Economic Warfare: Iran - Help and Hinderance

America's financial war on Iran

The UN sanctions prohibit transactions with a small number of Iranian banks, companies and individuals said to be directly involved in the country's nuclear programme or in support for terrorism.

But there is also a second, potentially more powerful, element. Since September 2006, US officials have been travelling the world talking to banks and company bosses. They aim to persuade business to voluntarily abandon or scale back all dealings with Iran.

Mr Levey, who is spearheading the Treasury's campaign, insists he is already getting results.

"There is significant evidence that it's working in the sense that Iranian business is being subjected to greater scrutiny and it's more difficult for them to operate," he says.

"A number of major financial institutions have cut off doing business with certain Iranian banks or with Iran entirely."

American financial pressure shows up in small ways. For example, international banks have become reluctant to issue letters of credit on Iranian trade, or only on exorbitant terms.

Letters of credit guarantee payment in international commerce. The alternative is paying in cash.

This has been going on since last September 2006. The HSBC was a major investor and handler of Iranian accounts. But, as the recent designation of IRGC as a terrorist organization (thus, all members are terrorists), one more "loophole" was closing against an organization that holds the reigns of companies that buy nuclear materials and other prohibited items.

So is American financial pressure as effective a tool as US officials claim?

Dubai is a good place to find out - a rich Gulf city that is Iran's economic gateway to the world.

A quarter of Dubai's population are Iranian and much of Iran's trade goes through Dubai. The relationship is similar to China's link with Hong Kong.

Iranian businesses in Dubai are universally reluctant to talk about such a sensitive topic. They risk offending either the Americans or the government in Tehran, more or less whatever they say.

Dubai and other international businessmen are only interested in one thing: money. They invest on that pre-requisite alone. Political, ethical nor humanitarian issues are at best, secondary concerns. Further, some businessmen are from the region don't see any ethical or political issues because a country like Iran is familiar to them in how it operates. The main concern is: is Iran stable enough that investments will see a return. At this moment, with Ahmedinijad exerting serious control over both the political and economic sectors, the answer is "yes" providing expected oil prices continue to rise and keep money in Tehran's pocket. Or, more importantly, as long as Iran can give the illusion that all is well (such as keeping $60 billion in reserve cash in a European bank while simultaneously being unable to pay workers, pay the fees for the nuclear plant at Bushehr and numerous other economically troubling concerns).

Mr Hashempore says Iranian businesses are all worried about US financial pressure, but so far, they are finding ways round it.

Mr Hashempore confirms that many Iranian firms are barred from doing deals in dollars, but they cope by switching to euros or yen instead.

He also says that many Iranian companies are able to pass themselves off as local Dubai businesses, which means they can get loans and letters of credit from international banks.

Under Dubai law, foreign enterprises are required to have a local business partner, nominally with a 51% stake in the firm.

These partners are usually paid a fee and play no active role in running the business, but for legal purposes, the firm can say it is locally-owned and thus avoid American financial pressure.

This is nothing new. Saddam was using the same loopholes to support his failing regime, purchase materials, launder money, etc, etc.

The obvious way to strangle the economy is to hit the vulnerable oil and gas industries. And yet, for international energy companies, Iran is potentially a mouth-watering prize.

European energy giants - including Shell, Spain's Repsol and Total of France - are eyeing up big up Iranian deals, as are Chinese and Malaysian oil firms. But in so doing, they all risk alienating the US, the world's only super-power.

Most oil companies do business in the US - and that would be under threat if they get too close to Iran.

There are already sanctions in place that limit investment to $20mil/year. This has greatly damaged an already aging oil infrastructure. A recent report indicates that Iran has twice the reserves of Russia, but Russia produces six times the daily output of Iran.

"What you're seeing is a strange sort of dance with some of these energy companies and they're all hoping that another company will be the first one in to become the lightning rod for the US reaction," he explains.

"The first company that does break ranks and makes a major investment will lead to an opening of the floodgates," he says, meaning that if one oil company does a deal with Iran, lots of others may follow.

