TEHRAN WILL FEEL EFFECT OF SANCTIONS BEYOND ITS OIL SECTOR

The less crude the nation sells the fewer dollars it earns to pay for goods and services. Dania Saadi reports

With just over two days left until the US reimposes sanctions on the Iran’s oil industry, the country may be set to lose more than just its exports of crude.

In mid-2012, when the US imposed sanctions on entities and financial institutions dealing with Iranian oil and payments and Europe embargoed crude imports from Tehran, the effect was devastating.

Iranian Oil and gas exports, which netted $118.2 billion (Dh434bn) in revenue for the 2011-12 financial year ending March, plummeted to $62.9bn the following fiscal year, according to International Monetary Fund figures. The erosion in earning power sent the rial plunging against the US dollar and Iranian citizens took to the streets, twisting Tehran’s arm to join the negotiation table over its nuclear programme.

The scene today is not very different and likely to get worse.

On May 8, US President Donald Trump withdrew from the nuclear deal signed in 2015 and said he would reimpose US sanctions on Iran, triggering a 180-day countdown to reinstate economic barriers that were lifted in 2016.

Iranian oil exports have plunged 36 per cent to 1.6 million barrels per day at the end of September from 2.5m bpd at the end of April, translating into nearly 900,000 bpd, according to Bloomberg data.

Experts expect Iranian oil exports to plunge to a low of a million bpd if the United States does not grant waivers to countries that continue to import oil from the country. Exports of crude and condensate, a light oil that fetches a higher price than standard oil, plunged in September to their lowest level since February 2016.

Many countries, mainly India, China and Turkey, are in a wait-and-see mode and are discussing getting waivers with the US, which has indicated that it wants Iranian oil exports to go down to zero.

Several countries “may not be able to go all the way to zero” right away on purchases of Iranian oil after US sanctions on the Middle East nation takes effect, White House national security adviser John Bolton said on Wednesday.

“We want to achieve maximum pressure but we don’t want to hurt friends and allies,” Mr Bolton said.

Whether waivers are granted or not, sanctions will exacerbate an already weak banking infrastructure that had forced many Iranian lenders to offer unsustainable high levels of interest rates at 30 per cent to depositors under pre-2015 sanctions regime. The country needs hard currency to pay for its imports and the less oil it sells the fewer dollars it has to pay for goods and services.

The IMF had forecast in March Iran’s gross official reserves to reach $111.7bn this 2017-2018 financial year, which equates to 14.6 months of imports. Reserves are expected to have fallen further as the rial has lost as much as 75 per cent of its value since the beginning of the year, stoking inflation.

As panic set in, amid the run up to sanctions and a plummeting national currency, Iranians sought refuge in gold bars and coins as a safe haven for their investments. Demand for gold reached 21.1 tonnes in the third quarter of this year, the highest level since the second quarter of 2013, accounting for three quarters of demand in the Middle East, according to the World Gold Council.

“As hard currency inflows decline, the rial will remain subject to downside pressure,” says Andrine Skjelland, Mena Analyst at Fitch Solutions, a unit of the Fitch Group. “Inflation, which is also fuelled by rapid money supply growth, in turn looks set to accelerate. This will weigh on domestic investment and consumption.”

Fitch estimates inflation in Iran to average 33.2 per cent in the 2018-19 financial year, nearly double its previous forecast of 17 per cent. Last year it stood at 9.6 per cent. With the deteriorating financials and in the wake of criticism from hardliners at home, Iranian President Hassan Rouhani has had to replace the central bank governor while policymakers ousted his economy and labour ministers over the summer.

“We view it as unlikely that the Iranian authorities will have the capacity to fully meet import demand over a sustained period of time under tightening US sanctions,” says Ms Skjelland. “We therefore believe it is likely that the authorities will eventually devalue the preferential exchange rate or narrow the definition

of basic goods that qualify for imports at that rate.” Inflation will reach 35 per cent this year and 40 per cent in 2019 as sanctions bite, according to the Institute of International Finance. Imports are projected to fall 10 per cent in volume terms in 2018 from a year earlier.

“Iran will rely on a combination of barter trade and other foreign currency payment to buy goods from foreign countries,” says Garbis Iradian, chief Mena economist at the IIF.

If Tehran goes down the barter deal route, it won’t be the first time. During the sanctions regime under former US president Barack Obama, Iran engaged in barter deals and used local currencies such as the rupee to sell oil to India, Tehran’s second-largest oil customer after China.

“In China it is pretty easy [to do barter deals] because they sell everything. The question is how much China wants to go around the sanctions and set up these payment systems,” says Roger Diwan, vice president of financial services at IHS Markit.

“With India you have less options with what you can do with it [a barter].”

The European Union, Tehran’s third largest oil customer, has also reduced its exposure to Iranian oil, although it is still party to the 2015 nuclear deal. The EU is planning to set up a special payments vehicle to allow its companies to buy oil from Iran and bypass US sanctions. But companies are reluctant to engage with Tehran nonetheless.

“If you are an entity that has any kind of commercial relationship with the United States and exposure to the US financial system there is a risk of violating sanctions,” says Neil Davidson, head of the oil industry and markets division at the energy watchdog International Energy Agency.

“It is that risk which has led many major companies such as Total to pull out of deals with Iran even though the European Union has announced a scheme to protect European companies from exposure to the US.” French energy major Total pulled out of a $4.8bn deal to develop gas reserves in

Iran, which is in dire need of foreign technology to prop up its dilapidated industry.

Not everyone sees an end in sight for the sanctions era.

“This US administration would like to see the imports go to zero, but I don’t think India and China can afford to not buy Iranian crude,” says Peter Kiernan, lead energy analyst, at Economist Intelligence Unit. “The Obama administration had a purpose with the sanctions and that was to bring about negotiations to the nuclear issue and the intent of sanctions was to force other countries to reduce the purchase of Iranian oil. But this time around what is the endgame? It is going to be indefinite.”

A further issue that Iran faced in the past is shipping because international insurers refused to deal with Tehran and its maritime transport last time around for fear of falling foul with the US.

“Another limitation is insurance and shipping but Iran has a fairly large fleet of tankers to continue to export 1 to 1.3 m bpd of crude,” said Mr Diwan.