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Wednesday, March 21, 2007

Iran politics: Sanctions spanner


The fresh sanctions that the UN Security Council is considering for Iran are not, at first sight, particularly harsh. They are focused on companies, individuals and banks deemed to be involved in the nuclear fuel programme and in missile development, and include a ban on Iranian weapons exports, although not on arms purchases. An embargo on direct lending to the Iranian government has also been proposed, but may ultimately be dropped in deference to the concerns of some Council members to soften the sanctions package. The oil and gas sector will not be directly affected, enabling Iran to continue to reap the benefits of selling some 2.6m barrels/day of oil at over US$50/b (as well as covering its fuel supply gap with imports of the equivalent of some 200,000 b/d of gasoline). Most categories of imports will also be, formally, unaffected.

Collateral damage

Nevertheless, the initial sanctions, approved at the end of last year, and the general political tensions surrounding the nuclear dispute have already had a serious indirect impact on business in Iran, owing to the disruption of finance for both trade and projects, as banks and export credit guarantee agencies have grown increasingly concerned at the medium- and long-term risks. The changes in the balance of political power within Iran have contributed to the problem. The parliamentary and presidential elections in 2004 and 2005 bolstered the position of the Islamic Revolutionary Guards Corps (IRGC), whose affiliated companies have taken a large slice of the major contracts awarded over the past two years in the infrastructure and oil and gas sectors. Khatam-ol-Anbia (Ghorb), the engineering arm of the IRGC, has, for example, won contracts for a gas pipeline, the development of phases 15 and 16 of the South Pars gasfield and for work on the next phase of the Tehran metro, quoting prices that could not be matched by local and foreign competitors. However, several IRGC-affiliated companies are thought to be included in an annex to the draft sanctions resolution, listing firms and individuals whose external assets could be frozen. This will create difficulties for IRGC contractors procuring equipment from abroad for their projects, which goes some way to explaining why the Iranian government is working so hard to prevent the sanctions being approved in their current form.

The impact of the squeeze on business with Iran has already shown up in trade and credit statistics of major suppliers. According to figures obtained by Bloomberg, Germany's total exports to Iran declined by 6% year on year in 2006 to €4.1bn, while export credit guarantees dropped to €904m from €1.45bn in 2005. (Iran tops the list of countries with total outstanding risk to the German federal government, at €5.5bn as of end-June 2006.) A survey conducted by Germany's DIHK chambers of commerce found that 10% of 120 companies doing business with Iran had felt informal pressure to reduce trade, according to Bloomberg. A further 16% said that they were starting to experience such pressure.

Dubai's gain…and possible pain

In 2003 the UAE took over from Germany the position of largest exporter to Iran, according to UN figures. These sales, mostly in the form of re-exports through Dubai, more than doubled over the subsequent two years, reaching US$7.3bn in 2005, with the UAE's share of total exports to Iran rising from 12% to 19% over the same period. Indications from the US administration that it is considering imposing stricter export controls for US-origin goods trans-shipped through the UAE, as part of the squeeze on Iran, have therefore been met with some alarm in the Gulf state. However, according to an unnamed US official quoted by the Financial Times, the administration has no immediate plans to include the UAE on a new list of countries designated "destinations of diversion concern". The official described a UAE export control law, which was recently approved by the cabinet, as a positive development.

Russia's stakes

Iran is also a significant export market for Russia, whose sales in 2005 were just over US$1bn. Part of this was presumably connected with the construction of the Bushehr nuclear power station, which has been the subject of some sharp recent exchanges between the Russian and Iranian parties involved. Russia claims that Iran has failed to meet its agreed payments schedule, and has cited this as the reason for failing to start deliveries of enriched uranium fuel for the 1,000-mw plant. Iran has denied dragging its feet on payments--although there is evidence of some disruptions caused by the Tehran government's decision to switch from dollars to euros in settling its accounts for the project. US and European diplomats have suggested that Russia has in effect told Iran that there can be no question of the fuel being delivered as long as Iran continues to defy UN Security Council resolutions calling on it to suspend its own enrichment activities. This suggestion has been hotly denied by Russia, which insists that there is no linkage between Bushehr and the wider nuclear dispute. Iran has branded Russia an unreliable partner, which casts doubt on the viability of a longstanding compromise proposal, whereby Iran would be given access to Russian facilities to carry out the critical phases of uranium enrichment, so as to ensure that there could be no military application.

Russia has at the same time called for part of the draft sanctions resolution to be modified, in response to reservations expressed by South Africa (the current chairman of the Security Council), Qatar and Indonesia. South Africa has called for a 90-days cooling-off period before any new sanctions are decided, and is said to have recommended that most of the fresh measures envisaged in the new resolution be deleted. Iran's foreign minister, Manouchehr Mottaki, expressed his appreciation of South Africa's stance during a visit to Cape Town on March 20th, during which he met President Thabo Mbeki. Iran is a major supplier of oil to South Africa, with sales worth some US$2.2bn in 2005; South Africa's MTN, the holder of the country's second mobile-phone licence, is also one of the biggest recent foreign investors in Iran. Mr Mottaki travelled on to Indonesia, in an effort to bolster the effort to limit the scope of the new sanctions by appealing to another influential member of the Security Council that is concerned to avoid being seen as part of a Western campaign to demonise a fellow Islamic nation.

The Economist Intelligence Unit
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