Federal Showdown Over Increased Monetary Access to Iran

Henry Whipple

As his final year in office winds down, President Barack Obama has been making his mark on the world. In recent weeks, the president has made headlines with his historic visit to Cuba, the first by a sitting President in 88 years. Following his return to the United States, he turned his focus towards further progress with Iran, albeit facing some backlash within the federal government. 

Under the 2015 nuclear arms agreement between the US and Iran, critical nuclear technology sanctions against Iran were eliminated. However, such measures have done little to help Iran’s long-constricted economy expand and prosper, and the Obama administration is currently considering options to relieve economic sanctions. A key part of this relief package is unprecedented access to U.S. currency, via licenses that would allow foreign financial institutions to conduct trade with the dollar in order to support Iranian business dealings.

It’s critical to note that Iran would still be shut out of the American financial system; the Obama administration’s proposal would only lighten the burden upon Iran when trying to do business with Western nations. Congress finds a problem with this policy, however, since President Obama previously assured its members that, under the nuclear arms deal, Iran would never be granted access to the dollar and financial markets. Several Republican legislators fear that Obama’s attempt to boost Iran’s economic standing would go too far, cutting into the United States’ own economic influence while concurrently putting the global economic system at stake. Two Republicans in particular, Mark Kirk and Mike Pompeo, are propelling forward this viewpoint on behalf of many frustrated colleagues. 

“Any administration effort to get foreign financial institutions...to enable Iran’s terror-sponsoring regime to conduct transactions in U.S. dollars...would benefit Iran’s terror financiers while fundamentally undermining the USA PATRIOT ACT 311 finding that Iran’s entire financial sector is a jurisdiction of primary money laundering concern,” argues Kirk of Illinois. 

The Republican senator, who is already supporting a new push in Congress to confront Iran’s recent ballistic missile test with increased sanctions, sees a direct relationship between increased financial access and supporting a culture of terrorist ideas and illicit economic activities. Congressman Pompeo of Kansas similarly fears the empowerment of the Islamic Revolutionary Guards Corps (IRGC), Iran’s most powerful security and military organization, which also maintains extreme economic influence via its authority over political decisions (Nader, USIP). “American and international businesses can’t ignore the [IGRC]’s vast control over the Iranian economy and the threat Iranian banks pose to the international financial system,” Pompeo emphasized to The Free Beacon.

The surface-level numbers for Iran’s economy are poor enough: high levels of inflation, a weak currency, skyrocketing youth unemployment rates, and incomplete construction endeavors are all putting the country in a bind. Yet since U.S. sanctions began isolating Iran’s economy, corruption has dominated the nation by way of the IRGC’s immense market influence (for example, filling the shoes of major international companies that fled Iran following the sanctions). 

Current President Hassan Rouhani has failed to attract new investors into the country in order to help eliminate widespread market corruption, a shortcoming that is encouraging U.S. lawmakers to push back against President Obama’s economic proposal. The administration sees little issue with granting Iran the same conventional economic freedoms held by most economically involved countries, but many Republican legislators are concerned with expanding economic access to a nation caught in the crossfire.

What's Golden

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Andrew Stiles

The world economy is struggling, and investors are now rushing to buy a commodity that has a history of retaining its value during hard times: gold.

 

Gold is traded through futures. When the markets are bearish, gold is often considered a safe asset, and investors cherish it. The logic behind gold’s stability is related to its ability to function as an alternative currency; it has a high value relative to its weight, and supply is extremely scarce.

It is considered so reliable that at one point in history, the United States backed up every single dollar of currency with the same weight in gold. Although this is has changed, investor attitudes toward the metal have not.

The sense of security that this precious metal emits is once again influencing investor decisions in global markets. With oil now consistently trading below $30/barrel, technology industry stocks falling in value, and emerging markets struggling, the price of gold has skyrocketed during the past month. What seem like peripheral issues are actually directly influencing its value. Gold Futures began February at $1128.00, and have since jumped over 10% up to $1247.80. Year-to-date, Gold has increased in value by 16.75%.

Gold has leveled-out in the past few days, as news leaked that the United Arab Emirates energy minister, Souhail Al Mazroui, said that OPEC is “ready to cooperate” with other oil market players on production cuts. Countries such as Russia have been negotiating with OPEC to try to curb oil production, but talks have thus far failed.

Cutting oil production would lower oversupplies of oil, and help push its price back up. An increase in the value of oil futures might draw investors away from gold; however, yesterday, details of the production curb were announced, and have disappointed many investors. Perhaps gold still has room to climb.

Why Oil Matters

C Adam Pfander

It’s no secret that the stock market is hurting right now—and we can place a lot of the blame on low oil prices. The explanation appears counter-intuitive at first; cheap oil spells cheap energy, which means we all save on gas and heat and anything plastic. That should improve our wealth, not damage it, right? Yes. In fact, the Economist reports that declining oil prices have historically resulted in economic growth. So why are stocks tanking?

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The current upheaval in the stock market represents the decoupling of finance from economics. While our economy is gaining strength, some of the world’s largest companies, along with once-prosperous oil-producing nations, are struggling with depressed oil prices. These companies are, most notably, energy manufacturers like Chevron and Exxon Mobil. The nations that are suffering are export based-economies like Russia, Saudi Arabia, and Venezuela - the latter two are members of the Organization of the Petroleum Exporting Countries [OPEC].

The economic well-being of these countries and companies rises and falls with the price of oil. Adding to the uncertainty, many oil-producing nations are politically unstable. Venezuela recently declared an economic state of emergency, and while governments in the Middle East are in a tenuous situation now, conditions will worsen if their main source of income dries up.

What is behind the plummeting oil prices? The market forces of supply and demand. In the past 18 months, oil producing nations have been manufacturing full-tilt. Pair this with the rapid expansion of natural gas production in the United States, and the market is simply flooded with oil.  According to the New York Times, approximately one million barrels of oil are produced (supplied) in excess of what is bought (demanded) each day. One million barrels of excess oil act like one million anchors, dragging the price of oil down to historic levels.

The depressed oil market does not alone affect a small group of energy producers and oil-exporting nations. Fossil fuels lie at the heart of the US economy, so trouble in the oil market threatens the US economy as well. Cheaper oil means less energy exploration and extraction, a significant source of fixed capital investment – that is, sales of machines in the economy.

All of this unrest spooks financial markets. If oil companies stop expanding production today, then they could fail to meet their debts in the future, which can cause bankruptcy. Investors grow wary of whether or not they will get their money back from these companies. Should the Middle East erupt into political turmoil due to decreased oil revenues, then emerging market investors also become worried of losing their money. This concern over the future is contagious, and has spread to financial institutions across the globe.

Last month, oil reached a low of $28.35/barrel in mid-January - that is less than a 20-piece bucket of KFC chicken. Recently, the per barrel price has risen to the mid-$30 range largely due to rumors that Russia is negotiating with OPEC to curb oil production. This is not the first time that Russia has attempted to influence OPEC, but previous attempts have failed. Each day that oil prices remain low causes oil based countries, companies, and investors to worry more. This could change if Russia succeeds in its talks with OPEC, but the talks seem like a ‘hail-mary’ in the oil game.