On May 8, 2018, President Donald J. Trump announced that The United States would unilaterally withdraw from the July 2015 JCPOA Treaty.
The P5 + 1 Treaty had defined a strong limitation of Iran’s production of fissile material, in exchange for a partial lifting of trade sanctions, not only in the oil sector.
On November 5, 2018, the USA reintroduced a vast series of sanctions against Iran, with the obvious and immediate effect of pushing the Brent barrel price to 73.17 US dollars.
It should be recalled that the Brent Crude is one of the three oil price benchmarks, which derives from the trading criteria of the oil extracted in the North Sea, for which there are other types such as Forties, Osemberg and Ekofisk, known with the generic name of BFOE.
Brent is the easiest oil to refine and also to transport and is therefore the most commercialized type.
The other benchmarks are the West Texas Intermediate (WTI) and the Dubai-Oman. But there are also others, which are less widespread and commercialized.
Hence the criterion of US sanctions against Iran – which have never been so harsh – is eminently political.
This happens despite the fact that the International Atomic Energy Agency (IAEA) – the UN agency located in Vienna, which monitors the proper implementation of the JCPOA, from which the USA has unilaterally walked out -maintains that, before the US withdrawal, Iran did not infringe the rules of the 2015 agreement on the extraction and production of enriched uranium and plutonium.
Therefore the United States wants to reach an economic crisis of such intensity that the Iranian people themselves cannot fail to turn against the Shiite regime to overthrow it definitively.
Hence an “Arab spring” in a non-Arab country, triggered not by returning jihadists – as happened in Cyrenaica against Gaddafi’s Libya – but by a very severe economic crisis.
What if the oil sale crisis triggered a new production mechanism in Iran? And what if the energy geopolitics of Central Asia were not so prone to US wishes?
As certified by the International Monetary Fund, Iran went into recession precisely because of renewed US sanctions.
Can we believe that, in the Internet era, the Iranian people do not know it?
Vaste programme en effet, as General De Gaulle used to say. A vast program indeed was the one of the “Arab spring” induced by the economic crisis – like all the others, which failed miserably. As demonstrated by Germany in the 1930s, by the USA after 1929, by Italy after the Euro, by Argentina after Economy Minister Domingo Cavallo and by many other dollarized and later abandoned countries, the political effects of a severe recession are never predictable.
President Trump and his ruling class said they wanted “to reduce Iranian oil exports to zero”.
Well, but how? Preventing the USA, China, Russia and India from buying the Iranian oil, right now that oil contracts denominated in renmimbi are starting in China – some of them precisely with Iran?
What would happen if – as history has taught us, even recently – the people united even more with the Iranian political elite?
This could also happen, considering that the sanctions enable the Iranian Shiite regime to become the only de facto distributor of prebends, income and support for all the Iranian crowds.
Only with tolerance for the parallel shadow economy, which is already thriving in Iran, can the Shiite regime stay in power without much trouble.
On top of it, the project of the Iranian Shiite regime could be to widen the already great divide between Europe and the United States, so as to later use the EU to avoid the US sanctions altogether.
France, Germany and Great Britain have recently registered a Special Purpose Vehicle (SPV) to avoid the US sanctions.
How does this SPV work? In essence, it is a company specialized in a securitization operation.
The SPV becomes the transferee of groups of homogeneous securities to be allocated to the service of what it issues to fund the operation itself.
The INstrument in Support of Trade EXchanges (INSTEX) concretely operates to provide services that favour trade between the EU and Iran.
It is not a bank, but it coordinates all EU payments to Iran, given that the Iranian exporters want and buy Euros to trade, obviously, with the EU, but the European banks are very reluctant to accept Euro funds originated in Iran.
Considering that the US sanctions affect anyone who trades with Iran, the EU banks are in fact afraid of being totally excluded from the North American market, as would actually be the case according to the rules recently enacted by President Trump.
Certainly the European States, which are always so fearful of the USA, even when it would not be needed, have not set up such a company for nothing.
And indeed, in early 2017, European food exports to Iran were worth 298 million euros, while EU similar imports from Iran totaled 292 million euros.
EU medicine exports amounted to 951 million euros and imports were slightly lower.
In short, INSTEX should work well, although for small amounts. However it will operate, above all, as a mask for EU contracts with Iran and as supplier of euros to Iran, after the creation of derivatives.
Will this be enough? We do not believe it.
But let us revert to oil.
With the new US sanction regime, the United States has accepted – with a six-month renewal to be negotiated at each expiry date – that only six countries can still buy oil and its by-products from Iran.
