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04/16/12

Iran Economic Report: March 2012

Source: Vesta Monitor

Iran Economic Report (Monthly) - Number 4, March 2012

Vesta Monitor has published its March 2012 issue of “Iran Economic Report”. Executive Summary follows. To see and download the full report, please go to www.vestamonitor.com.


Executive Summary

The Iranians start their new year when their country encounters significant political and economic challenges. Supreme leader Ayatollah Ali Khamenei has named the Year 1391 as the year of “National Production, Supporting Iranian Capital and Labor,” while economic policies of the 9th and 10th governments have literally paralyzed production and employment. Many production units have gone out of business and many units only use less than half of their capacity.

During the past 6.5 years Mahmoud Ahmadinejad injected billions of dollars in the economic system that led to cheap imports. The double digit inflation rate, fixed foreign exchange rate policy, and massive excess liquidity imposed high costs on Iranian goods and made imports very cheap.

Gold prices and foreign currency rates rebelled against the Iranian rial last year. The event instigated a surge in prices of imported goods as well as prices of local goods. Mainstream Iran is in a protracted recession and the future is uncertain.

The European Union followed the US and imposed sanctions on Iran. EU sanctions along with other punitive measures imposed by the United States are part of Western efforts to derail Iran's disputed nuclear program. New European sanctions bar investments in oil, gas and petrochemical industries, imports of oil and oil products, banking and insurance transactions, including the Central Bank of Iran, and shipping.

In an unprecedented move SWIFT cut off its services to Iranian banks, which will impose serious repercussions on Iran’s international financial transactions.

In this edition of the VM “Iran Economic Report” the main focus is on the foreign exchange market and ramifications of the rate surge as well as Iran’s oil industry and sales challenges.

Important News Flow - January 2012 to March 2012
  • Persian new year 1391 began on March 20th
  • Iran buys U.S. wheat - Iran has purchased 60,000 metric tonnes (66,139 tons) of U.S. wheat, which industry sources said reopened grain trade ties between the two countries embroiled in a stand-off over Tehran's nuclear ambitions.
  • Hyundai stops its cooperation with Iranian auto industry - A strict new American law is putting pressure on foreign companies to reduce or eliminate their operations in Iran or risk penalties in the United States market.
  • Peugeot discontinues it business in Iran - PSA Peugeot Citroen's production of vehicle kits to ship for assembly in Iran will remain halted for at least five months.
  • South Africa stops buying Iranian oil - Engen unit, the biggest South African importer of Iranian crude, said it has suspended imports of oil from the Middle Eastern nation amid economic sanctions by the U.S. and the European Union.
  • Malaysian Petronas discontinues purchasing oil from Iran - Malaysian state oil firm Petronas will halt all imports of Iranian crude from April, two months before a U.S. embargo takes effect, joining a growing list of buyers bowing to Western pressure to isolate Iran.
  • Iran halts oil sales to two Greek companies - Iran has cut oil sales to two major Greek firms, Hellenic Petroleum and Motor Oil Hellas, after the companies defaulted on their crude purchases from Iran, the state-run English language satellite Press TV reported without further details.

Table of Contents

1 Executive Summary ................................................................................................ 5
2 Important News Flow - January 2012 to March 2012 .................................................. 5
3 Current Affairs ......................................................................................................... 6
3.1 Replacing Iran’s Oil - Iran surrounded by Arab rivals ............................................... 6
3.2 A Review of Imposed Sanctions on Iran in the Past Year (1390) .................................7
4 Macro-economy ...................................................................................................... 8
4.1 Parade of Rates in the Market - A short story of the foreign exchange rate against the Iranian rial in 1390 (2011)................................................................................................. 8
4.1.1 Claims that were refuted ..................................................................................... 9
4.1.2 Peak of the tension in winter ............................................................................... 9
4.1.3 Market’s tepid reaction to the good news .............................................................10
4.2 The Role of False Demand in Foreign Exchange Market Turbulence ..........................10
4.2.1 Roots of turbulence in Iran’s foreign exchange market .......................................... 11
4.2.2 Demand for foreign currency ............................................................................... 11
4.2.3 Foreign currency for travelling ............................................................................. 12
4.2.4 A reality called unofficial demand ........................................................................ 12
4.2.5 Smuggling, the real but unofficial need ................................................................ 12
4.2.6 In quest of unreal needs ..................................................................................... 12
4.2.7 Roaming liquidity .............................................................................................. 12
4.2.8 Conclusion ....................................................................................................... 13
4.3 Repercussions of Rial Devaluation for Iran .............................................................. 13
4.4 Prediction of Foreign Exchange Market in Iran ........................................................ 17
5 Banking and Monetary Policy .................................................................................. 18
5.1 Repercussions of SWIFT Boycott of Iranian Banks ................................................. 18
6 Government and Fiscal Policy ................................................................................. 19
6.1 Ahmadinejad and the Budget Bill .......................................................................... 19
6.1.1 The 1391 budget bill .......................................................................................... 21
6.2 A Critical Look at the Role of the Ahmadinejad Administration in Iran’s Economy in Recent Months .................................................................................................................. 22
7 Oil, Gas and Energy ............................................................................................... 24
7.1 Opportunities and Threats for Iran’s Natural Gas reserves and Industry ..................... 24
7.1.1 Letters for Deadline ........................................................................................... 24
7.1.2 Will Turkey bypass Iran? ................................................................................... 25
7.1.3 South Pars sour gas behind Europe’s gates ........................................................ 25
7.1.4 What does Iran do with its gas? ......................................................................... 26
7.2 Effects of Finding an Alternative for Iran’s Oil - Three scenarios for changes in global economy after sanctioning Iran...................................................................................... 27
7.3 Severe Consequences for Iran for Losing Its Oil Market Share ................................. 28
7.4 $50b in Oil Deals for Chinese Firms! ..................................................................... 29
7.4.1 Contracts with Chinese firms ............................................................................. 29
7.4.2 What are Tatars doing in Iran? .......................................................................... 30
8 Capital Markets ..................................................................................................... 31
8.1 A Review of the Tehran Stock Exchange in the Course of Last Year (March 20, 2011 - March 20, 2012) ................................................................................................................. 31
8.1.1 A statistical analysis of the Stock Exchange market in the Year ‘90 ................... 31
8.1.2 Lowest Return in the last three year ................................................................. 31
8.1.3 The best and the worst days ........................................................................... 31
8.1.4 Hopes and fears in 1391 ................................................................................. 32
9 Trade and Commodities ....................................................................................... 33
9.1 Twelve-Month Trade Figures of the Year 1390 ...................................................... 33
9.1.1 Major imports and main countries of origin ........................................................ 33
9.1.2 Major exported commodities and main export destinations ................................. 34
9.1.3 Effects of foreign exchange rate fluctuations on decreasing smuggling ................. 34


About:
Vesta Monitor
is a wholly independent economic research group under the management of Vesta Capital, LLC (www.vestacapitalllc.com). With a focus on West and Southwest Asia (currently Iran, Iraq, and Afghanistan), VM offers clients a complete perspective into the dynamics and developments of its covered regional economies and current affairs. The group reports include:

Periodic economic and business review reports: VM’s periodic reports comprise current economic and business events and the corresponding analyses. The reports are published monthly and quarterly;

General economic and business analysis reports: VM’s general reports include macroeconomic analysis and forecasts as well as industry and business analysis.

For more information please refer to the Vesta Monitor website www.vestamonitor.com.

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