Sanctions by the United Nations Security Council left the door open for further sanctions by the US and the European Union. Recently passed US sanctions targeting energy sector of Iran is a comprehensive economic warfare strategy involving gasoline, natural gas and oil sanctions, which is Iran’s economic livelihood. What is hoped to be accomplished is to humble the regime to sit and talk about the nuclear program, stop its support of terrorism, and pay attention to the human rights of its citizens.
In view of the latest economic sanctions on Iran by the United Nations, US, and European Union, it brings forth the question of what can be different this time that might compel Iran to comply with the wishes of the aforementioned. The focus of all sanctions has been to stop Iran from enriching Uranium and clarify its nuclear intentions among other things. On the other hand, Iran contends that they have signed the NPT, allowed inspectors in, they do not possess or seek nuclear weapons and are being singled out by countries that possess nuclear weapons. And Iran has declared they will not give up their legitimate right to peaceful nuclear activity under pressure.
This time the West has tightened up its belt, short of going to war, and has come out swinging. June 9 sanctions by UN Security Council briefly involved trade and financial transactions targeted at IRGC, sale of heavy weaponry, investment of any type that may benefit the nuclear program, inspection of ships and planes transporting contra-ban, travel ban and asset freezes on 40-plus individuals. All these are an expansion of previous sanctions with some twists. The one that is most significant is the one by the US, relating to the energy sector of Iran. It is to be considered as a comprehensive economic warfare strategy involving gasoline, natural gas and oil sanctions, which is Iran’s economic livelihood. What is hoped to be accomplished is to humble the regime to sit and talk about the nuclear program, stop its support of terrorism, and pay attention to the human rights of its citizens.
Although Iran is ranked 4th in the World for production of oil (4,700,000 bbl/d), behind, Russia (9,980,000 bbl/d), Saudi Arabia (9,200,000 bbl/d), and the US (8,457,000 bbl/d), it lacks the capacity to refine sufficiently for its own use. Iran imports 40% of its refined gasoline, and previous sanctions have prevented capital investment in the energy sector and technology for exploration and development of oil and gas fields. The energy sanctions have had broad support on both side of the isle and have passed the Senate and the House.
Already a number of Iran’s suppliers have chosen to exit the market: BP (Britain), VITOL (Swiss-Dutch), TRAFIGURA (Swiss-Dutch), and GLENCORE (Swiss-based), SHELL (Dutch), RELIANCE (India), LUKOIL (Russia), and PETRONAS (Malaysia). The penalty is that they could lose business in the US, Europe, Canada, and other supporting countries as well; the risk is not worth it. You cannot transport such an expensive cargo without insurance. So far two underwriters have dropped out of the market, MUNICK RE, and ALLIANZ. Also Lloyd’s of London is on board but waiting for completion and implementation of the sanctions laws.
While Iran is trying to build its gasoline stock in anticipation of gasoline shortage, the imports have increased significantly. In addition to the high cost of importing gasoline, Iran subsidizes gasoline to the general population plus other commodities. This has put considerable pressure on the government treasury. That is where the idea of phasing out the subsidies has come about. It has been extremely controversial since the regime has been caught between a rock and a hard place. On one hand they did not want to provoke the already discontented masses and on the other hand they are strapped with a rapidly shrinking treasury. It has cost the government 100 billion dollars per year to maintain the subsidy program. That is about 30% of the annual budget. Compelled to survive, Majles passed the legislation and the Guardian Council approved phasing out the food and gasoline subsidies in stages.
With actual inflation of 20-25%, and unemployment rate of 20%, it is expected that elimination of subsidies will have an adverse effect causing higher inflation down the road. Hossein Askari, professor at George Washington University has noted in “Foreign Policy” that Iran economically is in “dire straits” and “faced with these economic realities, the regime has decided to cut energy and food subsidies…the expected price increases associated with the elimination of subsidies should send inflation soaring above the 30-40 percent rate.”
Now we must examine the role of IRGC in the total economy and energy sector in particular. Khatam al-Anbiya is the largest company in Iran, known as Ghorb (Garargah Sazandegi-ye-Khatam al-Anbiya). It’s affiliated with IRGC and started as a construction and engineering company after the Iran-Iraq war for the country’s reconstruction. It employs about 40,000 and holds as many as 1700 government contracts.
Over the years IRGC expanded its enterprise to other opportunities along the lines of telecommunications, energy, logistics and services, and automobile. They also build dams, bridges, and tunnels underground for railways. Ghorb’s director is IRGC General Rostam Qasemi, and its chief executive is IRGC’s commander and chief, Major General Mohammad Ali Jafari. Ghorb’s military projects extend to the Nuclear and Ballistic missile programs. Smuggling contraband of sorts, electrical appliances and gasoline is another. But maintaining the regime with their brutal repressive measures that the world has witnessed is their specialty, as they control Basij, the military, police, and other security personnel. Ghorb was added to the list 0f 40 including 15 other companies connected to IRGC.