These countries are China, Japan, South Korea, Taiwan, India, Turkey, Greece and Italy.
Italy – a diligent child with some need for US funding and political support to avoid being sanctioned – has already canceled purchases from Iran.
Iraq hasalso been given a specific 90-day time limit, as from March 2019, to keep on buying energy from Iran, considering the stable electricity and energy crisis in that country.
It should be recalled that, in 2017, the above mentioned six countries received over 75% of Iranian oil and by-products exports of that year. Nevertheless, after the second cycle of US sanctions, only three countries have continued to buy much oil from Iran, namely Turkey, China and India.
Thus Iranian oil production fell from 3.8 million barrels a day in May 2018 to 2.7 million barrels a day in December 2018.
We will analyze the current data, which has strong geopolitical relevance.
Cui prodest? Probably only Russia.
In all likelihood, the growth of oil exports requested to OPEC by President Trump will be accepted both by Saudi Arabia, which always needs to sell, and – above all – by the Russian Federation, which follows the fluctuations of the Saudi OPEC and also needs to cash fresh liquidity quickly.
Japan, however, is satisfied with the pace of oil imports from Russia.
Furthermore, China is also right in expecting an increase in Russian natural gas imports via the “Power of Siberia” pipeline.
We cannot still rule out the possibility of a further pipeline bringing Russian gas from the North, through North Korea, to South Korea.
Another piece of the Iranian puzzle, given the excellent relations between North Korea and Iran – also at military level.
The bank assets frozen as a result of the current US sanctions are above all 1.9 billion US dollars of the Central Bank of Iran in US banks, as well as additional 50 million US dollars strictly owned by diplomats. Also the proceeds of the British Assa Company, which controls the interests and stakes of Bank Melli in New York, are still frozen in the United States, with many real estate properties owned in various US States, as well as the funds to compensate the victims of Iranian terrorism – an asset which is worth 46 billion dollars.
After the second and current cycle of sanctions, in the USA there are still 38 entities, mainly dealing with oil and gas, which are officially and collectively named Execution of Imam Khomeini Order (EIKO).
However, the “policy line” of Iran’s Revolutionary Guards that dominate much of the Iranian economy is still in place.
It should be recalled that the Pasdaran policy line is to widen the economic and political gap between the EU and the USA.
In fact, shortly the Iranian government will announce that it has granted to Iran’s Revolutionary Guards as many as five of the seven oil exploration areas not yet officially disclosed.
One of these areas will be a substantial portion of the large oil site of Yadavaran.
With Sinopec, China has already stopped oil exploration in Yadavaran, because it wants Iran to pay all the fines that may possibly be imposed by the USA for any breaking of sanctions.
Obviously the funds coming from the exploitation of the new section of the Yadavaran oil site can be used by the Pasdaran to finance the Hezbollah and all the other Shiite guerrilla activities in the Middle East and in the rest of the world.
It should be recalled that the Pasdaran control as many as 27 Iranian oil companies and the Revolutionary Guards’ network also controls as many as 200 Iranian companies, which have many different goals.
The idea of the above mentioned European “vehicle” will be the main instrument of the Pasdaran operation on oil and natural gas.
They will accumulate euros in the EU importers’ coffers to reach such a level of EU currency to be received in bilateral trade as to stimulate Iran’s economy, including the oil-based one.
From the substitution of imports to the substitution of the trading currency – this is the Revolutionary Guards’ project.
The EU, however, has always maintained that Iran has never broken the terms of the JCPOA Treaty and this is what also CIA states.
The triangular trading system, however, has already been organized.
The USA has promised Germany – the actual EU leader – that, if Europe accepts US sanctions on Iranian oil, it will never impose sanctions on Iran’s natural gas, which is also the EU’s real commercial target.
Hence if the gas and petchem trade between Iran and the EU increases, the likelihood of a US military attack against the Islamic Republic of Iran will decrease proportionally, unless the USA materially closes the strategic route of the Iranian oil and gas trade, namely the Strait of Hormuz.
Otherwise, the way out for Iran would be standard sales to Russia, with a 50 billion US dollars of annual payments by the latter, to have preference over Iran’s entire oil and gas sector, as well as increase military collaboration, and finally achieve Russia’s de facto control over Iran’s oil and gas production.
Iranian exports, however, keep on rising.
In March, Iranian oil exports reached 1.7 million barrels a day, with a 70% increase compared to the previous three months.
The peak was reached in April 2019, with 2.8 million barrels a day – an average of 2.4 million crude oil barrels per month over the previous three months.
