U.S. sanctions on Central Bank of Iran to hit its economy

Iran Materials 18 October 2011 09:40 (UTC +04:00)

Azerbaijan, Baku, Oct. 15 /Trend T.Konyayeva/

Toughening the U.S.-backed sanctions imposed on the Central Bank of Iran (Bank Markazi) will paralyze the country's economy and the oil sector in particular, U.S. Northeastern University Professor Kamran Dadkhah believes.

"The extent and severity of the U.S. sanctions on the central bank of Iran are yet to be determined," Dadkhah wrote Trend in an email. "Nevertheless, sanctions on the central bank of Iran will have severe and disabling consequences for the Iranian economy and its oil sector."

The Obama administration is considering sanctioning Iran's Bank Markazi for allegedly backing an assassination plot in which two Iranian-born men are accused of planning to blow up the Saudi Arabian ambassador to Washington, Los-Angeles Times quoted David Cohen, the Treasury undersecretary for terrorism and financial intelligence, as saying.

Such sanctions would aim to isolate the Bank Markazi from the world economic system by barring any firm that deals with it from doing business with U.S. financial institutions.

Cohen, who is in charge of U.S. sanctions on Iran, said if other countries joined in the blacklisting, it "could further isolate the central bank of Iran, with a potentially powerful impact on Iran."

Some Iranian officials have warned that they would look on such a move as an act of war.

Dadkhah said Iran already has difficulty receiving its oil revenues from international customers and sanctions on the CBI will make extremely difficult and very costly for the Iranian government to receive its oil revenues from its foreign oil importers.

U.S. sanctions do not ban purchases of Iranian crude, but they pose obstacles for foreign banks to pay Iran the hard currency that makes up around 50 percent of government total revenue. In August, Indian refiners began paying oil debts after a seven-month attempts to find a way to get their overdue money to Tehran.

Since December, 2010, India and Iran try to find ways for New Delhi to pay for imports of 400,000 barrels per day or 12 percent of its oil demand after the Reserve Bank of India halted a clearing mechanism under U.S. pressure.

At the same time, Reuters quoted Korean government sources with direct knowledge of the situation as saying that Iran could have nearly $5 billion of cash trapped in South Korea by the end of the year as sanctions stop it repatriating money from oil sales.

Furthermore, Dadkhah noted that sanctions will cripple Iran in making payments outside Iran since the CBI is the major financial intermediary for government expenditures inside and outside of Iran.

"Recently Ahmadinejad asked the central bank to open a five billion dollars line of credit outside Iran for the Oil Ministry to be used for investment in oil fields. Presently, it is difficult for the central bank to carry out this order. If sanctions are imposed it will become impossible," he said.

In addition, sanctions will aggravate the Iranian oil sector's decline caused by lack of investment particularly foreign investment and the inability to use advanced technology, Dadkhah added.

Iran's refusal to abandon its nuclear activities has resulted in resolutions adopted by the UN Security Council in 2010, as well as additional unilateral sanctions approved by the U.S. Congress and the foreign ministers of all EU countries, which were primarily directed against the banking, financial and energy sectors of Iran.

Restrictions imposed by the EU include the ban on the sale of equipment, technologies and services to Iran's energy sector which is a major source of revenue for the Iranian regime; the same measure refers to the refining industry. New investments in Iran's energy sector have also been also prohibited as a whole. Because of lack of investments due to the sanctions, the production capacity is decreasing, and therefore, Iran cannot effectively increase production.

The situation was deteriorated since last September, when expanded U.S. sanctions on Iran have prompted four of Europe's five biggest oil companies - Total, Statoil, Eni and the RD/Shell - to stop investing in Iran. Later, in October, Inpex, Japan's top oil explorer, announces withdrawal from Iran's Azadegan oil field project to avoid U.S. sanctions.

Dadkhah thinks one consideration on the mind of American policy makers may be the effect of sanctions on the international oil market and the price of oil.

"Given Saudi Arabia's excess capacity, the rise in Iraq's oil output, and the resolution of Libyan crisis, the drop in Iran's oil output could easily be replaced by other producers," he concluded.

In his testimony, Cohen said U.S. officials were also considering halting all sales of oil products made from Iranian crude to the U.S. market. Americans use gasoline that is refined from Iranian crude by international oil companies, which then distribute it in the United States. Cohen said Treasury economists were studying that proposal to evaluate its effect on oil markets.