Iran Sanctions Crisis Deepens

Iran Sanctions Crisis Deepens

The US has hit Iran with new sanctions and is preparing more, scaring Arab Gulf banks. Food shortages loom over Iran just before an election. The rulers’ power struggle deepens and parliament backs off its threat to end oil exports to Europe. Iran squeezes India to sign a gas field deal and Indian refiners find a way to pay for crude, MEES editors write.

According to Iran’s Majlis Energy Committee Vice-President Naser Soudani, the ambassadors of Germany, France, Italy and Greece have frantically appealed to parliament and the Iranian Foreign Ministry not to immediately cut oil exports to Europe, according to Iranian media. The proposed move is in retaliation for the EU decision to end Iranian oil imports by 1 July.

MEESunderstands thatonlythe Greek and Italian ambassadors have made such pleas, and to the Ministries of Petroleum and Foreign Affairs, but not parliament. The German and French ambassadors indirectly supported their request. As a result of combined pressures and China’s decision to drastically reduce its Iranian imports in the first quarter of 2012, Iranian MPs decided to take a more conciliatory tone, announcing on 8 February thatthey would consider the imposition of an oil embargo on the EU statesafterthe 2 March parliamentary elections. Parliament has gone into recess until 4 March, without debating the “double urgency” bill that its authors had said would be put to a vote on 5 February. Mr Soudani said that by 7 February, 191 out of 290 MPs favored the introduction of embargo legislation. He expected the bill to pass before Iran’s New Year parliamentary recess starts on 20 March.

China has used Iran’s increasing isolation from its European markets to impose its terms over a price reduction dispute that has been raging between Beijing and Tehran since the autumn of 2011. China, which imported last year around 555,000 b/d, has reduced its purchases by some 285,000 b/d in the first quarter of 2012. China is importing 100,000 b/d more of Saudi crude than in 2011. It also plans to increase its Iraqi imports by 50% compared to last year, and is buying up significant quantities of spot cargoes from Russia and Libya (see page 21).

Indian Imports Rise

India  has  stepped  in  to  boost  its  own  purchases  from 330,000 b/d  in the fourth quarter of 2011 to almost 550,000 b/d in  January  2012.  Part  of  the  reason  why  Indian  refineries have  increased  their imports from  Iran  is  that the two states managed to strike a new agreement on the payment method forIndia’s crude supplies, according to which up to 45% of all imports will be paid for in rupees.Iran’s Ambassador to India Mehdi Nabizadeh toldThe Times of Indiaon 8 February that Iranhas opened accounts in Indian banks, including UCO Bank. The Central Bank of Iran (CBI) and the Reserve Bank ofIndia have together arrived at the payment mechanism.

The Iranian ambassador said that India refused to consider payment for oil in gold and did not clarify what method of payment has been chosen for the remaining 55% of oil imports, even though it is most likely to be paid in US dollars that will be channeled to Iran via non-US and non-EU related Asian banks. Indian media reported thatIranwas left with no option but to accept the Indian proposal afterTurkey’s Halk Bankasi was ordered to stop routing Indian oil payments from state-owned refineries to Iran in dollars in January.

Iran aims to bring India into conflict with the West by setting a month’s deadline for a consortium of Indian state-run oil firms to sign a contract to develop an Iranian gas field in the Gulf, according to The Times of India. The consortium of ONGC Videsh, Oil India Ltd and refiner-marketer Indian Oil Corporation told Iran in 2010 it would invest $5bn into developing the Farsi offshore block. Gas-starved New Delhi does not want to lose the right to a share of the field under a buyback deal, but neither does it want to fall foul of Western sanctions, which would hurt its oil firms. Some IOCs have been kicked out of Iran for not developing projects on time – even when the delays were due to the impact of US sanctions.

The EU was expected to push India at a summit on 10 February – as MEES was going to press - to use its influence with Tehran to get it to change its stance on its nuclear program, which has triggered the sanctions. The EU is in free trade talks with India at the summit and hopes its commercial relationship with New Delhi will get India to use its leverage through its Iranian crude purchases – about $12.7bn last year.

Japan –Iran’s second largest importer in 2011, with an average intake of 340,000 b/d – has still to clarify its position on US sanctions. Japanese Foreign Minister Koichiro Gemba said on 4 February that Japan has requested a waiver from the sanctions and has proposed specific oil reductions. However, two ofJapan’s top refineries, JX Nippon Oil and Energy and Cosmo Oil, appear to have been only making gestures of good will towards the US rather than making actual deep cuts in their usual imports of Iranian crude. On 8 February JXNipponannounced that it had renewed an 83,000 b/d contract for 2012, but it might not renew another 10,000 b/d contract that expires in late March,Sankeidaily reported. Cosmo is also reported to have reduced its imports by 10,000 b/d in January to 30,000 b/d.