One of the main reasons for this peak in Iran’s oil is the Chinese demand – oil that China can now buy at a discount thanks to the US sanctions.
With the second cycle of US sanctions China is allowed to buy 360,000 crude oil barrels.
Obviously it will continue to buy what it needs even after the US sanctions being fully effective.
However – as the Saudi intelligence services claim -whatever happens, at the end of the sanction regime, the reduction in Iranian oil sales is expected to be40% on oil and by-products.
This is a minimum, but stable limit for the Iranian Shiite regime to stay afloat.
But this will not substantially change the relations between the Shiite government and the big crude oil importers that will still be able to change, divert and silence the new US sanctions.
Finding Fulcrum to Move the World Economics
Where hidden is the fulcrum to bring about new global-age thinking and escape current mysterious economic models that primarily support super elitism, super-richness, super tax-free heavens and super crypto nirvanas; global populace only drifts today as disconnected wanderers at the bottom carrying flags of ‘hate-media’ only creating tribal herds slowly pushed towards populism. Suppose, if we accept the current indices already labeled as success as the best of show of hands, the game is already lost where winners already left the table. Finding a new fulcrum to move the world economies on a better trajectory where human productivity measured for grassroots prosperity is a critically important but a deeply silent global challenge. Here are some bold suggestions
ONE- Global Measurement: World connectivity is invisible, grossly misunderstood, miscalculated and underestimated of its hidden powers; spreading silently like an invisible net, a “new math” becomes the possible fulcrum for the new business world economy; behold the ocean of emerging global talents from new economies, mobilizing new levels of productivity, performance and forcing global shifts of economic powers. Observe the future of borderless skills, boundary less commerce and trans-global public opinion, triangulation of such will simply crush old thinking.
Archimedes yelled, “…give me a lever long enough and a fulcrum on which to place it, and I shall move the world…”
After all, half of the world during the last decade, missed the entrepreneurial mindset, understoodonly as underdog players of the economy, the founders, job-creators and risk-taker entrepreneurs of small medium businesses of the world, pushed aside while kneeling to big business staged as institutionalized ritual. Although big businesses are always very big, nevertheless, small businesses and now globally accepted, as many times larger. Study deeply, why suddenly now the small medium business economy, during the last budgetary cycles across the world, has now become the lone solution to save dwindling economies. Big business as usual will take care of itself, but national economies already on brink left alone now need small business bases and hard-core raw entrepreneurialism as post-pandemic recovery agendas.
TWO – Ground Realities: National leadership is now economic leadership, understanding, creating and managing, super-hyper-digital-platform-economies a new political art and mobilization of small midsize business a new science: The prerequisites to understand the “new math” is the study of “population-rich-nations and knowledge rich nations” on Google and figure out how and why can a national economy apply such new math.
Today a USD $1000 investment in technology buys digital solutions, which were million dollars, a decade ago.Today,a $1000 investment buys on global-age upskilling on export expansion that were million dollars a decade ago. Today, a $1000 investment on virtual-events buys what took a year and cost a million dollars a decade ago. Today, any micro-small-medium-enterprise capable of remote working models can save 80% of office and bureaucratic costs and suddenly operate like a mini-multi-national with little or no additional costs.
Apply this math to population rich nations and their current creation of some 500 million new entrepreneurial businesses across Asia will bring chills across the world to the thousands of government departments, chambers of commerce and trade associations as they compare their own progress. Now relate this to the economic positioning of ‘knowledge rich nations’ and explore how they not only crushed their own SME bases, destroyed the middle class but also their expensive business education system only produced armies of resumes promoting job-seekers but not the mighty job-creators. Study why entrepreneurialism is neither academic-born nor academic centric, it is after all most successful legendary founders that created earth shattering organizations were only dropouts. Now shaking all these ingredients well in the economic test tube wait and let all this ferment to see what really happens.
Now picking up any nation, selecting any region and any high potential vertical market; searching any meaningful economic development agenda and status of special skills required to serve such challenges, paint new challenges. Interconnect the dots on skills, limits on national/global exposure and required expertise on vertical sectors, digitization and global-age market reach. Measuring the time and cost to bring them at par, measuring the opportunity loss over decades for any neglect. Combining all to squeeze out a positive transformative dialogue and assemble all vested parties under one umbrella.
