Rouhani’s Inherited Economic Links to Latin America

Rouhani’s Inherited Economic Links to Latin America

By: Mary Campbell, Research Associate at the Council on Hemispheric Affairs

The relationship between the Islamic Republic of Iran and Latin America is likely to weaken considering the effort newly inaugurated President Hassan Rouhani is exerting to initiate dialogue with other countries. Interestingly, the attempts by the new Iranian head of state to create ties with more diverse members of the international community may jeopardize some of Iran’s current relationships, especially in Latin America.

In order to analyze the possibility of weakened relationships with Latin America, it is imperative to review the existing ties that Iran has with the region.  Currently, Iranian-Latin American relations are primarily based on petroleum products, foodstuffs, and most of all, a few of these countries’ willingness to disobey international trade sanctions regimes. However, despite these governments’ efforts, the Islamic Republic’s economy continues to suffer and Rouhani is obligated to domestically turn his nation’s economy around.

Some Latin American countries, predominately the region’s members of the Organization of the Petroleum Exporting Countries (OPEC)—Venezuela and Ecuador—are violating sanctions through supporting their OPEC colleague, Iran, byfinancially testing the status quo and using its petroleum products. Additionally, countries such as Bolivia, Uruguay, and Argentina are selling food to Tehran. In maintaining these commercial ties, these states are also disregarding probable economic penalties to prove their independence from the United States and their freedom of action from the United Nations.

opec

Photo source: PressTV

Venezuela and Ecuador Support Fellow OPEC Member

As fellow members of OPEC, Venezuela and Iran’s relationship was amplified by the friendship between former Iranian President Mahmoud Ahmadinejad and the late Venezuelan President Hugo Chávez. Venezuela’s ongoing trade statistics demonstrate the enduring collaboration between the two nations despite the existence of the sanctions afflicting Iran. When the initial shock of the 2006 sanctions was felt in the Islamic Republic, Tehran struggled to provide oil for its own people. Not long after the setback, Chávez formed a bond with Ahmadinejad and Venezuela’s state oil company, Petróleos de Venezuela (Petroleum of Venezuela; PDVSA) in order to export to Iran to satisfy that country’s domestic market requirements, facing the consequences when Washington imposed sanctions on PDVSA as well. [1]

In addition, oil exports from Venezuela are gradually replacing Iran’s petroleum products in several of the larger countries that currently adhere to U.S. sanctions. In the past two years, PDVSA’s oil exports to China and India have doubled to almost a million barrels per day, and Venezuela has grown from the seventh to the third largest supplier of oil to China and India in the past two years.[2] Considering this, and Iran’s shortage of petroleum production, it is no surprise that oil exports from Tehran to those countries have halved in the past two years. [3]

In the face of international sanctions regimes in 2010, Chávez began to funnel funds from the Export Development Bank of Iran (EDBI) to the rest of the world through the Banco Internacional de Desarrollo (the Bank of International Development; BID).[4]  BID, a small Venezuelan bank, assists the EDBI by using encrypted communications and receives payments for helping to maintain Iran’s presence in the global economy.[5] Despite being sanctioned almost immediately by the United States, the European Union, and the United Nations, BID devised a new plan that consists of channeling the payments to Venezuelan and Panamanian banks that have relationships with U.S. banks, and then by directing amounts of money wherever Iran desires. [6] So far, this method has been partially successful in reintroducing Iran into the international economy.

Along with Venezuela, another fellow OPEC member, Ecuador, reached out to Iran after sanctions were imposed against Tehran. For example, President Rafael Correa publicly supports Iran’s right to pursue nuclear technology.[7] Moreover, in July 2012, then president of Ecuador’s Central Bank, Pedro Delgado Campaña, asserted during his tenure that Ecuador could trade with whomever it desired regardless of sanctions regimes.[8] It is important to highlight that until December 2012, Delgado was concurrently the head of a government committee that worked with Iran and the president of Ecuador’s Central Bank, which made it easier for Caracas to collaborate with Iranian companies.[9]

In February of 2012, delegates (including Delgado) from Petroecuador, Ecuador’s state oil company, met with delegates from the National Iranian Oil Refining and Distribution Co. (NOIC) and EDBI to enhance relations. At this conference, EDBI proposed a $400 million USD credit line to Petroecuador, and the company responded with a list of petroleum products it wanted in exchange.[10] At the time, Iran did not have sufficient oil to adequately supply its own people, so the discussions were delayed but eventually agreed upon in 2013.[11]

Furthermore, nearly all of the Ecuadorian banks and refineries that maintain ties with Iran are already on the U.S. Treasury’s Office of Foreign Assets Control sanctions list and some are on the U.N. sanctions list as well.[12] However, the Ecuadorian version of Venezuela’s BID, Banco Cofiec has opened an account to pilot funds through Russia to the Islamic Republic.[13] Cofiec is even more successful than BID because Ecuador’s official currency is the U.S. dollar, so it does not need to be converted, as most international trade is conducted in U.S. dollars. This makes such transactions more difficult to detect.[14]

Despite these nations’ support, neither Venezuela nor Ecuador is in a position to bolster another nation’s economy (such as Iran’s), considering the economic difficulties both countries are currently facing. Venezuela relies heavily on imports, but has exported at higher levels than it is accustomed to over the past few years. [15] In addition, this past year, Ecuador experienced its slowest rate of economic growth since an economic crisis started in 2010.[16] These two countries, as Tehran’s strongest supporters in the region, illustrate that Iran cannot rely on Latin America alone to expand its economy, a fact that newly inaugurated President Rouhani has recognized as it appears that he will be able to improve diplomatic relations with the United States.

