IRAN: The price of sanctions

On 24 March, the UN Security Council passed resolution 1747, tightening sanctions it first imposed on Iran in December for refusing to suspend its uranium enrichment programme. Investment becomes a riskier proposition by the month.

Iran's leaders look more adamant than ever that they will not compromise on enrichment. The capture of 15 UK sailors and marines the day before the UN vote, and the dramatic nature of their release, was followed days later with the announcement of progress in the drive towards nuclear technology. The situation is likely to deteriorate before getting better (see box).

But against these bitter odds, some touchstone projects seem to be going ahead. In the refineries sector, German and South Korean contractors have a $1,720 million letter of intent to expand the Isfahan facility (News, page 12). Renault cars are starting to roll off the production line in Karaj as the French manufacturer works to complete a $370 million initial investment. International oil companies (IOCs) are also buying tender documents for a new upstream exploration round.

The sanctions will have a limited effect. They ban arms exports from Iran, forbid imports of nuclear or ballistics material and freeze the assets of some individuals and companies supposedly involved in the nuclear programme - including those linked to the Islamic Revolutionary Guards Corps (IRGC). Bank Sepah and Bank Saderat are unable to do business with the outside world.

More importantly, the resolution will be seen by many companies as evidence of higher political risk. The Security Council will meet again in late May to reconsider the issue. Meanwhile, the US is pressing Western companies to abandon their work with Iran, increasing the political risk of such projects. Resolution 1747 called for voluntary restrictions on loans to Iran, which the US is likely to push its allies to impose.

The US' stated aim is to choke investment in Iran's oil sector. It knows Russia and China are unlikely to accept tough sanctions now - and in any case it cannot stop oil exports without pushing energy prices through

the roof. However, with reports of field depletion and falling output capacity, it believes Iran's oil revenues - about $45,500 million in the first nine months of the year - can be stifled.

The growing problem for Tehran is payment. Transactions in US dollars have become more difficult, because of the formal sanctions and unofficial pressure on Western banks to stop dollar clearing. It is also nearly impossible to secure project finance from Western banks, and it is more difficult to win export credit agency (ECA) support for work in Iran.

Bank Markazi, the central bank, is trying to solve one problem by switching all oil sales from dollars to euros. Chinese trader Zhuhai Zhenrong said in March it had switched to the currency for the bulk of its 240,000 barrels a day of imports from Iran, while Japan's Nippon Oil, another major customer, said it was 'looking at' an informal request to switch to yen or euros.

While Iran's oil price is still quoted in dollars, the moves are having some success. Hojatollah Ghanimifard, international relations head of National Iranian Oil Company (NIOC), says more than 60 per cent of sales are in non-dollar currencies, while Bank Markazi governor Ebrahim Sheibani says only 20 per cent of foreign currency holdings are in dollars.

With foreign finance almost non-existent, more and more projects must be paid for on a strictly cash basis. Despite the oil windfall enjoyed during the past few years, money is tight. President Ahmadinejad's populist government has increased spending substantially - much of it on social projects - and there is little left for oil investment.

The Oil Stabilisation Fund, which was originally set up to support private industry and provide a buffer against oil price shocks, is regularl