In October 2007, IRGC was designated as Foreign Terrorist Organization (FTO) worldwide and the US Treasury designated it as a Specially Designated Global Terrorist (SDGT). This, due to support for Hezbollah and Hamas, the attacks in Buenos Aires in 1992 & 94, assassination of Iranian dissidents in Europe, and alleged claims of arming and training insurgents in Iraq and some Taliban, plus involvement in the alleged nuclear weapons program.
How did so much wealth and power come to IRGC?
Shortly before Ahmadinejad 2005 election, Khamenei ordered the initiation of Privatization program to be implemented over a 5 year period resulting in a 20 per cent reduction in public-holdings. Such were large-scale oil and low-end gas industries, mines, banks, power generation, roads, aviation, shipping etc. – it was intended to transfer these to cooperatives with loan guarantees and tax rebates. This would amount to $110-120 billion of transfer from public assets to private.
Iranian economists expressed concern about the lack of anti-trust laws in Iran, transparency, and the fact that Iran’s Majles was making it difficult for foreign direct investment. This was not to stop Ahmadinejad moving forward and boasting about it. He expressed in an interview that prior to 2005 there was only 3 billion in privatization transactions, by April of 2010 they had conducted 60 billion through Tehran Stock Exchange. Larijani criticized Ahmadinejad for not involving “the genuine private sector”. A pie chart shows the percentage of assets purchased through privatization of state owned enterprises in Iran by purchasing sector 2005-2009 as follows: Private sector 12.5%; cooperatives 19%; Public Non-State sector 68.5%. Is there any question as to who the public Non-State sector is?
In December 2009, US House of Representative passed the initial version of the Energy sanctions. Since then, in February 2010, Ahmadinejad addressed GHORB commanders and executives to be ready “to enter high-end oil and gas activities in order to satisfy the domestic needs of the Country”.
In March, the Oil Ministry awarded Ghorb a contract worth $850 million for pipeline projects. In April a Turkish Firm withdrew from Phase Three of South Pars oil and gas, and it was awarded to Ghorb at no-bid, a $7 billion project. In May Qasemi informed Larijani that IRGC is going to replace Shell and Total in South Pars. Larijani now has jumped on board, assured him of his support in Majles. Anglo-Dutch Shell and Spanish Repsol withdrew June 4 on phase 13 & 14 of South Pars. A no-bid contract of $5 billon was awarded to Khatam al-Owsia Consortium, consisting of Ghorb and two other IRGC companies. IRGC holdings is numerous and beyond the scope of this article. But there is a critical point that we shall discuss in the following conclusion.
There was a reason for the United States to pass antitrust laws. It simply wanted to prevent any particular company from getting too big and the threat of becoming a government within a government, as well as promoting and protecting competition. This is beneficial to people because the companies no longer can set their own wages, benefits and safety standards. People have the choice to shop and buy the best product and services for the least amount. Good for the people and good for the economy. It ensures the fundamental liberty of the people. When you have a company who owns nearly a quarter of the total wealth of the nation and practically runs every industry, in addition, it controls the nations’ muscle (the various forces); you have a giant swallowing the nation. There are no checks and balances and no regulatory government agency to oversee their work. They could cut corners to maximize profits. Who has the gumption to question it?
The two top figures in Iran are trying to buy IRGC’s loyalty by giving them anything they want. Call it privatization or contracts. It is giveaway for the service of keeping them in power at the expense of the people. Also, IRGC is designated as a terrorist organization. With sanctions in place, any company dealing with IRGC would pay the price. Those who are involved with projects are pulling out, and others who have interest in Iran cannot step in and invest, because of IRGC. Iran’s present economic shortfall requires $25 billion per year of foreign investment to maintain status quo. Under the present circumstances that is not likely to happen. Privatization was turned into militarization and once a robust economy is now turning to a dead-beat.
SOURCES
UN Adopts New Sanctions on Iran, Neil MacFarquhr, The New York Times, June 9, 2010.
Foundation for Defense of Democracies (FDD), The Iran Energy Project. iranenergyproject.org
Law Information: The True Purpose of Antitrust Law, Lawyers Attorneys, November 2007. legalcatch.wordpress.com
American Enterprise Institute For Public Policy Research (AEI),The Revolutionary Guard’s Looting of Iran’s Economy, Ali Alfoneh, June 2010. aei.org
