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Last Updated: Wednesday, 14 November 2007, 19:36 GMT
Iran faces up to tighter sanctions
By Jon Leyne
BBC News, Tehran

Iranian woman shopping at Tehran's main bazaar in Iran (25/10/2007)
Economic sanctions could have an impact on domestic prices

Iran is bracing itself for a new round of sanctions after British Prime Minister Gordon Brown called for more restrictions on trade.

Mr Brown called for a ban on investment in the oil and gas industries if Iran does not agree to end the production of enriched uranium, which the West fears could be used to make a nuclear bomb.

The issue will return to the UN Security Council this month.

The official response from the Iranian government is one of defiance. Officials speak of a campaign of "psychological warfare" against Iran, and point out that the country has been the subject of sanctions since the Islamic revolution in 1979.

It is certainly the case that the new UN sanctions have been hard to agree, despite pressure from Washington. But Gordon Brown's call could damage the Iranian economy regardless.

Chinese hopes

According to businessmen here, several German companies have decided to pull out of Iran - or at least dramatically reduce operations - following Mr Brown's speech on Monday.

Because of US unilateral sanctions - and the political climate - it is already very difficult to finance major projects in Iran.

Iranian President Mahmoud Ahmadinejad (L) shakes hands with Chinese Foreign Minister Yang Jiechi during a meeting in Tehran (13/11/2007)
China wants to invest in Iran but could lack essential technical skills

For example the energy company Shell is looking at a big project in the gas sector, but there is almost no chance of raising the billions of dollars of international investment necessary.

Recently the Russian oil company Lukoil announced it was pulling out of a major project here because of US pressure. Lukoil feared its trading links with the US could be damaged.

China is keen to step into the breach. Chinese Foreign Minister Yang Jiechi has been in Tehran this week. But experts say Chinese energy companies do not necessarily have the skills Iran needs.

To take one sector, Iran has the world's second largest gas reserves, but storing and freezing gas for transport requires technical expertise only available in the West.

'Virus effect'

What have particularly damaged the Iranian economy are the unilateral financial sanctions imposed by the United States.

The financial sanctions only apply to three banks - Bank Melli, Bank Mellat and Bank Saderat - as well as to companies associated with the Revolutionary Guards. But they have a "virus" effect, spreading throughout the economy.

Even Iranian banks, let alone foreign ones, are wary of dealing with the sanctioned entities, for fear of retaliation by the US.

That means it is very difficult to raise letters of credit - the financial instruments used by big importers and exporters. Investment is even harder to finance overseas.

Barrels of oil
The Iranian economy benefits from high global oil prices

In the long term, that is likely to be very damaging to the Iranian economy, particularly the energy sector.

One recent report suggests that in the coming decades, Iran would actually cease being a net oil exporter.

That, despite the fact that this country has the world's largest combined reserves of oil and gas.

But with oil prices nudging up towards $100 (48.50) a barrel, Iran still has plenty of cash to spend at the moment.

Even if individual German companies are pulling out, official figures show that German exports to Iran increased in the first six months of this year compared with the same period in the previous year.

The United Arab Emirates has become the largest exporter to Iran - even though the UAE is hardly a major industrial power.

Those figures suggest that a lot of Iranian exports are being diverted through the Emirates, re-labelled or re-flagged. One economist estimates that is adding 15% to the value of commodities being bought by Iran.

And even Britain is still doing good business with Iran. One Iranian bank still has a branch in London, through which most European financial transactions are funnelled.

So, it is difficult to isolate a country with tens of billions in cash to spend. But each new twist makes life more complicated and more expensive for the Iranian government.

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