Iran threatens US Navy as sanctions pinch economy

Tehran ups sabre-rattling as US moves to target oil exports with new curbs
US military generic
By Reuters
Wed 04 Jan 2012 01:01 PM

Iran threatened on Tuesday to take action if the US Navy
moves an aircraft carrier into the Gulf, Tehran's most aggressive statement yet
after weeks of sabre-rattling as new US and EU financial sanctions take a toll
on its economy.

The United States dismissed the Iranian threat, saying it
was proof that sanctions imposed over Iran's nuclear programme were working.
The Pentagon said it would keep sending carrier strike groups through the Gulf
regardless.

The prospect of sanctions targeting the oil sector in a
serious way for the first time has hit Iran's rial currency, which reached a
record low on Tuesday and has fallen by 40 percent against the dollar in the
past month.

Queues formed at Tehran banks and some currency exchange
offices shut their doors as Iranians scrambled to buy dollars to protect their
savings. World oil prices jumped more than 4 percent.

Army chief Ataollah Salehi said the United States had moved
an aircraft carrier out of the Gulf because of Iran's naval exercises, and Iran
would take action if the ship returned.

"Iran will not repeat its warning ... the enemy's
carrier has been moved to the Sea of Oman because of our drill. I recommend and
emphasise to the American carrier not to return to the Persian Gulf....we are
not in the habit of warning more than once," he said.

The Pentagon appeared to walk a delicate line, assuring more
"regularly scheduled movements" of aircraft carrier strike groups
into the Gulf, but stopping short of announcing any special activity in
response to the Iranian threat.

"The deployment of US military assets in the Persian
Gulf region will continue as it has for decades," the Pentagon said.

The aircraft carrier USS John C. Stennis leads a US Navy
task force in the region. It is now outside the Gulf in the Arabian Sea,
providing air support for the war in Afghanistan, said Lieutenant Rebecca
Rebarich, spokeswoman for the 5th Fleet.

The carrier left the Gulf on Dec 27 on a planned routine
transit through the Strait of Hormuz, she said.

Forty percent of the world's traded oil flows through that
narrow straight - which Iran threatened last month to shut if sanctions halted
its oil exports.

Brent crude futures were up more than $4 in late Tuesday
afternoon trade in London, pushing above $111 a barrel.

Asked at the Pentagon whether there was any US military plan
to bolster its presence in the Gulf or test the Iranian threat, spokesman
George Little said: "No one in this government seeks confrontation over
the Strait of Hormuz."

"It is important to lower the temperature," he
said.

Tehran's latest threat comes at a time when sanctions are
having an impact on its economy, and the country faces political uncertainty
with an election in March, its first since a 2009 vote that triggered
countrywide demonstrations.

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The West has imposed the increasingly tight sanctions over
Iran's nuclear programme, which Tehran says is strictly peaceful but Western
countries believe aims to build an atomic bomb.

After years of measures that had little impact, the new
sanctions are the first that could have a serious effect on Iran's oil trade,
which is 60 percent of its economy.

Sanctions signed into law by US President Barack Obama on
New Year's Eve would cut financial institutions that work with Iran's central
bank off from the US financial system, blocking the main path for Iran to receive
payments for its crude.

The EU is expected to impose new sanctions by the end of
this month, possibly including a ban on oil imports and a freeze of central
bank assets.

Even Iran's top trading partner China - which has refused to
back new global sanctions against Iran - is demanding discounts to buy Iranian
oil as Tehran's options narrow. Beijing has cut its imports of Iranian crude by
more than half for January.

White House spokesman Jay Carney said the latest Iranian
threat "reflects the fact that Iran is in a position of weakness."
State Department spokeswoman Victoria Nuland said it showed international
pressure was "beginning to bite."

Turkish Foreign Minister Ahmet Davutoglu will visit his
counterpart in Tehran on Wednesday to discuss Iran's nuclear programme and
developments in Iraq and Syria.