So, basically, everybody is waiting for the first company to take one for the team and then they will be happy to build up the Iranian oil and natural gas fields, provide a criminal, terrorist, oppressive regime with the revenue that would sustain it for decades more.

Thanks big oil. For that reason alone, I'd be willing to support the "go green" protest the oil companies radicals.

Other Iranian Coverage:

Voice of America: Iran's Fifth Column

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Economic Warfare: Iran SitRep

There are many interesting things going on in Iran and with US Foreign Policy.

Economic Brinkmanship

Ace of Spades points out that the US is going to designate the IRGC (Iranian Revolutionary Guard Corps) as a Foreign Terrorist Organization:

The designation of the Revolutionary Guards will be made under Executive Order 13224, which President Bush signed two weeks after the Sept. 11, 2001, attacks to obstruct terrorist funding. It identifies individuals, businesses, charities and many extremist groups engaged in terrorist activities. The Revolutionary Guards would be the first national military branch included on the list, U.S. officials said -- a highly unusual move because it is part of a government, rather than a typical non-state terrorist organization.

The order allows the United States to block the assets of terrorists and to disrupt operations by foreign businesses that "provide support, services or assistance to, or otherwise associate with, terrorists."

The main goal of the new designation is to clamp down on the Revolutionary Guards' vast business network, as well as on foreign companies conducting business linked to the military unit and its personnel. The administration plans to list many of the Revolutionary Guards' financial operations.

According to the report, all known individuals and businesses related to the IRGC will be listed. This comes on the heels of continuing allegations from the the US that Iran is providing weapons and money to insurgents in Iraq and Afghanistan while Ahmedinijad denies any involvement without actually directly denying knowledge:

When asked if Iran is supplying weapons to the Taliban by a reporter from Voice of America, a U.S.-funded outlet, Ahmedinejad laughed and said the United States doesn't want Afghanistan and Iran to be friends.

"The same allegation are made in Iraq. They are saying that they discover some weapons," Ahmedinejad said at a news conference with Afghan President Hamid Karzai. "What is the reason why they are saying such things? Iran is a big country. I have serious doubts about this issue."

Per a March review of the situation, the IRGC owns and operates upwards of 50% of industries and services within Iran. It also employs about 50% of the government work force. Previous sanctions against the Iranian government, including those originally in place since the 1979 hostage crisis, were specifically against the Iranian government in Tehran. The Iranian government has been transfering industries and control of service sectors to the IRGC, it's commanders and other related individuals in an attempt to side step these sanctions. This new designation will close up the loop hole that they operate in, force tighter controls by banks, companies and states who want to do business with the US to comply and, finally, allows the US to bring to bear other important tools through state, treasury, FBI and other government organizations.

Allahpundit at Hotair has a run down of recent attempts over the last year to squeeze the Iranian government with economic sanctions:

The two rounds of UN sanctions on Iran for noncompliance on its enrichment program specifically targeted the assets of the Guard’s top commanders; a parallel track of unilateral U.S. sanctions since January (around the same time Bush informally declared war on the regime) has been aimed at squeezing foreign financial institutions who deal with Iran. Formally designating the entire Guard a terrorist group will, I’m guessing, let the feds reach far beyond the commanders and squeeze even harder. Revisit this WaPo piece from April, also written by Wright, and marvel at the massive power they now enjoy within Iran under Ahmadinejad, himself a veteran of the group.

Another economic pinch came in October of 2006 when November and December oil futures took a precipitous drop by as much as $20 per barrel (from appx $73/barrel in June 2006 to appx $56/barrel) for an estimated net loss of up to $25 billion for the Iranian State revenues (17% of revenue; total budgeted revenue $143 billion) and did not regain the top price until almost a year later. The Iranian economy is largely based on oil and natural gas exports with 70% of its revenues depending on this business stream.

