dollars on the street, dismissing the black market trade as a “peripheral” market. Bahmani then set a new official rate for the rial at 12,260 per dollar.
Two days later, street sellers dropped their dollar price on January 28 to 15,000 rials that morning—but raised it to 18,000 rials by afternoon. Their adjustment was still an improvement compared to the 21,000 rials they were asking for at the end of the previous week. Licensed foreign exchange dealers posted the 12,260 rate on their currency boards, but reports suggest they were neither buying nor selling any currency.
Further proof that Iranian authorities are worried about the country’s currency came earlier this month, when Ayatollah Sadegh Amoli Larijani, head of Iran’s judiciary, threatened currency speculators with the death penalty. The rial’s decline is bad news for average citizens, who fear the loss of their life’s savings. Some importers are also worried about this development.
Importers in Trouble, Famine Feared
Iran’s troubled rice and steel markets reveal just how complicated business has become. Vijay Setia, president of the All India Rice Exporters’ Association, first warned at the end of January that Iranian importers of basmati rice from India were holding back payments. Iranian buyers, he said, “have to shell out more in terms of dollars, and they are unwilling to lose money.”
On February 7, Setia announced that Iranian buyers had defaulted on payments for 200,000 tonnes of rice worth some $144 million and advised Indian exporters to cease selling rice to Iran on credit. As of the end of January, about 400,000 tonnes of grain sat on bulk carriers outside of Iranian ports, with the vessels unwilling to discharge their cargoes because Iranian importers could not guarantee payment.
One month before, on January 9, Assadollah Asgarowladi, one of the most senior elected leaders of the Iran Chamber of Commerce, was quoted by an Iranian news agency making an alarmist prediction. With the weakness of the rial at the time, he warned: “We will have famine in the country after six months.” Asgarowladi’s pronounced fear is significant. When he last attended a speech by the Supreme Leader, Khamenei mentioned his name first when he acknowledged the dignitaries in his audience. He also heads the Iran-China Joint Chamber of Commerce.
“King Market” in Jeopardy
According to traders, Iran’s lucrative steel trade has also ground to a halt thanks to EU and American financial restrictions. Reports suggest it is currently impossible for Iranian commodity buyers to obtain enough dollars and euros. They are thus forced to offer letters of credit in less attractive currencies which are not always convertible.
One anonymous trader told Reuters on February 9 that he was struggling to find a solution to the problem and was worried that new arrangements might be compromised if discovered by international monitors. “If I find a way to do that I won’t tell you,” the trader told Reuters. “Iran is the king market in steel and if we can find a way to trade with them again we certainly would not share the know-how.” Some steel merchants have had no choice but to take suitcases of dollars to Iran’s northern borders to pay for truckloads of steel at border crossings.
Beijing Holds Out for a Discount
Iranian and Chinese negotiators failed to agree on any new 2012 oil contracts in December. As a result, China has cut purchases of Iranian crude by half since the beginning of this year. Negotiations remain stalled, meaning Iran will be unable to sell oil to China through March. The best Iran can hope for is a restoration of 2011 crude sale volumes in April at the earliest.
Like many Iranian officials, Oil Minister Rostam Qasemi denied that Iran faces any problems. “We have not had any serious decrease in oil exports to China and I don’t think the Chinese have been influenced by U.S. pressures,” Qasemi told reporters in Tehran on February 4. “In the next ten days, we will have a trip to China to negotiate with Chinese officials about various energy issues, including development,” he added. “We haven’t given any discount to any country with regard to oil price because we don’t see it as necessary. The oil price is fixed.”
Chinese traders now enjoy more leverage in price negotiations knowing that the EU ban of Iranian crude will come into effect on July 1. After that point, Iran will have little choice but to sell to Asian markets after being squeezed out of Europe. Because of China’s tough stance, Iran will have “lost” close to 26 million barrels of crude sales between January 1 and March 31. These stocks may eventually be sold later but at a discount.
Makeshift Arrangements
As noted above, paying for imports in foreign currency has become increasingly problematic for Iranian businessmen. But the government, which controls the oil industry, is also finding it hard to arrange for payments of Iranian crude. The threat of sanctions is forcing customers to find new ways to pay. On February 8, for instance, Iran’s state-run Fars news agency quoted Iran’s ambassador to India, Mehdi Nabizadeh, saying that India may soon pay for as much as 45 percent of its crude imports from Iran in rupees. “Indian oil importers are keen to use this method for paying Iran as they believe the channel of payment through a Turkish bank may be blocked due to sanctions,” Nabizadeh remarked.
Annual crude trade between Iran and India amounts to $9.5 billion. But a new payment scheme is desperately needed since the Reserve Bank of India halted transactions in euros and dollars in December 2010. For now, transactions are routed through Turkey’s Halkbank, but January reports suggest Halkbank has warned Indian refiners it may be forced to stop facilitating transactions.
