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Page last updated at 23:45 GMT, Friday, 16 April 2010 00:45 UK

US puts economic squeeze on Iran

Iran's Badr Abbas oil refinery - 2004
Iran's oil exports, and dependence on refined imports, may be its weakness

By Jon Leyne
Tehran correspondent, BBC News, reporting from London

As pressure grows on Iran over its nuclear programme, there is evidence that behind the scenes, the United States has stepped up its push to isolate Tehran economically.

In recent weeks a number of countries and companies have cut back on their imports of Iranian crude oil. They include some of Iran's most important trading partners: China, Japan and India.

At the same time more companies have stopped supplying Iran with refined petroleum. Because of a shortage of refining capacity, Iran relies on such imports to meet domestic demand.

The move was explained in unusually blunt terms this week by a senior US official.

William Burns, US Under-Secretary of State, told a Congressional committee: "What we've been doing is to try to use every lever that we already have at our disposal to encourage foreign companies, foreign entities to cut their ties with the Iranian economy."

"The squeeze is on," said Kate Dorian, Dubai bureau chief for the energy analysts Platts. "Very few people are willing to deal with Iran directly."

Barack Obama - April 2010
Washington is using "all levers" to build pressure on the Iranian government

Even the head of the Iranian union of oil exporters, Hamid Hoseyni, has acknowledged there has been a cut in exports of Iranian oil to China, Japan and India - all key customers - though he said overall Iranian exports had not been affected.

The pressure on Iran comes as the United States leads a push for new sanctions on Iran over its nuclear programme.

President Obama has said he expects the measures to be agreed at the UN Security Council "this spring". Spring officially turns to summer in the United States on 21 June, so that gives American diplomats just over two months to conclude their negotiations.

Production down?

Hard figures are difficult to confirm, and traders point out that Iran may simply have been over-pricing its oil. Iranian oil also suffers from being very "heavy" so it can be more difficult to sell when the market is over-supplied.

Platts energy analysts reckon that Iranian output is holding up at 3.76 million barrels a day, well above their Opec target. But others use Iranian government figures to paint a much less rosy picture, suggesting Iran is producing not much more than 3.5 million barrels a day.

KEY BACKGROUND
Isfahan nuclear plant

Mr Hoseyni of the Iranian union of oil exporters is quoted as saying that China has cut imports from Iran from 400,000 barrels a day to 200,000 barrels a day.

Japan is also reported to have cut back on imports of Iranian oil. And the Indian company Reliance has also reduced or ended its dealings with Iran.

Reliance was an important customer for Iranian oil because its huge refinery was particularly suited to processing Iran's output of heavy or very heavy crude.

According to the semi-official Iranian news agency, ISNA, Reliance was buying 90 to 100,000 barrels of oil a day, or 2.4% of Iranian output.

Reliance was also one of the biggest suppliers of refined petroleum to Iran, and it is one of a number of petrol suppliers who appear to have succumbed to political pressure to pull out of trading with Iran, or at least cut back on the business.

Others include the Russian company, Lukoil, BP, Shell, Trafigura, Vitol, Glencore and IPG.

Dependence

Iran's dependence on imported petroleum has often been identified as one of its weaknesses. Iranians love their cars, and when petrol rationing was introduced in the summer of 2007, there was violence on the streets.

The US congress has been pressing President Obama to introduce sanctions on petrol exports to Iran. So far Mr Obama has been reluctant to go ahead, at least with any formal measure.

Some analysts point out that Iran has alternative suppliers who can fill the gaps. The analysts PFC say that Turkmenistan, Venezuela, Kuwait and Malaysia have all been willing to make up the shortfall.

A Chinese tanker this week was reported to be preparing to carry a major shipment of petrol to Iran. And Total of France is also still selling petrol to Iran.

Petrol station in Tehran after petrol rationing protests - 2007
Announcements on petrol rationing brought unrest to Tehran in 2007

Total's CEO has said that his company has received "indirect" messages from Washington about such sales, though not a direct request to stop.