Other Latin American Countries Seek and Continue Trade

In addition to the Latin American OPEC member states, other western hemispheric countries that wish to demonstrate their support for Tehran also maintain and solicit trade with the Islamic Republic. One example of this is the relationship between Bolivia and Iran, which many speculate is a response to the close ties between Venezuela and Iran.[17]

In May 2011, President Evo Morales announced that Bolivia would assist the Islamic Republic in constructing its lithium reserves.[18] According to the news agency United Press International, lithium could be used in the near future as a substitution for uranium and that sanctions ought to be implemented.[19] Additionally in May, President Morales made it known that Bolivia might increase bilateral relations with Iran and that studies were in progress to determine if Iran will invest in Bolivia’s oil reserves. As of the beginning of July, Tehran has agreed to assist Bolivia in oil and gas exploration.[20] Since La Paz believes in the peaceful nature of Tehran’s pursuit of nuclear technology, Bolivia recently stood by Iran throughout its time of need, though it is too soon to tell whether these ties will last if sanctions against Iran are loosened.

Iran and Argentina have a strong and growing trade relationship as well. The increased ties that President Christina Kirchner oversaw have incited domestic disapproval due to the widespread belief that the Iranian government was behind the Asociación Mutual Israelita Argentina (AMIA) attacks in 1992, which were the deadliest terrorist attacks in Argentina’s history, as well as reproach from the United States and Israel. However, Argentina’s struggling economy (the World Bank predicts that unemployment will increase by almost 50 percent this year) makes the continuance of trade relations with Iran appealing.[21] Argentina is the seventh largest exporter to Iran and its second most important trading partner in the region.[22] Argentina’s bilateral exports to Iran consist of food and staple goods, making Iran the tenth largest customer of Buenos Aires.[23] However, potential sanctions from the U.S. Congress against Argentina, regarding trade between Buenos Aires and Tehran, may influence the Kirchner government to regard commercial relations with Iran as less appealing. 

Uruguay also has maintained trade ties with the Islamic Republic despite the international sanctions regime. However the sanctions have perhaps transformed Uruguay’s trade with Iran from being based on payments to a system resembling bartering, as Uruguay announced in April 2012 that it would be interested in trading rice for Iranian oil. The South American nation sold 90,000 tons of rice to Iran in 2011 and was the largest exporter of rice to the Islamic Republic in 2012.[24]  This manner of bartering is a common technique for Tehran since it makes trade more discreet. Thus, the risk for Iran’s trading partners is minimized, which is essential for maintaining willing economic partners. However, if the sanctions are reduced, Iran may seek a rice supplier that offers better prices than Uruguay, which would mean a decrease in Tehran’s ties with Montevideo.

Ultimately, even though the Islamic Republic has managed to maintain somewhat close commercial ties with several Latin American nations throughout the country’s recent epoch, it continues to suffer economically. Rouhani’s experience and agenda bring hope for an improvement of the country’s economy. However, if Iran’s relations with the West improve in the coming years, Tehran’s relationships with Latin American nations could become less desirable. 

Current Economic Failures & Possibilities Ahead 

Rouhani received an outright majority in the recent presidential election because his supporters believe in his ability to fix the economy.[25] Since oil is among the few resources Tehran has at its ready disposal and a majority of its governmental programs are funded with oil revenue, the sanctions against Iran are devastating. Iran currently suffers from rapid inflation and soaring unemployment due to a shortage of goods and the aforementioned 50 percent drop in oil revenue, both of which are consequences of the international sanctions.[26]

In the case that Rouhani is successful in lessening or terminating the sanctions imposed on Iran, it will undoubtedly affect his country’s future relations with Latin American countries. Given its current precarious situation, Iran cannot spare any possible trading partners, but these ties would likely weaken if Iran makes these nations compete for trade against countries that are currently adhering to the sanctions (i.e. China and India). In this case, Iran would be a more valuable trading partner to these Latin American states than they are to it.

Mary Campbell, Research Associate at the Council on Hemispheric Affairs

Please accept this article as a free contribution from COHA, but if re-posting, please afford authorial and institutional attribution. Exclusive rights can be negotiated.