An Indian government delegation is due to visit Tehran later this month, where they hope to finalize a deal allowing Iran’s national oil company to accept payment in rupees. But even this arrangement could require a revision of the Indian tax code, thus forcing buyers to do even more so that Iran can still sell crude. All of this drama and negotiation serves to highlight just how complicated trade with Iran has become of late.
Winners and Losers
Sanctions have created winners and losers inside Iran. Beneficiaries of sanctions include insiders able to acquire rials at the new official rate of 12,260 per dollar. As stated above, Iranian rice importers defaulted en masse this month on $144 million owed to Indian traders. Leading members of Iran’s rice guild—to name just one organization—are likely to ask the government for rials in order to pay some of this debt. If they are able to get dollars at the new official rate, their cost of goods sold will have only risen 8 percent—but the retail price, as it stands now, is up by 250 percent. Other traders with direct access to currency at official exchange rates could replicate this trick and profit handsomely.
Others, however, are not so lucky. Iran’s economic predicament has put President Ahmadinejad in the hot seat. Conservatives in the Majles aligned with Ayatollah Khamenei will have a chance to question him thoroughly on matters of economic, domestic, and foreign policy after parliamentary elections are held on March 2 and the Majles reconvenes on March 4. Official Iranian media has made public a variety of questions which Ahmadinejad will be forced to answer. Many focus on the economy and, however indirectly, the ripple effects of sanctions.
These unexpected casualties of sanctions aimed at Iran’s oil exports and financial system have by now been well-publicized. But it would be a mistake to conclude that Iran’s economy will soon reach a tipping point which might force the regime to re-think the value of its nuclear program. It could be many more months before a turning point is reached.
Foreign Reports is a Washington, D.C.-based consulting firm that writes and distributes timely intelligence reports on political developments in the Middle East relevant to oil markets. Oil companies, governments, and financial institutions rely on Foreign Reports for their insight and analysis on key issues affecting the world generally and the Middle East specifically. The firm was founded in 1956 and the current President is Nathaniel Kern.
The Middle East Policy Council is a tax-exempt, 501(c)(3) nonprofit, nonpartisan, educational organization founded in 1981 to provide policymakers and the public with credible, comprehensive information and analysis on political, economic, and cultural issues pertaining to U.S.-Middle East.
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Nathaniel Kern, Matthew M. Reed
The secondary effects of the European Union ban of Iranian oil and new American sanctions targeting Iran’s Central Bank are still multiplying. Iran’s currency has plummeted in value these past few months and China now enjoys more leverage than ever as it negotiates new oil contracts. Imports of rice, tea, wheat, corn, palm oil and steel, among others, have ground to a halt.
Meanwhile, it looks more than likely that a small group in Iran could benefit from the currency’s collapse. Those close to Supreme Leader Khamenei also hope to benefit politically by placing the blame squarely on President Ahmadinejad. The Iranian parliament, or Majles, made an unprecedented move on February 7: the body summoned Ahmadinejad for a special inquiry where he will be forced to answer for his stewardship of an economy under stress.
The Rial Tumbles
The immediate casualty of the EU decision was the Iranian rial, the street value of which declined rapidly. On January 26, the Central Bank of Iran’s Governor, Mahmoud Bahmani, said he had given up trying to influence the rates charged by men hawking wads of dollars on the street, dismissing the black market trade as a “peripheral” market. Bahmani then set a new official rate for the rial at 12,260 per dollar.
Two days later, street sellers dropped their dollar price on January 28 to 15,000 rials that morning—but raised it to 18,000 rials by afternoon. Their adjustment was still an improvement compared to the 21,000 rials they were asking for at the end of the previous week. Licensed foreign exchange dealers posted the 12,260 rate on their currency boards, but reports suggest they were neither buying nor selling any currency.
Further proof that Iranian authorities are worried about the country’s currency came earlier this month, when Ayatollah Sadegh Amoli Larijani, head of Iran’s judiciary, threatened currency speculators with the death penalty. The rial’s decline is bad news for average citizens, who fear the loss of their life’s savings. Some importers are also worried about this development.
Importers in Trouble, Famine Feared
Iran’s troubled rice and steel markets reveal just how complicated business has become. Vijay Setia, president of the All India Rice Exporters’ Association, first warned at the end of January that Iranian importers of basmati rice from India were holding back payments. Iranian buyers, he said, “have to shell out more in terms of dollars, and they are unwilling to lose money.”
On February 7, Setia announced that Iranian buyers had defaulted on payments for 200,000 tonnes of rice worth some $144 million and advised Indian exporters to cease selling rice to Iran on credit. As of the end of January, about 400,000 tonnes of grain sat on bulk carriers outside of Iranian ports, with the vessels unwilling to discharge their cargoes because Iranian importers could not guarantee payment.
One month before, on January 9, Assadollah Asgarowladi, one of the most senior elected leaders of the Iran Chamber of Commerce, was quoted by an Iranian news agency making an alarmist prediction. With the weakness of the rial at the time, he warned: “We will have famine in the country after six months.” Asgarowladi’s pronounced fear is significant. When he last attended a speech by the Supreme Leader, Khamenei mentioned his name first when he acknowledged the dignitaries in his audience. He also heads the Iran-China Joint Chamber of Commerce.
