Iran’s Economy: A Political Battleground, But Could it Undo the Islamic Republic?

Jul 5, 2011 3:47pm

The public purse is a political battleground in any country. But when Ayatollah Ali Khamenei dubbed this Persian calendar year 'the year of of economic jihad,' it signaled a turn – the pain of a flailing economy now so sharp that the regime wanted to shrug it off publicly with an air of defiance. “Iran’s economy is in shambles. It’s now so mismanaged, they’re starting to worry about its impact on the regime,” says Karim Shirazi, an Iranian analyst in Dubai. We agreed not to use his real name so that he could speak frankly without compromising himself or his company’s work in the Islamic Republic. The Iranian economy is weighed down by pressures and problems, externally, by sanctions punishing its nuclear program, and internally, by policies of President Mahmoud Ahmadinejad  and his government. Is the hurt so bad it could take down the system? That’s the money question. On the flip side, an economic turnaround could boost those in power. “If the regime can expand prosperity to a wider base, the Islamic Republic could survive indefinitely,” says analyst Jason Rezaian. With politics clouding reality and little reliable data, here’s the compiled summary of our own reporting and analysis in the public domain: Sanctions are biting harder than ever, but business still gets done through the leaks and loopholes. So it’s not changing the regime’s behavior where it counts: on its nuclear policy, specifically, its accelerating enrichment of uranium. President Mahmoud Ahmadinejad’s policies have been largely bad for business and made life harder for most Iranians. Together, that could get Ahmadinejad booted from office, but it probably won’t topple the regime. Iran is rolling in oil money – a salve for all its economic wounds. But Iran can’t effectively tap the wealth underground, given the bans on foreign investment in the energy sector. That, combined with overall mismanagement, makes Iran’s economy is “fundamentally unsustainable,” in the words of one analyst – a “patient with many viruses.” Is the patient terminal? Could a bad economy crack the Islamic Republic? There are many opinions, but no one really knows. The best we can do is chart the forces. We’ve expanded some of them below, line by line, so you can grapple for yourself. SANCTIONS ARE BITING HARDER THAN EVER… The sanctions regime punishing Iran’s nuclear program has intensified in the past year, making it harder and much more expensive to do business in or with the Islamic Republic. New sanctions targeted some of the most vulnerable points, the transactions Iran needs most: gasoline imports, access to global banking and foreign investment in the energy sector. The consequences are a felt force, from Tehran businessmen traveling with suitcases of cash because they can’t wire money abroad to Iran oil production steadily declining for lack of up-to-date hardware.  Strategically, this round of sanctions has forced countries and companies to choose: do business with Iran or do business with America. For many, it makes basic business sense to turn their back on the Islamic Republic. BUT BUSINESS IS STILL GETTING DONE… Sanctions don’t scare everyone. China, India  and South Korea are guzzling Iranian oil. Through leaks and loopholes Since May the U. S. Treasury Department has called out companies from the UAE, Venezuela, Singapore, even Israel, all for allegedly skirting sanctions to do business with Iran. “The question is, “Who’s not doing business with the Islamic Republic?” says Avi Jorisch, a former  Treasury Department official who says Iran has deftly circumvented sanctions through a network of correspondent banks in Europe and Asia. New sanctions in June alleged that Iranian shell companies were using banks like Citigroup, HSBC, and Bank of America to do business.  “We in the West are playing a cat and mouse game…they move their cash and we highlight it.” As long as Iran can sell its oil to a world of buyers – pulling billions of dollars a week in revenue – Iran’s economy will churn well enough to get by. …SO IT’S NOT CHANGING THE REGIME’S BEHAVIOR WHERE IT COUNTS Four rounds of U.N. sanctions haven’t changed Iran’s behavior in ways the West wants to see – an end to uranium enrichment, the calming of fears of a nuclear weapon in the Islamic Republic. “Iran has determined this is a national security objective for them, mastering the fuel cycle. So they're able to absorb a lot of economic pain,” said Trita Parsi, head of the National Iranian American Council. Parsi, the author of a coming book on President Obama’s diplomacy with Iran, says sanctions will keep coming – if only because the U.S. has a limited toolkit. “We are largely doing this because we can't do anything else,” he says. “We need to give the impression that we're tough … that is the current motivation.” And while sanctions may be the only option, there’s a recognition in Washington that they’re of limited use. “If your definition of sanctions is that [they] must change behavior in order to be successful, then economic sanctions are a failure,” says Avi Jorisch. “But if one defines it as there to increase financial pain, increase the cost of doing business, then I would say that sanctions have been a great success.”  