Guest Post: The Other Side Of Sanctions

Tyler Durden's picture




 

Submitted by Felix Imonti of OilPrice.com,

Iran has been pushed into a corner and is fighting for its life.  The safest weapon in its arsenal is an economic strategy; and it is the one point where the United States is vulnerable. 

There is no doubt about it.  Section 1245 of the National Defense Authorization Act that was signed into law by President Obama on December 31, 2011 is having the intended effect upon Iran.

Unlike previous sanctions, Section 1245 attacks the foundation of the Iranian economy.  The provisions of the law seek to stop the sale of crude oil and to block transactions between the Iranian central bank and the rest of the world.  About fifty percent of the national budget is funded from the sale of exported crude oil that provides eighty percent of the foreign exchange.  "Crude (oil) sales are a trap which we inherited from the years before the (1979 Islamic) Revolution," Khamenei told a gathering of researchers and scientists at the end of July.  

An immediate consequence of the legislation has been the plunge in the exchange rate of the Iranian Rial that has lost half its value against the U.S. dollar.  A combination of devalued currency and a break down in international bank transfers has created shortages of imported products, including basic food grains.  The result is seen in an official inflation rate of 25 percent and an unemployment rate of 12.3 percent.

Before the implementation of the sanctions, Iranian oil exports were the second largest in OPEC at 2.2 million barrels per day.  Today, the current level is around 1.1 million barrels, but that does not take into account the oil leakage through the sanction barriers.  A friendly government in Baghdad makes Iraq one of the easier routes to the world market.  Shipments of gold bullion through Turkey to Iran indicate that the Iranians are selling to someone.

After nearly thirty years of dealing with American sanctions, the Iranians have developed methods of evading some of the restrictions, but the current application goes far beyond anything faced earlier.  The National Iranian Oil Company has been forced to relinquish its monopoly of sales and authorized private traders to market the crude.  The Oil Products Exporters Union expects to manage a fifth of exports and claims to have completed arrangements with refiners in Europe.

In spite of the evasive measures that are being employed, The Iranian treasury is still losing about thirty billion dollars per annum, a decline from seventy-two billion in 2011.  Beyond that, reduced exports are causing a problem of what to do with the surplus.  On shore facilities have been filled.  Seven million barrels are being held at Sidi Kerir in Egypt.

That leaves the tankers as the only other storage choice.  Half the Iran tanker fleet of forty-seven ships is already sitting at anchor with tanks full and no place to go.

The less attractive possibility is for the National Iranian Oil Company to continue shutting down wells.  Already, production has declined from 3.5 to 3.3 million barrels per day.

Once they are shut down and the pressurizing of the aging neglected wells stopped, salt water seepage will make it costly and difficult to reactivate them.  When they are reopened, production is likely to be reduced.  This is the long term damage that the sanctions will have upon the economy. 

How long can they endure the losses?  That is the question that the Ayatollah has to be asking.

So far, there are no signs that people are starving from food shortages, and there is no indication that people are taking their grievances into the streets.  Regardless, Tehran cannot ignore the long term damage to the economy and the potential for social disorder.

Right now, the bombs are not falling.  Sooner or later, though, the risk of war must be resolved.  They cannot ignore that Section 1245 is a declaration of war; and must be treated accordingly.  The Ayatollah has said, “Threat for threat.” 

Ayatollah Khamenei compares the present situation of Iran to Mohammed and his early followers who were besieged for three years in the desert of Saudi Arabia.  When there seemed to be no hope, they struck the surrounding superior army and defeated it at Badr and Kheybar. 

He sees Iran is also surrounded by an enemy.  They are being confronted by two carrier battle groups with a formidable destructive capacity that Iran cannot hope to stop or to match; the repeated threats from politicians in the United States and Israel to attack Iranian nuclear facilities; the newest sanctions that are slowly strangling the economy; and Khamenei believes that it is all for the sole purpose of regime change.

That raises the question.  How does a minor military power contend with the forces available to the United States?  The leaders in Tehran talk about closing the Straits of Hormuz and developing new missiles.  It is all bravado that Khamenei hopes will calm anxieties at home and frighten potential aggressors.

