NEAR EAST REPORT AIPAC'S BIWEEKLY ON AMERICAN MIDDLE EAST POLICY
BP stopped investing in Iran’s energy sector several years ago; last year it stopped selling Iran gasoline, too.
Many of the world’s top fuel traders have completely stopped selling refined petroleum to the Islamic Republic. Royal Dutch Shell is one of them.
Allianz, Europe’s largest primary insurer by gross premiums, announced in February that it was suspending its business in Iran.
Iran Feels Effect of Sanctions
As the House and Senate continue their efforts to draft a final version of the Iran Refined Petroleum Sanctions Act, major oil companies, insurance firms and international banks have taken notice of the bill’s progress and ended or reduced their ties with Iran, even before the law takes effect.
Oil Companies Stop Selling Iran Gasoline
Many of the world’s top fuel traders have completely stopped selling gasoline to the Islamic Republic. This isolation makes life more difficult for the regime in Tehran. Although Iran is a major oil exporter, it lacks a sufficient domestic refining capability and relies on outside companies in order to meet its population’s demand for gasoline and other refined petroleum products.
The Indian company Reliance no longer sells gasoline to Iran because it is unwilling to risk its growing business interests in the United States. BP stopped investing in Iran’s energy sector several years ago; last year it stopped selling Iran gasoline, too. Royal Dutch Shell has done the same.
Glencore, a Swiss company that is in the process of an initial public offering (IPO) in the United States, cut off its refined petroleum shipments to Iran in the last quarter of 2009 due to the risk that its relationship with Tehran posed to the success of its IPO.
The Independent Petroleum Group (IPG) of Kuwait once provided Iran up to 25 percent of its gasoline imports. That changed last January partly due to the risk of losing its close relationship with Morgan Stanley, the U.S. bank that finances much of IPG’s business outside of Iran.
And finally, Russia’s largest non-state oil company, Lukoil, announced in April that it would join the growing list of companies that refuse to sell gasoline to Iran.
With so many companies refusing to sell Iran gasoline—and with Iran’s domestic demand for refined petroleum rising—the effect of U.S. sanctions on Tehran is as clear as it is predictable: higher prices for the regime. This month, for example, the National Iranian Oil Company paid as much as 45 percent more for gasoline deliveries than did Saudi Aramco.
There are, of course, other oil companies that continue to sell gasoline to Iran. One of them, the French energy giant Total, said it was waiting for Iran sanctions legislation to become law before changing its behavior. “If there is a law that tells us to stop, then we will,” said Total CEO Christophe de Margerie. BACK TO TOP
Insurance Companies Isolate Iran
Gasoline companies’ termination of sales to Iran is not the only reason that Tehran is feeling the squeeze of sanctions. Insurance companies are also increasingly cutting their ties with Iran by refusing to insure firms that continue to do business in the Islamic Republic and vessels that continue to ship gasoline to Iran.
Due to existing U.S. sanctions laws and pending legislation in Congress, insurance companies face a choice between access to the massive U.S. market and access to the minuscule Iranian market. The decision is an easy one for them.
Allianz, Europe’s largest primary insurer by gross premiums, announced in February that it was suspending its business in Iran. The same month, Munich Re, a German reinsurance company that is one of the world’s top two reinsurers, said it would not renew existing business or underwrite any new business with insurance companies in Iran.
Again, the effect of companies pulling out is clear: higher prices for the regime. Any insurance company that is still willing to insure a company operating in Iran charges more in order to compensate for the increased risk—and also because there is less competition.
The same trend is happening with insurers of ships traveling to or from Iran. Last year, Munich Re pulled out of reinsurance for marine shipping of fuel into and out of Iran.
In March, London's marine insurance market added Iran to its list of areas deemed “high-risk” due to the potential for increased U.S. sanctions. The high-risk designation will add a risk premium to all insurance contracts for vessels transiting Iran.
According to Neil Roberts, secretary of the Lloyd’s Market Association, which represents the interests of all underwriting businesses in the Lloyd’s market, ships transiting the area will have to notify underwriters of voyages up to 12 nautical miles off Iran’s coast.
“The reason [Iran has] been added is that underwriters are mindful of possible U.S. sanctions against the country and really need to have a good idea of their exposures and the trade they are covering,” Roberts said. BACK TO TOP
Banks Refuse Credit to Iran
Due to U.S. pressure, almost all international banks have stopped issuing letters of credit for refined petroleum deliveries to Iran. This reality has forced Iran to pay cash in advance for its gasoline purchases, adding additional costs to the transactions.
A major European bank has gone as far as threatening to sever ties with any trading clients that are caught diverting gasoline cargoes to Iran, according to a February report from International Oil Daily. Credit Suisse, which was fined for its ties with Iran, reportedly sent a letter to its clients asking them to confirm that they are not involved in any business with Iran. Banks are also now demanding certificates of discharge in order to ensure that refined petroleum cargo is not diverted from its original destination to ports in Iran.
In addition, KPMG, one of the “Big Four” accountancy firms, recently announced it was severing its ties with Iran, ending its partnership Bayat Rayan, one of Iran’s leading accountants.
As oil companies, insurance firms and international banks reduce their ties with Iran, Tehran is feeling the stress. Gasoline prices in the Islamic Republic are rising, and the government is under tremendous pressure to reduce its dependence on gasoline imports. The final passage and implementation of U.S. sanctions legislation targeting refined petroleum exports to Iran will only hasten these developments. BACK TO TOP