At the same time, in September of 2006 the US began to quietly advise international banks of the illegal or improper transfer of funds from credit lines and accounts to Iranian agencies and companies involved in the development of Iran's disputed WMD/Nuclear programs, terrorist organizations, illegal arms purchasing and other dubious projects instead of in infrastructure, businesses, oil and natural gas development that would have provided revenues to pay these debts. Besides being illegal and against known sanctions or laws of the banks' host nations, it also made Iran a bad credit risk. Import and Export businesses in Iran were affected as well when credit lines were not extended. These businesses that included food, textiles and manufactured goods, had to scramble for cash upfront to purchase goods, driving inflation even higher.

Housing prices have doubled, resources such as gasoline and natural gas have been rationed and teachers and other government workers have been unpaid for almost a year. This is nothing new as the government under Ahmedinijad has run into cash crunches since his tenure began.

Economic Mixed Bag and Caution Over Projected Impact

Some sources believe that the current Iranian economic situation is not all that bad:

Iran’s economy has stagnated in recent months, partly because of the country’s growing isolation in the world economy, partly as a result of dipping oil prices, and partly because of the government’s statist policies which limit private enterprise. Prices on goods like vegetables have tripled in recent months, while housing prices have doubled since last summer, reports the Associated Press. Economists say the government, which oversees 7 percent of the world’s oil reserves, has failed to redistribute this windfall of energy profits. Yet Torbat says Iran’s economy is not faring poorly when compared to its Middle Eastern neighbors. After all, annual growth hovers around 5 to 6 percent, Iran has $60 billion in foreign exchange reserves, and it boasts a current accounts surplus (that is, it exports more goods and services than it imports). Unemployment figures (officially 10 percent but probably closer to 30 percent) are also on par with the region, Torbat says

. There are several problems with this analysis, though, it is important to note that the Iranian economy had slightly stabilized in the spring of 2007 when, after US sanctions and refusal to allow Iran to trade in US dollars, it switched to the EURO. The euro is strong against the US dollar and provided an uptick in value of the Iranian Rial, but decreasing oil prices are, once again, placing a cash crunch on Tehran.

Problems with the above analysis include a comparison to other ME neighbors, two of which (Iraq and Afghanistan) are war torn nations as opposed to Iran's comparably stable and industrial nation. Second, regardless of "growth" that "hovers around 5 to 6 percent", it is offset tremendously by the rate of inflation that is somewhere between 16% and 22%. Inflation trumps economic growth. Third, Iran may "export more goods and services than it imports", but that is complete misdirection. Iran is a net importer of several essential goods and resources including gasoline (they only have one refinery) and manufactured goods like household and industrial equipment, cars, cooking oil, etc. In terms of food, Iran has been pressing subsidized farmers to export wheat and other agriculture, forcing the price of food to increase substantially as it must be imported to provide for the general population.

However, some companies and nations continue to invest in Iran including China, Canada and Gulf nations like Dubai. Creating some jobs, but far below Ahmedinijad's campaign promises to create almost a million jobs a year. There are also deals with European nations and Turkey for natural gas and a recently inked deal with Iraq for a pipeline to refine oil and sell the finished product back to Iraq.

This deal precipitated the replacement of Iran's oil minister:

Reuters noted on August 13 that the Oil Ministry was also accused of agreeing to provide Pakistan and India natural gas through the "Peace Pipeline" project at a disadvantageously low price. Vaziri-Hamaneh recently rejected claims by parliamentarians that Iranian negotiators had agreed to sell gas at a 30 percent discount. He said there has been no agreement on price, so no discount could have been given. The daily "Etemad" cited regional gas sales as a factor suggesting Vaziri-Hamaneh had been removed. The same paper on August 13 observed that Vaziri-Hamaneh had also failed in the past two years to attract investment from major international oil companies.

The last is a little disingenuous as ongoing and increased sanctions keep most companies from investing anything beyond $20 million/year per US Law and UN sanctions. There is also a problem that Iran has consistently overspent its budget and has borrowed heavily against future oil revenues while US efforts with international banks have made Iran a much higher risk for investment. Further, the aging oil infrastructure requires many expensive updates just to maintain status quo, much less increase its viability. Finally, Iran has not been a good partner by providing its share of the costs for infrastructure development. This makes oil companies reluctant to invest heavily and undercut their own profits.