Over the three decades of the Islamic Republic, the Iranians have been careful about pushing Washington to the point that it would retaliate militarily.  The Ayatollah is not going to provoke the U.S. to destroy the theocratic regime and his political career.

“….to defend ourselves we will attack on the same level as the enemies attack us," Khamenei said on television in March.  Section 1245 is economic warfare.  That is most likely to be the battlefield that Khamenei will choose and it fits perfectly into the strategies employed over the centuries by the persecuted Shia minority

Where is the United States vulnerable economically?  It is the draconian character of the sanctions.

At the end of June, Washington did what was expected.  All twenty of Iran’s regular buyers were granted six month wavers that will push the next decision beyond the November election.  To have found any of the twenty governments to be in violation of the sanction restrictions would have compelled Washington to deny access to the U.S. financial system.  That would have Sparked an economic war with countries taking sides in support or in opposition to the United States.

It is no secret that many governments object to the sanctions and are willing to deal outside of normal channels for a reduced price.  If the Iranians should use the new private traders to dump a few million barrels of oil onto the market at a sharply discounted price, they just might encourage one of these governments to openly defy the United States for a bargain.  Should the United States imposes restrictions upon the offender, that could trigger an unwanted trade war,  while ignoring the challenge would render the sanctions meaningless and invite everyone else to go bargain hunting.

As a persecuted minority, the Shia have learned that the weaker in a conflict must employ cunning rather than muscle.  The philosophy is the core principle of the Iranian Revolutionary Guard that focuses upon the use of asymmetric warfare.  Employing economic tactics is just another form of the asymmetric warfare.

It is the inherent weakness of the alliance that is Iran’s strength.  The unwillingness of Washington to pressure supposed allies and the simple fact that there are buyers willing to defy the sanctions secretly reveals the cracks in the system.  If the Iranians can break through the weak point in the American siege, they will be able to repeat without firing a shot the triumph of Badr and Kheybar

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Fri, 08/10/2012 - 17:33 | 2695443 Id fight Gandhi
Id fight Gandhi's picture

So sick of Israel and their war machine.

Fri, 08/10/2012 - 17:38 | 2695457 NemoDeNovo
NemoDeNovo's picture

+1.5 Quadrillion for that one......

Fri, 08/10/2012 - 17:53 | 2695490 hedgeless_horseman
hedgeless_horseman's picture

 

 

Honest question:  Does Israel allow inspection of its nuclear program by the IAEA?

Do the concepts of self determinism, private property, freedom and liberty really have any meaning when they only apply to me, but not to you?

Fri, 08/10/2012 - 17:53 | 2695509 Seer
Seer's picture

Ha, ha!  You cannot inspect that which doesn't exist!

By all "offical" accounts Israel doesn't have nukes!  If you say they do (and you happen to live there while you say so) you end up being placed in prison (Mordechai Vanunu).

Fri, 08/10/2012 - 18:12 | 2695534 hedgeless_horseman
hedgeless_horseman's picture

 

 

By all "offical" accounts Iran doesn't have nukes, either. 

So, what is the IAEA's "official" stance on Israel?

They get another passover waiver?

Fri, 08/10/2012 - 18:38 | 2695629 DaveyJones
DaveyJones's picture

it's almost as if none of this makes any sense

Fri, 08/10/2012 - 19:48 | 2695778 engineertheeconomy
engineertheeconomy's picture

Bomb Israel. That makes sense

Fri, 08/10/2012 - 23:02 | 2696212 jonjon831983
jonjon831983's picture

Well, theoretically to be fair of tit for tat bombing - if you do - target Dimona or whereever their supposed nuclear projects are - not all of Israel.

Fri, 08/10/2012 - 18:59 | 2695678 smlbizman
smlbizman's picture

my human nature at seeing the bully get its ass kicked is at an all time high....

Sat, 08/11/2012 - 00:43 | 2696375 fourchan
fourchan's picture

lol mitt gave the green light already to bomb iran so thats how that will go.