Iran has responded to the tighter measures with belligerent
rhetoric, spooking oil markets briefly when it announced last month it could
prevent shipping through the Strait of Hormuz.

It then held 10 days of naval exercises in the Gulf, test
firing missiles that could hit US bases in the Middle East. Tuesday's apparent
threat to take action against the US Navy in international waters takes the
rhetoric to a new level.

Experts still say they do not expect Tehran to charge
headlong into an act of war - the US Navy is overwhelmingly more powerful than
Iran's sea forces - but Iran is running out of diplomatic room to avert a
confrontation.

"I think we should be very worried because the
diplomacy that should accompany this rise in tension seems to be lacking on
both sides," said Richard Dalton, former British ambassador to Iran and
now an associate fellow at Chatham House think tank.

"I don't believe either side wants a war to start. I
think the Iranians will be aware that if they block the Strait or attack a US
ship, they will be the losers. Nor do I think that the US wants to use its
military might other than as a means of pressure. However, in a state of
heightened emotion on both sides, we are in a dangerous situation."

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Henry Wilkinson at Janusian Risk Advisory consultants said
the threats might be a bid by Iran to remind countries contemplating sanctions
of the cost of havoc on oil markets.

"Such threats can cause market confidence in the global
oil supply to wobble and can push up oil prices and shipping insurance prices.
For the EU powers debating new sanctions, this could be quite a pinch in the
current economic climate."

The new US sanctions law, if implemented fully, would make
it impossible for many refineries to pay Iran for crude. It takes effect
gradually and lets Obama grant waivers to prevent an oil price shock, so its precise
impact is hard to gauge.

The European Union is expected to consider new measures by
the end of this month. The sanctions would halt purchase of Iranian oil by EU
members such as crisis-hit Greece, which has relied on easy financing terms offered
by Tehran to buy crude.

French Foreign Minister Alain Juppe said Paris wants new
measures taken by Jan. 30, when EU foreign ministers meet. A German Foreign
Ministry spokesman said Berlin was in talks with other EU states on
"qualitatively new sanctions."

Greek government sources said that Athens, thought of as a possible
veto-wielding holdout, was ready to support sanctions. One official said:
"If the European Union decides to impose the sanctions, Greece will join
them."

Michael Mann, spokesman for EU foreign policy chief
Catherine Ashton, said member states would discuss the issue this week in the
hope of agreeing on new steps before the Jan. 30 meeting. "The ball is
still in the Iranians' court," he said.

Iran has written to Ashton asking to restart talks over its
nuclear programme that collapsed a year ago. The EU says it does not want talks
unless Iran is prepared to discuss serious steps, such as halting its
enrichment of uranium.

Although China, India and other countries are unlikely to
sign up to any oil embargo, tighter Western sanctions mean such customers will
be able to insist on deeper discounts for Iranian oil, reducing Tehran's
income.

Beijing has already been driving a hard bargain. China,
which bought 11 percent of its oil from Iran during the first 11 months of last
year, has cut its January purchase by about 285,000 barrels per day, more than
half of the close to 550,000 bpd that it bought through a 2011 contract.

The impact of falling government income from oil sales can
be felt on the streets in Iran in soaring prices for state subsidised goods and
a collapse of the rial currency.

"The rate is changing every second ... We are not
taking in any rials to change to dollars or any other foreign currency,"
said Hamid Bakshi at an exchange office in central Tehran.

The economic impact is being felt ahead of a nationwide
parliamentary election on March 2, the first vote since a disputed 2009
presidential election that brought tens of thousands of Iranian demonstrators
into the streets.

In a sign of political tension among Iran's elite, a court
jailed the daughter of powerful former President Akbar Hashemi Rafsanjani on
Tuesday for "anti-state propaganda."

Rafsanjani sided with reformists during the 2009 protests.
Daughter Faezeh Hashemi Rafsanjani went on trial last month on charges of
"campaigning against the Islamic establishment."

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