Another recently replaced minister notes other issues:

Ahmadinejad has been criticized across the political spectrum in Iran for the country's high inflation, and for ploughing extra revenues from high crude oil prices into high-spending infrastructure projects.

In his letter, Tahmasebi cited an "emphasis on the freezing of prices of industrial goods such as cement, sugar, dairy products, vehicles, and home appliances, while the cost of all the other elements in their production has increased."

He also complained that "the ministries of energy and oil could not give factories the necessary water, electricity, and gas. This emanated from a lack of investment in their expansion."

"Other infrastructure" includes new military buildings and the Bushehr Nuclear Plant that costs $25 million/mo just to continue work. According to Atomstroiexport:

Russia has said it will stick to the project, worth about $1 billion. But Atomstroiexport said Iran was still paying just a fraction of the $25 million a month needed to finish the plant.

"Confidence in the project has been undermined," said Atomstroiexport spokeswoman Irina Yesipova. "It is an unstable situation where there are lots of announcements but no money."

Iranian officials insist they have made payments on time and say Moscow is delaying because of Western pressure.

"There is just not sufficient financing and that has influenced confidence, the confidence of the Russian side and Russian subcontractors towards the Bushehr project and towards Iran," Yesipova said.

Other money has gone towards Iran's conventional weapons build up, the financial and material support of terrorism and dubious programs to create "jobs" that are state programs without any revenue stream or return for the government.

The outgoing industry and mines minister, Alireza Tahmasebi, has faced more concrete problems. Tehran-based economist Said Lailaz wrote in "Etemad" on August 13 that figures provided in recent years by Iranian Central Bank hinted at weak -- and declining -- industrial output. Lailaz wrote that the growth in the Persian year to March 2007 of the value of industrial output was the lowest in seven years despite significant state investment each of the past two years. Lailaz forecast continuing industrial decline, leading him to conclude that "for the first time since the [Iran-Iraq war of 1980-88], the engine of Iran's economy, the industrial sector, has effectively broken down." Lailaz did not lay the blame solely on Tahmasebi; on the contrary, he pointed out the role of what he described as "contradictory" government policies. He said the government apparently preferred to pour money into its own job-making schemes, rather than into existing industrial enterprises. Lailaz also argued that industry was hurt by the government's tampering with tariffs, and by its liberalization of some imports while the prices of some domestically made goods were fixed. Moreover, he noted the inflationary effect of the spending of billions of petrodollars inside the country.

Unstable Economics and Consolidating Power

Like Putin's move to place former KGB compatriots in key government and industry positions, Ahmedinijad has been replacing ministers with former IRGC and known hardliners as well as stacking the election certification board in time for the upcoming parliamentary elections. An obvious move to insure that parliament, as well as other government sectors comply with his programs.

As the economy lists from one side of the line to the other, Ahmedinijad, with the support of certain elements on the governing council, continues to consolidate power. the US, in turn, continues to put pressure on every point of the Iranian economy. Iran, in return, ratchets up its rhetoric and support for terrorists in a proxy war against the US. Their sole intent is to force the US out of the region and provide much needed breathing room from the ongoing economic destruction of their regime.

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Gasoline Prices: Prepare for a Pain in the Wallet

Between the Iran Crisis and the impending nationalization (take over) of oil fields in Venezuela, world consumers should prepare for a deep pain the wallet.

Once recognized as a world leader among state-owned companies, PDVSA today is a troubled entity struggling to cope with responsibilities that far exceed merely pumping oil. Ch?vez taps the state-owned giant to finance an array of social programs at home and to cement his regional influence through subsidized oil exports to allies such as Cuba and Bolivia.[snip]

If an overtaxed PDVSA stumbles, the United States could feel the reverberations. In January, Venezuela, a leading member of the Organization of Petroleum Exporting Countries (OPEC), was the USA's fifth-largest source of imported oil, shipping 955,000 barrels of crude each day. That figure is 23% below the level of one year ago, reflecting the aging of Venezuela's oil fields and its compliance with OPEC production quotas.[anip]

Today, employment exceeds pre-strike levels, and Venezuela claims to be producing 3.3 million barrels of oil per day. But the International Energy Agency in Paris puts current production at 2.43 million barrels, and analysts say PDVSA continues to suffer the lingering effects of the political battles that consumed it in recent years.[snip]

Just to maintain current production, PDVSA must invest $3 billion annually in its aging fields, EIA says. But Ch?vez has drained PDVSA's coffers to fund generous health, education, literacy and food programs, leaving insufficient funds for its core operations.

