Squeezing Iran

The Washington Post reports: Iran Feels Pinch As Major Banks Curtail Business.

More than 40 major international banks and financial institutions have either cut off or cut back business with the Iranian government or private sector as a result of a quiet campaign launched by the Treasury and State departments last September, according to Treasury and State officials.

The financial squeeze has seriously crimped Tehran's ability to finance petroleum industry projects and to pay for imports. It has also limited Iran's use of the international financial system to help fund allies and extremist militias in the Middle East, say U.S. officials and economists who track Iran.

The U.S. campaign, developed by Treasury Secretary Henry M. Paulson Jr. and Secretary of State Condoleezza Rice, emerged in part over U.S. frustration with the small incremental steps the U.N. Security Council was willing to take to contain the Islamic republic's nuclear program and support for extremism, U.S. officials say. The council voted Saturday to impose new sanctions on Tehran, including a ban on Iranian arms sales and a freeze on assets of 28 Iranian individuals and institutions.

"All the banks we've talked to are reducing significantly their exposure to Iranian business," said Stuart Levey, Treasury's undersecretary for terrorism and financial intelligence. "It's been a universal response. They all recognize the risks -- some because of what we've told them and some on their own. You don't have to be Sherlock Holmes to see the dangers."

What are the dangers? Any project started now could be repudiated by the next government in Iran. Who is scaring the bankers the most? Iran's President. The feller I like to refer to as Ahmanutjob.

Ahmadinejad's rhetoric -- from denying the Holocaust to comparing Iran's stock exchange to gambling -- has helped, experts say. "There is very little foreign investment in Iran not because of sanctions, but because of the atmosphere created by Ahmadinejad's crazy statements," said Jahangir Amuzegar, former Iranian finance minister and executive director of the International Monetary Fund.

In recent news a possible naval blockade due to the capture of 15 Bitish marines by the Iranians could hasten their decline.

The Bush administration has taken several other actions in recent months to contain Iran, including deploying two Navy carrier strike groups near the Persian Gulf, arresting operatives of the Revolutionary Guards' al-Quds Force in Iraq and pressing for two U.N. resolutions to punish Iran for not suspending its uranium enrichment program.

Iran is having problems with its gasoline supply. For another it is not maintaining its oil production infrastructure. Iranian net oil output is declining at better than 10% a year. By no later than 2015 its net oil output will be zero. Since oil accounts for 80% of Iran's export revenues the pinch is already starting to hurt and will only get worse.

In December, Iranian oil minister Kazem Vaziri Hamaneh acknowledged that Tehran was having trouble financing petroleum development projects. "Currently, overseas banks and financiers have decreased their cooperation," he told the oil ministry news agency Shana.

This is a regime on the decline. The question is how fast. In the early days of any blockade the pinch does not seem serious. The longer things go on the more trouble multiplies. Production is cut in industry A due to lack of resources which affects industry B which has not felt the external crimp. This cascades.

Iranian importers are particularly feeling the pinch, with many having to pay for commodities in advance when a year ago they could rely on a revolving line of credit, said Patrick Clawson, a former World Bank official now at the Washington Institute for Near East Policy. The scope of Iran's vulnerability has been a surprise to U.S. officials, he added.

The financial institutions cutting back business ties are mainly in Europe and Asia, U.S. officials say. UBS last year said it was cutting off all dealings with Iran. London-based HSBC (which has 5,000 offices in 79 countries) and Standard Chartered (with 1,400 branches in 50 countries) as well as Commerzbank of Germany have indicated they are limiting their exposure to Iranian business, Levey said.

America has a lock on the international banking system. Only friends get to play.

Let me add the biggest risk factor. What do socialist countries (which Iran is) do when economics gets tough? They nationalize. i.e. they steal the investment. Returns have to be very high to make such risks worth while.

H/T Captain's Quarters where ajacksonian has left a very good comment, as have others.

Cross Posted at Classical Values