“King Market” in Jeopardy
According to traders, Iran’s lucrative steel trade has also ground to a halt thanks to EU and American financial restrictions. Reports suggest it is currently impossible for Iranian commodity buyers to obtain enough dollars and euros. They are thus forced to offer letters of credit in less attractive currencies which are not always convertible.
One anonymous trader told Reuters on February 9 that he was struggling to find a solution to the problem and was worried that new arrangements might be compromised if discovered by international monitors. “If I find a way to do that I won’t tell you,” the trader told Reuters. “Iran is the king market in steel and if we can find a way to trade with them again we certainly would not share the know-how.” Some steel merchants have had no choice but to take suitcases of dollars to Iran’s northern borders to pay for truckloads of steel at border crossings.
Beijing Holds Out for a Discount
Iranian and Chinese negotiators failed to agree on any new 2012 oil contracts in December. As a result, China has cut purchases of Iranian crude by half since the beginning of this year. Negotiations remain stalled, meaning Iran will be unable to sell oil to China through March. The best Iran can hope for is a restoration of 2011 crude sale volumes in April at the earliest.
Like many Iranian officials, Oil Minister Rostam Qasemi denied that Iran faces any problems. “We have not had any serious decrease in oil exports to China and I don’t think the Chinese have been influenced by U.S. pressures,” Qasemi told reporters in Tehran on February 4. “In the next ten days, we will have a trip to China to negotiate with Chinese officials about various energy issues, including development,” he added. “We haven’t given any discount to any country with regard to oil price because we don’t see it as necessary. The oil price is fixed.”
Chinese traders now enjoy more leverage in price negotiations knowing that the EU ban of Iranian crude will come into effect on July 1. After that point, Iran will have little choice but to sell to Asian markets after being squeezed out of Europe. Because of China’s tough stance, Iran will have “lost” close to 26 million barrels of crude sales between January 1 and March 31. These stocks may eventually be sold later but at a discount.
Makeshift Arrangements
As noted above, paying for imports in foreign currency has become increasingly problematic for Iranian businessmen. But the government, which controls the oil industry, is also finding it hard to arrange for payments of Iranian crude. The threat of sanctions is forcing customers to find new ways to pay. On February 8, for instance, Iran’s state-run Fars news agency quoted Iran’s ambassador to India, Mehdi Nabizadeh, saying that India may soon pay for as much as 45 percent of its crude imports from Iran in rupees. “Indian oil importers are keen to use this method for paying Iran as they believe the channel of payment through a Turkish bank may be blocked due to sanctions,” Nabizadeh remarked.
Annual crude trade between Iran and India amounts to $9.5 billion. But a new payment scheme is desperately needed since the Reserve Bank of India halted transactions in euros and dollars in December 2010. For now, transactions are routed through Turkey’s Halkbank, but January reports suggest Halkbank has warned Indian refiners it may be forced to stop facilitating transactions.
An Indian government delegation is due to visit Tehran later this month, where they hope to finalize a deal allowing Iran’s national oil company to accept payment in rupees. But even this arrangement could require a revision of the Indian tax code, thus forcing buyers to do even more so that Iran can still sell crude. All of this drama and negotiation serves to highlight just how complicated trade with Iran has become of late.
Winners and Losers
Sanctions have created winners and losers inside Iran. Beneficiaries of sanctions include insiders able to acquire rials at the new official rate of 12,260 per dollar. As stated above, Iranian rice importers defaulted en masse this month on $144 million owed to Indian traders. Leading members of Iran’s rice guild—to name just one organization—are likely to ask the government for rials in order to pay some of this debt. If they are able to get dollars at the new official rate, their cost of goods sold will have only risen 8 percent—but the retail price, as it stands now, is up by 250 percent. Other traders with direct access to currency at official exchange rates could replicate this trick and profit handsomely.
Others, however, are not so lucky. Iran’s economic predicament has put President Ahmadinejad in the hot seat. Conservatives in the Majles aligned with Ayatollah Khamenei will have a chance to question him thoroughly on matters of economic, domestic, and foreign policy after parliamentary elections are held on March 2 and the Majles reconvenes on March 4. Official Iranian media has made public a variety of questions which Ahmadinejad will be forced to answer. Many focus on the economy and, however indirectly, the ripple effects of sanctions.
These unexpected casualties of sanctions aimed at Iran’s oil exports and financial system have by now been well-publicized. But it would be a mistake to conclude that Iran’s economy will soon reach a tipping point which might force the regime to re-think the value of its nuclear program. It could be many more months before a turning point is reached.
Foreign Reports is a Washington, D.C.-based consulting firm that writes and distributes timely intelligence reports on political developments in the Middle East relevant to oil markets. Oil companies, governments, and financial institutions rely on Foreign Reports for their insight and analysis on key issues affecting the world generally and the Middle East specifically. The firm was founded in 1956 and the current President is Nathaniel Kern.