At the very least, though, the pressure means Iran may have to pay a premium for its petrol imports, even if they can be re-sourced through flags of convenience.

The pressure on Iran is an interesting study in how the United States uses its economic might to leverage political influence.

Lukoil, for example, although it is a Russia company, also has major US shareholders, and a chain of petrol stations in the United States. Reliance of India also has significant interests in America as well.

US pressure

For some time, American officials have been using these levers to curtail financial transactions with Iran.

European banks have received a simple message: they can either trade with Iran, or with the United States, not both.

US treasury officials have made a least two visits to Europe to underline the message.

As a result it is becoming increasingly difficult to transfer money to and from Iran, and it is almost impossible to obtain letters of credit, another possible reason for the reduction in the oil trade.

The United States has also been using its alliance with Saudi Arabia to help suggest alternative sources of oil supply for Asian countries who make up some of Iran's most important customers.

There's also a wider push to encourage non-American companies to stop doing business with Iran.

The German company Daimler announced this week that it was pulling out of Iran. The German Chancellor, Angela Merkel, has reportedly agreed to discourage trade between German companies and Iran, so long as Washington does not use public pressure on the issue.

Austria, however, still actively and openly promotes trade with the Islamic Republic.

Worker unrest

The Obama administration says it wants new UN sanctions to target the nuclear programme, and specifically the Revolutionary Guards, who occupy a growing position of power within the Islamic Republic.

American officials argue that they want to hurt the leadership and not the Iranian people. There's also a fear that the Iranian government could blame sanctions for its self-created economic problems.

Mahmoud Ahamdinejad - 2010
Iran's Mahmoud Ahamedinejad may be isolated even within conservative Iranian circles

In any case, Washington would be unlikely to secure agreement at the United Nations for the sort of measures it is pressing informally.

But the behind the scenes pressure to isolate Iran economically seems designed to produce more widespread economic problems, and perhaps even to provoke worker unrest.

Exile groups have been giving many details of layoffs imposed on Iranian workers, and also numerous protests over unpaid wages.

Those are all indications that President Mahmoud Ahmadinejad's government is facing growing economic pressure, at a time when its legitimacy continues to be challenged following the disputed election last summer.

To date, though, worker unrest has not risen to the point that it appears to pose a major threat to the government.

Nevertheless economic pressure on the Iranian government, combined with mismanagement and under-investment, and growing domestic demand, does appear to mean that Iran is struggling to maintain the current level of oil export earnings, a critical lifeline for the government.

Internal division

According to one western analysis of figures from the Iranian central bank, those lower oil earnings are seriously depleting Iranian foreign currency reserves. Mr Ahmadinejad's profligate spending have made things worse as well.

Under this assessment reserves could reach a critical level within a year, forcing the government either to devalue the Iranian rial, or to make other drastic policy decisions.

One of the biggest problems for Mr Ahmadinejad's government is that it is severely weakened since the disputed election last summer. It has often appeared incapable of decisive action, sometimes close to paralysis.

The divisions are not so much between government and opposition, as those between different factions of conservatives. Mr Ahmadinejad himself is deeply unpopular even amongst many fellow conservatives. He is not owed many favours.

The effect of that has been seen most clearly in the dramatic swings in policy over the nuclear issue. But it is also causing big problems in the management of the economy.

One response to the financial crisis might be to cut subsidies, particularly petrol subsidies, something Mr Ahmadinejad has been trying to do.

But the Iranian president has been entangled in a long running dispute with the parliament over the extent of subsidy reform, and there's no sign of an early resolution.

This American economic pressure appears aimed to encourage Mr Ahmadinejad to come to the table over the nuclear issue. So far there is little sign of this bearing fruit. And there is little sign that President Ahmadinejad's government even has the authority to offer a deal over the nuclear question, even if it wanted to.

But Western policy makers could also be playing a longer game. They may be hoping that in the longer term, economic pressure could undermine Mr Ahmadinejad's position, or even eventually threaten the very existence of the Islamic Republic itself.



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