Archive for the 'Trade' Category

All Aboard for Iran Sanctions Enforcement?

Published on February 18, 2010 in Ports, Shipping and Trade. 0 Comments

In the wake of Hillary Clinton’s  trip to the Gulf, the United States is making a renewed push to line up actors that would be key to enforcing  any new sanctions against Iran.  The FT reported yesterday that Lloyds, which runs an influential insurance market for 8-10% of the world’s shipping, would halt coverage for refined petroleum shipments bound for Iranian ports:

“If the legislation is passed and sanctions are put in place by the US, we would comply and ensure underwriters in Lloyd’s were compliant, although we would not want the compliance burden to be disproportionate,” said Sean McGovern, general counsel for Lloyd’s.

Lloyd’s is telling underwriters they would be wise to review their contracts to look for ships heading to Iran. Mr McGovern said it was possible that underwriters would be compelled to ensure that a ship they had covered would not be going to Iran.

This could take the form of inserting exclusion clauses in contracts, specifying that ships would not be covered if they carried goods to Iran. Such changes would be likely, at the least, to make insurance for ships serving Iranian ports harder to obtain and more expensive. They could also reduce the supply of refined oil for Tehran.

Meanwhile, Abdulrahim Al Awadi, an official at the UAE’s central  bank has said that it “will implement any UN resolutions without reservations on any countries, including Iran.”  The article went on to link the issue of Emirati sanctions enforcement to the question of the UAE being placed on an international money laundering blacklist:

When asked whether the U.A.E. is worried about IRGC money being funneled through U.A.E. banks, Al Awadi refused to answer the question, but stressed on the U.A.E.’s compliance with FATF standards.

A new FATF list of countries that are considered to be lax in combatting terrorism financing and money laundering will be released after the conference, which ends Feb. 19, Al Awadi said. The list is called the International Cooperation Review Group, or ICRG.

Al Awadi added the U.A.E. is confident that it will not be placed on the list.

“Our (anti-money laundering and financial terrorism) laws are strong and there are no loop holes,” he said.

The key distinction here is that Lloyds will comply with unilateral U.S. sanctions, while the UAE seems to require multilateral sanctions approved by the UN to act– measures that Russia and China are now working to delay and dilute, according to a new report by ICG, and others.  Does Al Awadi’s statement reflect a newfound Emirati resistance to go along with informal U.S. sanctions of the sort arranged by Stuart Levey at the U.S. Treasury?  There’s not enough evidence here to tell, but an issue to watch closely as the sanctions game picks up.  -WW

Iran and the Dubai Debt Crisis

Published on December 2, 2009 in Security and Trade. 3 Comments

dubai sunsetI have been scanning Iranian media over the last few days, trying in vein to find a juicy story that explores Iranian perspectives on the unfolding Dubai debt crisis.   No luck.   Much of the Iranian coverage I have seen has been rehashings of wire service stories that don’t really add much to what’s out there in English.

Why aren’t Iranian media paying much attention?  One possibility (as suggested by an IranGCC co-contributor) is that Iran needs all the allies it can get now, and is reluctant to crow about Dubai’s misfortune.   I’m more inclined to say its a symptom of the short shrift that foreign economic news tends to get in Iran’s press.  In any case, Dubai should be a much bigger story in Iran.

The crisis triggered by Dubai World’s request for a six-month repayment standstill on its debt, precipitated by a crash in overheated property values and the credit crunch, will affect Iran and Iranians in several ways.  A quick overview:

Remittances: There are tens of thousands of  Iranian nationals and Emiratis of Iranian origin living in Dubai and a number of Iranian institutions (a hospital, elementary schools, a branch of Azad Islamic University, the list goes on).  While Iranians will not be hit as hard as Indians, Pakistanis or Filipinos  working in the emirate, many will lose their jobs in waves of layoffs.

Property holders: Wealthier Iranians, too, were caught up in the property bubble that is now bursting – no  doubt underwater on mortgages or out down payments on developments that will no longer be built.  Dubai will surely lose cache as the place for vacation or investment properties, which will likely put a bigger damper on retail sales.  Shoppers at the Mall of the Emirates Zara will likely be hearing a lot less Farsi for the next few years.

Banking and Transactions: Iranian banks are not among the top countries with exposure to Dubai World’s debt; most are European, so the banking crisis is not likely to spread across the Gulf.   Yet Dubai has long been an offshore hub for Iranian transactions, a role that has intensified as U.S. sanctions began more aggressively targeting Iranian banks.   (The U.S. also has a program at Treasury intended to shut down banking opportunities  for Iranians in Dubai).   Several analysts have been floating the possibility that one of the things Abu Dhabi will demand in return for bailing out Dubai will be a crackdown on Iranians doing business in the emirate.

