31 December 2007

The shockwaves of 5%, where jihad meets economics

From al-Reuters 31 DEC 2007:

UPDATE 3-Turkmenistan stops gas exports to Iran
Mon Dec 31, 2007 2:08pm GMT
(Adds Mehr report, analyst comment, paragraphs 2, 5, 12-15)

By Zahra Hosseinian

TEHRAN, Dec 31 (Reuters) - Turkmenistan has stopped natural gas exports to Iran, causing winter shortages in some parts of its neighbour, Iranian officials said on Monday.

The major Central Asia producer blamed technical problems but some Iranian media reports suggested it had halted deliveries because it wanted to raise the price of gas.

Turkmenistan normally supplies 5 percent of Iran's gas consumption with 20-23 million cubic metres per day, the National Iranian Gas Company said.

Turkmen officials were unavailable for comment on Monday. Turkmen media have said an Iranian delegation visited Ashgabat on Dec 26-27 to discuss gas prices for next year.

"In their comments, some (Iranian) officials have said that Turkmenistan has doubled the price of gas," the semi-official Mehr News Agency said, without quoting any of them by name.

Ebadollah Ghanbari, who heads the public relations unit of the national gas company, said Turkmenistan on Saturday slashed exports to Iran by half to 10 million cubic metres, before stopping deliveries completely a day later.

"In an official letter they said it was due to technical problems," he told state broadcaster IRIB. "Since yesterday evening Turkmenistan has completely cut its gas exports to Iran."

Despite its massive gas reserves, Iran has been a net importer of gas since 2002.


The cuts caused difficulties in parts of northern Iran in the middle of winter. Some hospitals were affected, bakeries faced shortages and gas was turned off to some government offices to make more available for households.

"Because of the sharp decrease in the pressure of natural gas many restaurants and motels ... are completely or partially closed," state radio said.

The state gas company urged Iranians to use less energy.

Jonathan Stern of the Oxford Institute for Energy Studies described the timing of the supply disruption as odd and said it might be linked to Turkmen price demands.

"It's very oddly timed, nobody does 'repairs' at this time of year unless there's been some kind of accident which is not mentioned here," Stern told Reuters.

"With Russians paying 30 percent more from tomorrow and 50 percent more from July, I would expect the Iranians to be facing similar demands," he said.

Stern was referring to a price agreement in November between Russia's gas export monopoly Gazprom (GAZP.MM: Quote, Profile, Research) and Turkmenistan, which now charges $130 per 1,000 cubic metres.

But Iranian Foreign Ministry spokesman Mohammad Ali Hosseini said Turkmenistan was working to sort things out. "There are a certain number of technical problems and they are trying to solve the problems over there in Turkmenistan," he said.

Iran sits on the world's second largest gas reserves after Russia. But sanctions, politics and construction delays have slowed gas development, and analysts say it is unlikely to become a major exporter for a decade.

(Additional reporting by Marat Gurt in Ashgabat, Barbara Lewis in London, writing by Fredrik Dahl; editing by William Hardy)
Well, if you haven't read my previous stuff on Iran's Oil Problem and its Oil Outlook, now is the time to, because Iran just hit the wall.

Iran subsidizes natural gas so as to keep things running and folks happy. They don't use natural gas to rejuvenate their oil fields, which is one of the cheapest ways to do it. Instead, with non-market prices they get steep use and an increase in that use. If an energy source is cheaper than others, it gets over-utilized, just ask the folks in Iraq who don't pay monthly bills for electricity but get the 'all you can eat with a flat tax' deal from the Government. If there were meters, Iraq's power problem would diminish greatly, but that would also stall out the economic recovery so it will wait. Iran, however, is selling the natural gas at a rate cheaper than re-utilizing it for their oil fields. In theory they should have more than enough to export.

Which brings up the prime question: Why is Iran importing any natural gas?

And why is 5% of their natural gas supplies coming from imports via Turkmenistan?

This was supposed to be a money making export, as they had just finished a pipeline deal with India for natural gas. So *what* are they going to put in that pipeline? Right now the answer is NOTHING.

The folks in Turkmenistan suddenly had a great awakening: they were keeping the Iranian natural gas market afloat and NO ONE ELSE WOULD SELL TO THEM.

