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Iran’s economy reveals power and limits of US sanctions – Al Jazeera English

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Tehran, Iran – As economists, politicians, and pundits mull the threat of “swift and severe” United States economic sanctions against Russia should the latter invade Ukraine, one country that has long been in Washington’s crosshairs does not have to ponder what such punitive measures can do – Iran.

Some 655 Iranian entities and individuals were sanctioned under the administration of former US President Barack Obama, according to data compiled by the Center for a New American Security (CNAS). But the most brutal punishment kicked off in 2018, after former US President Donald Trump’s administration unilaterally withdrew from the Iran nuclear deal with world powers and Iran’s banks were cut off from the Society for Worldwide Interbank Financial Telecommunication – SWIFT, the global financial messaging system.

That was just the opening salvo in the Trump administration’s “maximum pressure” campaign that aimed to force Tehran back to the nuclear negotiating table by crippling Iran’s economy.

In 2020 Washington levied more designations against Iranian banks, effectively severing the country’s financial sector from the rest of the global economy. That same year, the Paris-based Financial Action Task Force (FATF) – the global money watchdog – placed Iran on its blacklist.

And those were just the major headline grabbers. The Trump administration targeted Iran’s economy with more than 960 sanctions, according to CNAS – a barrage that continued unabated as Iran’s healthcare system buckled under the most brutal waves of COVID-19 infections seen in the Middle East, and despite myriad appeals by world leaders to offer Tehran a temporary reprieve for humanitarian reasons.

Iranian women look at the showcase of a shop in Tehran, Iran Annual inflation in Iran is running north of 42 percent [File: Majid Asgaripour/WANA (West Asia News Agency) via Reuters]

All of those sanctions are still enforced by the current administration of US President Joe Biden.

Today, no sector of Iran’s economy has been spared by Washington’s punitive measures, which helped propel the country into a two-year recession and continue to impact every aspect of day-to-day life.

Annual inflation is running north of 42 percent, according to Iran’s statistical office. The national currency, the rial, has lost more than half of its value in the past three years. Oil exports fell from roughly 2.5 million barrels per day in 2017 to less than 0.4 million barrels per day in 2020, according to the US Energy Information Administration – though they did start to slightly recover last year.

In a speech to a group of businessmen and manufacturers on Sunday, Supreme Leader Ayatollah Ali Khamenei said the data of the past decade, especially those for economic growth, inflation and foreign direct investments, are “unsatisfactory”.

But Iran’s economy did not totally collapse. It started to return to growth – albeit from a low base – last year, thanks to an easing of cross-border trade, COVID-19 restriction rollbacks, and a sharp rebound in the price of oil.

Having proven more resilient and diversified than some predicted, Iran’s economy grew 2.4 percent in 2020-21, said the World Bank, and is forecast to grow 3.1 percent in 2021-22.

‘Resistance economy’

The administration of President Ebrahim Raisi has set a considerably more ambitious goal. He is targeting a growth rate of 8 percent.

The conservative president aims to achieve that through the “resistance economy” doctrine, which mainly consists of boosting self-sufficiency, and trade ties with regional neighbours as well as China and Russia.

But even as that policy – which includes “nullifying” sanctions in parallel to negotiating efforts in Vienna to lift them – has returned the economy to a degree of growth, challenges remain.

“A continuation of the banking sanctions and Iran’s FATF blacklisting will limit the potential of Iran’s international trade,” says Bijan Khajehpour, managing partner at Eurasian Nexus Partners (EUNEPA).

A continuation of the banking sanctions and Iran’s FATF blacklisting will limit the potential of Iran’s international trade.

Bijan Khajehpour, managing partner, Eurasian Nexus Partners

Khajehpour told Al Jazeera that if the banking restrictions remain in place, the cost of financial transactions will remain high, making imports and exports more expensive. It would also limit the types of markets and companies Iran is able to engage with.

“Therefore, the Iranian economy won’t prosper, though it may be able to generate low-level growth,” he said.

But to sustain that growth, Iran requires major infrastructure investments that Khajehpour says the country can only afford if sanctions are lifted.

Raisi’s proposed budget for the next Iranian calendar year beginning in late March, which assumes sanctions remain in place, is forecasting a boost in oil income and a 60 percent increase in tax revenues, including from combating rampant tax evasion.

Still, Iran is expected to run a sizable budget deficit – a fiscal imbalance that existed even before Trump’s sanctions.

China and Russia

The bulk of projected oil income is expected to come from China, which remains Iran’s top buyer.

Exact shipment data is unavailable as exports under sanctions are kept secret and the oil is marked as originating from Malaysia, Oman, and the United Arab Emirates.

However, in mid-January, China officially announced its first import of Iranian crude oil since December 2020 in defiance of US sanctions.