Sat, 08/11/2012 - 08:26 | 2696751 goldfish1
goldfish1's picture

the mittens campaign is but a water test to see the stomach of the people for war and accelerated fleecing

 

how vulnerable are the "owners"? don't know about them, but their henchmen (bankers, lawyers, indian chiefs) are very vulnerable

 

 

Fri, 08/10/2012 - 19:35 | 2695746 Jack Burton
Jack Burton's picture

The west see Israel's hundreds of nuclear weapons as allied nukes, ready to be used for western interests. Thus they are considered weapons of peace. Any Iranian nuclear weapon would confirm a measure of invasion security for Iran, thus NATO would find it hard to invade and conquer Iran, so the west labels any Iranian nuclear weapon a weapon of agressive war.

That is the difference. Israeli nukes good, Iranian nukes bad.

Fri, 08/10/2012 - 19:36 | 2695740 Jack Burton
Jack Burton's picture

Indeed, we are all sick of the Israeli war machine, which is financied in large part with American tax dollars.

Iran is one of the last nations in the Middle East that is independent of NATO and Israel, this alone makes them a prime target, as NATO, Israel and the USA all demand alligance to the Neo-Liberal globalized world power exercised out of Washington DC.

Iran is not going to attack anyone, and they all know it. They orgainized the Iraq invasion of Iran in hopes of an easy victory using Iraq as the proxy. It didn't work, in spite of the Wests sanction and aid in carrying oput chemical warfare against Iranian infantry and a missile campaign, again aided by US targeting data, against Iranian cities.

Iran is a thorn in the side of Israel as they support oppostion groups to Israeli expansion, such as the wars to conquer southern Lebanon.

SO sure, Israel wants Iran torn apart like Iraq, it is in their interest to see Iran ripped up and engaged in ethnic civil conflict. Iraq is the model, split now between three or more factions and basically powerless. Iran will not be so simple to dismember. Iran has some amount of Chinese and Russian support, as these two countries see a need to stop NATO expansion into the entire Middle East. China and Russia may be very lukewarm in their support for Iran, but they also have had enough of USA expansion into the Middle East and Central Asia. The Syrian conflict is showing that Russia and China have decided to cease surrendering to NATO expansion. I imagine Russia and China would react much more strongly in support of Iran than they have for Syria. It is all a matter of self interest. Russia and China are not at all ready to let the USA own Iran as a puppet NATO base. Nope, I think they are ready to draw the line firmly in the sand when it comes to NATO conquest of Iran.

Fri, 08/10/2012 - 19:50 | 2695780 Freddie
Freddie's picture

Well Iran was going to set up a oil exchange that did not use dollars to settle transactions,  This was supposed to be happening fairly soon.  The threat to The Ben Bernank's fiat The JP Morgue and The Goldman Sack tissue paper is huge.  This is the real Iranian threat.  

Fri, 08/10/2012 - 17:49 | 2695499 Haager
Haager's picture

Agreed.

Somebody should tell them if they suffer that much fear, bombing the neighbours doesn't cure the fear - a psychiatrist does.

Fri, 08/10/2012 - 18:36 | 2695625 Umh
Umh's picture

How come people want to let politicians off the hook all the time. To me it seems like we blame everyone, but the people who actually make the decisions. It's not the lobbyist screwing up it's the politicians. It's you're politicians who are doing these things.

Fri, 08/10/2012 - 18:56 | 2695671 NotApplicable
NotApplicable's picture

Politicians? Since when do puppets decide anything?

If they want to retain power, they do exactly what they're told. Otherwise, they are cast aside for someone who will (with one exception of one man they cannot reach).

Sat, 08/11/2012 - 05:53 | 2696623 Mr Poopra
Mr Poopra's picture

Israel isn't what it seems.  It's a fake country created by a clandestine group to use as a proxy in geopolitics.  Remember, we need to spend more money invading sovereign nations and liberating their civilians to death.  These are really all we need to ask a potential Presidential candidate:

1.)  What is your stance on the Federal Reserve and fractional reserve lending?

2.)  What is your stance on Zionism?

 

Support for either indicates ignorance or complicity, either of which are unacceptable for a post of this level of authority.  Typically you can figure out the rest of their platform based on the answers to these two questions.

Fri, 08/10/2012 - 17:36 | 2695450 Squid Vicious
Squid Vicious's picture

but...but...but... they're all TERRORISTS!!!

Fri, 08/10/2012 - 17:36 | 2695452 Landrew
Landrew's picture

The Iranians have the ultimate card to play, several rockets into the Saudi oil terminals and it's over.