If you were in that position, what would *you* do?

Can you say: raise the prices?

And if Iran doesn't play pattycake?

'We have *repairs* so no natural gas for you until we are done.'

In other words: pay up, or else.

Iran, with its refineries in disrepair can't capture enough natural gas to keep its own markets going and hasn't invested much of anything in marginal expansion or new gas field work since 1979. And since folks pay under the market price to help keep the economy going, you can't very well raise the price of it, can you?

So what does Iran do?

'Pretty please, don't use as much.'

Iran can't complain it doesn't have enough natural gas... no that second largest reserve of same on the planet demonstrates just the opposite.

Iran can't complain that the contracts aren't 'fair' as they do *worse* with their oil contracts.

Iran can't raise the price without causing a major recession or depression and starting to shut down some sectors of the economy. Plus, if they raise the prices for natural gas, they will be raising the cost of operating gas fired electrical facilities. A 'double-whammy' on the economy.

Iran might start 'rationing' it, but how they would do that is beyond me. Maybe start closing shut-off valves to certain neighborhoods for half-a-day at a time? That will start to cause some *serious* complaints, not just from college students or government employees, but from everyday folks.

Iran has only one solution that it tends to use for everything, and that is to shift terror operations. So Turkmenistan can expect to get its own little Hezbollah and meet-ups with the Qods forces. Which will be a blessing for Iraq and a 'holding pattern' in Lebanon. Unless, of course, Turkmenistan is *serious* in which case the next year in Iran is make or break.

And if Iran has to *pay up* a lot of terrorist cash will suddenly *dry up*.

Thank you to Turkmenistan!

If you can hold out you just might start solving the problem of Iran in a real hurry.


M. Simon said...

A. J.,

You and I have been on the same page on this for quite some time.

I covered the Cash Flow Jihad aspect. You have been covering oil.

America is squeezing Iran by preventing them from earning income from other than oil. Iran's own bad policies (as you point out) are squeezing their oil income.

In other times this would be called the policy of blockade.

I posited that they had a window of opportunity for their jihad program. They lost the war in Lebanon (intended to weaken Israel - it did not). They needed an unstable Iraq (so they could take Iraqi oil fields to stave off collapse). That didn't work out either.

They are now between a rock and a very hard place. Afghanistan is their last hope. However, even if they win it they gain a liability, not an asset.

If they don't get nukes within a year (Pakistan?) they are fooked.

M. Simon said...

Let me add that Iran sells gasoline in Iran for under 50¢ a gallon. About 1/4 the world price.

BTW Iran raised gasoline prices by 25% last summer. It was around 34¢ a gallon previously.

In addition economic genius Ahmanutjob withdrew all the Iranian cash reserves from the world banking system to stave off disaster. It created an inflationary spike and produced nothing as the money was not invested but went to support jihad and stave off internal economic collapse.

Paying off the Shiites for the disaster in Lebanon must have cost a lot. However, without that payment Iran loses prestige and its proxy Hizbollah.

Historical precedent - Germany summer of 1918.

M. Simon said...

Another point. Perhaps the CIA leak - taking pressure off Iran - was policy and not a rogue element in the US Government acting without authorization.

In fact it may have been in Iran's interest because by making a deal re: funding the insurgency in Iraq in exchange for a reduction of American military pressure they reduce the cash flow strain.

My guess is that it will buy time for Iran, but not enough. So it was a good deal for us. If we reckoned that the slide had gone so far as to be irreversible.

A Jacksonian said...

Simon - My thanks!

I would look, instead of organized blockade, at the way Iran actually runs its energy export contracts. A good compare/contrast is the Saddam regime from 1991 onwards under some real blockade and Iran since 1979 under economic blockade.

Saddam, even under blockade, was able to get world prices for crude and steady customers (and get kick-backs into the bargain). By being reliable he was able to continue minimal investment into his petro system to keep it running and shift from natural gas to crude oil for his power plants (the natural gas becoming vented into the atmosphere). This garnered steady income and erosion of international will, because he could bluster and posture, but he made the point of reliability and that if he went France, Russia and China would be getting zero repayment of their debts.

