Sanctions Lift Implies Attack on Asian Banks
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On June 11th the U.S. State Department granted waivers for impending financial sanctions for seven countries who had not previously gone far enough in curbing their use of Iranian oil to be included in the first round of exemptions, which included Japan and many countries on the periphery of Europe. This latest group: Malaysia, Taiwan, Turkey, India, Sri Lanka, South Korea and South Africa, are now no longer facing being shut out of engaging in trade with U.S. companies or doing business with U.S. banks. This leaves just China and Singapore as the two countries who are facing sanctions come June 28th.
What I find interesting about this is that while India has publicly been very hostile to the U.S. on this issue, pledging to continue to trade with Iran in a variety of ways, even going so far as to welcome the Iranian Foreign Minister at the beginning of the month. A recent trade agreement between the two countries made it clear that India will still be buying more than 300,000 barrels of Iranian oil per day and paying for 45% of it with Rupees and not the U.S. dollar.
Why Did They Get Exemptions?
Also making the headlines recently has been the news that gold trade between Turkey and Iran has increased catastrophically. More than $1.27 billion in gold, traded as the SPDR Gold Trust ETF (NYSEMKT: GLD), changed hands between Turkey and Iran in April. Moreover, Turkey has been instrumental in acting as a banking conduit to Iran for the past year. Whether that relationship is still in effect is unknown, and the sanctions exemption implies that.
Since June 1st, however, it is important to note that the Turkish Lira has rebounded sharply versus the Dollar 2.7% in seven trading days, reinforcing the idea that June 1st was a form of pivot point in the markets. On May 31st the Central Bank of Turkey announced that they were considering raising the reserve limits for Turkish banks for holding gold as an asset on their balance sheets. Turkey biggest bank, Turkiye Is Bankası AS, is preparing to accept up to $1 billion in gold reserves by the end of 2012.
South Korea, according to a May 31st report from Al Arabiya News, imported more than 7.5 million barrels of oil from Iran in April, 60% more than they had imported in March. Like India, Russia and to a lesser extent Turkey, the Korean Won has depreciated heavily against the U.S. dollar since the beginning of March around the time of the Greek default and the expulsion of Iran from SWIFT on March 16th. That depreciation, 7% from trough to peak, has since fallen back, mirroring the drop in the Lira and other currencies. How did South Korea get an exemption when they are buying more oil from Iran now than when they did earlier in the year?
Malaysia was brought to heel with an attack on the price of palm oil in the last few weeks which ran completely counter to the trend in price and the fundamentals. Palm oil is extremely important to Malaysia’s economy. The Ringgit has also been under attack versus the dollar losing more than 6% trough to peak since late February. Malaysia announced that they would not only be stopping all imports of Iranian oil but stopping all exports of palm oil to Iran as well.
China has made it very clear that they have no intention of stopping the flow of Iranian oil to their ports and refineries. They have set up insurance contracts in Japan to allay fears to the mostly European banks who hold the notes on most of the tankers. They have responded with threats of seizure and default if those tankers are loaded after June 28th. In response to the latest announcement China’s Financial Minister Liu Weimin reiterated China’s position that unilateral sanctions were not something they supported and refused to acknowledge the validity of any country attempting to strong arm a third into going along with them.
China’s not getting an exemption as Iran’s biggest trading partner with an intransigent stance like that makes perfect sense. So, why was Singapore singled out? The government of Singapore is notorious for not interfering in the private oil refining industry has very openly been putting pressure on Singaporean companies to stop doing business with Iran. And they have. Nearly no oil was purchased from Iran in April as a result. South Korea increases their dealings with Iran by 60% they get an exemption. Singapore practically stops importing oil from Iran and they are still on the list.
Look no further than the recent set of changes to Singapore’s rules on both Over the Counter derivative and precious metals trading. I’m sure the situation is more complicated than that but it is a good place to start asking why. Starting this fall there will be on transactional tax on bullion quality gold and silver, trading in Singapore. Silver is traded in the U.S. as the iShares Silver Trust ETF (NYSEMKT: SLV). It’s market cap is currently near $10 billion. It is their stated goal to create Asian fix prices for gold and silver, similar to those put out by the LBMA every morning. More importantly, however, is the requirement that all OTC derivatives involving a Singaporean primary party be transacted through a public clearing house, in effect bringing the entire shadow banking system into the sunlight. This will attract a massive amount of capital for those truly wishing to hedge their bets while also bringing potential liquidity to these markets.
The Singapore Dollar has depreciated 6.7% since March and is holding above the breakout level of $1.27. The iShares MCSI Singapore Index ETF (NYSEMKT: EWS) has lost 10% and has lost 3% of its AUM since the beginning of May when the Greek elections spooked the market and we have hurtled towards the current situation in Europe. Conversely, capital has been flowing out of the Euro and into the Singapore dollar. What should be noted is the abnormal volume for EWS the day after the sanctions announcement where four times the average volume was purchased, 7.4 million shares.
Bringing OTC derivative trading into the open is anathema to the major U.S. banks that deal in them. Moving sovereign and corporate CDS trading into the open will bring a level of transparency to the process that might make certain very powerful parties uncomfortable as real price discovery is allowed to take root in those markets. Singapore and Hong Kong are the rising stars in the financial world as capital flight from the west accelerates. Using the cover of oil sanctions and a nuclear Iran to cripple their rise in importance cannot be discounted. If in the next week we hear that the proposed changes outlined above are scuttled then it would follow that Singapore will be allowed to continue to do business with the U.S.
This is the grand game, an inflection point in the history of the financial world. China and the U.S. are headed for a major clash in the next 30 days. The U.S. has put its cards on the table by making both Intercontinental Exchange and the CME group a ‘systemic’ part of the banking system in case there is wholesale disruption of the commodity markets. They have played the SWIFT card and they have told Singapore and Shanghai (with Hong Kong standing as the proxy for now) that they will destroy their banking system to get their way.
Singapore, for its part, is desperately trying to convince the U.S. that they have complied, but their entreaties have fallen on deaf ears.
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