The oil company's obligations to the poor appear to be mushrooming. PDVSA last week disclosed that it spent $13.3 billion last year on social programs, almost twice as much as in 2005 and more than it invests in its oil operations.

Incredibly, at a time of sky-high oil prices, the company's net income last year fell 26% to $4.8 billion on $101 billion in revenue, according to unaudited financial results published in Caracas. That's less profitable than other state-owned oil producers such as Norway's Statoil, which last year was twice as profitable as PDVSA in terms of net income as a percentage of revenue.[snip]

In addition, Venezuela is over stating it's current production. Venezuela says it is producing 3.3 million/bbl when the EIA puts it at 2.43 million (and falling if needed investment in the infrastructure is not made). Second, PDVSA is claiming that it will boost oil production to 5.8 mil/bbls per day by the end of 2008. Most experts say these projections "lack credibility". Third, Venezuela is claiming that it's exploration will boost it's "reserves" to 316 bil/bbls, replacing Saudi Arabia as number 1 in the world.

The real tell is here:

The new Orinoco contract terms, however, will raise the break-even price of the four projects from about $18 per barrel to $35, Sira says. And that change, coupled with the political risk associated with operating amid an uncharted socialist revolution, means the private oil companies are unlikely to make the additional investments Venezuela needs.

With the rise in price and the lack of investment that will most likely result in a decline in production, world oil prices will continue to rise and world consumers will feel a deep pain in their wallet. Particularly, consumers in the United States.

Publius Pundit notes that other Latin American nations are boosting their sales to the US: Brazil and Colombia. Publius says look for a possible re-alignment of security. This shift has been coming for awhile since the introduction of CAFTA that President Bush signed into law in 2005. Hugo Chavez has opposed CAFTA for several reasons. He opposes US "interference" in Central America. He may believe that Central America should become its own "sphere of influence" and support each other. He's made several attempts to bring other nations into his "sphere" including Bolivia and Argentine. He may also believe that trade agreements with other Central American countries, especially those with energy resources, will undercut Venezuela's trading power.

The key to continuing economic success in the US is a stable energy resource. Stable energy resources come from diversified investment and imports. The question is whether this diversification and improved production in these nations can offset the problems Venezuela, Iran and the continuing ME crisis are causing.

Your pain may vary.

***Heh. Even the Ayatollah of Iran knows that it's Economic Warfare among other things:

Ayatollah Khamenei called “psychological warfare, economic war, and countering the scientific development of Iranian people” the three main approaches of the enemies.[snip]

Pointing to the enemies’ “economic war” against the country, he said they want to put the people in a difficult economic situation but with the announcement of the Article 44 of the Constitution and a serious effort by government to implement the privatization plan a new opportunity has been opened for economic recovery in the country.

Pointing to economic threats against Iran for its nuclear program, he said, “the Iranian nation has developed and gained access to nuclear energy through such sanctions and therefore don’t scare this nation of sanctions.”

You think?

Everybody thinks.

(h/t Pajamas Media)

Apparently, the United States will attack Iran at 4 AM on April 6 (Good Friday). I don't believe it, but it is some interesting propaganda.

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Iran: Desperation

Britain seeks to raise pressure on Iran over sailors

After a day of escalating tension between London and Tehran, which pushed oil prices up sharply, the U.N. Security Council agreed a watered down statement expressing "grave concern" at the situation and supporting calls for the crew's release.

Britain, which had sought a tougher statement, plans to urge the European Union to help isolate Iran at a two-day meeting of EU ministers starting on Friday.