Iran changes its contracting price structure based on how the regime 'feels' about certain Nations and companies. Further they did not retain oil field rejuvenation knowledge nor the ability to run internal marginal expansion programs. Iran was basically asking for others to pay the price of maintenance and expansion to get oil, and then have that price set on whimsy, not world oil prices. By the late 1990's Japan had walked away from that and told its suppliers it would not look favorably upon others who did help Iran with their petro infrastructure. First Russia then China took a look at Iran, with the latter first announcing a $10 billion package and then pulling back from that. Russia's Gazprom told the leadership and stakeholders *not to touch Iran* to help them.

Here is where it gets interesting, especially as the research would have to be done before the announcement and there is one individual linked with Gazprom (and may actually be the controller of it) that could do the math on natural gas and have the resources to exploit what he saw. Russia, in the post-USSR, has stood up three-way investment structures for its companies: Russian government (public), Private investment, Organized Crime. Almost on an equal parity basis. The Red Mafia has a controlling if not majority interest in Gazprom. The man who figured out how to shift black market money to white investments so as to control the constituent parts absorbed into Gazprom is, perhaps, the shrewdest economist on Rock 3 from the Star Sol: Semion Mogilevich.

His area of power?

The 'stans of old Soviet Republics, in particular Turkmenistan. A classically trained economist would analyze that Iran, cut off from easy outside purchases of a vital supply, would be held captive to that supply when it needed to import it. Remember this is the man now wielding a major controlling faction of Gazprom that he helped to engineer to wrest control from Yukos/Yukoil. He actually had a major share of *that* too, but wanted better control, thus starts the wheeling and dealing in the late 1990's to get Gazprom and have it incorporate his distributed holdings.

If Iran has a blockade, it is through turning all other customers off to it, more than effectiveness of internatioinal law and the UN. And when no one else will get you what you need, who do you turn to? The Loan Shark. Iran's mullahs thought that Turkmenistan and Mogilevich would *keep* to *their* pricing contracts. And they did!

Right up to the 5% mark.

While only a 1 part in 20 'hit', it effectively eliminates all natural gas based economic expansion and increases the cost of maintenance to the rest of the system. Iran's refineries are now moribund: their secondary source of natural gas should come from these, but they don't cover the supply needs internal to Iran. As natural gas needs to be kept 'at pressure' to ensure no problems with the pipelines and to ensure proper working of all equipment associated with natural gas, that 5% hit goes *just* outside the tolerance levels for most equipment to safely operate.

To raise pressure you either increase input or remove output.

Apparently someone has a long term goal on the oil and gas supplies of Iran and will be doing anything to get it, include make Iran dependent upon him. My guess, just pulled purely from having an idea of how that system works and who has controlling ownership of it, places this event at the doors of Semion Mogilevich. He probably knows the Iranian petro-infrastructure better than Iran does at this time. Better than China. Better than the US. Better than the international oil companies, due to the length and breadth of the Gazprom survey work.

Jihad, as we have seen on the small scale, an use organized crime (Iraq, Lebanon, Bosnia, TBA South America, Chechnya, Uzbekistan, Tajikistan...), but, in this instance, with the international oil market turned off to Iran's contract structure and Iran needing natural gas... organized crime can start dictating to jihad based Iran and getting nuclear devices to use against Putin is not going to be enough as Putin knows who the controlling interest in the Russian economy is. Pakistan, at 20% Shia isn't going to go the Iranian model and, in fact, Iran's Baluch ethnic minority have proven competent in terror internal to Iran and have worked with their cousins in Pakistan who feel cheated of autonomy when Pakistan stood up.

Afghanistan also offers no good input due to ethnic/religious divides close to that of Pakistan, plus the Pashtuns along the western edge who are heavily aligned to Sunni-Deobandi views. Weapons they will buy, but Iranian views they will not.

Iran now has serious problems.

It is going at shadow-loggerheads with the toughest crime group on the planet: the Ivankov/Mogilevich gang. They ran the Bank of NY money laundering scheme, they laundered money for Monzer al-Kassar and Mogilevich, they manipulated the Canadian stock market and defrauded US investors, murder is not a 'last resort' to the them and often the first resort. Iran has been importing thugs from the 'stans to help it control its population... and I bet that not *all* of those are Islamic based.