Fri, 08/10/2012 - 17:54 | 2695513 tbd108
tbd108's picture

Not likely. This would draw a response from the West (uniting all of the oil consuming nations) that would be the end of the regime, one way or another.

Fri, 08/10/2012 - 19:14 | 2695705 HardAssets
HardAssets's picture

A better card to play would be selling oil to China far below market.

Let China wield her financial 'weapons' against the West if retaliated against.

Fri, 08/10/2012 - 19:42 | 2695763 Global Hunter
Global Hunter's picture

I'm going to go out on a limb here and say they are selling oil to China at a big discount to mrkt bid.

As an interested observer who is not a big fan of the Iranian gov't, I have to conclude they are doing what they "have to do".  After all they are protecting their national sovereignty and are and have been planning ahead.  I'm not sure game our politicians are playing the same game, they seem naive to me, but it appears to me that they're in over their heads. 

I think the best strategic move Iran can make is the "rope a dope" one, they'll exhaust the US and NATO into the ground.

Fri, 08/10/2012 - 20:09 | 2695805 Freddie
Freddie's picture

You know they are selling oil through China.  Iran just needs to avoid any LBJ/Democrat Party Gulf of Tonkins because Vietnam was LBJ/JFKs war.

Fri, 08/10/2012 - 21:22 | 2695952 CompassionateFascist
CompassionateFascist's picture

How does Iran "avoid" an Israeli submarine putting a torpedo into an American warship?

Fri, 08/10/2012 - 20:15 | 2695819 Landrew
Landrew's picture

The WHOLE WORLD would stop in it's tracks without Saudi oil. The global depression would be so severe we would sue for peace.

Fri, 08/10/2012 - 20:16 | 2695823 Landrew
Landrew's picture

BTW, Iran isn't Iraq, Iran has 70 million people not 25 in Iraq

Sat, 08/11/2012 - 00:21 | 2696353 TheFourthStooge-ing
TheFourthStooge-ing's picture

.

Not likely. This would draw a response from the West (uniting all of the oil consuming nations) that would be the end of the regime, one way or another.

Destruction of terminal facilities and oil transport infrastructure in Saudi Arabia, Kuwait, Bahrain, Qatar, and the UAE would fuck the global economy hard. It wouldn't be a sucker punch, it would be a baseball bat pummeling to the head followed by steel-toed boot kicks to the testicles of the supine body. Think of it as the Iranian regime's "Samson Option".

Sat, 08/11/2012 - 10:44 | 2697086 Landrew
Landrew's picture

As you see from my comments I totally agree with you. What's really strange is back in the first war on Iraq we role played U.S./U.N. against Saddam I was chosen to play Saddam. When the aircraft carriers moved in I launched a total war on Saudi oil facilities and the game was over. People freaked saying that isn't the game! You were supposed to plan against US! I said I did! Within weeks the world was in chaos and there was fighting within states over who deserved oil. Game changed overnight.

Fri, 08/10/2012 - 17:36 | 2695454 vinu02
vinu02's picture

Sanction means lose money, lose job and pay more at the gas station. http://www.freefdawatchlist.com/2012/08/directionless-stock-market-now-ready.html

 

Fri, 08/10/2012 - 17:38 | 2695458 HungrySeagull
HungrySeagull's picture

Our Ferret learned something once.

 

It kept dumping poo into a corner of the living room. We sprayed it with anti ferret scent. At first it recoiled at the spot and we smiled and told each other that is that.

 

Until it turned around like a Semi Trailer (After smelling the boundaries...) and backed in to take the dump.

 

Yea, I wanted to make dinner out of that scrany thing.

Fri, 08/10/2012 - 17:42 | 2695476 Gully Foyle
Gully Foyle's picture

HungrySeagull

Ferrets shit in corners. You own one and didn't know that?

When the fuck has Boundary worked without positive and negative reinforcement?

Just to let you know, you can teach a Cat to use the toilet.

Ferrets have too much will for that trick.

Fri, 08/10/2012 - 18:38 | 2695630 shovelhead
shovelhead's picture

How do you teach the cat not to toss his cigar butts in the toilet?

Fri, 08/10/2012 - 19:43 | 2695768 Global Hunter
Global Hunter's picture

a ferret?  How did you get roped into that?  I can't even cope with a mother in law!

