Iran: Has the Rising Price of Oil Trumped Sanctions?

By Victor Comras

A major debate is ranging in European capitals on how best to deal with the growing prospect of confrontation with Iran over its ongoing nuclear weapons development program. Last month French President Sarkozy and British Prime Minister Gordon Brown called on their EU colleagues to impose new EU sanctions against Iran. French Foreign Minister Bernard Kouchner also warned that dire consequences could result if Iran were permitted to continue unimpeded on its presence course. G7 Ministers meeting in Washington also praised new warnings issued by the 34 nation Financial Action Task Force (FATF) that Iranian banks posed serious international money laundering and terrorism financing risks. The United States had hoped that against this background EU countries would follow-suit after the US targeted new sanctions measures against Iran’s largest banks, the Iranian Revolutionary Guard Corps (IRGC) and IRGC controlled companies. But, this has not happened. Rather, the EU council has put on hold any new measures pending further developments and further reports from EU negotiator Javier Solana and IAEA director Mohamed El Baradei.

Some of my colleagues have suggested that the new US measures, and threats that the US will look more closely at those institutions doing business with designated entities in Iran, would persuade major European and other financial institutions to disengage from such relationships. But, without EU Countries adopting their own new sanctions measures, this may be no more than wishful thinking given the rise in the price of oil, significant increases in Iran’s oil revenues, and profit motivations. While several European banks have taken some steps to reduce their Iran exposure, few have actually withdrawn from the Iran market. Several have moved away from handling US dollar transactions for Iran and substituted euros or other foreign currencies. And, Iran, itself, has adeptly moved away from US dollar transactions into euro based transactions. This is particularly the case with oil industry-related transactions. Last March, Iran’s then Oil Minister Kazem Vaziri-Hamaneh announced Iran would accept euros for crude oil sales, and would carry out its oil-industry related equipment purchases in euros rather than dollars. Arrangements were also made with Japanese customers to accept the Yen. Iran’s new Oil Minister, Gholamhossein Nozari is also expected to direct Iran’s energy sector further away from US dollar influence. Iran's central bank has also shifted to holding its foreign reserves in a basket of 20 currencies of which U.S. dollars now reportedly make up less than 20 percent..

German Chancellor Angela Merkel’s meetings last week with President Bush further underscored differences in Europe over the course of action to be followed. Unlike recent statement by French and British leaders, German leaders have continued to express their reticence to restrict banking activities, commercial deals and investments in Iran. Merkel again stressed Germany’s position that the Security Council, rather than the EU Council, is the proper forum for seeking agreement on further sanctions. She also insisted that the current round of negotiations be allowed to run through before new sanctions are considered. And, even in the likely event that such further negotiations go no-where, she committed herself only to having “a closer look again at {sanctions} and possibl(e) need to work together with our German business community. I will talk with them again on further possible reductions of those commercial ties." At the other end of the spectrum, British Prime Minister Gordon Brown has called for a worldwide ban on all companies developing Iran’s oil and gas fields if Iran fails to curb its nuclear ambitions.

And what effect has the current international sanctions and the additional US measures actually had on Iran. Well, it is clear that they have had some impact, but certainly not enough to deter Iran from its present course. Several European banks have pulled back, or put on hold further discussions concerning some major oil field, pipeline and other potential financial commitments. Bank Sepah has had to close down its direct operations in Europe, and Bank Saderat and Bank Melli are cautiously redirecting their accounts away from European financial institutions. European boardrooms are also reflecting on the risks and likelihood of further EU sanctions measures, and as to whether they should really be concerned by threats of additional US regulatory activity. They are also concerned about their public relations in the United States, the growing impetus behind US disinvestment movements, and the threats of possible new US congressional action.

The fact is that Iran’s oil export revenue surge has served to shore up Iran’s otherwise foundering economy, at least for the short term. Last February Iran officials expected oil revenues to surpass $50 billion, and this can probably be raised by some 20 to 30 percent a result of the spot market price increases. Either way, increased oil revenues have resulted in a government revenue surplus which can be used to substitute for the loss of foreign funding for current critical infrastructure projects. However, this increased oil revenue has not insulated Iran’s vulnerable commercial class from the potential impact of any new European trade restrictions that might be directed at them. And this commercial class, which is crucial to providing new job development and for moderating current high urban unemployment rates, could prove to be Iran’s Achilles Heel.

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