Iran's economy is holding its breath and was gasping for air the last year or so when the government had major problems paying its employees. Unable to expand petro-fields, unable to keep refineries working well, needing to import gasoline and then natural gas from organized crime... this is not the description of a robust economy ready to take on all comers and create nuclear power plants. Even if they wanted to buy those lovely Toshiba self-contained plants, the Japanese government would not allow it.

This is not 'blockade' but isolation through being absolutely unreliable and nasty to everyone. Without friends they turned to 'everyone's friend' who has a cost much higher than the stated price. I don't see Iran, as-is, surviving 5 years... tough to make 3 at this point... and 1 is looking extremely hard. Possible with some help from Venezuela... but they, also, have similar oil problems due to communist-style control.

To fund jihad you need steady income and a stable society.

The society is unstable.

Now the crunch time comes: jihad or economy?

Decisions, decisions... glad I'm not making them!

M. Simon said...


First off. They have hit the wall way sooner than expected. Yea.

Second off. I don't believe Iraq was totally cut off from the world banking system in the way Iran has been.

That move caused Iran to take its money out of the bank and hide it under the mattress.

This complicates things as they must use couriers to move money instead of electrons. Electrons are faster and cheaper.

Evidence of that necessity are two things - to supply the Palis suitcases of cash had to be moved from Egypt. The same was true after the Lebanon dust up in '06.

I agree it is not the main problem. It does add friction re: time and transaction costs. It also another discouragement to doing business with Iran.

As you know a blockade is never perfect. However, a 10% imbalance of supply vs. demand over time strangles you.

I'm now going to read the rest - of your reply and may have more.

M. Simon said...

A. J.,

This sentence in from Oil Outlook is telling:

Throwing in bursts of cash makes that cycle nastier, while giving short-term gains.

That was one of the effects of forcing Iran out of the world banking system.

M. Simon said...

I still think what is happening is blockade.

The methods are are different than traditional blockade. The effect is the same.

BTW would you copy your reply to Classical Values? I think it deserves a wider audience.

A Jacksonian said...

Simon - I will do that as soon as things settle here in a bit...

Just a quick view: I think and its on the 'higher than supposition' list, that Iran has been getting access to banks via the Red Mafia, the Kasser family money laundering system or via corrupted S. American or Chinese banks. The hundreds of millions spent by Iran on arms, munitions, SAM systems and other goodies from Russia, China and some arms firms in Eastern Europe point to a relatively large external banking system beyond the reach of UN sanctions and US fund transfer systems... but after the 1990's BoNY money laundering scandal and ongoing problems with various banks (including Citibank) in S. America, I would say that an 'economic blockade' that does not include ships and aircraft is not a preventative to Iran.

Lack of foresight, unwillingness to invest in or learn the petrosystem, unwillingess to train individuals to take care of the system, the concept of 'return on investment' being lacking in Iran's outlook... with those one does not need an economic blockade. Saddam had to pass his oil through UN and other agencies for OFF, and he skirted that with oil smuggling on the small scale, and even with that he found plenty of corrupt institutions to get a kick-back and banking system going outside of the UN's oversight. Iran, by contrast has a few major Nations putting pressure on it (US, UK, Japan), a number willing to do large scale transactions no-questions-asked (Abu Dhabi, Grand Caymens, Switzerland, Indonesia), and a number willing to go beyond that (Russia, China, Syria, and banks in Argentina, Paraguay, Bolivia, Algeria). Really the BoNY scandal should be the warning siren that the entire 'world banking system' is a series of interoperating networks with multiple cross-over points that are easily compromised locally even if an institution is 'globally reputable'. Almost the entirety of 'watching transactions' happens with systems that voluntarily come into that system and even then BoNY demonstrated how 'reputable accounts' can be created and un-created untraceably for transactions. Beyond that there is the highly lauded 'know your customer' which, in the Grand Caymens, is usually someone with cash to open up an account as a 'businessman'. Simon Reubens had easily thwarted the FED, UK, France, Russia, and every other Nation part of the BoNY system just by over complexity of transactions.

