Through a bond market, countries look to “sell” their debts to international investors by parceling them into portions that can be bought individually. Raising money through the bond market is often easier than getting a loan from one or several banks; because the debt is divided into portions investors of nearly any size can afford, banks and/or individuals with less capital on hand can come to the table. By getting more players involved, the country that needs its debt serviced can increase competition over the bond and thus decrease the price it has to pay for it. Of course, for this to work, someone actually has to want to buy the bond. Unlike a loan that is negotiated with one or several financial institutions, a bond market works on the principle of a market. It rewards creditworthy countries whose debts are highly sought after (due to the nation’s perceived financial strength and thus ability to repay the “loan” plus interest), and punishes countries that are not creditworthy. In those terms, forays into the bond market are risky, as they potentially expose states to the scrutiny of investors.

Current global financial conditions of tightening credit make investment in Iranian bonds highly unlikely, as very few sovereign or private investors have any money on hand, particularly to buy risky bonds. But leaving this aside, Qazavi’s announcement leads one to wonder about the overall health of the Islamic Republic.

As oil prices threaten to sink below $50 per barrel any day now, Iran is scrambling to cover its budgetary costs, with potential social unrest looming if various government subsidies — particularly those for gasoline, which refinery-poor and gasoline-guzzling Iran has to import — have to be cut. Tehran is staring social unrest in the face, and desperate times might call for such desperate measures as begging cash-strapped foreign investors for $1 billion.

Another problem with the bond issuance in the current geopolitical climate is that it is unclear whether any European or Asian bank would dare to finance the bond. Since 2002, when Iran’s last bond was issued, the United States has specifically targeted Iranian banks, cajoling the European Union to stop doing business with certain Iranian banks and getting more than 40 international banks to agree to halt business with Tehran. In October 2007, Washington also designated several Iranian banks as supporters of terrorism.

Furthermore, the United States’ Iran Sanctions Act (ISA), currently in place until 2011, strongly discourages foreign companies from investing in Iran’s energy sector and pledges retaliatory sanctions from Washington against those who do. In his announcement, Qazavi noted that the bond issuance would let investors “safely invest and take part in various projects including petrochemicals” — investments the ISA specifically tries to discourage non-U.S. entities from engaging in. It’s unclear whether the ISA would give Washington the authority to put Iranian bond purchasers under sanctions, but the possibility clearly exists, and it will be enough to deter the already-bearish global investors.

On the flip side, Qazavi’s comments might be evidence that the latest round of negotiations between the Americans and Iranians are progressing well, and that they might even be near their conclusion. Washington’s ultimate goal in the negotiations is to limit Iran’s influence in Iraq, while Tehran wants to limit the United States’ ability to roll forces east from Baghdad. Negotiations began as early as months before the U.S. invasion of Iraq, but ultimately stalled on the most important issues, as an emboldened United States rejected Iran’s offers for a comprehensive deal on Iraq. Iran responded to the rebuff by restarting its nuclear program, and by supporting Hezbollah in its conflict with Israel in the summer of 2006, as well as backing Shiite groups in a flare-up of violence in Iraq in November of that year. The two sides went back to the negotiating table after the successful 2007 U.S. troop surge.

With the United States and Iraq inking a Status of Forces Agreement (SOFA) that will lead to the withdrawal of U.S. forces from Iraq in three years, it appears that Washington and Tehran also are now close to a deal. Iran’s judiciary chief, Ayatollah Mahmoud Hashemi Shahroudi, confirmed as much on Nov. 18 when he said the Iraqi government had done “very well” in approving the SOFA. It was the first time Tehran had voiced any sort of approval of the agreement. The United States will of course hope that the Baghdad of three years from now will be able to resist Tehran’s influence, and that the troop withdrawal will therefore be possible.

Qazavi’s comments on the $1 billion bond, put in the context of ongoing negotiations, suggest that Tehran might be betting that talks with the Americans are near an end. A U.S. rapprochement with Iran would certainly place a stamp of approval on foreign investment in Iran. Without such a stamp, any bond issuance would make little sense. Therefore, Iran must be either desperate for capital due to serious economic problems, or preparing for a positive announcement on the negotiating front.

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