For additional news and analysis on Latin America, please go to: LatinNews.com and Rights Action 

References

[1] Charlie Devereux and Daniel Cancel “PDVSA Bonds Slide After U.S. Imposes Sanctions on Company For Iran Links,” Bloomberg, May 24, 2011, Accessed August 19, 2013, http://www.bloomberg.com/news/2011-05-24/pdvsa-bonds-sink-after-u-s-imposes-sanctions-on-company-for-links-to-iran.html

[2] Blas, Javier. “Venezuela Fills Void Left by Iranian oil Export Sanctions,” Financial Times, June 13, 2013, August 19, 2013, http://www.ft.com/intl/cms/s/0/47e7fad8-cdc3-11e2-8313-00144feab7de.html#axzz2al0IZtHg

[3] Javier Blas, “Venezuela Fills Void Left by Iranian oil Export Sanctions,” Financial Times, June 13, 2013. August 19, 2013 http://www.ft.com/intl/cms/s/0/47e7fad8-cdc3-11e2-8313-00144feab7de.html#axzz2al0IZtHg.

[4] Noriega, Roger. “Iran-Venezuela money laundering confirmed?” American Enterprise Institute Ideas, February 4, 2013, Accessed August 19 2013, http://www.aei-ideas.org/2013/02/iran-venezuela-money-laundering-confirmed/.

[5] Douglas Farah, Pamela Philips Lum. “Ecuador’s Role in Iran’s Latin American Financial Structure: A Case Study of the Use of COFIEC Bank,” International Assessment and Strategy Center, March 13, 2013. Accessed August 2, 2013. http://www.strategycenter.net/docLib/20130313_EcuadorIran_FarahLam_031213.pdf.

[6] Douglas Farah, Pamela Philips Lum. “Ecuador’s Role in Iran’s Latin American Financial Structure.”

Robert Morgenthau, “Morgenthau: The Link Between Iran and Venezuela – A Crisis in the Making?” Latin American Herald Tribune, September 8, 2008. Accessed August 19, 2013. http://laht.com/article.asp?ArticleId=343289&CategoryId=10718.

[7] Cárdenas, José. “The Chavez Model Threatens Ecuador,” American Enterprise Institute, March 21, 2011. Accessed August 19, 2013. http://www.aei.org/outlook/foreign-and-defense-policy/regional/latin-america/the-chvez-model-threatens-ecuador/

[8] Nathan Gill, “Ecuador to Buy Iranian Fuel in Defiance of Western Sanctions,” Bloomberg, July 18, 2012. Accessed August 19, 2013. http://www.bloomberg.com/news/2012-07-18/ecuador-to-buy-iranian-fuel-in-defiance-of-western-sanctions-1-.html.

[9]Douglas Farah, Pamela Philips Lum. “Ecuador’s Role in Iran’s Latin American Financial Structure.”

[10] Otto Reich, Ezeqiel Válzquez-Ger. “Amb. Otto Teich and Ezequiel Vázquez-Ger: More questions about Iran’s activities in Ecuador,” The Hill, August 6, 2013. Accessed August 19, 2013. http://thehill.com/blogs/global-affairs/guest-commentary/242321-more-questions-about-irans-activities-in-ecuador.

[11](Farah, Lum.)

[12] Ibid.

[13] Ibid.

[14] Ibid.

[15] Javier Blas, “Venezuela Fills Void Left by Iranian oil Export Sanctions.” 

[16] Nathan Gill, “Ecuador to Buy Iranian Fuel in Defiance of Western Sanctions.”

[17] Ariel Farrar-Willman and Robert Frasco, “Bolivia-Iran Foreign Relations,” American Enterprise Institute Iran Tracker, August 4, 2010. Accessed August 19, 2013. http://www.irantracker.org/foreign-relations/bolivia-iran-foreign-relations.

[18] Avi Jorisch, “Why Iran and Bolivia are in Business,” United Press International, May 10, 2012. Accessed August 1, 2013. http://www.upi.com/Top_News/Analysis/Outside-View/2011/05/10/Outside-View-Why-Iran-and-Bolivia-are-in-business/UPI-29341305022140/.

[19] Avi Jorisch, “Why Iran and Bolivia are in Business.”

[20] “Iran, Bolivia Agree on Joint Oil, Gas Exploration,” Fars News Agency, June 2, 2013. Accessed August 19, 2013.  http://english.farsnews.com/newstext.aspx?nn=13920411001153.

[21] “Argentina,” The World Bank, Accessed August 9, 2013. http://data.worldbank.org/country/argentina.

[22] “Trade in Argentina,” The Observation of Economic Complexity, 2010. Accessed August 19, 2013. http://atlas.media.mit.edu/country/arg/.

[23] “Argentina,” The World Bank.

[24] “Uruguay Wants to Barter Rice for oil with Iran,” Reuters, March 30, 2013. Accessed August 2013. http://www.reuters.com/article/2012/03/30/uruguay-iran-rice-idAFL2E8EUE8T20120330.

[25] Mehrun Etebari, “Iranian Public Opinion Polling and Rouhani’s Electoral Victory,” Brookings Institute, August 8, 2013. August 19, 2013.http://www.brookings.edu/blogs/iran-at-saban/posts/2013/08/08-iran-public-opinion-rouhani-election-mohseni.

[26] Ladane Nasseri, “Iran’s President-Election Rohani Talks Economic Reform,” Bloomberg Business Week, July 3, 2013. August 19, 2013.  http://www.businessweek.com/articles/2013-07-03/irans-president-elect-rohani-talks-economic-reform.