There is no real possible way to deal with *that* without requiring a 'good housekeeping seal of approval' sort of deal and creating a *closed* internal banking system only to those banks and institutions willing to undergo such continuous auditing. And that would have to include every other financial institution (stock exchanges, bond exchanges, commodity exchanges, insurance brokerages, etc.) that requires access to that network.

A banking or financial embargo I see very little of. Even controlled source scrutiny, as under Saddam's Iraq, didn't work and actually made the corruption worse (as witness the spreading of it into TotalFinaElf). Even in pulling down TransWorld Commodities, the Red Mafia quickly shifted to energy concerns and Gazprom. The other industrial concerns likewise compromised have their account systems put in service of their co-owners so that money laundering of, say, heroin or human trafficking funds enter into accounts in the West, they are, apparently, 'reputable'. Iran can be hampered by Western financial institutions, but only if they lost access to the other main systems would they face serious problems.

At this point I am not going to give the Treasury Dept or anyone else in high government office any credit for something covered by willful neglect of basic economics in Iran. I wish we *did* have a system like that, but I have seen zero evidence of it combing through things like BNL/BCCI, organized crime stretching from NoKo to Americas to Africa to Europe to Asia, and the Russian Red Mafia compromising of Western Banking systems.

The concept of fluctuating power supplies and adding/subtracting input to a system that is not well understood or regulated is exactly what we have here. Some maintenance here, some there, but no regularized schedule... and if Turkmenistan gets *cute* and starts to send some gas, then full amounts then half, then two-thirds, then one-quarter.... chaos. It doesn't take much to change a pressurized system into something less than stable. And as Iran comes to need *more* natural gas it will either have to stop all efforts in Iraq and buy it from the Iraqis (heh) or buy more from the corrupt system in Turkmenistan which leaves them at their mercy.

Any way you cut it, it is Turkmenistan in the driver's seat right now for Iran's fate. That 5% makes so much possible... and the choices in Iran are now very, very, very few.

M. Simon said...

Blockades are seldom 50% effective. The usual range is 10% to 30%. Which is why they are long term strategies.

The key is not "can Iran get stuff". The key is "how much and at what price".

The purpose of the economic cutoff for Iran is to increase the rate of decline and multiply instabilities. It is certainly doing that.

Of course they can still do business with smugglers. However, like our own drug wars it introduces and strengthens the criminal element. In fact the Soviet self imposed embargo made it the country it is today.

Plus such a system de-moralizes society as the rich can get things that are unavailable to the average man. There is not even the hope of future availability because of economic shrinkage.

In any case this is a debate about margins. I'm in agreement with your general thesis.

The fact that Iran has pulled back from Iraq is a key indicator of how bad they are hurting.

Israel's bombing of Shiite infrastructure was another way of tightening the noose despite the fact that it seemed so stupid at the time.

Another key is the dog that didn't bark - Syria vis a vis the Israeli air raid.

M. Simon said...

As to seeing a banking embargo.

Iran pulled 30 bn in fiat money and $2 bn in gold out of the wold banking system for fear its accounts would be frozen. It doesn't have to work or work well. It need only cause the enemy to make a false moves.

As I said the banking embargo need not be totally effective. It need only drive Iran into dealing with suppliers of last resort. The loan sharks.

BTW I have thought for a long time that Putin was playing a double game. See my analysis of the Israeli raid on Syria. All the BS about Israeli/American magic jammers was just that.

I think Putin gave the Israelis a "backdoor" IFF code. You send the right code and the attacking aircraft don't show up on the radar screen. If you were selling weapons to potential enemies - wouldn't you?

A Jacksonian said...

Simon - Agreed on sanctions and such: they are a minimal solution, at best.

The cost of overhead doing business via the secondary channels is probably a 5-10% off of income, which Iran, if they have any wit at all, can deal with. Mostly it is a delay/timing effect and Iran demonstrated after the 2006 Hez/Israeli dust-up that they can exercise external channels adroitly, refilling Hezbollah arms and coffers in under 6 months.