And the market is still swinging in Iran’s favour. Last week, oil prices were at their highest level in more than seven years, thanks to tight supplies and concerns over escalating tensions between Russia and the West over Ukraine.

The news came roughly at the same time as the Raisi administration announced its oil exports had increased by 40 percent compared to the final month of President Hassan Rouhani’s administration in August.

Iranians walk down a market street in Tehran, Iran Iranians walk down a market street in Tehran, Iran [File: Majid Asgaripour/WANA (West Asia News Agency) via Reuters]

January was also a busy month in terms of Iranian efforts to boost political and economic bilateral ties with China and Russia.

Iran’s Foreign Minister Hossein Amir-Abdollahian said during a trip to Jiangsu, China that a 25-year comprehensive cooperation accord signed in 2020 has entered the implementation stage, although he did not elaborate on what exactly that means.

Meanwhile, Raisi met with Russian President Vladimir Putin in the Kremlin, where the two leaders backed closer ties, and their officials signed a number of agreements that the Iranian side said would have tangible results in the foreseeable future.

‘Too optimistic’

Warmer relations with China and Russia cannot however fully offset the stranglehold of US sanctions, says energy journalist and analyst Hamidreza Shokouhi.

“There are rivalries between Russia and the US – as we see now in Ukraine – and China and the US, and these will naturally have some impacts, but it would be too optimistic to depend on these countries’ abilities to nullify sanctions,” he told Al Jazeera. “The more Iran becomes dependent on these countries, as it has already become to a degree, naturally it increases China and Russia’s maneuvering power on Iran and this is not a good thing for Iran at all.”

In the energy sector, Shokouhi believes that for now, Iran can only depend on China for limited oil sales, and on Russia mainly for a potential development of and investments in energy projects, although sanctions are likely to curb that potential.

Last week, Iran’s Economy Minister Ehsan Khandoozi announced that Russia has agreed to allocate a new line of credit to develop the Sirik power plant in Hormozgan as a result of Raisi’s trip, but he did not disclose details.

The first agreements for developing the power plant were signed after the nuclear deal with world powers was initially clinched in 2015, but the plant has been among several similar energy projects undertaken by Russia and China that remain incomplete.

Neighbours and Vienna talks

According to EUNEPA’s Khajehpour, trade with regional neighbours can continue to contribute to Iran’s economic growth, but there are limits. For example, at times trade can entail barter agreements that are limiting for Iranian firms.

“Nonetheless, experience has shown that companies which enter export markets, even regional ones, are likely to develop other international markets,” he said.

“So, one can view the growing regional trade as a medium-term platform for strengthening Iran’s exports to international markets.”

But both Khajehpour and Shokouhi emphasise that Iran needs the nuclear negotiations in the Austrian capital to be successful if it wishes to unlock its economic growth potential.

“It appears the people and the business community in Iran are all eager for an agreement on the nuclear deal so there can be a sliver of hope for the economy,” said Shokouhi. “If there’s no agreement, I can’t imagine a bright outlook for the economy under these harsh circumstances.”

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Germany Risks a Cascade of Utility Failures, Economy Chief Says – BNN

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(Bloomberg) — Germany should prepare for deeper cuts in Russian gas supplies because President Vladimir Putin is pursuing a conscious strategy of driving up prices to undermine European unity, Economy Minister Robert Habeck said.

“We aren’t dealing with erratic decisions but with economic warfare, completely rational and very clear,” Habeck, the deputy chancellor in Olaf Scholz’s government, said Saturday on a panel. “After a 60% reduction, the next one logically follows.”

German leaders are stepping warnings of impending turmoil and natural-gas shortages in Europe’s biggest economy, which relies on Russia for about one-third of its energy. Putin has gradually reduced supplies after European countries imposed sanctions in response to Russia’s invasion of Ukraine.

German utilities are at risk of cascading failures that might require activating a legal clause that would allow them to pass on price increases outside of contract commitments, Habeck said.  

Germany has refrained from activating the measure for now because it would lead to an “immediate price explosion” for consumers, he said at an event sponsored by the Die Zeit weekly. The government is working on an alternative, he said, without elaborating. 

“If one company were to fail, or other companies were to fail, it’s like a domino effect that would very quickly lead into a deep recession,” he said.

European energy companies are facing a squeeze after Russia curbed flows on a key gas link earlier this month, forcing utilities to buy fuel on the spot market at elevated prices. High power prices are increasingly prompting German factories and businesses to curb demand and the government has activated the second stage of a three-stage gas emergency plan. 

Russia has reduced shipments through Nord Stream by 60% and the pipeline is scheduled for a full shutdown this month for maintenance. Germany has raised doubts that Nord Stream will resume supply after that.

Russia’s goal is to keep energy prices high and “destroy the unity and solidarity of the country,” Habeck said.

Germany’s government and energy giant Uniper SE are discussing stabilization measures. Finance Minister Christian Lindner said any additional government assistance would be in the form of a loan guarantee.

