Checks are bouncing all over Iran today. Police in Tehran -
fired tear gas and tried to disperse the protesters, who rallied outside the capital's central bazaar. Many left their businesses and shuttered their shops.
"Our checks bounced, our businesses are ruined," said a businessman who gave his name as Ali. "How shall we earn a living?"
The sanction-driven devaluation of the Iranian rial against the USD appears to be causing the same inflationary agony that the South experienced during the waning years of the Civil War.
The Grand Bazaar, the economic hub of Tehran, was shut down, as merchants, unable to determine what the rial was worth, effectively went on strike. U.S. and EU led sanctions against Iran have led to unrelated shortages as nervous banks ban all transactions with Iran rather than risk the ire of Washington and Brussels.
Officially, the Grand Bazaar is not, repeat NOT, closed. According to the Mehr news agency, who quoted police Col. Khalili Helali:
The Tehran bazaar is not closed. Police will deal with the guilds that have closed their shops to cause (economic) disruption.
Unofficially, the Grand Bazaar is closed.
What makes this development even more interesting is that in Iranian society, the Grand Bazaar is viewed as a force of conservatism, tying the Iranian clergy with middle class shop keepers and traders. The money-changers are being literally scourged and driven out of the temple, not that it will do Tehran much good, at this point.
The Central Bank of Iran, which lost one of its last major Western financial clearinghouses when Standard Chartered (SCBFF.PK) was called on the carpet, pegs the rial at 12,250/$1 USD; but that's the "official rate," available only to those businesses which Washington and Brussels allow through. What Iranians actually pay attention to is the black market "unofficial" rate, which shot up to 35,500 rial/$1 USD, an 80% depreciation against the US dollar in only a year.
Fig. 1: The "Official" Collapse Of The Rial
Can't the Iranians still do business with China, India, Singapore, et al?
That's where it gets a little more complicated. While China and Singapore both received waivers from the Obama administration, ostensibly allowing them to do business with the Iranian regime, each had to spend considerable political/economic capital in order to get them. In effect, Washington allowed itself to be bribed by a few select nations in exchange for trade concessions, with the understanding that those nations will pass the costs of the quid pro quo to Iran in the form of significant discounts on the price Iran sells its oil for.
This hurts Tehran on a number of different levels:
- Iran does not possess the infrastructure to refine oil itself.
- Iran provides an extremely generous energy subsidy for its own people in return for support of the regime. Iranians only pay 35 cents or thereabouts for a gallon of gasoline, a political necessity in light of a 80% depreciated currency - which, in turn, has painfully increased the cost of imports. Any increase in the gasoline subsidy will hike the cost of these products even further, as foodstuffs and durable goods must be transported from point A to B.
- Iran has to make about $75 per barrel of oil in order to pay its bills. The current price of oil is about $108 a barrel. But remember that discount Iran is being forced to give its customers? China and Singapore aren't paying $108 a barrel for Iranian oil.
Tehran is under more pressure than you read in the papers. India, for example, would like to purchase more crude from Tehran, but this is happening very slowly, as no one will insure the vessels from real or American/Israeli made "accidents" at sea.
Tehran's problem isn't finding buyers for the oil it produces, it's finding anyone willing to insure the supertankers that carry it. Washington was willing to look the other way for Singapore, China and India, but it never guaranteed the safety of Iran's oil tankers once they were on the high seas. "Accidents" happen.
Formerly, European insurers were responsible for underwriting almost all of Iran's supertankers. Now that the EU ban restricts from doing so, the Iran regime has grown so desperate to set sail that Tehran has offered to write insurance on its own ships.
A senior official from Iran's major tanker operator NITC told Reuters in June that it had secured insurance cover from privately owned Iranian provider Kish P&I, with $1 billion in insurance in the event of a collision or oil spill.
Kish P&I relies on state-run Central Insurance of Iran as its reinsurer. Any claim made against it would likely have to go through a sanctioned bank. Nevertheless, Kish has said it is confident it would be able to pay Western ship industry claims in the event of accidents.
Iran is coming very close to being a net importer of energy in 2012; a situation which is stretching the Iranian economy to the breaking point, even as Tehran drowns in excess oil which it has no ability to refine.
Case in point: after ordering 12 new supertankers from China, which the Iranian government began taking delivery of in May, the Iranian government is still ordering more. Note, that each of these tankers carries 318,000 deadweight tons, or about 2 million barrels of crude, depending on the specific gravity of the oil; which means that Iran has weeks -if not months- of surplus inventory gathering dust. (Actually, it's floating just off-shore of the Persian Gulf.) Meanwhile, the number of tankers transporting Saudi crude in the Persian Gulf is at an all-time high, making it that much more difficult for Iran to find available ships.
It gets worse. The cost of the actual loss of Iran's output is difficult to pinpoint with precision, but the president of the Energy Policy Research Foundation estimates that it comes to about $10 a barrel. So subtract $10 from the already heavily discounted price of Iranian crude. But how much of a risk premium is currently priced in due a potential Israeli strike on Iran's nuclear facilities? If the Iranian regime implodes, the threat of an Israeli strike will evaporate along with the premium - and that's not even taking into consideration all the hedge funds and retail investors piling into oil (OIL) as a safe haven in response to QE3.
The Moral Of The Story
If Tehran caves due to inflationary pressure, the price of oil will fall through the floor and anyone unfortunate enough to hold a long position will get their eyeballs ripped out. (It's a technical term.) Conservative investors looking to hedge against the Fed's balance sheet expansion may want to consider substituting yellow gold (GLD) for black.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.