Fri, 08/10/2012 - 23:59 | 2696330 Precious
Precious's picture

It IS his mother-in-law --- he calls her the "ferret". 

Fri, 08/10/2012 - 17:38 | 2695459 blunderdog
blunderdog's picture

     Employing economic tactics is just another form of the asymmetric warfare.

Yeah, it's wild, right?  The US being the "big guy" still has to stoop to economic tactics because we blew our military wad over the past decade.  We probably couldn't hold Grenada at this point.

Oh...wait...you meant asymmetric warfare on the part of the Iranians....

Fri, 08/10/2012 - 17:43 | 2695477 BurningFuld
BurningFuld's picture

Could always declare war on Canada again.

Fri, 08/10/2012 - 18:39 | 2695631 JimmyCDN
JimmyCDN's picture

United we stand, divided we fall, fellow North American...

Fri, 08/10/2012 - 18:50 | 2695654 Bohm Squad
Bohm Squad's picture

...or France:  They'll just surrender.

Sat, 08/11/2012 - 12:23 | 2697410 bankruptcylawyer
bankruptcylawyer's picture

sooner or later the u.s. is going to have to let germany have a real army with nuclear weapons again. 

 

france is going to be pissed about it, but---there's nothing you can do to stop the uber-menschen. 

the germans are just that good. I think they'd be much more useful this time around in helping the west achieve global domination as a united front.

no gas chambers this time though, ok?

 

Sat, 08/11/2012 - 01:36 | 2696469 Skateboarder
Skateboarder's picture

CA and USA are both corporations under the same belt duh.

Fri, 08/10/2012 - 17:39 | 2695465 boogerbently
boogerbently's picture

Many powerful countries are opposed to the sanctions, including Russia and China.

These two countries also want the price of gold (currently being held down by the US) to rise.

To the point that, just like circumventing the US in trading oil, China wants to open up its own PM market.

Fri, 08/10/2012 - 18:25 | 2695603 BigJim
BigJim's picture

Why would China want the price of gold to rise? It's a buyer, not a seller.

They're very happy to pick up tonnes of physical at discounted prices... once they've spent most of their USD reserves on physical assets (including gold, silver, farmland, mines, etc, etc) then they'll want the price to rise.

I expect the rigging to continue for a few years yet. No one in a position to do anything about it, wants it any other way.

Fri, 08/10/2012 - 20:13 | 2695818 boogerbently
boogerbently's picture

They have been buying gold. They can't buy both. Can they buy more of the "physical assets", you refer to, with their TONNES of gold worth $1600/oz, or $5000/oz ?

Plus, with all the fiscal IRRESPONSIBILITY, and the EU zone breaking up, at least to some degree, the world will return to some level of gold standard. All the sovereigns will want gold higher to make their paper worth more.

JMO

Fri, 08/10/2012 - 23:28 | 2696277 neilhorn
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boogerbently:"They have been buying gold. They can't buy both."

When I go to Walmart I can buy more than one thing at a time. (Although, I try to keep my purchase count below twelve, so I can fit in the express lane.) Nearly everything there is from China, so I know they can sell more than one thing at once. What hindereth the Chinese from buying both? Are the Chinese printing presses not as efficient as the ones we have in America?

Sat, 08/11/2012 - 09:19 | 2696850 boogerbently
boogerbently's picture

I believe they intend to buy both. First, more gold, then, after the gold rises, they use IT to buy more assets.

The more the gold rises, the less they need to print.

The more gold rises, the more they CAN print.

Fri, 08/10/2012 - 17:41 | 2695471 New_Meat
New_Meat's picture

demmurage, bitchez!

Fri, 08/10/2012 - 19:42 | 2695766 mofreedom
mofreedom's picture

No dem, priv ships.  Cant let that go!

 

Fri, 08/10/2012 - 17:41 | 2695472 magpie
magpie's picture

Selling them porn and MBS for Oil would have broken them in milliseconds, but alas...

Fri, 08/10/2012 - 17:45 | 2695482 lesterbegood
lesterbegood's picture

I disagree the presumption of the author that Iran is fighting for its life due to sanctions imposed by the US. Iran has no problem selling its oil to China and India.

I believe that these sanctions will backfire on the US and the FED.

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