Gulf Arab producers are boosting supplies to make up for any shortage in the current climate, to the anger of Iran, which has warned fellow OPEC members against this course of action. The UAE will fulfill all supply contracts to Asia for March, for the first time in almost a year, to help buyers cut their dependence on oil from sanctions-hit Iran, Reuters reported. South Korea’s President Lee Myung-bak visited the UAE, Qatar and Saudi Arabia on 6-9 February to secure energy supplies. South Korea is the fifth largest buyer of Iranian crude. Mr Lee’s office said on 8 February that Saudi Arabia – South Korea’s biggest oil supplier – would “actively consider” measures, including offering additional crude supplies, if South Korea asked for them.

Sanctions Deeper And Broader

US sanctions are now going deeper and broader than earlier measures against the oil industry. On 1 February US President Barack Obama signed an Executive Order that tightened the screws on Iran’s economy, freezing all property of Iran’s central bank and all other Iranian financial institutions, as well as all property of the government of Iran. Previously, US banks had to reject Iranian transactions. Under the new order they can now seize assets they find. The US Senate has proposed more sanctions aimed at Iran’s financial system by severing Iranian banks’ access to the global swift communications system that most banks use to transmit data. A full vote has not yet been taken on that measure.

The ever-tightening sanctions are scaring Arab Gulf banks. Media reports at the beginning of February said that the central banks of the UAE and Qatar had told lenders to stop financing trade with Iran. However, a source at the Central Bank of the UAE said that “no explicit instructions were given” to that effect. There are certain institutions named in US and UN sanctions, so the banks are monitoring these accounts and reports are being obtained, he said. But he explained that the normal activities of local Iranian banks in the UAE are allowed to continue. The Dubai Financial Services Authority (DFSA), which regulates the Dubai International Financial Centre, said that it encourages firms to pay attention to sanctions from the US and EU.

However, the source at the Central Bank of the UAE said concerns are growing that more restrictions will come “so at every bank everyone is scared.” On 27 June 2010 financial institutions in the UAE were told they must freeze accounts of 41 individuals that had become subject to central bank scrutiny and that investigations were ongoing into several companies which had links with blacklisted companies (MEES, 5 July 2010).

In Qatar a similar picture emerges. Bankers contacted by MEES said that they had not been issued specific instructions by their central bank. “If the idea is to stop activities with sanctioned banks in Iran, yes, but to discontinue financing trade with Iran, I doubt it,” said one, noting that Iran’s trade with Qatar is insignificant when compared to the UAE’s. “It’s only a couple of hundred million US dollars’ worth, and runs into a few billion for the UAE,” he said. Another Qatari banker noted that employees at his institution had been told that any transactions with Iranian customers must be referred to the compliance department. However, this appeared to be in response to the media reports rather than a directive from the Central Bank of Qatar.

Another Gulf banker noted that even though there has been no official communication, most financiers are being very cautious. “When the CBI became subject to sanctions it became much more serious. It goes deeper into the financial sector,” he said. “As a result no one is willing to take the risk of having their funds frozen.”

Foreign Currency Restrictions

CBI Governor Mahmoud Bahmani announced an interest rate hike to 21% and further restrictions on the sale of foreign currency. Furthermore, “the government will not give foreign currency for storage,” he added – which has been interpreted as meaning Iranians will no longer be allowed to exchange rials for dollars unless they can prove an immediate need. The free market rate for the rials is now $1=IR19,000 – 55% above the central bank’s official ‘reference rate’ of $1=IR12,260. However, exchange agencies have run out of dollars and MEES learns that Iraqi exchange dealers are refusing to accept rials from thousands of dollar-hungry Iranians who cross the border.

Some Iranians may soon face physical hunger too, following non-payment for some imports of Indian rice – a staple in Iranian cooking. India supplies Iran with 45% of its annual imports of 1.2mn tons and India’s rice exporters have warned against extending credit to Iranian customers, following defaults on payments for up to 200,000 tons.

The economic pressure is widening the split in the ruling powers. “Even during the war we did not witness such instability,” Alaeddin Boroujerdi, head of the Majlis Foreign Affairs Committee, told the semi-official Fars News Agency. “Government officials and the president himself should definitely be held accountable to people and public opinion.”

Parliament summoned President Mahmoud Ahmadinejad to be questioned by MPs about the economy and foreign policy. The speech of parliamentary deputy speaker Mohammad Reza Bahonar, attacking the president while explaining the summons, was broadcast live on Iranian state radio.

Copyright MEES 2012.