With the recent strengthening of Western economic sanctions against Iran, the prospects for the country are at a crossroads.

Over the past 30 years, the West avoided — in all areas — making moves that could negatively affect the supply of oil on world markets due to its heavy reliance on imports. But, recent events have forced them to raise the stakes.

This is critical for Iran, where the oil sector means either prosperity — by providing enough funds to finance its nuclear and military programmes — or economic collapse.

Turning point

The conflict between Iran and the West over the past three decades excluded oil because of its significance to the global economy as a whole, but growing tension has now changed the nature of the game.

Iran's insistence on carrying on with its nuclear programme has added a new dimension to the conflict, that goes beyond the question of oil supplies to include complicated economic, security and political issues of a strategic nature for both sides.

The West believes that it is time that sanctions hit Iran's economic backbone and its main source of income, especially after Teh-ran managed to cope with other forms of economic boycotts thanks to huge oil returns. These gave Iran great flexibility in dealing with European measures aimed at putting its nuclear programme under the supervision of the International Atomic Energy Agency.

Although European countries have announced measures to reduce their imports of Iranian oil, the United States has taken a further step, albeit indirectly, that may have deeper repercussions for Iran's oil exports.

The US has imposed sanctions on Iran's central bank, limiting the ability of buyers of Iranian oil to pay for their purchases. This is important since global oil sales are conducted in dollars and most deals go through the financial and banking system in New York.

Initially, Washington tried to impose an embargo on Iran's oil supplies, but Asian countries did not respond to the US call due to their growing energy demand. Iran is popular in Asia as it gives countries long terms to pay off their oil purchases, a facility that led to the accumulation of over $2 billion (Dh7.35 billion) in outstanding payments from India. In addition, Asian countries, particularly China and India, are making the most of this dispute between Iran and the West to get discounts on their oil purchases from Iran.

The financial embargo on Iran's oil sales, therefore, may be seen as being more effective by the US, especially after failed attempts by Iran to sell its oil for currencies other than the dollar. This is exactly what the late Iraqi president Saddam Hussain tried, unsuccessfully.

It is expected that the new US measures would reduce Iran's oil sales by 25 per cent. Imposing restrictions on the Central Bank of Iran will also affect Iran's exports and imports in general, especially if the EU countries and central bank joined the US in these new sanctions.

Iran has been left with nothing to fight with. It has taken hasty decisions on halting trade with some countries in the region and then retracted these decisions, further damaging its economy. The value of its currency, the rial, dropped by 10 per cent soon after Tehran announced unilateral measures restricting trade with GCC countries.

Growing isolation

But actually the strait is no longer as strategically important as it was, especially after oil and gas pipelines were extended from the Gulf to the Red Sea, the Mediterranean Sea and the Gulf of Oman on the Indian Ocean. The West, led by the US, has also prompted many African countries, such as Angola, Ghana, and some oil-rich Latin American countries, to increase their oil production. Opec member states, including GCC countries, are so far committed to their oil production ceiling in spite of having surplus capacity.

So the question remains whether a nuclear programme deserves all these sacrifices. The common man may answer this question before decision makers in a country of Iran's size and importance.

 

Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.