Friday, June 22, 2007

Further Round of Sanctions

All indications point to the possibility of no breakthrough in the talks between Larijani and Solana tomorrow in Portugal. If the talks fail, we should expect a further round of sanctions against Iran. In the June 16 posting on this blog, Gasoline Crisis in Iran, I discussed the inability of the government to handle the current gasoline crisis, with the implication that any future sanctions against the sale of gasoline to Iran could bring down the economy. Even the limited sanctions so far have already proved costly:

- On the banking front, France’s Societe General became the latest major bank to stop investing in Iran. SocGen late last month withdrew financing for further development of the South Pars gas field (Reuters, 28 may 2007). The Iranian government allocated $720 million from its Oil Reserve Fund to the project (phases 17 and 18), but without SocGen’s financing, the completion of the $5 billion project is in doubt.

- Iran holds second largest gas reserves after Russia. However, it has been unable to build the all-important liquid natural gas (LNG) plants. The compressed gas is cost-efficient to transport over long distances where pipelines do not exist. The US companies Bechtel and KBR control the constructions of almost all LNG plants in the world, and are prohibited to work in Iran. The continued participation of any foreign investors in LNG plants, including France’s Total in Pars LNG, now seems in doubt.

- Oil production has become stagnant at around 4 million barrels a day. The government goal for production of five million barrels a day could not possibly be met. US sanctions against its companies, and secondary US sanctions against non-US companies, for investing in oilfield development has resulted in deteriorating state of the oilfields in the country.

- The Iranian government has transferred home its financial reserves that were previously deposited in European banks for fear of being blocked. The government lost income from interest on these funds. A number of high net worth individuals have also transferred home their deposits in the European bank for the same fears and under pressure from their bank managers. The flow of such considerable cash back to Iran and Ahmadinejad’s expansionary populist economic policies has created an inflation that is getting out of control.

- The IMF is forecasting a 6% growth in GDP if the oil prices remain high. The problem is that almost all the growth will come from oil revenues, making inflation even more out of control.

- The inflation rate is estimated by Iran analysts to be over 20%. With unemployment rate in high teens, such high inflation will create serious problems for the government. Iranian governments in recent memory facing such high inflation and unemployment have fallen.

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