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Iran Might Be Thinking To Sell ‘Oil Bonds’ To People To Raise Cash

Iranian President Hassan Rouhani speaks during a cabinet session in the capital Tehran, July 29, 2020
Iranian President Hassan Rouhani speaks during a cabinet session in the capital Tehran, July 29, 2020

Iranian President Hassan Rouhani's promise last week to announce an "economic breakthrough" soon gave way to speculations that Iran was ready to approve anti-money-laundering laws mandated by the international community.

But now another idea has been floated: Selling oil bonds to people to pocket their savings in hard currencies with a promise to pay them back later with a profit.

The Financial Action Task Force, FATF has been demanding Iran to put in financial safeguards against money laundering and Financing of terrorism that hardliners have been resisting so far.

The reason why people thought the government was finally approving the FATF bills was that Rouhani said Khamenei's approval was needed for the decision that is expected to bring about an economic breakthrough.

Reformist figure Hossein Marashi, undated.
Reformist figure Hossein Marashi, undated.

Centrist politician Hossein Marashi said during a meeting with Rouhani that the government can keep the country's economy going for at least another year by collecting everyone's foreign currency and gold giving them "oil shares".

The next step in Marashi's plan was buying back the shares from citizens after three years. The statement has led many to believe that the Rouhani administration is going to sell "oil bonds" to Iranians against U.S. dollars and euros. This would keep the government going "for another year".

The same plan was put forward in 2012 under the Ahmadinejad administration when sanctions against Iran's oil industry began to be enforced. The plan was never put into action.

It is highly doubtful that citizens would risk their foreign currency and gold savings in order to invest in oil transactions. Practical feasibility is another question.

Many business-minded Iranians on social media reminded Rouhani that no economic breakthrough could be brought about overnight or within a week.

The Iranian government is facing a serious budget deficit in the current year. Some experts say up to one third of the country's budget cannot be realized, particularly as Iran's oil exports are drastically reduced by U.S. sanctions and the impact of the coronavirus pandemic.

The current year's budget was based on the projection of selling one million barrels of oil per day at the price of $50 per barrel. But Iran’s actual oil exports are much lower and the average oil price in the world market has been around $31 during the past five months.

In the meantime, there are reports that say Iran has offered high discounts to its oil customers. This brings the actual price the country charges to much lower than $31 per barrel. Therefore, oil revenues this year will not even reach the projected $18.25 billion.

Mohammad Hossein Farhangi, a lawmaker for Tabriz, said on Sunday that Iranians are keeping some $35 billion of cash at their homes. This is almost equal to government's budget for a year.

On the other hand, according to the Iranian Central bank, the amount of cash in Iranian currency at the people's disposal has exceeded 27,00, trillion rials; an economic reality that will lead to uncontrollable inflation.

So, based on Marashi's plan, the government is hoping to collect Iranian and foreign currencies from the people in order to reduce liquidity and make up for the budget deficit at the same time.

But there are so many uncertainties that will dissuade ordinary people from investing in such a scheme. There are speculations that the government will offer 30 percent profit for those buying the bonds in hard currency. But if after three years the government pays them back in local currency, they will almost surely lose money. There is no confidence in the Iranian rial and hardly anyone would give up his dollars now for a shaky promise of profits three years later.

There are more uncertainties: Is there a guaranty that that Iran's oil exports will increase in the next three years? If not, will the government be able to repay the people's money? If it wants to pay in rials, then at what rate of exchange? The same question applies to the price of oil. It was 61 dollars per barrel last year, it is $31 per barrel this year. How much it is going to be in three years?

If for instance the government sells $10 billion of bonds, is it going to be able to repay the investment plus profits on maturity date?

This comes while the National Iranian Oil Company had an accrued debt of $50 billion until last year and there is no new report about the company's financial status in the current year.