CAN ASIA SAVE IRAN ?

Majority believe that US financial sanctions and recent European Union oil embargo will deprive Iran of funds required for running its nuclear program but that may not be the case. On new year eve, US passed a law which restricts all foreign institutions doing business with Irans central bank to invest in US. This was followed by a January 24 European Union decision to stop importing Iranian oil starting from July 2012. Reacting to sanctions, belligerent Iran threatened to block the Strait of Hormuz a passage for flow of worlds more than one-fifth oil claiming that west is waging an economic war on Iran. Replying to the Iranian threat of closing Strait of Hormuz, US warned of military action. West says Irans nuclear enrichment program is aimed at developing nuclear weapons a claim denied by Iran. Iran says its nuclear program is for peaceful purposes power and cancer treatment. But West wants Iran to stop its nuclear program which Iran has refused to do so. Downplaying the effect of European oil embargo Iranian president Mahmoud Ahmadinejad, speaking to state television, said: "Once our trade with the Europe was around 90 percent but now it has reached to 10 percent and we are not seeking this 10 percent... experience has shown that Iranian nation will not be hurt. Defiant Iran is now seeking to pass a draft bill which will stop oil supplies to Europe with immediate effect until Europe revokes its oil embargo on Iran. Irans deputy parliamentary speaker Mohammad Reza Bahonar said If we are supposed to pay the cost of these sanctions in six months, then let Europe deal with an increase in oil prices and pay the cost right now. Describing the structure of draft bill, Vice-Chairman of the parliament's Energy Commission Nasser Soudani told Fars News Agency The bill has 4 articles, including one which states that the Islamic Republic of Iran will cut all oil exports to the European states until they end their oil sanctions against the country." Some are contesting the legality of these sanctions. Turkey says it is bounded to the decisions made by UN only. China and Russia believe these sanctions will backfire and work against European interests. Kremlin warned EU of subordinating itself to US.

Apart from financial sanctions, in September 2010, a powerful virus named stuxnet damaged several centrifuges at Natanz uranium-enrichment plant in Iran, possibly delaying progress by 2-3 years. Israel and US are believed to be behind this cyber attack.

Opportunity for Asia

Iran whose 80 percent revenue comes from selling of oil exports 60 percent oil to Asia, out of which 40 percent to India and China alone. Iran is second largest oil exporter after Saudi Arabia among OPEC countries - pumping 3.575 million barrels a day and exporting 2.5 Million barrels per day of crude in December. - can find new buyers or may increase oil supplies to Asia. Irans largest customer for oil is China, followed by European Union, India, Japan, South Korea and Turkey. Therefore, to make sanctions more effective, US is trying to pressurise Asia to join sanctions but India, China, Turkey has promised to continue buying Iranian oil. But Japan is discussing the situation with US and possibly may even support sanctions because of the closeness with US. China - which has reduced its demand for Iranian oil is speculated to be a major beneficiary. "I think the real beneficiary of [the EU oil embargo against Iran] would be China, because they will likely squeeze Iran and get their oil imports at $20 or $30 dollar discount, and use that oil to fill their strategic petroleum reserve," Bank of America analyst Sabine Shels told CNBC. Analysts believe Chinas small reduction in demand may be a tactic to pinch Iran on oil-pricing As the pressure gets more intense on Iran and Iran wants to ensure its oil revenue, Im sure Iran will be eager to keep China as a customer and China will be in a good position to negotiate a good price, Victor Shum, an energy analyst for Purvin & Gertz in Singapore said. But the main problem for Asia will be how to pay back to Iran. There are unauthenticated reports that India, China and possibly Turkey also will pay in gold. But Indian government is yet to confirm this. Earlier due to financial implications of doing business with Iranian Central Bank, India was using the services of a Turkish Bank but now the Turkish bank has raised its hand and asked India of some alternate arrangements.

Will EU oil embargo backfire on Europe ?

If EU stops importing Iranian oil from July 2012 and fails to get any timely alternate arrangement - shortfall in oil supplies and the production changes could have

devastating effects on the costs of industrial production, transportation, and market prices. And in worst case scenario - If Iran halts oil supplies to Europe even before July 2012 - then this EU embargo will effectively be deepening the crisis in the Eurozone. Piero De Simone, one of the leaders of Italys Unione Petrolifera warned that Europe may have to import refined Iranian oil from Asia. Saudi Arabia is ready to fill the gap even though some doubt the Saudi capability. Worst hit countries will be those who are already facing severe financial crisis i.e Italy, Spain and Greece. Iran exports 18 percent oil to Europe with major shares of Italy (7 percent) and Spain (6 percent). Even if EU is successful of finding new oil suppliers, new oil producers will be extremely reluctant to do business with the countries that are empty pocket. Moreover, the rise in everyday prices, ranging from food to transportation, will not be limited to the European Union, but will have global ramifications.

Global oil price rise

IMF warned that latest sanctions by US and EU may increase oil prices by 30 percent. OPEC also stated that although there is no shortage but oil prices may increase. Civil war in Libya increased oil prices by $ 20 per barrel, now if Iran which exports twice than Libya stops supplying it may be even worse. Taking Iranian oil out of the global market could add as much as $40 to the price of a barrel of oil, Bank of America analyst Sabine Shels said in a recent CNBC interview. Turmoil in Nigeria and Iraq, a stillunsettled Libya and doubts on Saudi capacity to fill the void implies oil prices could rise in 2012.

Fall of Petro-dollar
Iran has paced up its move of not using US dollar and Euro as policy in bilateral trade relations. Iran is discussing with India to settle payments with gold, Iran and Russia do business in Iranian rials and Russian roubles, while Iran trades with China and other asian economies by using using the Chinese renminbi, Iranian rial, Japanese yen, and other non-dollar and non-euro currencies. May be it could be the beginning of fall of Petro-dollar. Iran is becoming more and more defiant of sanctions imposed by west. Its true that much of US power is physical and other countries fear to confront US. If Iran is successful in overcoming these western pressures and remains undeterred it may be possible in future more countries to refuse to succumb to US pressure. No doubt, there will be financial implication of it.