Iran sanctions hit energy, finance hardest

International sanctions slapped against Iran over its controversial nuclear programme could pose grave long-term challenges to two of its major industries – oil and gas, as well as financial – analysts have commented.

Iran, which has been reliant on its energy sector to support government expenditure, is ranked third, next to Saudi Arabia and Canada, in the list of countries that have the highest stock of proven crude reserves. As of January 2010, the country holds about 10 per cent or an estimated 137.6 billion barrels of the world’s proven oil reserves, according to the CIA World Factbook.

This natural wealth, however, has been threatened by a string of sanctions imposed by the United States (US), European Union (EU) and the United Nations (UN).

“The latest sanctions target the energy sector in particular. This is important because despite its energy reserves, Iran lacks refining capacity to keep up with domestic demand,” according to Euromonitor International.

Since 1995, through executive orders signed by then President Bill Clinton, US companies have been banned from investing in Iran’s oil and gas trading, prompting Tehran to look for other buyers.

The US Congress decided recently to further tighten those sanctions in a bid to curb Iran’s nuclear power programme by imposing measures that could also affect companies from other countries doing business with Tehran.

The new US legislation, signed on June 24, threatens to penalise companies supplying Iran with refined petroleum products with a fair market value over $1 million (Dh3.67m). Those found violating this policy will be denied US contracts or banned from doing business with the US, according to Reuters.

EU states and the UN followed suit. Aside from visa ban on senior Iranian officials, the EU has suspended any transactions with Iranian banks and insurance companies, as well as investments in the country’s promising energy sector. EU member states have also been urged to deny Iranian cargo flights access to their airports.

The UN, meanwhile, expanded a partial ban on trade of civilian and military items suspected of being used for Iran’s nuclear and missile programmes.

Liz Martins, head of Middle East and North Africa-Country Risks & Financial Markets at Business Monitor International, says Iranian banks and companies suspected of being connected to the nuclear programmes will also be targeted by the international sanctions.

The United Kingdom, for instance, has frozen its business relations with Bank Mellat and the Islamic Republic of Iran Shipping Lines as of October 2009, citing as reason their involvement in Iran’s development of nuclear weapons.

“Also, the sanctions target Iranian firms thought to be trading ‘dual-use’ (ie military and civilian) technologies. Iran’s elite Revolutionary Guards are believed to have front companies seeking to acquire dual-use technology. There is a risk, though, that legitimate Iranian businesses operating in Dubai will be hurt,” says Martins.

Quantifying the economic losses

When asked about the financial impact of the ongoing sanctions, Martins was quick to point out that “it is impossible to quantify the losses to the Iranian economy” and until matters are resolved, foreign sanctions will continue to put pressure on Iran’s already fragile economy.

In addition, the issue runs the risk of potentially increasing public discontent with Iranian President Mahmoud Ahmadinejad. Martins believe, however, that the sanctions will not likely yield any meaningful concessions on Iran’s nuclear programme.

“Any apparent concessions are likely to be a bid to stall for more time. Iran will find loopholes to reduce the impact of sanctions,” she said.

As its trade relations with US and Europe become strained, Iran has diverted its attention to the Asia-Pacific region. According to a Euromonitor report published this month, the sanctions have accelerated Iran’s trade “reorientation” with Asia, particularly China and India for foreign investment and technology.

“Western Europe’s share of the world’s imports from Iran dropped from 32.3 per cent in 2004 to 21.2 per cent in 2009, while Asia Pacific’s share jumped from 55 per cent to 68.7 per cent over the same period,” the report mentioned.

Iran’s growing trade with the Asia Pacific region will help it offset the loss of reduced trade with Europe, particularly as emerging economies are leading the global economic recovery, Euromonitor noted.

Aside from energy and finance, the sanctions also affect Iran’s business and consumers, especially since the government is expected to phase out food and energy subsidies.

The CIA World Factbook cites Iran as the 19th most populous country in the world with a population of over 67 million as of July 2010. Its demographics reflect a vibrant population with majority or over 73 per cent aged between 15 and 64 years.

Euromonitor International believes that such young, technology-savvy population holds significant market potential for the future.

However, unpredictable domestic policy, international isolation and the practice of limiting Western influences constitute major obstacles for businesses seeking to enter the Iranian market.

Sanctions fail to dampen administration

A recent statement by its central bank chief highlights the Iranian administration’s determination to refuse to succumb to pressures brought about by the ongoing international sanctions. Governor Mahmoud Bahmani said the sanctions will only spur the country to be economically self-sufficient.

“We should change these threats into opportunities. They [foreign countries] are fighting to not give us their products and we fight them back by not wanting their products. It is much more interesting than sitting and getting upset,” he was quoted by Reuters as saying.

In its Global Economic Prospects report released this summer, the World Bank estimates Iran’s real GDP to grow three per cent in 2010, up from the estimated 1.8 per cent performance last year. The growth has been attributed to increased revenue from the hydrocarbon sector, which is gauged at an $80-per-barrel price level. The agency also sees the country’s economy slightly rising to 3.2 per cent in 2011 and 2012.

However because of recent developments, the report failed to mention if tougher sanctions will pose any serious or lasting effect on Iran’s economy.

Business Monitor’s Martins believes the nuclear issue surrounding Iran will not likely dissipate in the near-term.

“If anything, matters could get worse. Iran seems unlikely to compromise, and even if [President] Ahmadinejad is replaced with someone less fierce in rhetoric, the basic leadership will remain in place and the nuclear programme will continue,” she said.