The Coming Iranian Financial Crisis

The United Nations has imposed tough sanctions on Iran. Even though Japan was the latest country to join the sanctions, the U.S. Treasury department has found that many Iranian banks are still operating within the borders of one of the United States’ oldest allies. Germany has recently taken moves to close many of the banks operating within its borders, although the country remains Iran’s largest trading partner. On June 30 2010, the Treasury department confirmed that four out of five Iranian owned banks were operating in Germany.

China is a natural trading partner for Iran as a major non-Western economy prepared to do business with it, but the relationship is not always a smooth one.  Until recently, Chinese petroleum industry equipment offered one of the few ways round the numerous United Nations and unilateral sanctions imposed on Iran because of its uranium-enrichment program.  Beijing's decision to back the latest set of United Nations sanctions in early June 2010, requiring it to apply tougher conditions to trade and financial transactions with Iran, has clearly miffed officials in Tehran. But that is unlikely to have a major impact on an economic relationship that is important to both countries.  Beijing's backing for the latest round of UN sanctions against Iran was hardly surprising.  The Chinese have voted in favor of all previous Security Council resolutions.

The influx of cheap Chinese-made goods has almost eliminated the ability of Iranian companies to compete and exports to the China mainly consist of crude oil rather than manufactured goods.  To counteract the criticisms from Iranian business for the Chinese dominance of the local Iranian market, China has decreased the number of Chinese companies permitted to export to Iran from 20,000 to 1,000.

Last year, Beijing became Tehran's most important trading partner with Iranian crude accounts for one-third of imports for the energy-hungry Chinese economy. The Iranian-Chinese Chamber of Commerce estimates that bilateral trade will continue booming in 2011 and show a 50% year-on-year increase in monetary terms.

Iranian officials have proposed that to get round the financial strictures created by sanctions, crude exports could be paid for in Yuan rather than dollars or euro, or used as payment in kind for Chinese investment projects and key import items like refined fuel and machinery.

Overspending

In a recent disclosure, Iranian President, Mahmoud Ahmadinejad, stated that Iran is running a staggering $140 billion debt, according to figures released by the regime’s Central Bank. $60 billion alone is owed to Iran’s Central and domestic banks.  This is surprising as in the past four years the governments has spent $256 billion in petroleum revenues and still have acquired $140 billion in debt.

While the Central Bank has refused to release data about the debt, budget and government expenditures, it has come to light that the government owed $55.4 billion in February 2010 to the regime’s banks. Other domestic debts owed by the government are $21 billion to social services, $4.5 to the Armed forces,  $6 billion to water and electricity contractors and $1 billion dollars for each of the Transportation and Oil ministries.

The government and state-owned enterprises have over the past four years issued government bonds which they pay the principal and interest for. The total debt arising from these bonds reaches up to $16 billion.

With increased pressure from the West and difficulties with it largest trading partner, Iran has found itself with an ever expanding dilemma of how to solve its domestic and foreign affairs.  The ruling government has a firm grip over the country, with support from the majority of the populace and the clerics who maintain Islamic law, but this is possible to change.  The increase in the financial burden being placed on Iranian workers and businesses may just accomplish what the West has been unable to do with sanctions, topple the current regime, leaving the Iranian people to clean up the mess.

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