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Iranian oil sales, foreign exchange taking a hit from US, UN sanctions

Despite Tehran's insistence that increasingly strict sanctions are not harming Iran, Iranian oil sales are down and its foreign exchange access is being hampered by the US and UN sanctions.

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Since 2010, the NIOC has experienced a decline in oil export sales and so been forced to store more unsold oil than the country's typical seasonal storage levels, according to oil ministry officials. Meanwhile, heightened international enforcement of financial sanctions against the Islamic Republic have constrained the NIOC's access to company earnings from oil sales overseas.

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Since oil export revenues are Iran's primary source of foreign exchange, monetary policy makers inside the Islamic Republic's Central Bank are finding it increasingly difficult to facilitate foreign currency transactions and regulate the depreciation of Iran's currency, say local financial advisors and economists.

“Not only do they get less oil income," says an Iran analyst, speaking from Tehran on condition of anonymity, "but their ability to manage the exchange rate gets constrained as well.”

To manage the decline in oil sales and eliminate any unsold oil stored offshore, Iran has reduced daily oil production and offered discounts to foreign customers, who as a result of US and international sanctions must pay higher transaction fees and deal with a lengthier bureaucracy to buy Iranian oil, says a senior Iranian oil official.

“If we're sensitive about price, then oil stocks will rise again,” the official said. “We just want to sell.”

Iran hasn't released an official estimate of its foreign currency reserves since 2008, when the figure stood at just over $80 billion. Anecdotal evidence suggests that number has fallen by 35 percent to around $54 billion, according to interviews with local economists.

Since 2002, when Iran's Central Bank unified the country's street and official exchange rates to implement a managed floating-rate system, Iran's national currency has depreciated an average 3.25 percent per year, according to Central Bank statistics. Since the beginning of the Iranian new year in March, the exchange rate – currently around 10,600 rials per dollar – has depreciated an additional 3 percent.

Looking to Asian banks

Iran has managed to use small, local banks based in countries such as the United Arab Emirates, Turkey, and Malaysia to facilitate smaller cash transfers back to Iran. To deal with banking constraints for larger money transfers, the NIOC and Central Bank have engaged in book-to-book accounting with willing trading partners, primarily in Asia, whereby refineries buying Iranian oil pay the NIOC with the purchaser's local currency instead of US dollars.

Earnings from oil sales are deposited into locally held accounts and spent in that country to finance imports into Iran, according to Tehran-based financial advisors. Any surplus balance is used as collateral to obtain loans for project financing, in order to avoid having to obtain letters of credit, which are now more difficult to obtain as a result of sanctions.

Mr. Ferrari, the attorney specializing in US Treasury legislation, said such financial moves don't fall under the jurisdiction of OFAC-administered sanctions against Iran. “For Asian banks that don't have a presence in the US, we don't have authority to charge them or enforce the sanctions,” he says.

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