Iran suffers under sanctions, faces threat of more

Iran, OPEC's second-biggest oil producer, is threatened with new economic sanctions by US President Barack Obama, who has vowed to make it "pay a price" for an alleged assassination plot in Washington. Western and UN sanctions in force over Iran's controversial nuclear programme already weigh heavily on the country, which is dependent on its rich oil and gas sector. Officially, Iran's leaders say the sanctions have only strengthened their economy, and that they have found new partners such as China to replace the Western ones leaving. Despite some delays in getting paid because of problems in effecting financial transactions, which for instance left India $5 billion in arrears before settling early this year, Iran continues to sell its oil without too much problem. This year it is projected to rake in more than $100 billion because of the high price oil fetched over 2011. The country, which ranks behind only Saudi Arabia in the Organisation of Petroleum Exporting Countries, pumps an estimate 3.5 million barrels of oil a day. It also has the second-biggest gas reserves in the world after Russia. "The oil bounty has allowed it to mitigate the effects of the Western embargo," a European economist in Tehran said on condition of anonymity. "Trade circuits have become more complicated because of the sanctions against the main Iranian banks, but Iran has the cash to keep the country running," he said. Imports have fallen four percent since the start of the year, but non-oil exports have grown 40 percent and could bring in $35 billion, according to government figures. "But Iran still has a currency problem because it is selling more and more oil, especially to Asia, against consumer products to get around the bank sanctions," one European expert said, also declining to be identified. Tehran spends $3 to $4 billion dollars a month shoring up its currency, the rial, and to pay handouts to the population to compensate for energy subsidies that were cut last year, according to estimates by several Iranian and foreign experts. They believe Iran's finances have become taut. As a possible indication of the problem, the rial has made several drastic movements in the past months, despite the stated goal of the central bank to ensure stability. Another symptom appears to be delays piling up in government payments to suppliers, mainly because the state is believed to be drawing money from ministerial budgets to pay the public handouts, according to parliament. The energy ministry is thought to be $2.7 billion behind in its payments, according to the head of the parliamentary committee on energy, Hamidreza Katouzian. The delays are now being felt by oil and gas subcontractors, even though they are meant to be given priority in being paid, several sources in the sector told AFP. Iran's main financial problem is that Western investment has dried up. And new partnerships forged with Chinese, Turkish and Russian companies have not plugged the gap, according to a European analyst in Iran. Foreign investment needs are officially put at around $10 billion a year in the oil and gas sector. Yet total direct foreign investment over the past Iranian calendar year, from March 2010 to March 2011, amounted to $3.5 billion for all sectors, according to the economy ministry. China, one of the few allies Iran has against Western pressure, has in the past six years signed energy investment deals worth $40 billion. But less than $3 billion is believed to have been invested thus far, Western experts say. Iran has multiplied warnings to China over the delays. Last week it announced the suspension of a $16 billion contract with one Chinese company in an offshore Gulf gas field to push Beijing to make good on its promises to develop another zone, in the giant South Pars field. The situation is little better with Russia, even though Moscow is hostile to Western sanctions. Iran, also last week, kicked Russian energy giant Gazprom out of a $2 billion dollar oil development project after accusing it of dragging its feet for the past two years.