Choking Iran: Asian Dealings & Its IMF Membership

♠ Posted by Emmanuel in ,, at 2/07/2012 08:37:00 AM
It may be a surprise to some readers that the Islamic Republic of Iran is a member of the World Bank and the IMF. Not that it's benefited much in the way of funding from either lender in recent times--it's not received any World Bank loans since Ahmadinejad came to power in 2005, f'rinstance. I am sure you are all aware of the United States-led effort to curtail Iran's dealings with the rest of the world. Whereas pressure used to applied solely to American financial institutions having deals involving Iranian entities, the latter's alleged hunger for nuclear weapons development has resulted in a broader dragnet pressuring everyone else to play along with the US tune.

This post proceeds in two parts. First we consider how Iranian trade is being negatively affected outside of the US and European sanctions. Second, we ponder the imponderable: would a US- and European-induced balance of payments crisis make Iran seek emergency funding from the IMF?

[I] To be sure, Iran has been negatively affected not only with European countries singing the sanctions tune but also Asian countries that find their efforts to deal with Iran frustrated by the additional hassles introduced as of late:
On Sunday, U.S. President Barack Obama authorized new measures which extend sanctions to all Iranian financial institutions and require financial institutions doing business in the United States to block and freeze transactions having a suspected link to Iran. Previous sanctions had only required American banks to reject those transactions.

Asian importers of Iranian crude, fuel oil and iron ore will find the sanctions complicate payment, which already often goes through intermediaries in the Middle East. Iran will be forced to rely more on settlement in illiquid currencies, which raises its cost of trade and adds to pressure on its currency.

"Iranian cargoes I can get, that's not a problem. But how to pay is a problem," said an iron ore trader in New Delhi. Some Indian rice exporters already have reported defaults by Iranian customers, after a rial devaluation in January made payments more expensive for both the Iranian importers and the Dubai intermediaries, who must convert rial into dollars to transfer money back to India.

Iranian fuel oil shipments through Singapore are slowing as sanction worries deter traders, while some Iranian iron ore exporters are accelerating loadings to China for fear of even more difficulty procuring ships and payment later this month. Iran's economy is already so weakened that its oil exports are more valuable than its imports of food and consumer goods, making it difficult to offset its exports by paying for imports.

An agreement between Iran and India to settle 45 percent of Indian crude oil purchases in rupees leaves Iran saddled with a currency that is only partly convertible. Iranian money, an estimated $5 billion so far, is piling up in South Korean banks as South Korean refiners continue to pay for shipments in won, which the banks cannot legally transfer back to Tehran. "We don't do money laundering with Iran and our won-denominated bank accounts have nothing to do with the toughened U.S. measures," a Bank of Korea source told Reuters.
Even Chinese financial institutions that you would think are less sensitive to Western pressure are now more reluctant to deal with Iran lest they be cut off from doing business in the United States altogether:
Only a select few Chinese banks are still willing to process payments for Iranian shipments, and those must be filtered to be sure none of the counterparties appears on official sanction lists, an exporter in China said. Customers are also required to issue a guarantee to the banks opening letters of credit that any losses due to sanctions will be borne by the buyer, not the bank.

Chinese buyers of Iranian iron ore must pay 25 percent in advance and settle the remainder in Dubai dirham on presentation of the bill of lading, one Indian trader said. Other iron ore or fuel oil buyers pay with direct cash transfers, sometimes routed through more than one intermediary before ending up in a Middle East bank account belonging to the Iranian exporter. The exporter uses its representative office in the third country to bring the money home to Iran.

If trade with Iran slows, it will generally be a bigger problem for Iran than for its customers. For instance, about one-third of Iran's iron ore production is sold to China, but that only accounts for about 3 percent of China's massive imports. But Iranian crude is still an important source for Asian buyers, making up roughly one-tenth of imports into India, China, Japan, and South Korea.

China cut its purchases of Iranian crude oil to half last year's volume due to a dispute over pricing and payment terms. Iran wants Chinese buyers to pay within a shorter period -- possibly a sign of its need for currency.
[II] Now here comes the kicker: As I mentioned above, Iran remains a World Bank and IMF member. In fact, it is a charter member of the Bretton Woods institutions. If it finds itself in BOP difficulties, who will it turn to as a lender of last resort? That modern-day all-purpose saviour of ailing countries the PRC does not seem ready to bail out Iran if push comes to shove. Indeed, China at the moment appears more content squeezing Iran for more oil at lower prices given the Iran's unfavourable geopolitical situation.

Thus, would a US- and European-led institution alike the IMF lend to a country that its hegemonic backers meant to inflict financial difficulties on in the first place? It boggles the mind what sort of conditionalities would be placed on Iran if these remote possibilities were to happen of Iran first seeking assistance and then the IMF giving it. In recent times, it is no surprise that the Iranian representative has used IMF gatherings as an opportunity to berate the West.

At the 2011 World Bank / IMF meetings, Iranian Finance Minister Seyed Shamseddin Hosseini delivered a speech (screed) on the "Necessity to Rethink World Bank Behavior" [!]:
These meetings are held at a juncture that we still see the negative consequences of the global crisis on the economic and financial environment. The debt of the United States Government has exceeded 14 trillion dollars and the impacts of downgrading US credit rating, as well as low economic growth and its negative prospect, has resulted in severe fluctuations in the money, commodities and capital markets.

The Euro Zone, too, faces three contradictory policy challenges, namely implementation of austerity economic measures, low growth rate, and incapability in repaying its debts and honoring financial obligations. These problems root from the following:

1. The current architecture of the world’s economy, due to inconsistency between the financial and the real sectors, creates unavoidable periodical instabilities. Settling this issue requires amending the current financial and monetary models, and shifting toward new models, such as Islamic finance, which are based on the balance between the financial and real sectors of the economy.
2. Political instability influences the economic performance. What is now happening in the MENA region, though appears to be political, doubtlessly deepens the global economic crisis, if the political and military interventions are not avoided.
3. The management of the international monetary and financial institutions has been deviated from its original functions and pursues the political will of some certain shareholders.

Unfair sanctions imposed on countries, such as the Islamic Republic of Iran, and following the will of some certain countries by the World Bank, in drawing up its relations with Iran, is a proof to this point. That the World Bank management, contrary to its Articles of Agreements, avoids approving the Country Assistance Strategy for Iran, and refrains from offering technical assistance to Iran, is another evidence of its deviation.

As the representative of a country which is a founding member of the World Bank, I would like to emphasize on the loyalty of the management of the World Bank to its Articles of Agreement as well as good and corporate governance, instead of biased governance.
Things will get more interesting soon enough, I fear. Other countries would like nothing more than deal with Iran without all of the associated hassles inflicted by external parties and will find ways to do so if there really is interest. Although Western media may be shy about saying so, there is an undercurrent of discontent about the IMF lending most of its monies--a lot of it from developing countries, by the way--to troubled European ones that do not necessarily suffer from balance of payments difficulties.

In which case, why would Iran be a less legitimate borrower than all of those "developed" European nations whose problems are not really those the IMF was meant to address? The more you think of all these money and power issues, the more you become disillusioned with the world of subprime globalization we find ourselves in. Perhaps ignorance really is bliss.