Syria, however, is now no longer unbarked, a few posts back they have offered their first warning barks on a totally other matter. Spain and the US are main targets, but Sarkozy has just put France in an opposition stance to Syria... France will not be threatened under him, apparently, at least from Syria. This is relatively big news and it is flying completely under everyone's radar... things are about to heat up because Syria, not Iran, is looking to get its main agent back.

We do tend to forget that Hezbollah-Lebanon is a two-input group... Syria rarely uses it. Also the decline in Iraq, especially the Qods force, is due to Iranian problems, but in the western areas it may be Syria trying to do something... this is *not* Austin Bay's 'Tet' view, but Syria threatening to ratchet up things for other reasons.

It says a lot that Syria will risk so much to get one man back...

We may, finally, have to wake up to deal with them. Let us hope it is not a chem/bio wake-up call.

A Jacksonian said...

Given the state of Syria's air defense system as demonstrated over the Bekaa in 2006, I have serious doubts that it is highly effective *anywhere* else in Syria.

I also discount the jammers on one main reason: Israeli 'nap of earth' flying skill. I've looked that place over in imagery and there are only trees to worry about in the Euphrates valley... believe me, Israeli pilots could easily evade detection between Israel and the valley and then out via Iraq over Jordan and to Israel... or even the same way home.

For all the air defense stuff Syria buys, they aren't too skilled in *using it*. And they don't have an air force to speak of either.

As for 'backdoors'... remember that China hacks Russian equipment quickly to reverse-engineer it. Most of the air defense systems have been on the market for a year or more, which means Chinese r-e has already started if not come to basic completion. This is why Russia 'licenses' China to sell knock-offs: China would just sell them anyways so best to get something from them. And the system, itself, has yet to be tested against Western trained pilots and aircraft... oh, wait... Israel tested them over Syria, or flew well enough so that Syria never got a chance to use them.

Say, which is more embarrassing to Syria? Having equipment and have it fail or having it and not *using it*? Hmmmm...

And via de Atkine's view, Syria *is* that incompetent.

M. Simon said...

A. J.

Let's continue this at Classical Values.

It deserves a wider audience. I have posted my replies and if you would put yours up it would be very good.

GM Roper said...

A.J. This poses an interesting question. Will Iran, the big bad boy of the gulf currently eventually fizzle out and Syria be a part of that fizzle?

I wonder!

A Jacksonian said...

GM Roper - What is fascinating about the Iran/Syria alliance is that Syria is quite used to throwing over allies once it gets what it wants: long-range ballistic missile technology and the full CBN suite of weapons.

The USSR got pulled into that and started to disassociate itself even before the USSR cracked up. Iran is providing nuclear processing beyond what Syria can easily buy, but may now have a low level processing to weapons grade U-235 via equipment purchased for Iran via the AQ Khan network (with Syria being the intermediary and taking the 'middle mans cut'.

Syria has provided the skill and organized crime acument to turn Hezbollah from 'just another local terror organization' into a global concern with its fingers in the narcotics trade, money laundering trade, intellectual property theft, and such white world things as beef processing and retail ownership of malls. This does *not* describe how the mullahs see the world but does accurately describe the capability of Syrian intellectual capital as seen in the al-Kassar family and other, related, groups.

Syria has gone WMD to sacrifice everything else on its conventional front: tanks, aircraft, trucks, subs, surface combatants.... all of those are suffering from lack of modernization with only a recent truck and air-defense buy from Russia helping things out. The Assad family realizes that with long range missiles it *currntly has* its reach stretches out to the 'boot' of Italy, into the lower Balkans, Romania, Bulgaria and south down to Alexandria and the oil fields of KSA. Strategically Syria is far better positioned geographically to threaten Europe than Iran is...

So, if the income diminishes and Iran starts to economically crumble under assault from sudden gas price swings what happens? Well, Putin has *already* restored ties with Syria...

Syria could, once again, throw over a partner, utilize the 'shared' assets (being Hezbollah) and, with Russian support, get even *better* missile technology. Or offer the regime of Iran a 'exile' so that Syria could get a 'figurehead council' to run Hezbollah while it did the actual commanding, while gaining Russian support.

Syria, as it is not infested with an end-time '12th imam' concept, does take the long and more practical view of the world. They are the weakest regime in the Middle East and *yet* they always come out with *just* what they want.