Iranian Sanctions do More Harm than Good

The Iranian petroleum industry has been crippled by the economic sanctions we have imposed on Iran along with the European Union and other countries in July. Iran is exporting less than 1 million barrels per day and that’s a 20-year low. This knocks them from third place on the global exports list down towards India and Brazil at 23rd. It also makes for good press and sound bites by the President on September 11th. Unfortunately, his actions on this embargo are actually separating us from global trade with the very partners we need to pull our economy out of the doldrums. Furthermore, it is galvanizing the Iranian citizens’ resolve against us.

The restrictions the U.S. has placed on the Iranian banking system has forced Iran to conduct business in the local currency of its export destination targets. This has created new insurance of shipments as well as leasing or, ownership of the oil tankers themselves.  Previously, most of this business was done in U.S. Dollars. Now, we see countries like India, China and Japan trading rice, medical supplies and steel for Iranian oil and conducting this business in the destination countries’ local currencies, the Rupee, Yuan and Yen.

The economies of India and China have slowed but they are still growing and continue to hold the greatest potential for future growth. Growth requires petroleum and the relationship they are forging with Iran to meet their needs is problematic to say the least. These countries are using the same tactics that Russia used in the Cuban Missile Crisis to facilitate good will among a trapped nation by providing economic and human relief from their perceived oppressors. This is also exactly what we did during the Berlin airlift immediately following World War Two. The strategy continues to be replicated because it works.

The countries that are continuing to do business with Iran may not be entirely altruistic in their trade of base human needs for oil. The banking restrictions the U.S. has put into effect along with the E.U. oil embargo has caused Iran’s currency, the Rial to plummet. Officially, the Iranian Rial is fixed at 12,259 Rials per U.S. Dollar. Unofficially, the real exchange rate has fallen to 26,000 Rials per U.S. Dollar. The devaluation of their currency provides them with a smaller return on the oil they trade with their partners but more importantly it creates a spiral of misery for Iranian citizens.

Iranian citizens find that their expenses have more than doubled. To put this in perspective, if $1 bought a loaf of bread in June, it now costs $2.12. Your daily expenses are now twice as much as they were two months ago and your personal employment outlook is bleak, at best. The Iranian citizen unable to provide for his family will buy right into the governmentally censored media and blame his child’s hunger on America and the European Union. That same citizen will be more than grateful for the bag of rice labeled in Hindi.

Iran’s supreme leader, Ayatollah Khameni has vowed to form, “an economy of resistance.” Therefore, President Ahmadinejad will continue to work with the oil industry to ensure that enough is sold to keep the economy moving while simultaneously ensuring that the average Iranian citizen remains miserable enough to despise us. Iran is the 18th largest global economy with plenty of reserves to plod their way through these sanctions. Therefore, the leaders can afford to keep their citizens miserable while still providing enough nourishment to make them strong enough to fight. We will continue to be held up as the scapegoat for their misery as long as these restrictions are in place. This strengthens the cultural divide between east and west and separates us from the, “understanding countries” like India, China and Japan.

Economically, the United States can’t afford an isolationist policy that restricts trade with some of the fastest growing countries. The cause may be the believed infraction of the Non-Proliferation of Nuclear Weapons Treaty but the effect will be the loss of international trade and good will. Iran has been growing as the sole mega-power within their geographical area, in large part thanks to our actions in Iraq and Afghanistan. Iran will not witness an Arab spring. Perhaps, we should question their desire to pull the trigger on a nuclear winter.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

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