Acts of Desperation: Siege Mentality

Iran is now also militarily encircled by the US forces. American troops are based in almost every country bordering Iran - Afghanistan, Iraq, Turkey, Pakistan and Azerbaijan.

The US Navy has been conducting a series of exercises in the Gulf - the biggest war games in the area since the invasion of Iraq four years ago.

The sense of being under siege is compounded by the US military's detention in January in Iraq of five Iranians. [snip]

And in December a former Iranian deputy defence minister disappeared in Turkey. Some Western media reported that he had defected to the West.

But the Iranian government and his family say he was abducted by the US or Israel.

All these events and pressures have created a siege mentality in Tehran.

More on Economic Warfare

Reflecting the confusion inside the Iranian state, the first coordinates for the allegedly transgressing British boats given to the British by the Iranian government turned out to be within Iraqi territorial waters too. Not until three days later did the Iranians come up with a second "corrected" set of coordinates which conveniently put the British forces on the wrong side of the line. Only someone whose political and moral compass is totally disorientated by hostility to American and British policy could dare to suggest that this act of shameless, lying, cross-border piracy is justified or excusable.[snip]

But there is something Europe should do: flex its economic muscles. The EU is by far Iran's biggest trading partner. More than 40% of its imports come from, and more than a quarter of its exports go to, the EU. Remarkably, this trade has grown strongly in the last years of looming crisis. Much of it is underpinned by export credit guarantees given by European governments, notably those of Germany, France and Italy. According to the most recent figures available from the German economics ministry, Iran is Germany's third-largest beneficiary of export credit guarantees, outdone only by Russia and China. Iran comes second to none in terms of the proportion of German exports - in recent years up to 65% - underwritten by the German government.

The total government underwriting commitment in 2005 was €5.8bn (£3.9bn), more than for Russia or China. As the squeeze grows on Iran from UN sanctions and their knock-on effects, and as President Mahmoud Ahmadinejad fails to deliver on his populist economic promises, this European trade becomes ever more vital for the Iranian regime - and ever more dependent on European government guarantees to counterbalance the growing political risk.

In the Commons yesterday a former foreign secretary, Malcolm Rifkind, asked if Britain's European friends - and Germany, France and Italy in particular - might be prevailed upon to convey to Iran, perhaps privately in the first instance, the possibility that such export credit guarantees would be temporarily suspended until the kidnapped Europeans are freed. I gather that if such private pressure is not forthcoming, Britain might be tempted to raise the suggestion more formally at a meeting of European foreign ministers in Bremen this weekend.

So here's a challenge for the German presidency of the European Union: will you put your money where your mouth is? Or are all your Sunday speeches about European solidarity in the cause of peace and freedom not even worth the paper they are written on?

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Economic Warfare: Iranian Economic Crisis and the British Sailors

We're not going to attack Iran unless they actually put on trial or kill any Brit. Then, all bets are off.

In the mean time, I haven't had time to post on it previously, but Iran is about to implode Soviet Style. I'm not going to suggest a date, but the writing is on the wall if you know where to look and are looking at something other than British Tars and jollies, Iran's "sovereign waters" or their Nuclear ambitions.

Long before the current sanctions, the US was already pressuring banks and other financial insitutions to limit transactions with Iran starting back in Sept. 2006. Largely because Iran was acting like any rogue regime and not being forthcoming about where the money was going. Iran was also trying to cover its tracks, keeping the Iranian name off of many transactions.

In a Washington Post article from March 25, the details of this program were laid out, including comments from the Iranian Oil Minister about how damaging its been to their oil infrastructure (already old and decrepit) as well as the Minister of Trade discussing the difficulties importers are having in getting goods in to sell (Iran having all sorts of problems that require net importing of basic goods) because they now have to pay in advance to obtain these goods instead of relying on revolving lines of credit.

The recent UN sanctions simply formalize what the US has been trying to get done on an Ad Hoc basis.