Not to be confused with academic courses on fixing Paper-Mache economies and broken paper work trails, chambers primarily focused on conflict resolutions, compliance regulations, and trade groups on policy matters. Mobilization of small medium business economy is a tactical battlefield of advancements of an enterprise, as meritocracy is the nightmarish challenges for over 100 plus nations where majority high potential sectors are at standstill on such affairs. Surprisingly, such advancements are mostly not new funding hungry but mobilization starved. Economic leadership teams of today, unless skilled on intertwining super-hyper-digital-platform-economic agendas with local midsize businesses and creating innovative excellence to stand up to global competitiveness becomes only a burden to growth.
The magnifying glass of mind will find the fulcrum: High potential vertical sectors and special regions are primarily wide-open lands full of resources and full of talented peoples; mobilization of such combinations offering extraordinary power play, now catapulted due to technologies. However, to enter such arenas calls for regimented exploring of the limits of digitization, as Digital-Divides are Mental Divides, only deeper understanding and skills on how to boost entrepreneurialism and attract hidden talents of local citizenry will add power. Of course, knowing in advance, what has already failed so many times before will only avoid using a rubber hose as a lever, again.
The new world economic order: There is no such thing as big and small as it is only strong and weak, there is no such thing as rich and poor it is only smart and stupid. There is no such thing as past and future is only what is in front now and what is there to act but if and or when. How do you translate this in a post pandemic recovery mode? Observe how strong, smart moving now are advancing and leaving weak, stupid dreaming of if and when in the dust behind.
The conclusion: At the risk of never getting a Nobel Prize on Economics, here is this stark claim; any economy not driven solely based on measuring “real value creation” but primarily based on “real value manipulation” is nothing but a public fraud. This mathematically proven, possibly a new Fulcrum to move the world economy, in need of truth
The rest is easy
Evergrande Crisis and the Global Economy
China’s crackdown on the tech giants was not much of a surprise. Sure, the communist regime allowed the colossus entities like Alibaba Group to innovate and prosper for years. Yet, the government control over the markets was never concealed. In fact, China’s active intervention in the forex market to deliberately devalue Yuan was frequently contested around the world. Ironically, now the world awaits government intervention as a global liquidity crisis seems impending. The Evergrande Group, China’s largest property developer, is on the brink of collapse. Mounding debt, unfinished properties, and subsequent public pressure eventually pushed the group to openly admit its financial turmoil last week. Subsequently, Evergrande’s shares plunged as much as 19% to more than 11-year lows. While many anticipate a thorough financial restructuring in the forthcoming months, the global debt markets face a broader financial contagion – as long as China deliberates on its plan of action.
The financial trouble of the conglomerate became apparent when President Xi Jinping stressed upon controlled corporate debt levels in his ongoing drive to reign China’s corporate behemoths. It is estimated that the Evergrande Group currently owes $305 billion in outstanding debt; payments on its offshore bonds due this week. With new channels of debt ceased throughout the Mainland, repayment seems doubtful despite reassurances from the company officials. The broader cause of worry, however, is the impact of a default; which seems highly likely under current circumstances.
The residential property market and the real estate market control roughly 20% and 30% of China’s nominal GDP respectively. A default could destabilize the already slowing Chinese economy. Yet that’s half the truth. In reality, the failure of a ‘too big to fail’ company could bleed into other sectors as well. And while China could let the company fail to set a precedent, the spillover could devastate the financial stability hard-earned after a strenuous battle against the pandemic. Recent data shows that with the outbreak of the delta variant, the demand pressure in China has significantly cooled down while the energy prices are through the roof. Coupled with the regulatory crackdown rapidly pervading uncertainty, a debt crisis could further push the economy into a recession: a detrimental end to China’s aspirations to attract global investors.
The real question, therefore, is not about China’s willingness to bail out the company. Too much is at stake. The primal question is regarding the modus operandi which could be adopted by China to upend instability.
Naturally, the influence of China’s woes parallels its effect on the global economy. A possible liquidity crisis and the opaque measures of the government combined are already affecting the global markets: particularly the United States. The Dow Jones Industrial Average (DJIA) posted a dismal end to Monday’s trading session: declining by more than 600 points. The 10-year Treasury yields slipped down 6.4 basis points to 1.297% as investors sought safety amid uncertainty. The concern is regarding China’s route to solve the issue and the timeline it would adopt. While the markets across Europe and Asia are optimistic about a partial settlement of debt payments, a take over from state-owned enterprises could further drive uncertainty; majorly regarding the pay schedule of western bondholders amid political hostility.