I am skeptical of the “Abu Dhabi Iran Crackdown” thesis  for two reasons.   One is that Iranian trade and investments are one of the pillars underpinning Dubai’s recent growth; to alienate Iranian investors, shoppers, property holders would be to freeze out one of the main populations that has made Dubai the hub it is today.  Secondly, the volume of trade is so vast (and often informal) that it policing such an agreement would be almost impossible.   The pressure from Abu Dhabi on Dubai to cut Iran ties may very well be there, but this will likely amount to a slap on the wrist (indeed, there were  reports after the recession began of Dubai visa troubles  for a handful of Iranian businessmen).  But don’t expect Iranian business out of Dubai any time soon.

-WW

photo courtesy of Flickr user faceymcface1 under a CC license. 

Guards Win $2.5b Chabahar Rail Contract

Published on November 11, 2009 in Free Trade Zones, Ports and Trade. 0 Comments

Today from the BBC:

Iran’s Revolutionary Guards have won a $2.5bn tender to build a railway route linking the south-eastern port of Chabahar to Iran’s rail network.

Transport minister Hamid Behbahani said it was part of a transit route for goods from Chabahar to the north-eastern border town of Sarakhs.

The Guards’ engineering wing, Khatam-ol-Anbia, has been awarded government contracts worth billions of dollars.

The BBC article puts the rail contract in context of the IRGC’s increasing influence in Iran’s economy and politics.  Certainly a valid angle, but there is a bit more to the story.  Chabahar is one of Iran’s coastal free zones, meant both to create Iranian jobs and to boost Iranian trade with Central Asia.  The port was reinvigorated in 2004 and has been financed almost entirely by India, as a rival to Pakistan’s nearby Gwadar port (Registan has a useful backgrounder on the two ports here).  The railroad in question will link Chabahar to the Turkmen border, thus giving India a trade route to Central Asia that bypasses Pakistan.  The original article (Farsi) makes no mention of any Indian financing for the deal, but given the gobs of money they’ve spent on developing Chabahar I wouldn’t be surprised if they are paying for the rails too.

-WW

Erdogan's Tehran Visit Yeilds Energy Deals

Published on October 30, 2009 in Energy, Natural Gas, Politics, Security and Trade. 0 Comments

Iran’s Oil and Energy Information Network has a story (Persian) on two energy deals that Turkish Prime Minister Erdogan concluded on his recent visit to Tehran. Under the headline “Conditions for Transfer of Iranian Gas to Europe have been Met,” the piece quotes Ahmadinejad’s Vice President Mohammadreza Rahimi praising “brotherly” relations with Turkey and the signing of trade initiatives that would eventually total $30B.

Rahimi mentions two specific initiatives, one to cooperate towards developing an additional 6,000 MW of power generation capacity in the two countries. Second is an an agreement for Iran to supply gas to Europe via Turkey (presumably through the planned Nabucco pipeline) and also to act as a transhipment route for Turkmen gas en route to Europe.

Using Iranian gas to fill Nabucco has been discussed before, but this marks a step closer towards making it a reality. The deal, and Erdogan’s high profile visit to Tehran, are no doubt ruffling feathers in DC, but there has been little official reaction to the visit so far. This seems like another example of the “’sleeping with your friends’ enemies” argument that Bryan Early advances here. In sum, friends of a sanctioning state are in fact more likely to flout sanctions and trade restrictions because of security afforded by the alliance with the sanctioning state. Turkey’s alliance with the U.S. by virtue of NATO membership means that the U.S. is likely to be less able to compel it to adopt its Iran-isolating agenda.

-WW

Catching Up

Published on October 26, 2009 in Energy, Politics and Trade. 0 Comments

Apologies for the lack of posting in recent weeks – was in the middle of relocating to Washington and juggling other projects. We are also in the process of re-launching the blog, so stay tuned for the new URL. Here are a few links as we get back into the swing of things:

-WW

1. Flynt and Hillary Mann Leverett have launched The Race for Iran, a new blog on Iran’s geopolitics. Also be sure to read their recent monograph on Iran-China relations.

2. Fereidun Fesharaki’s excellent talk at CSIS on world energy markets, with emphasis on Iran and China. A key takeaway is that China’s investments in Iran’s upstream oil and gas production are running at a loss, which underlines the Leveretts’ point that Chinese interest in Iran is more about building a long term strategic relationship than filling immediate energy needs.

