The London based International Centre for Development Studies stated that trade sanction on Iran has affected vital sectors of the Iranian economy. The Centre pointed out in a report that with the Iranian Riyal losing 50 percent of its value and inflation being 27 percent up this has not stopped Iran’s manoeuvres to bend those sanctions.
With the Iranian oil exports coming down to 40 percent, Iran is finding it increasingly difficult to get the $400 billion to develop its energy sector. Iran is following a policy that allows developing its petro-chemical industries especially oil derivatives and fuel. Iran consumes about 80 million liters of petrol daily with about 37 million of it being imported. Iran is working to produce the imported amount locally. However, this has become a burden on Iranians as money gained from drivers buying their locally produced petrol is being spent later on hospitals that daily receive hundreds of patients who suffer suffocation because of polluted air. High levels of pollution in Tehran have caused the death of about 4,000 people in 2012.
In an attempt to increase its revenues, the Iranian government has lowered the price of fuel by 45 percent to correspond with the lowering of its currency but this action has also doubled the smuggled amount of fuel. Due to the big difference in petrol prices, with Turkey for example, the amount of smuggled fuel has risen to 6 million liters of Diesel and 2 million liters of petrol daily. Iran cannot raise the prices due to inflation and the bad effects on common people. Still, the report shows that even with rising prices there will always be a noticeable difference in prices which makes it very difficult to fight smuggling. The report stresses that Ahmadinejad’s government is in favour of lifting subsidies from fuel and commodities that is estimated of about $100 billion but, at the same time, is postponing this to gain voters support before the coming presidential elections and due to internal conflicts between the reformers and conservatives.
Difficulties funding energy projects
According to the report Iran is facing serious problems funding energy projects to compensate for the deficit in revenues. So, Iran is doing its best to attract as much investments as possible especially from countries that were exempted from international sanctions. Iranian economy is losing $42 billion annually due to oil sanctions and the Iranian Central Bank has announced selling assets from the Ministry of Oil worth of $10 billion to finance the development of Pars oil fields in the Gulf. Iran is also funding its National Development Fund by cutting 20 percent of its oil revenues to finance its national grid projects. In addition, the Iranian Marine International Oil Company ("IMINOCO"), issued bonds with 20 percent interest in Riyals over a period of four years. Such bonds are considered as high risk bonds so Iran has developed a new policy to collect its financial earnings from countries that buy its energy like Turkey and Pakistan. Turkey is paying with gold and the value of its shipments to Iran has reached $12 billion in 2012. Pakistan, on the other hand, that imports gas and electricity from Iran, is financing Iranian companies that take reconstruction projects in Pakistan and also exporting one million tons of wheat to Iran each year.
Increase in non-oil exports
The report indicates that Iran has started, since international sanctions were implemented, to increase its exports of non-oil products to more than 50 countries around the world including some European countries. The non-oil products have risen by 8percent in 2012 to reach $32 billion. According to the International Centre for Development Studies Iran has spent $3.5 billion as government support for scientific research centers that grew up by 50percent during the past three years and managed to develop about 40 petro-chemical products such as Biosurfactant that is used to recycle oil from the mud that is gathered at the bottom of large oil tanks by using the Nano technology. Iran is also adopting a policy that utilizes imports to support production not consumption. Goods imported are meant to help local production and later exports. Iran is working to gain technical knowledge on additives and stimulators that help to increase its petro-chemical exports to $14 billion to more than 60 countries in one year only.
The report by the International Centre for Development Studies indicates that the recent sanctions, imposed by the US on Iran, are the strongest and toughest. Those sanctions included preventing Iran from buying Aluminium, steel, coal and other important materials used for construction and car industry. The sanctions also included preventing Iran from trading its oil for cash from other countries. According to the report the recent sanctions aim to; stop the car industry that has dropped by 40percent and is now threatening 500 thousand workers of losing their jobs, increase the rate of inflation especially with a higher prices of property and building materials and minimise the reserve of foreign currencies of the Central Bank of Iran as a preliminary action to topple the Iranian regime in case it kept on its hard position regarding the nuclear file.
Bending the sanctions
Nevertheless, the Iranian president government, according to the report, has taken precautionary measures to lessen the effects of the new sanctions. Iran has lowered the cost of its industrial spending by stopping its imports of steel that was about 7 million tons of ore steel and is working to increase its domestic product by 8percent annually. Iran has also produced about 253 thousand tons of Aluminium and 168 thousand tons of the Alumina powder in 2012 while working to increase its Aluminium production to reach 400 thousand tons in mid 2013.
In order to avoid an economy crisis caused by stopping the car industry and forcing half a million worker to lose their jobs, Iran has developed its car industry so it can accommodate engines working either on petrol or Compressed Natural Gas (CNG). The number of stations selling gas has risen from 60 in 2006 to 2000 in 2012. Numbers Dual-fuel cars has gone up from 1500 in 2006 to 3 million in 2012. Iran has contracts with the Iraqi Ministry of Trade to sell 30 thousand Iranian cars to Iraq each year.
In 2010 the Iranian Automobile Industry Company (Khodro) built, in co-operation with the Iraqi Ministry of Trade, a plant to assemble Iranian cars in Al-Eskandariya City, South of the capital Baghdad. Through that plant Iranian cars are sold directly all over Iraq. Iraq is considered as one of the biggest markets that import Iranian cars and this has helped Iranian cars companies to double their profits to 100percent. This means Iran has ensured the production and exporting of its cars and avoiding any stopping to production lines.