Gas rationing — if it came to that — presents challenges because the grid often isn’t separated between residential and commercial customers, Habeck said.

If a factory is connected to the gas network and a whole part of the city is connected to it, then this factory can’t be taken out of the network. 

“That will probably then be regulated at the expense of the factories that are not connected to a mixed network,” Habeck said. 

Household customers in Germany are protected by law from gas shutoffs.

©2022 Bloomberg L.P.

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Argentines Seek Hedging in Crypto After Economy Minister Resigns – BNN

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(Bloomberg) — The cost of buying Tether with Argentine pesos surged Saturday after Economy Minister Martin Guzman resigned. 

The resignation marked the biggest departure of President Alberto Fernandez’s government after infighting escalated within the ruling coalition. No replacement was immediately named.  

The price of Tether measured in Argentine pesos jumped on major exchanges soon after the minister announced his resignation on Twitter, according to the CryptoYa website, which reports minute-by-minute prices. The coin fetched 257 Argentine pesos on the Binance exchange, up 6.6%. On the Lemon Cash exchange, prices jumped 11% to 279 pesos. 

Crypto is the only market trading in Argentina on Saturday. While volumes are small, the moves could indicate unease, at least among some traders, over the growing rift within the ruling coalition and concern over the government’s ability to tackle rising inflation and other economic challenges.   

Argentina is one of the nine countries with the highest adoption of cryptocurrencies, according to Chainalysis, a site specializing in crypto and blockchain. In a country with recurring currency crises and inflation running around 60% annually, two-thirds of Argentines who invest in crypto say they do so to protect their savings, according to a study by Buenos Aires-based Wunderman Thompson.

©2022 Bloomberg L.P.

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Charting the Global Economy: Factories Slow Down From US to Asia – BNN

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(Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Manufacturing from the US to Asia is very much in a slowdown as factories continue to struggle with supply snarls, labor shortages and elevated materials costs.

A measure of US manufacturing activity weakened in June to a two-year low, and several regional Federal Reserve surveys indicated business activity shrank. Factory purchasing managers’ gauges across Asia eased, with South Korea, Thailand and India among those showing the biggest declines, according to S&P Global.

Similar indexes in Poland, Spain and Italy also showed weaker activity compared to May.

Here are some of the charts that appeared on Bloomberg this week on the latest developments in the global economy:

US

Consumer spending fell in May for the first time this year and prior months were revised lower, suggesting an economy on somewhat weaker footing than previously thought amid rapid inflation and Fed interest-rate hikes.

Regional Fed manufacturing surveys have taken on a grimmer tone, with four of five indicating business activity shrank in June. Separately, a measure of overall manufacturing slid to a two-year low as new orders contracted, restrained by lingering supply constraints and some softening in demand.

The pandemic housing boom is careening to a halt as the fastest-rising mortgage rates in at least half a century upend affordability for homebuyers, catching many sellers wrong-footed with prices that are too high.

Europe

Confidence in the euro-area economy slipped as households become more pessimistic amid fears a Russian energy cutoff will spark a recession. At the same time, they’re less worried about inflation than they were a month ago, though there’s a split between core and peripheral euro-area countries.

After suffering from unprecedented shocks in recent years, the UK is succumbing to more intractable problems marked by plodding growth, surging inflation and a series of damaging strikes.

Asia

China’s economy showed some improvement in June as Covid restrictions were gradually eased, although the recovery remains muted. That’s the outlook based on Bloomberg’s aggregate index of eight early indicators for this month. The overall gauge returned to the neutral level after deteriorating for two straight months.

Japan’s factory output shrank at the fastest pace since the height of the pandemic as the lagged impact of China’s virus lockdowns continued to disrupt supply chains and economic activity in the region. The weakness in manufacturing extended across Asia, particularly in South Korea, Thailand, India and Taiwan.

Emerging Markets

Colombia’s central bank delivered its biggest interest rate increase in over two decades. Policy makers are bracing for another spike in annual inflation that’s already above 9%. 

Two years after Argentina emerged from its latest default, a debt crisis in brewing once again. This time, the immediate trouble is in the local bond market, where creditors have become reluctant to roll over maturing government bonds.

Zambia’s inflation rate dropped below 10% for the first time in almost three years in June, bucking a global trend of record consumer-price growth. Optimism over the nation’s economy since the election of Hakainde Hichilema as president in August, a potential debt restructuring and a $1.4 billion bailout package from the International Monetary Fund has seen a rally in the local currency, which has helped contain prices.

World

Differences in underlying inflation trends call for different policy outlooks among the world’s top central banks, according to Bloomberg Economics. The Fed will have to go well into restrictive territory, the Bank of England may go a little above neutral and the European Central Bank might not even get that far.

©2022 Bloomberg L.P.

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