On 9 July, Lloyd’s of London delivered the latest in a series of blows to Iran’s embattled economy. The London-based insurance market declared it would not insure or reinsure petroleum shipments going into the country, following US President Barack Obama’s signing into law of new sanctions specifically targeting Iran’s fuel imports.
|German exports to Iran (Euros million)|
|Source: Deutsch-Iranische Handelskammer|
For a country that has consistently failed to produce enough gasoline to keep pace with demand, the new measures imposed on international shipping companies threaten to restrict the flow of fuel to Iran. The Lloyd’s marine insurance market represents 15-20 per cent of the total marine insurance industry, and cannot easily be ignored.
Feeling the heat
Key producers have been shutting down supplies this year. UK/Dutch Shell terminated gasoline deliveries to Iran in March, while Swiss-based traders Vitol Holding, Trafigura and Glencore also halted gasoline supplies. In July, Shell failed to renew a jet fuel contract with Iran Air, while the UK’s BP has also seen it politic to halt fuel supplies to Iranian airliners. Perhaps more disconcertingly for Iran given its close ties with Moscow, Russia’s Lukoil followed suit, bringing an end to gasoline supplies this year.
I’m not sure if sanctions will help the West bring the government to the negotiating table
Fariborz Ghadar, Center for Strategic and International Studies
Iran is clearly feeling the heat. The Lloyd’s action coincides with a tightening of the sanctions noose in the past couple of months. On 9 June, the UN Security Council imposed additional sanctions against Iran, substantially strengthening existing measures. These were tightened further in July when the EU implemented the resolution with restrictions on the Islamic Republic of Iran Shipping Lines.
It is clear that gasoline import dependence represents a weak point in Iran’s economic armoury. Imports account for 30-40 per cent of Iran’s gasoline demand, with an average 130,000 barrels a day (b/d) imported last year. Yet the jury is out as to how much the various trade-related sanctions will impact Iran’s economy, more specifically, how they will influence President Mahmoud Ahmadinejad’s attitude to negotiating over his nuclear programme.
Recent completion of gasoline production units at Bandar Abbas, Tabriz and Isfahan as well as the Lavan and Arak refineries are estimated to have added 20 million litres to the company’s gasoline production capacity. This falls far short of what Iranian motorists need to keep their engines running; the government’s declared ambitions to become self-sufficient in gasoline within three years now lack credibility.
|Iran’s imports, by quarter ($m)|
|Source: Iran Central Bank|
The toughened sanctions will force a tightening of Tehran’s gasoline rationing. This year, the government has already reduced gasoline allocation from 100 litres a car down to 60 litres of subsidised gasoline a month.
The government’s efforts to cut its gasoline import dependence have already had a marked impact. Iran imported 507,250 tonnes of gasoline worth $376m in the first three months of the current calendar year (beginning 21 March 2010), a near 50 per cent decrease compared with the previous years’ figures, according to ISNA News Agency.
|Iranian gasoline imports|
|March-June 2010||March June 2009|
Some of the decline will have been caused by the withdrawal of shipments from the West; yet much is also down to the government’s restrictions. The International Energy Agency (IEA) forecast in its July monthly oil market report that Iran will reduce its gasoline import bill by 75 per cent within the next five years. This will be made possible by expanding refining capacity and removing remaining subsidies. Iran’s gasoline imports will shrink to 100,000 b/d in five years from 400,000 b/d in 2009, the IEA said.
Tehran is undertaking a series of other initiatives to deflect the impact of trade restrictions. It is looking to be flexible about which currencies it uses for oil trade. Reports suggest the state wants to adopt the UAE dirham for its European transactions, for example.
Where necessary, Islamic money transfers – under the hawala system – will be used as payments for imports as many Western banks have stopped doing business with Iran. More than 80 international financial institutions have terminated or scaled back their business with Tehran in the past three years.
|FDI flows to Iran ($m)|
|Source: FDI=Foreign direct investment. UNCTAD|
There are also significant gaps in the fence that will enable Iran to continue to import key petroleum products. Some international partners are still committed to keeping Iran well stocked. Russia announced on 15 July that it is ready to ship oil products to Iran. Significant volumes are already being smuggled in via Iraq and recent months have seen growing supplies from Chinese state traders and from Turkey.
If trade-related sanctions are proving less than effective in hitting Iran where it hurts, other measures are exerting a more marked impact on long-term economic prospects.
The US Treasury has done a rigorous job in stemming the flow of funds through Iran, clamping down on the Iranian business community in Dubai – the Islamic Republic’s traditional route to the global economy. Although Iranian firms are still able to insure themselves through Dubai-based entities, such as Bank Melli and Bank Saderat, many Dubai banks are hesitant to grant letters of credit because of US pressure. In the UAE, financial institutions cannot accept Iranian property as collateral in arranging loans.
Despite the success of financial curbs, it is on trade sanctions that the Obama administration is currently focusing its attentions. However, these are much trickier to enforce, as Iran has porous land borders with eight countries. Although the US has applied much greater pressure on the UAE to stem trade via Dubai, this is unlikely to dry up completely. Even if Dubai trade is shut down, traders can still move to other regional locations, such as Oman.
Tehran has other tricks up its sleeve. “Traders can move to ports that will accept an Iranian government guarantee,” says Fariborz Ghadar, a senior adviser on Iran at the US-headquartered Center for Strategic and International Studies. “They are basically trying to self-insure their ships or have the Iran government provide insurance.”
Iranians have also been busy renaming their vessels to circumvent punitive measures. Cover companies have been created for the state-owned Islamic Republic of Iran Shipping Lines, with 73 of the firm’s 123 known vessels reported to be now owned and operated by foreign companies not listed on the US Treasury Department’s Office of Foreign Assets Control blacklist.
The most recent trade figures suggest there has been little material damage from international sanctions, with imports still on an upward trajectory. Total imports grew 5 per cent in the third quarter of 2009-10 financial year to $13.4bn, according to figures released in July by Iran Central Bank.
The consequence of the increased sanctions will be a reorienting of Iran’s trade relationships. With the US and Europe clamping down on business dealings, a greater volume of Iran’s trade will shift eastwards. “Germany used to be the number one trading partner, but now it’s a distant number two. China is number one and India is growing rapidly,” says Ghadar.
That said, even though German Chancellor Angela Merkel has been increasingly vocal in denouncing Iran, German exporters are still shifting goods to Iranian merchants. In the first four months of 2010, trade between Iran and Germany grew nearly 20 per cent from the same period last year, according to the German-Iranian Chamber of Commerce. German exports to Iran grew by 13 per cent in the January-April 2010 period, to E1.24bn ($1.63bn) compared with the same period in 2009.
The most pain will be felt over the long-term, as foreign direct investment (FDI) restrictions choke Iran’s critical industries of much needed technology and spare parts. The inflow of FDI in 2008 was just $1.49bn, less than half the figure for 2005, according to the most recent data from UNCTAD. These flows are likely to have declined further in subsequent years.
The immediate impact of sanctions will be felt by ordinary Iranians forced to pay much steeper prices at the garage forecourt. The international community evidently hopes the unpopularity of this will apply pressure on the government to back down over its tough stance on its nuclear programme. But the record of sanctions on influencing behavior is not auspicious, from Zimbabwe to North Korea.
As Ghadar says: “Many of these sanctions will work to the advantage of Revolutionary Guards against the Bazaar [Iran’s traditionally powerful merchant class], which has to operate through letters of credit. The Revolutionary Guards work in the black market and I’m not sure if sanctions will help the West bring the government to the negotiating table.”