3. I came across the following story about cargoes of Indian basmati rice, originally destined for Iran, that are now flooding the Emirati rice market. A timely reminder of how closely the region’s economies are interlinked:

“Boats filled with basmati have been lying idle in Dubai and at Sharjah Cornice. Iran used to be a good market for UAE re-exporters and the fall in demand there will definitely hurt the UAE market.”

He said prices of many premium basmati rice varieties have fallen by 30 per cent to 40 per cent.

An official at Dubai Municipality’s Food Safety Department told Emirates Business: “The Iranian Government’s decision to ban Indian and Pakistani basmati is an erratic decision based on wrong interpretation of a speech by an Indian minister appealing to farmers to stop cultivating basmati in some areas. The Iranian buyers panicked and stopped importing Indian basmati. The rice coming to the UAE is regularly checked at the port of entry for food safety.”

Can Iran Really Shut Down Hormuz?

Published on September 9, 2009 in Energy, Security, Shipping and Trade. 0 Comments

There is an interesting piece in Foreign Policy, in which Eugene Ghloz takes on conventional wisdom about Iran’s ability to disrupt oil shipping through the Straits of Hormuz. How hard would be for Iran to shut down the straits?

The answer turns out to be: very hard. Iran would have to disable many of the 20 tankers that traverse the strait each day — and then sustain the effort. Iran cannot rely on the psychological effects of a few hits. Historically, after a short panic, commercial shippers adapt rather than give up lucrative trips, even against much more effective blockades than Iran could muster today. Shippers didn’t stop trying during World War I. Nor did the oil trade in the Gulf seize up during the 1980s Tanker War, when both Iraq and Iran targeted oil exports.

Instead, tankers tend to move around dangers. The strait is deep enough that even laden supertankers can pass safely through a 20-mile width of good water, not just the 4-mile-wide official channel. Tankers already take other routes when it is convenient; during a conflict, they would surely scatter, as they did in the 1980s. Although the strait is narrow compared with the open ocean, it is still broad enough to complicate Iran’s effort to identify targets for suicide and missile attacks. The area is too large to cover with a field of modern mines dense enough to disable a substantial number of tankers, especially given Iran’s limited stockpile.

Gholz also questions the ability of anti-ship missiles or small craft warfare to disable craft:

Over five years of the Iran-Iraq War, 150 large oil tankers were hit with antiship cruise missiles, but only about a quarter were disabled.

But surely ship insurers would want higher premiums if silkworm missiles are being lobbed at their tankers. And surely any type of military conflict in Hormuz – even if it does not end up taking out a large number of tankers – would be enough excuse for traders to bid up oil prices. The real question, which Gholz is right to point out, is the question of how long Iran could sustain such a military effort in the face of the inevitable U.S. response. My own sense is that an attack on shipping in Hormuz would produce an immediate and severe spike in oil prices, but one that would subside fairly quickly.

-WW

On the Iran Refined Petroleum Sanctions Act

Published on August 21, 2009 in Natural Gas, Politics and Trade. 0 Comments

I have a piece in this week’s Review section of The National arguing against the Refined Petroleum Sanctions Act of 2009 that we’ve been discussing on this blog quite a bit lately. The first few paragraphs are below, but click through to The National for the full article. -WW

Built to Spill

Americans like to think of sanctions as a targeted measure, but restricting Iran’s oil imports would distort trade in the whole region, argues Will Ward.

Iran’s Achilles heel, goes the mantra of many Washington hawks, is its dependence on imported petrol – the result of underinvestment in its energy industry during three decades of sanctions. While the country is a net oil exporter, Iran’s domestic refining capacity lags, forcing the Islamic Republic to import roughly a third of its daily petrol needs from abroad and ration consumer fuel purchases.

The US Congress is currently considering a bill, the Iran Refined Petroleum Sanctions Act, which would exploit this weakness by penalising companies and individuals that import petrol into Iran or invest in its domestic oil and gas infrastructure. The rosy logic behind the sanctions bill, which currently enjoys majority support in both houses of Congress, is not new: the hope is that ordinary Iranians, squeezed at the petrol pump, will pressure their recalcitrant leaders to halt uranium enrichment, embrace Israel and stop their unpalatable activities in Iraq, Lebanon and elsewhere in the region. That, or Tehran will lash out frantically in response, which will lead to an international consensus for even tougher sanctions – or worse.

Opponents of the bill have already pointed out many of its flaws: for starters, Iran could seek investments from Russia and China to build new refineries. Beyond that logistical loophole, it is also the case that Iranians generally support the country’s nuclear programme – and even if they didn’t, forcing Iran’s increasingly authoritarian government to reverse course would require months, if not years, of struggle and bloodshed. Sanctions against oil-producing nations often starve business and civil society, while the continuing flow of oil profits to the state leaves the targeted regimes more, rather than less, powerful – Saddam Hussein’s reign in Iraq being the best example.

