On 23rd January 2012, the EU announced a ban on oil imports, to take effect on 1st July 2012. A ban on petrochemical imports will take effect on 1st May 2012. The retaliatory text of the Iranian parliament's response was published yesterday. To date, some 150 of the 290 Deputies of the Majlis have signed the plan, which is due to be submitted to the Majlis Presiding Board. After a parliamentary committee has provided approval, it will be put to a vote during an open session of the Majlis. The 3 core elements of the Iranian proposal are that the Iranian government will be permitted to immediately:
- cease selling oil to those countries that initiated sanctions on Iran.;
- place travel restrictions on EU nationals travelling to Iran and on Iranians travelling to the EU; and
- prohibit imports of goods into Iran from those countries that imposed sanctions on Iran.
Who currently buys Iranian oil?
Estimates are as follows:
China: 549,000 bpd
EU (Greece, Italy and Spain): 450,000 bpd
Japan: 341,000 bpd
India: 330,000 bpd
South Korea: 244,000 bpd
Turkey: 182,000 bpd
South Africa: 98,000 bpd
Taiwan: 33,000 bpd
Sri Lanka: 39,000 bpd
How will these buyers (and others) react?
Those EU entities who currently receive Iranian oil in lieu of payment for outstanding historic debts (for example, ENI of Italy) will benefit from an indefinite carve out contained in the recent oil ban. Greece will suffer because it will find it hard to buy oil elsewhere on the generous credit terms currently afforded by Iran. We expect Japan and South Korea to reduce their oil purchases from Iran. As a result, we will likely see a decrease in the price of Iranian oil. This emanates not only from the EU ban but more likely as a result of pressure being placed by the US on other buyers of Iranian oil to cease doing so. The US has had mixed success to date, with China and India playing hardball. However, we may see a shift in approach with the US facing reality that they cannot force the likes of China and India to cease buying Iranian oil. The US may instead request that those who buy Iranian oil insist on steep discounts, in an attempt to damage the Iranian economy. We believe the Chinese and others will indeed achieve this. Pakistan may well step in and purchase Iranian oil, as may Egypt. South Africa has to date shown no sign of reducing its purchases. India is said to have reached agreement with Iran as to how it will pay for Iranian oil moving forward. India will pay 45% into Indian bank accounts opened by Iran. It is expected that Iran will use these Rupees to purchase Indian machinery, metals and car parts. In turn, India may invest in Iranian development projects. Previously, payments were said to have been routed to India through Halk Bank in Turkey.
Trading impact of sanctions on Iran
- Iranian buyers are said to have defaulted on payment for 200,000 tons of rice from Indian suppliers and there has been a call for Indian entities to cease rice exports to Iran which are based on credit.
- 5 deliveries of grain to Iran are said to have recently been diverted to new destinations because payments were held up. Circa 400,000 tons of grain on at least 10 vessels are said to have been held up outside Iranian ports.
- South Korea tends to pay Iran for crude oil in its local currency, but difficulty repatriating the funds under the weight of sanctions means Won worth an estimated €5 billion has piled up South Korean banks. Woori Bank and the Industrial Bank of Korea have apparently severed ties with Bank Tejarat.
- Malaysian palm oil exporters are said to have stopped supplying Iran with circa 30,000 tonnes of monthly exports. Malaysian palm oil firms would traditionally either sell directly to Iran or ship via Dubai, where the palm oil would be stored in warehouses and repackaged before being moved to Bandar Abbas.
Impact on the Iranian economy
- In its latest comprehensive assessment of the Iranian economy, the IMF estimated energy exports would amount to $103 billion to the fiscal year end (March 20, 2012), some 78% of total exports. It has been mooted that Iran might have to sell its oil at a discount of 10 - 15% to find buyers under sanctions. Assuming a 15% discount applied to all shipments and a further expected 10% cut in overall shipments, Iran's energy export earnings would shrink by around $24 billion.
- The difficulties in finding banks to pay Iran will result in the increased use of costly middlemen in Asia and neighbouring states which have not signed up to tough sanctions. We shall also see greater use of barter deals.
- Ultimately, we may see Iran enter into a recession. The IMF estimated Iran would post a budget surplus of about 2.8% of GDP this fiscal year; the fall in oil revenues, combined with an expected 10% cut in tax receipts due to a slower economy, could convert that into a deficit of over 2 % of GDP next year.
- The Rial has fallen by some 40% against the Dollar in recent months. Local bread prices in Iran are said to have tripled since December 2011 and life is becoming harder for Iranians.
The big worry is that domestic discontent could encourage Iran to "up the tempo" in its aggressive attitude to the West in a bid to unite the Iranian people. It is difficult to see Iran relenting and even more difficult to see the US and others standing by and allowing Iran to continue its alleged nuclear development. As a minimum, we expect the war of words resulting in occasional short-lived oil spikes. At its worst, a full blown conflict would see the oil price rocket.
Tidewater Middle East Company ("Tidewater")
This entity must not be confused with a US entity with a similar name. Tidewater has been subject to an asset freeze on 23rd January 2012 and is reported to have operations at seven of the main ports in Iran, namely (i) the Shahid Rajaee Container Terminal at Bandar Abbas, (ii) Bandar Imam Khomeini Grain Terminal, (iii) Bandar Anzali, (iv) one terminal at Khorramshahr Port, (v) Assaluyeh Port, (vi) Aprin Port and (vii) Amir Abad Port Complex. The EU asset freeze states "No funds or economic resources shall be made available, directly or indirectly, to or for the benefit of [Tidewater].....". This means that any EU entity or individual involved "directly or indirectly" in a payment which results in Tidewater receiving a benefit potentially in breach of the EU sanctions. This will include payment of port dues. We consider that any EU entity exporting or shipping goods to any of the above 7 ports may be at risk of implicitly breaching the EU asset freeze. This may potentially have the effect of putting an end to any significant EU exports to Iran.
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