The other signs are there, too. March 22 report from lebanon indicates that Hezbollahs South Lebanese constituents are unhappy because Hezbollah has yet to begin providing promised compensation for damage or building much needed infrastructure. Of course, the two week fight with Israel didn't help Hezbollah's wallet, but they usually have money coming in from their major terror supporter, Iran. No such thing is occuring right now.

The second, and most obvious, is the Iran/Russia dispute over the lack of payment for the monthly construction fee on the Bushehr nuclear facility. The Russians are saying it's one month, the Iranians said they were not behind, but suddenly were able to scrape together a half month's payment? The Russians pulled out all their people and said they'd be back when they got "all" the money.

The third tell are the recent, continuous teacher protests for almost two months, every week. The Iranian teachers union has been protesting the lack of payment of their salaries, the low salaries (compared to the rest of the government) and the generally bad facilities.

What really killed them was the precipitous drop in oil prices (from $72 to $58) last November right after many banks stopped giving them "credit". This was because short term, high risk oil future traders divested themselves of a lot of future shares. Winter weather projections did not sustain the need for high reserves (and, since they were all American traders, may have had a whisper in their ear).

Even though oil has risen back to $62/bbl, the entire loss to Iran is about $13 billion and counting. Not much to us, but for Iran, that's 10% of their entire yearly revenue of 143 billion. When their yearly "official" budget is $168 billion (2005), not including extraneous support to Hezbollah, Iraq Shiites and other terrorists, and annual revenue is 143 billion, they are about 25 billion short on a good year (previous years may have been more or less underfunded).


Since Iran is based on an Islamic economic structure, where they can neither invest in interest baring bank products, nor except loans with interest attached, getting the difference to make up this shortage leaves little choices. In an Islamic economy, they get around this somewhat by paying or accepting "management" fees or "rent" on loans.

At least half of the reason for the original Islamic Revolution in Iran was based on economic reforms making it more "Islamic" and thus more "equal and just". During the time of the Shah, there were extreme differences between the highest and lowest classes and with the strain from the Shah's forced "westernization and industrialization", it simply exacerbated the situation as the poor congregated it even greater communities in the cities seeking low paying manufacturing or oil industry jobs.

Like most "revolutions", it is not solely (or ever) about ideology so much as it is about finance. Thus, the Iranian Mullahs are adamant about complying with the Islamic model. If they don't, the entire cornerstone of the revolution ceases to exist and so do they.

In that case, the only way for the Iranians to meet their obligations as well as maintain their Islamic financial system is to take advances on their oil revenue from the oil companies. Some experts believe that Iran has already taken up to 10 years of revenue in advance.

Oil production has plateaued and may begin falling due to the inability or lack of desire in investing in this infrastructure. Previously complicated by US laws that penalized companies for investing more than 20mil in Iranian business, fortified with US actions in September and new sanctions on March 24, the ability to maintain Iran's oil economy is becoming impossible. Iran now produces 3.5 mil/day. At the height of the Shah's reign, it produced over 6.6 mil/bbl/day Even with a slow increase the price of oil, Iran will be hard pressed to recover because 50% of its revenues are directly related to oil and natural gas and 70% comes from exports.

If you can't pump out enough, if sanctions keep investments from coming in, if you have to pay for things "in advance", if you continue to take advances on future oil revenues that you probably cannot afford to pay back and your economic system prevents you from making investments or making loans that could cover your expenditures, you are in bad financial shape.

Other issues that compound the situation and lend credence to Irans current financial crisis are the 11% "official" unemployment rate ("official" because most economists believe it is understated and closer to 16%) and the 16% quarterly inflation (again "official" because some experts place inflation at 20-21%). This inflation offsets most gains from the increase in oil prices. For any other country, that's a depression.

Add to that 44% of the population is employed in the "service sector", including government, military, education, health, hotels, airport, police, etc, that are all run and operated by the government or its agents (the Iran Revolutionary Guards Corps operate the air port and various other service sectors under contract). The IRGC also manages most of the construction business in Iran, limiting foreign investment and distribution of income among the populace. Another 30% of the population is also employed in the oil and natural gas sectors, largely owned and operated by the Iranian government. Banking is also controlled by the Iranian government.