But even this litany of concerns about the efficacy of sanctions leaves aside a critical issue: the potentially disruptive consequences for the wider region. America, the world’s most prolific user of economic sanctions, conceives of them as narrowly directed measures against the target state – the impact on neighbouring states rarely registers in Washington. But sanctions, particularly on consumer products with mass demand like petrol, tend to produce distortions in regional trade dynamics that can have political repercussions. Powerful incentives are generated to meet demand for the sanctioned products, inside and outside of the targeted state, creating economic imbalances in the region and political tensions with the state that has imposed the sanctions. And in the case of petrol sanctions on Iran these consequences are likely to be acute, given the long and storied history of trade relations across the Gulf.

Click here to continue reading

The Iran Refined Petroleum Sanctions Act: Prudence or Prelude?

Published on August 9, 2009 in Natural Gas, Politics and Trade. 0 Comments

“He’s the elected leader.” Those were the words of White House Spokesperson Robert Gibbs (later retracted) one day ahead of Ahmadinejad’s inauguration in Tehran this past Wednesday. Concurrently, American media circles reawakened to the unlikelihood of Iran meeting the Obama-imposed September deadline. What should be done when, months after a fraudulent election and weeks after struggling to put together a cabinet, a disordered Iran fails to respond to American diplomatic overtures?

For many, two words suffice: tougher sanctions, shorthand for the Iran Refined Petroleum Sanctions Act. Consider recent comments made by R. Nicholas Burns, former Undersecretary of State and leader of Bush’s Iran strategy, “Draconian sanctions did not make sense in 2005 and 2006 but given the new weakness and vulnerability of the Ahmadinejad government, much tougher sanctions make sense now.” The assertion that regime instability somehow additionally opens Iran to the intended consequences of sanctions is problematic enough. But Burns further advocates that Obama be given complete autonomy when threatening, imposing or waiving the economic penalties and it is this condition that reveals much about its policy prospects.

Firstly, the condition is there to attract multilateral participation– if the US succeeds in winning allies for the imposition of a gas embargo, Obama’s promise of flexibility is meant to keep the coalition together. Continued loopholes are implicit and economic interests in diverse, participating countries are less threatened than might first meet the eye. Between February 1999 and June 2006, an estimated $80 billion + worth of foreign investment went into Iran’s energy sector despite the existence of the Iran Sanctions Act (ISA, originally ILSA), passed into law in 1996.

A quandry: For sanctions to stand a chance at being effective the targeted country must perceive that the costs of defiance are greater than the costs of compliance. Without the participation of China, Russia, Germany, the UAE et al. this calculation is unlikely (and even more so because Iran’s hardliners can be expected to use foreign pressure toward consolidating power). Yet gathering an effective coalition will require flexibility– if not in letter then in lax enforcement. So in both instances the sanctions stand to be neutralized.

More ominously, studies on sanctions (check out the Peterson Institute website if you haven’t already) demonstrate that their efficacy toward authoritarian and semi-authoritarian regimes is lost unless backed by a willingness to progress toward the military option. Far from a prudent substitute for the rush to war, sanctions can become a prelude– in this case we may be seeing a slow but sadly predictable march. -SW

NYUAD: Success in Numbers

Published on July 30, 2009 in Education, Politics and Trade. 0 Comments

In a little more than a year, a large pair of scissors will come across a large red ribbon and thus mark the inauguration of nothing short of the world’s biggest experiment in higher education. NYU Abu Dhabi will welcome its first students. As detailed in a recent two-part report by John Gravois in The National (Part I, Part II), NYU administrators have aggressively sought to preempt many of the challenges plaguing other Western degree programs in the Gulf, namely low student enrollment and an inability to recruit and then retain faculty.

NYUAD’s team on the ground has been given a sizable time window (at least in relative terms) through which to problem solve. The ambitious project was first announced in October 2007. By way of contrast, Michigan State University was asked to set up shop in neighboring Dubai inside of a year. Despite offering coursework with obvious links to the local economy (including degree programs in Business Administration and Construction Project Management), MSU-Dubai has experienced early troubles with enrollment, attracting just 40 students in 2008-2009.

For the fall of 2010 NYUAD will take in no more than 100 students but then projects to grow– and grow quickly– to 2,000 undergraduates and 800 graduates. To arrive at these numbers NYUAD is employing a strategy that is surprising as it represents a marked break from regional precedent.

