Abu Dhabi, UAEMonday 18 November 2019

New US sanctions on Iranian metals could stir dissent from within

Analysis: The latest economic curb on country's steel, aluminium and copper sectors puts jobs in those industries in the firing line

Fresh US sanctions on Iranian metals will further weaken the Iranian economy. AFP
Fresh US sanctions on Iranian metals will further weaken the Iranian economy. AFP

The latest round of US sanctions on Iran’s steel, aluminium and copper sector exports inherently target the jobs those industries provide with the aim of stoking unrest in the country that will challenge the Iranian regime from within, analysts say.

US President Donald Trump on Wednesday imposed new sanctions but offered to someday meet the Iranian leadership. The tougher sanctions were announced by the White House on the first anniversary of the US withdrawal from the Iran nuclear deal signed by Mr Trump’s predecessor Barack Obama.

Mr Trump said the new sanctions would hit “Iran’s revenue from the export of industrial metals – 10 per cent of its export economy – and put other nations on notice that allowing Iranian steel and other metals into your ports will no longer be tolerated".

Analysts, however, say the sanctions are geared more towards stifling the local steel, carbon and copper sectors and industries directly associated with them. Metals and mining companies directly employ more than 600,000 workers, according to a UAE-based analyst, while the automotive sector, which is the largest user of Iranian steel products, employs a further 1 million workers, according to Iranian media reports. Put together, they account for about 6 per cent of Iran’s total labour force.

“We have been saying that for a while, that sanctions can only bring pain, but the real change will come from within Iran,” said the UAE-based research analyst at an international bank, who declined to be named.

Iran's foreign ministry said on Thursday the new US sanctions were "against international norms", and warned Washington would be responsible for Iran's losses.

But some analysts say the latest sanctions are unlikely to affect global markets, Reuters reported. "Years and years of sanctions and lack of investment means that Iran has not been able to fulfil its potential of being a major metals producer," Saxo Bank commodities analyst Ole Hansen said.

"There was barely any reaction in prices to the news." Iran's mining industry was already "70 per cent under sanctions in practice" due to shipping and payment restrictions, the deputy head of Iran's Mine House, Mohammad Reza Bahraman was quoted as saying by the state news agency Irna on Thursday.

Others are not so sure. "The point about going after metals is indeed more global than it is local because of the current geopolitical aspects of commodity markets," said Theodore Karasik, a senior adviser at Gulf State Analytics.

"It's more than just Iran and Venezuela it's about the entire scope of the market ... it's quite extraordinary and will cast many theories on impact," he noted.

This is not the first time the steel industry, particularly, and mining and copper sectors have been targeted for sanctions and the new curbs are clearly aimed at the “pressurising the workforce in the country” to fan dissent from within, the UAE-based analyst noted.

“If you look at the magnitude of the people [these sectors employ] it has real implications as it could spill over to job losses and factory closures and that would trigger dissent,” the analyst added.

The Iranian public has been demonstrating against the leadership’s failure to boost the country’s economy, which began in earnest in January last year, with people taking to the streets in more than 80 cities, including the capital Tehran.

The US unilaterally pulled out of the 2015 Joint Comprehensive Plan of Action, or Iranian nuclear deal, reached between the five permanent members of the UN Security Council as well as Germany and the European Union. The agreement promised to curb Iran's uranium-enrichment activities in return for a revival of its beleaguered industrial sectors in general as well as aiding integration into world markets.

However, Washington imposed sanctions against the Islamic Republic in November 2018, accusing it of support for various terror outfits in the Middle East.

The US initially targeted Iran’s oil exports and in April said it would not renew waivers granted to eight nations importing Iranian crude when they expired on May 2. Washington threatened to impose sanctions against countries that continued to buy oil from Iran.

The US aim is to bring Iranian oil exports to zero and pile on the financial pressure to bring Tehran to the negotiating table. Proceeds from the sale of hydrocarbons is the biggest revenue earner for Tehran and US sanctions have denied Iran's government more than $10 billion in revenue, US officials said this month. Iran exported copper chain and downstream products worth $917.53 million in the year ended March 2019. It has 2.6 billion tonnes of reserves, according to Reuters. According to World Steel Organisation data, with output of 25 million tonnes, the country exported steel chain and steel products worth $4.118bn in the fiscal year ended March 2019.

“US economic sanction measures have become the foreign policy tool of choice by the current administration - seeking to change the behaviour of Iran by imposing additional sanctions, making clear that other actors face the risk of oil-related sanctions on Iran, and yet lifting sanctions [on Venezuela] where it believes its objectives have been met,” said Doug Davison, sanctions expert and a partner at law firm Linklaters.

“These actions are multi-faceted and require parties doing business globally to keep both eyes on the current status of a very complicated and rapidly changing set of requirements with significant risk if violated.”

The Iranian economy, which went into recession last year, is expected to slide deeper into economic contraction this year and inflation is expected to hit about 40 per cent or more, the highest rate among the Middle East and North African oil exporting nations, according to the International Monetary Fund.

The IMF estimates Iran inflation to rise to 37.2 per cent in 2019 after it climbed to 32.1 per cent last year from 9.6 per cent in 2017. However, the projection for Iran’s consumer prices by the lender were made before the US announced the end of waivers and it could very well rise beyond 40 per cent projections, Jihad Azour, director of the Middle East and Central Asia department at the IMF, said last month.

Iran's currency, the rial, hit record lows last year, losing more than 60 per cent of its value against the US dollar, and the government had to authorise the central bank to intervene in the foreign exchange markets in defence of its currency in October.

The rial has been on slide once again since the US sent an aircraft carrier and a bomber group to the Arabian Gulf to counter any Iranian hostilities this week. Iran's official exchange rate for the rial is 42,000 against the dollar versus a free market rate of 156,500 rials on Thursday against the greenback, according to bonbast.com data.

There is also little hope of progress on Iran's ability to recapitalise and restructure its battered banking sector as bad loans continue to mount, according to Fitch Solutions, a unit of Fitch Group.

The Islamic Republic is likely to devalue the official exchange rate of its currency and may narrow the definition of "basic goods" that qualify for imports at the current rate in 2019, Fitch said in a report this year. The re-imposition and further tightening of US sanctions have sharply reduced foreign currency inflows into Iran.

Updated: May 10, 2019 11:18 AM

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