That leaves approximately 10% of the population that owns and operates private businesses. Most of these are small "mom and pop" businesses such as bakeries, tailors, bookshops, etc. Very little manufacturing or other industries can flourish in Iran. In fact, Iran is a net importer of just about every kind of everyday goods from agricultural items, food stuffs, basic machines (TVs, washers, driers, even cooking utensils, cooking oil and pans), hygiene, textiles and so on.

It's a recipe for disaster and it is quickly looming for the Iranian government and economy.

In the March 25 WP article, a US treasury official was quoted saying that they had no idea the Iranian economic condition was so bad. Clearly, they weren't looking very hard.

Many editorials and blogs have been attacking the UN sanctions as "toothless", but that is far from reality when you take into account the Iranian economy. Excluding them from regular banking practices and available credit places them in a very bad situation.

In fact, while everyone is distracted with the question of whether the British Sailors and Marines were taken due to the sanctions and its effects on the Iranians nuclear ambitions, the real issue is the effect on their economy.

Very likely the Iranians are looking to extract some concessions from England to let some of the pressure off of their financial situation. Especially, because the British bank HSBC is one of Irans major banking partners and "lenders". It's the same tactics the Iranians tried in June 2004 when they took 8 Brits hostage and released them after 3 days of negotiations directly after the Brits have drafted the first "rebuke" to Iran from the IAEA (International Atomic Energy Agency).

The Iranians are playing a very high-stakes game. Aside from this act of war (considering it is the second time they have done it), or at least a revision of the Barbary Pirates holding British sailors for ransom, they have bit off more than they can chew politically and economically.

The Iranians are trying everything to reverse their economic spiral. Ahmadinejad recently visited Hugo Chavez in hopes of making a trade agreement with Venezuela as well as looking for an ally in OPEC. Venezuela currently chairs OPEC. The Iranians were hoping to get an emergency meeting with OPEC to reduce oil production among OPEC nations in order to further inflate the price of oil and help Iran out of its financial crisis.

This is the other reason that Iran has been trying to get a toe hold in Iraq. It desperately needs economic partners and OPEC partners to offset the Saudi/Gulf Arab influence. Finally, the Iraq alliance would cement an "arch of influence" from Hezbollah in South Lebanon, Syria, Iraq to Iran, isolating US allies in the south.

Unfortunately, the Saudis and Other Gulf Arab nations aren't interested in saving Iran since they see them as THE major destabilizer in the region now that Saddam is gone.

That means that Iran is in a hole with very few (if any) friends.

In fact, the Saudis and Egyptians are helping it along by even their mild or unbelievable threats of meeting Shia aggresion with their military or financially supporting Iraqi Sunnis. The Iranians responded by first financing more Shiite weapons and militias in Iraq to try to solidify control.

The final indicator of the Iranian economic crisis is reflected in the disappearance of al Sadr from Iraq, the Mahdi army from the streets and the uptick in inter-sectarian violence in Basra in South Iraq where SCIRI and DAWA are once again fighting for control of the region now that their benefactor's (Iran's) money is starting to slow down.

Just another sign of Iran's current cash crunch.

War is most likely not necessary. Even if Iran wins some concessions from England, even if oil prices continue to rise due to the current crisis, none of it will save their economy and none of it will save the Mullahs.

On the other hand, it is hard to know what the Mad Mullahs will do when backed in the corner and going down for the count. Still, they'd have to be really "mad" to risk open warfare.

One must wonder why the US congress is willing to leave Iraq, allow Iranian dominated Shia political parties to gain unchecked control, provide Iran with an economic and political ally when Iran is just this side of a Soviet Style Implosion?

Wall Street Journal: French Total and the Bribed Iranians

Other related posts:
Economic Warfare: Axis of Evil
Russia-Iran Matrix
Iranian Kursk (money and parts for military equipment maintenance lacking)China-Iran Matrix
Economic Warfare: Send them Levis
Iranian Dissidents use Nuclear Crisis to press for freedoms
Freedom is the Fire

Cross referenced at the Castle

Summary only...