Iran is also maneuvering around the banks transaction system (Swift) by using middle banks that can act as third party in trade contracts especially when large sums of money are involved. As for the individuals, there are the exchange bureaus that are represented by small trade companies mainly present in the Middle East. So money is paid to and through those bureaus using the local currency of the respective countries and then collected in Iran with Riyals or the Emirates Dirham which is being treated now as hard currency. Many Iranian businessmen have used those exchange bureaus to transfer large sums of money to help trade exchange between Iran and other countries in the world despite the fact that those bureaus cause damage to the Iranian currency because government loses control over its money. However, Iranian government turns a blind eye every now and then in order to ease dealings for businessmen and avoid public anger about tough financial monitoring procedures.
Tempting offers to Europe
The report, by the International Centre for Development Studies, indicates that the under-sanctions Iran is eager to maintain its position in international energy markets and is willing to provide those markets with oil and gas with favourable prices and conditions.
The difficult situation in the Euro zone, the high cost of energy and the increasing demand are beginning to trouble European economies, especially with Russia monopolizing the European gas markets. This situation weakens the political and economy situation of European countries before Russia and affects the stability of markets in case Russia stops its gas supplies.
Iran has offered, on many occasions, to supply Europe with gas at competitive prices. Those conditions have attracted China to sign long term contracts with the Iranian Ministry of Oil to buy oil and to develop Iranian gas fields in the Gulf. One Chinese company imports about 230 thousand barrels of oil a day through the Gulf to China. In addition, there are many companies from South Korea, Malaysia, India, Croatia, South Africa and Venezuela that have had exemptions from sanctions and are buying Iranian oil and working on developing Iran’s oil fields.
Taking advantages of regional tensions
The International Centre for Development Studies report stresses that Iran is making use of regional conflicts to open new windows to its companies and projects to get financial revenues to be used for support of Iran’s infrastructure projects and boost production. For example, Iran has taken advantage of the tensions between Armenia and its regional neighbors (Azerbaijan, Georgia and Turkey) to seal deals to provide electricity and to build gas stations on the borders between the two countries, as well as constructing rail lines and gas pipes that may reach Europe at a later stage.
The same has happened with Egypt that is facing tensions between the Muslim Brotherhood organization and some Gulf States. With Egypt’s constant need for investments to save its exhausted economy and help stop the Egyptian Pound from sliding even further, the Iranian hand pops up again full of attractive investments and projects. Iran exports have risen from $26 million to $133 million in 2012 while Egyptian exports to Iran, for the same period, was only $40 million. The size of trade exchange between the two countries is expected to go up to $500 million in case the marine line is to be approved.
The recent visit of the Iranian Foreign Minister, Ali Akbar Salihi, to Ghana, Benin and Togo and talks about exporting oil and gas in the same way as with Egypt shows the strategic importance for Iran to be present in Africa due to African markets, strategic location, large numbers of population and massive investment opportunities.
Betting on the Iranian street
The report by the International Centre for Development Studies states that the Obama administration is continuing to add tougher and tougher sanctions against Iran as this seems, from this administration point of view, to be the best way to make Iran abandon its nuclear programmes.
However, the possibility of an Israeli strike against Iran is a worrying factor to the US administration as the result of such action will not remain limited to Iran, but, will ignite an overwhelming conflict that can turn into an open war.
Taking this into account, the Obama administration is strongly betting on the option of the Iranian street and its movement against the hard line Ahmadinejad’s government to replace it with a more open and co-operative government especially on nuclear issues. But with the fact that Iran is manoeuvring to avoid sanctions and their effects on the Iranian economy may open doors to other options closer to a military action than a trade sanctions.
Weakened by the economic sanctions, Iran is seriously considering taking military countermeasures in response to these sanctions. The 24th fleet, comprising of Sabalan destroyer and Kharg helicopter carrier, is heading today to the Gulf of Aden to join other Iranian warships in the region. The report states that this dangerous development coincides with deployment of other countries warships to the Persian Gulf. In December 2012 Russian destroyer Marshal Shaposhnikov docked at Bandar Abbas port, while Iranian Navy has increased its presence in the Arabian Gulf waters and international waters. In July 2012 Iranian lawmakers have drafted a bill that would close the Strait of Hormuz for oil tankers heading to countries that have sanctioned Iran.
Nuclear Iran or catastrophic war
According to the report, if the next negotiations between Iran and the G6 will fail to change Iran’s views about its nuclear programme, then the world will face two options. Either to surrender and accept Iran as a nuclear power, which means new calculations need to be set for the region, or to launch a military action against Iran in which the region will not be isolated from. The first option will mean victory to Iran being a striking force, like Israel, in the region which will inevitably mean a new map of alliances for the region and change of allegiances. The second option is military confrontation with Iran that will cause catastrophic results over the whole region and the world not to mention the extremely high cost of such action. Between the two choices, the Obama administration will need to work out a new formula in dealing with Iran and its nuclear file. This seems to be a hard mission especially with Ahmadinejad’s government persistence on one hand and Israeli insistence to stop the nuclear programme as soon as possible on the other hand. Until a solution is found for this problem, the world will keep on holding its breaths and Iran will keep on testing the patience of many.
The International Centre for Development Studies (ICDS), based in London, is an independent think tank on international development issues. ICDS was founded in 2009 in the UK by a number of individuals interested in promoting policies and practices which lead to the reduction of poverty and the achievement of sustainable livelihoods in developing countries.
The Centre grew rapidly in two years, expanding both because of the nature of its work and its geographical scope.
Since its establishment, ICDS worked hard to provide the best information and analysis to government leaders, business people and analysts.