Bloomberg News

Europe Weighs More Sanctions as Iran’s Currency Plummets

October 03, 2012

Europe Weighing Additional Sanctions as Iran’s Currency Plummets

Iranian riot police stand next to a garbage container which is set on fire by protesters, in the first sign of public unrest over Iran's plunging currency, in central Tehran, near the main bazaar on October 3, 2012. Source: AFP/Getty Images

The U.K., France and Germany are pressing for new sanctions to bring Iran’s economy to its knees and curb its nuclear ambitions, according to several European diplomats, as rioting over the country’s tumbling currency suggests the existing sanctions are taking a toll.

In a confidential letter to the 27 EU member states, portions of which were provided to Bloomberg News, the foreign ministers of Europe’s three largest economies criticized Iran for its lack of openness over its nuclear program and called for raising the cost to Iran’s leaders of refusing to abandon what the U.S., Europe and Israel say is a covert nuclear weapons program. Iran says its program is solely for civilian energy and medical research.

“So far, Iran has not reacted positively to our proposal,” the British, French and German ministers wrote in their Sept. 20 letter, referring to a proposal for Iran to abandon medium-enriched uranium in exchange for aviation and energy incentives.

“On the contrary: Our concerns have once again increased,” the letter says, referring to an Aug. 30 report by the United Nations’ International Atomic Energy Agency in Vienna that found Iran had increased its stockpiles of enriched uranium, which -- if diverted from safeguards and further enriched -- could be used to produce a weapon.

Ahead of the next EU foreign ministers’ meeting Oct. 15 in Luxembourg, European diplomats and finance officials are discussing proposals to tighten the vise on Iran in the energy, finance, trade and transportation sectors, according to four European officials who all spoke on condition of anonymity because of diplomatic protocol.

More Pressure

The U.K., France and Germany believe a diplomatic solution is possible, the EU diplomats said, though they think more pressure is needed to force Iran to cooperate. Along with the U.S., Russia and China, the three European nations have engaged in nuclear negotiations with Iran since April that so far haven’t produced an agreement.

U.S. Undersecretary of the Treasury David Cohen is visiting France, Germany, Italy and the U.K. this week to discuss coordinating efforts to increase the pressure on the Iranian government.

Among the proposals under discussion in European capitals are measures to close the loopholes that have allowed Iran to circumvent existing sanctions, according to the four EU diplomats. Those would include limiting exceptions to the freeze on Iranian central bank assets under European jurisdiction, a move that would further complicate efforts by Iran to access its hard currency reserves to stabilize the Iranian rial, the diplomats said.

Other Proposals

Other proposals from the British, French and German governments include working more closely with the maritime industry to halt the reflagging of Iranian ships and tightening bans on sales of potential dual-use technology that might have nuclear or missile applications, the EU diplomats said.

Further financial penalties might include blocking more Iranian central bank transactions with European banks and halting so-called U-turn transactions for Iran that begin and end with a non-Iranian bank, according to the EU officials. Such measures would severely limit EU trade with Iran, proponents say.

Although the EU imposed an Iranian oil embargo on July 1, Europe continues to export billions of dollars of worth of goods and services to Iran, said Mark Dubowitz, executive director of the Foundation for Defense of Democracies, a Washington research group that advocates tougher sanctions.

European Imports

According to figures compiled by FDD from EU government sources, Germany exported 1.4 billion euros of goods to Iran between January and July of this year, and Italy exported 550 million euros worth between January and May 2012, Dubowitz said.

One senior European diplomat who called the existing sanctions unprecedented in their scale said the aim of new measures would be to bring Iran’s economy to its knees in a way that hurts the regime rather than the people.

Iran’s rial is already in a tailspin, dropping 18 percent on Oct. 1, reaching a record low of 35,000 to the dollar on the unofficial market, and losing more than half its value against the dollar in street trading in the past two months.

Iran’s free-falling currency has turned meat into a luxury, sparking overnight price surges and spurring shoppers to stockpile goods, Tehran shopkeepers said in interviews. Riot police yesterday fired tear gas and sealed off parts of downtown Tehran after the currency’s plunge triggered street protests.

Rising Inflation

The inflation rate, which Iran’s Parliament Speaker Ali Larijani last week estimated at 29 percent, sent the price of milk in Tehran up 9 percent yesterday.

The financial and oil sanctions now in place may be triggering a balance of payments crisis that could cripple the Iranian government’s ability to pay for essential imports, according to European and U.S. officials who spoke on condition of anonymity because of the sensitivity of the issue.

The plummeting Iranian currency is making imports prohibitively expensive. Combined with insufficient foreign exchange reserves that limit the euros and dollars available to pay for imported goods and services, new “EU sanctions that restrict Iran’s ability to import critical European goods and services could combine to push Iran to economic collapse,” Dubowitz said in an interview.

U.S. and European officials also credit the sanctions -- in conjunction with poor economic management in Iran -- for spurring capital flight from Iran and a crisis of confidence in the currency.

Cartoon Bomb

Israeli Prime Minister Benjamin Netanyahu’s speech at the United Nations’ General Assembly last week, in which he dramatized the threat from the Iranian nuclear program with a cartoon of a nuclear bomb and underscored Israel’s readiness to take preemptive military action, gives added impetus to the push for additional sanctions, according to the European diplomats.

Netanyahu, who’s expressed skepticism about the efficacy of U.S. and European sanctions, now seems to be more open to them.

An Israeli official said a foreign ministry analysis found sanctions are hobbling Iran’s economy, even though they haven’t prompted Iran to abandon its nuclear program. Israeli officials think further sanctions need to be more targeted, according to the foreign ministry official who spoke on condition of anonymity because of the sensitivity of the issue.

Netanyahu “really has no choice if the U.S. is dead-set against” a military attack, Shmuel Sandler, a political scientist at Bar Ilan University near Tel Aviv, said in a telephone interview. “For now, it looks like he’s going to have to wait and see if the sanctions work.”

‘Cripple Date’

Bijan Khajehpour, an Iranian economist and strategic consultant now based in Vienna, said he disagrees “with those who say the Iranian economy is collapsing or that there’s an economic ‘cripple’ date.”

The Iranian economy, he said, is too big and too complex for that, with ample domestic industry to replace foreign imports. Iran has been under a variety of sanctions long enough that its leaders have found illicit workarounds for most obstacles, he said.

Sanctions, he said in an interview during a visit to Washington yesterday, “are not achieving their goal” to persuade Iran’s leaders to abandon their nuclear program. Government and government-affiliated businesses are “actually benefiting” from restrictions on legal trade and from the currency crash, he said, by engaging in arbitrage and black- market activities, hiding assets and not being accountable.

To contact the reporter on this story: Indira A.R. Lakshmanan in Washington at ilakshmanan@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net


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