Source: Turquoise

Two major developments during the month of October have been the visit by Russian President Vladimir Putin to Tehran and the United States government's unilateral sanctions imposed on some of the major Iranian banks and companies affiliated to Iran's Revolutionary Guards Corps (IRGC).

After five decades without a state visit by a Russian or Soviet leader to Iran, President Putin made an official visit to the country in October to attend the Summit of the Caspian Littoral States. The Islamic Republic's relationship with the Soviet Union has been mostly frosty due to the Soviet Union's occupation of neighbouring Afghanistan and its support and sale of weaponry to Iraq during the eight-year Iran-Iraq war in the 1980s. However with the fall of the Soviet Union and after several visits by Iranian officials to Moscow, a new era of Russo-Iranian relations has gradually taken shape and developed to what President Ahmadinejad now calls, perhaps optimistically, "a natural alliance".  The sincerity of the Russian government is, however, highly doubted in Iran by both the political elite and the general public due to unpleasant historical memories and  the apparent Russian policy of playing it both ways when it comes to Iran's nuclear standoff. Although the Russians have supported Iran's pursuit of nuclear energy and have helped with the construction of Iran's first nuclear power plant at Bushehr, they have nonetheless been dragging their feet on sending nuclear fuel to Iran and giving a date for the completion of the Bushehr plant.  They also went along with other UN Security Council members to impose two sets of sanctions on Iran for refusing to suspend its uranium enrichment program.

Overall both Putin and Ahmadinejad attempted to use this trip to their respective political advantage.  Putin was able to demonstrate that Russia is independent in its foreign policy and would like to expand relations with Iran regardless of the West's opposition while Ahmadinejad secured the backing of the Caspian Littoral States for Iran's development of peaceful nuclear energy and also tried to make use of this event to prove that the West's plan to isolate Iran has failed. Both Ahmadinejad and Putin also proposed that no littoral state's territory should be used for military aggression against other states, which was approved by all parties at the summit. This was intended to counter reports that the United States is considering the use of Azerbaijan's territory to strike Iran in the event of a military conflict.

The US government meanwhile announced new unilateral sanctions on some of Iran's largest and best-known banks as well as a number of companies that are affiliated to the IRGC (Revolutionary Guards), a wing of the Iranian armed forces. The US also used the occasion to label the IRGC as a sponsor of terror. Three state-owned banks, Mellat, Saderat and Melli, were sanctioned this time along with Bank Sepah which was previously sanctioned by the US government. These banks were all accused by the United States of providing financial support to Iran's nuclear program and financing some of the groups that America considers terrorist organizations.  Although America's unilateral sanctions against Iran are not a new development and have been in place in one form or another since 1979, what gives significance to this round of sanctions is the fact that this is the first time a section of a sovereign nation's armed forces was labelled as a "sponsor of terror".  Also critical is that Bank Melli Iran is the largest and one of the oldest banks in Iran with which almost all Iranian families do some sort of  business on a regular basis.

These new sets of sanctions, like the ones previously imposed by the United States and also the UN, will most probably make it even harder for Iranian businesses to secure financing or credit letters from foreign banks and will generally increase the cost of operation and trade for many Iranian companies.   Although some European countries might follow suit and limit their business with the sanctioned entities, most analysts believe that the real impact of these sanctions will not be substantial for the following principal factors:

• Iran has already shifted most of its trade and business relations from West to East. Iran's trade with China last year stood at record level of $15 billion. This figure is expected to reach $20 billion this year making China Iran's largest trade partner.

• Iran has started to move its dealings away from the US dollar to other currencies such as the Euro and Yen leaving decreasing dependency on the US dollar.  As announced recently by the Ministry of Petroleum, almost all crude oil exports of the country, which constitutes around 80% of foreign earnings, is currently sold in non-dollar currencies.

• Due to its significant market size and commercial opportunities, Iran is a lucrative market for some  international banks that see the current sanctions as an opportunity to establish business here in the absence of competition from US and some of the European banks. A number of regional and Asian banks have already increased their business dealings with Iran.

• Many countries are opposed to this type of unilateral sanctions and will not abide by them. Russia and China, as well and the countries of the Non-Aligned Movement (NAM), have already condemned the move and emphasized the importance of negotiations rather than increased sanctions.

About Turquoise: Turquoise is a boutique investment bank based in Iran with offices in Tehran and London. Turquoise publishes Iran Investment Monthly with the aim of keeping its recipients updated on the latest macroeconomic developments in Iran, providing an in-depth analysis of the Tehran Stock Exchange as well as introducing new financial products and private equity opportunities to potential investors. For more information please visit: www.turquoisepartners.com/iraninvestment

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