The case of Qatar Foundation and its Academic Bridge Program serve as perhaps the most prominent divergence. Qatar Foundation sets enrollment targets for Qatari nationals and each of the six American universities located in Doha’s Education City. Even as the targets are non-binding, the Bridge Program gives an additional year to two years of preparatory schooling for Qataris transitioning to university. In so doing, the available pool of qualified local students is increased and low numbers across the Education City campuses are given a boost.

NYUAD has taken an entirely separate approach. The enrollment of a desired number of Emiratis is neither explicit nor implicit. University President John Sexton believes that UAE nationals are likely to be only a tiny percentage of the student population and he is unabashed in saying so. There is no preparatory, foundation year program. Instead, Sexton and NYUAD have ramped up admissions requirements and dubbed the Abu Dhabi venture NYU’s “honors college.” The “global education” offered at NYUAD will attractively combine with unparalleled financial aid packages– international students who would otherwise attend the Ivies (or else NYU’s Washington Square campus) will opt for freshman orientation Gulf-style. An estimated 40 to 50% of the student body will be made up of Americans.

By all accounts, NYUAD will open its doors with an impressive faculty. Whether the university can reach a total of 2,800 enrolled students, however, remains to be seen. Some observations about their efforts to date:

1) There will assuredly be dynamic tension between the appeal of an exciting, newly-established institution– indeed, perhaps the beginnings of the future of higher education itself– and a half-formed university experience. With less than 100 first-year students, the extracurricular opportunities on offer are sure to be limited. Abu Dhabi is likely to be a jarring introduction to the American freshman who traditionally stays in-country for his or her undergraduate experience (and all the more so given the UAE’s average highs of 102 degrees Fahrenheit in September). Whether NYUAD will be able to retain students from one year to the next is a question that needs considering.

2) There will assuredly be tension, no less dynamic, inspired by the availability of world-class education– expensively funded by the Emirate– and its inaccessibility to the local population. Relative to Dubai, Abu Dhabi has long-demonstrated a consistent uneasiness with the course and speed of societal change, the size and composition of its expatriate population and the loss of local heritage and culture. The issue of NYUAD’s labor policy has already cropped up and could become particularly thorny. In the absence of a large Emirati student contingent, NYUAD’s ability to meaningfully link up with the community and its existing universities becomes all the more vital.

3) Lastly, NYU is wisely utilizing the Institute of International Education toward identifying potential applicants. The IIE (the American non-profit responsible for administering the Fulbright) does not have a relationship with neighboring Iran. Before its Revolution, Iran had the single highest population of international students in American universities. NYUAD’s success in enrolling even a handful of students from Iran would do more than add to student numbers. It would also bolster Sexton’s case for the emergence of the Global Network University and its potential implications for the 21st century.

-SW

Weekend Reading (and Listening)

Published on May 30, 2009 in Politics, Security and Trade. 0 Comments

Will Ward

I want to quickly flag three important resources that are all well worth a click.

  • Check out this talk and accompanying oped by Bryan Early, who is a fellow at the Harvard Belfer Center working on sanctions policy. Early’s research is on the dynamics of (mostly) American sanctions and the effects these have on the trade of sanctions target countries with third party states. The work is based on an econometric analysis of over a hundred cases and found, among other things, the counterintuitive result that an alliance between the sanctioning state and a third party state means that the third party state is more likely to engage in sanctions busting trade with the sanctioned state. Why? Think about the USA-Iran-UAE trade triangle. US sanctions on Iran create market distortions – pent up demand in Iran and supply in the US. These imbalances lead to hugely profitable opportunities in countries like the UAE, which for cultural, geographical and historical reasons already have good trade relations with Iran. To make its sanctions more effective, the US needs to put pressure on the UAE to stop this trade but this is unlikely to occur because a) profitable trade with Iran produces domestic groups in the UAE who stand to lose a great deal from sanctions enforcement, and b) if the US pushes too hard, it could jeopardize its security alliance with the UAE.
  • Anthony Cordesman has a new working paper (PDF) on the Gulf military balance and terrorism/ asymmetric threat scenarios. Probably the best open source military analysis out there. Thumbnail is that Iran has a head and shoulders advantage over the GCC states in small craft naval warfare, but is severely outgunned in airpower, and that the biggest security threats are low intensity/ terrorism / infrastructure attacks but that a conventional war is unlikely. Also highly recommend their March report (PDF) assessing Israel’s (not great) military options against Iran.
  • Gary Sick who runs the terrific Gulf/2000 listserv has a new public blog Gary’s Choices to post his expert commentary on Iran and US-Iran relations. Although I can’t seem to link to individual posts, be sure to check out his post from May 27 responding to the Leveretts’ NYT oped on Iran policy.