Economists believe that, while a financial crisis doesn’t seem like a plausible threat, a delayed response or a clumsy reaction could permeate volatility in the capital markets globally. Furthermore, a default or a takeover would almost certainly pull down China’s economy. While the US has already turned stringent over Chinese IPOs recently, a debt default could puncture the economic viability of a wide array of Chinese companies around the world. And thus, while the global banking system is not at an immediate threat of a Lehman catastrophe, Evergrande’s bankruptcy would, nonetheless, erode both the domestic and the global housing market. Moreover, it would further dent Chinese imports (and seriously damage regional exchequers), and would ultimately put a damper on global economic recovery from the pandemic.
Economy Contradicts Democracy: Russian Markets Boom Amid Political Sabotage
The political game plan laid by the Russian premier Vladimir Putin has proven effective for the past two decades. Apart from the systemic opposition, the core critics of the Kremlin are absent from the ballot. And while a competitive pretense is skilfully maintained, frontrunners like Alexei Navalny have either been incarcerated, exiled, or pushed against the metaphorical wall. All in all, United Russia is ahead in the parliamentary polls and almost certain to gain a veto-proof majority in State Duma – the Russian parliament. Surprisingly, however, the Russian economy seems unperturbed by the active political manipulation of the Kremlin. On the contrary, the Russian markets have already established their dominance in the developing world as Putin is all set to hold his reign indefinitely.
The Russian economy is forecasted to grow by 3.9% in 2021. The pandemic seems like a pained tale of history as the markets have strongly rebounded from the slump of 2020. The rising commodity prices – despite worrisome – have edged the productivity of the Russian raw material giants. The gains in ruble have gradually inched higher since January, while the current account surplus has grown by 3.9%. Clearly, the manufacturing mechanism of Moscow has turned more robust. Primarily because the industrial sector has felt little to no jitters of both domestic and international defiance. The aftermath of the arrest of Alexei Navalny wrapped up dramatically while the international community couldn’t muster any resistance beyond a handful of sanctions. The Putin regime managed to harness criticism and allegations while deftly sketching a blueprint to extend its dominance.
The ideal ‘No Uncertainty’ situation has worked wonders for the Russian Bourse and the bond market. The benchmark MOEX index (Moscow Exchange) has rallied by 23% in 2021 – the strongest performance in the emerging markets. Moreover, the fixed income premiums have dropped to record lows; Russian treasury bonds offering the best price-to-earning ratio in the emerging markets. The main reason behind such a bustling market response could be narrowed down to one factor: growing investor confidence.
According to Bloomberg’s data, the Russian Foreign Exchange reserves are at their record high of $621 billion. And while the government bonds’ returns hover at a mere 1.48%, the foreign ownership of treasury bonds has inflated above 20% for the second time this year. The investors are confident that a significant political shuffle is not on cards as Putin maintains a tight hold over Kremlin. Furthermore, investors do not perceive the United States as an active deterrent to Russia – at least in the near term. The notion was further exacerbated when the Biden administration unilaterally dropped sanctions from the Nord Stream 2 pipeline project. And while Europe and the US remain sympathetic with the Kremlin critics, large economies like Germany have clarified their economic position by striking lucrative deals amid political pressure. It is apparent that while Europe is conflicted after Brexit, even the US faces much more pressing issues in the guise of China and Afghanistan. Thus, no active international defiance has all but bolstered the Kremlin in its drive to gain foreign investments.
Another factor at work is the overly hawkish Russian Central Bank (RCB). To tame inflation – currency raging at an annual rate of 6.7% – the RCB hiked its policy rate to 6.75% from the all-time low of 4.25%. The RCB has raised its policy rate by a cumulative 250 basis points in four consecutive hikes since January which has all but attracted the investors to jump on the bandwagon. However, inflation is proving to be sturdy in the face of intermittent rate hikes. And while Russian productivity is enjoying a smooth run, failure of monetary policy tools could just as easily backfire.
While political dissent or international sanctions remain futile, inflation is the prime enemy which could detract the Russian economy. For years Russia has faced a sharp decline in living standards, and despite commendable fiscal management of the Kremlin, such a steep rise in prices is an omen of a financial crisis. Moreover, the unemployment rates have dropped to record low levels. However, the labor shortage is emerging as another facet that could plausibly ignite the wage-price spiral. Further exacerbating the threat of inflation are the $9.6 billion pre-election giveaways orchestrated by President Putin to garner more support for his United Russia party. Such a tremendous demand pressure could presumably neutralize the aggressive tightening of the monetary policy by the RCB. Thus, while President Putin sure is on a definitive path of immortality on the throne of the Kremlin, surging inflation could mark a return of uncertainty, chip away investors’ confidence: eventually putting a brake on the economic streak.
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