AT HOME, AHMADINEJAD’S POLICIES HAVE BEEN BAD FOR BUSINESS… In his rise to power, Ahmadinejad publicly championed the interests of his support base, with policies of cash handouts, loan guarantees, low interest rates and other benefits for low-income Iranians. But analysts say those populist politics were bad economics. “There’s now an industrial crisis, a banking crisis and a currency crisis,” says Kevan Harris, a Johns Hopkins sociologist just back from a research trip to Iran. “Different industries complain they’re going out of business in six months.” “Everything he’s done has been inflationary, increased liquidity, flooded the market with imports,” says Karim Shirazi, the Iran analyst in Dubai. There are some winners in the current equation, though the economic pie they share is getting smaller. “Some businesses are really hurt, others are making more money than ever,” Shirazi says. “Sanctions are keeping out the competition, so they profit.” Also on the up: Iran’s Revolutionary Guards, who have expanded their business empire under Ahmadinejad. That crowds out private business, hurting the private sector. …AND MADE LIFE HARDER FOR MOST IRANIANS Each year it gets painfully harder for Iranians to make ends meet, especially squeezing the middle class. Inflation – the rising cost of practically everything – has frayed their spending power and widened the gap between rich and poor. Exact inflation levels are disputed, as with all statistics in Iran; government figures are as low as 14.2%, but independent analysts saying it’s more than double that – household expenses up 30% in a year, salaries not close to keeping pace.  The latest hit was subsidy reform, the removal of public entitlements in the form of blanket discounts. For three decades Iran’s government has used oil money to keep water, food, fuel, airline tickets  and much else cheaper than what would be their true market value. At time, one Tehrani told us, gas was less expensive than bottled water, while household water bills would come in at $2 per month. The result was massive public waste and an unsustainable bill to the government coffers. Ahmadinejad’s government just took those subsidies away. It was sound economics, saving the state an estimated $60 billion per year, bringing down energy consumption and winning Iran rare praise from the International Monetary Fund in a controversial report (critics slammed the IMF for “rash judgment” and accepting Iranian state statistics at face value). But removing those subsidies spiked the cost of living – the IMF report said that some goods are now 20 times more expensive. The price of bread, a staple meal item for lower and middle class Iranians, is officially up 25%. Kevan Harris, the sociologist, compiled numbers from the Iranian press: lavash bread up 73% in one year. Tomatoes prices up 47.2%, beef up 22%. Government handouts of $45 per person have cushioned some of the effect, especially for lower class – their consumption costs aren’t as high, so the cash handouts can cover them. But continued inflation will erode their finances, while other issues like a housing crunch and rising unemployment hurt Iranians of every class.  TOGETHER, THAT COULD GET AHMADINEJAD BOOTED FROM OFFICE… Ahmadinejad gets some credit for pushing through subsidy reform – something presidents before him wanted but didn’t have the guts to do. But economic issues, chiefly inflation and unemployment, have added heat to the social pressure cooker. The top grumble among Tehranis is that there are no jobs for anyone. Unemployment is officially at 13.5%, but that number hotly disputed. For women under 30, unemployment is an estimated 50%. Beyond which, underemployment is rampant – there’s not enough work for Iran’s young, growing labor pool. “Iran needs to produce 1 million jobs a year just to maintain those current levels. And the Iranian economy just can’t do that,” said Karim Shirazi. One Iranian businessman told us that with a government policy of low interest rates and wages pegged to inflation, companies are more inclined to lay off workers – it’s cheaper just to buy more machinery. That builds public discontent and hurts Ahmadinejad’s low-income voter base – not good for presidential popularity. But more crucially for his political survival, it gives his critics a hot talking point at a time of fierce political infighting. “Ahmadinejad’s opponents want to impeach him on grounds of incompetence, that he’s ruining the system,” said Shirazi. As they ratchet up calls for Ahmadinejad to step down, amid accusations of corruption and abuse of power, the economy would be convenient new ammunition – pinning those woes on Ahmadinejad would ease pressure on the regime. …BUT ALONE, THE ECONOMY PROBABLY WON’T TOPPLE THE REGIME Historically, it’s not the economy that stirs dissent in Iran – it’s been other complaints, perceived violations of civil and political rights. As a case in point: the jump in food and fuel prices spurred by subsidy reform hasn’t resulted in mass riots. “The biggest protests in Iran have had little to do with economy,” said Trita Parsi. “When Ahmadinejad rationed gas in 2007 there was public anger, but that translated to two to three days of protest by 10,000 people.” Compare that, he says, to 3 million protesters in Tehran alone after Ahmadinejad’s disputed re-election.  Other analysts say what boils public anger isn’t the state of the economy, it’s the gap between expectations and reality. Expectations in Iran are so low that the effects of new sanctions, bad policies, corruption or mismanagement don’t move the masses. Ironically, says Parsi, “it would be a greater vulnerability if Iran were a democracy. But if you put a squeeze Iran’s population, it doesn't mean they can do anything about it.” What also protects the Islamic Republic from mass protests is the fact that they’ve already happened. The regime has been vaccinated by its past experience – the 2009 Iran election crisis honed skills like crowd control and repression, monitoring and cybersurveillance. The Green Movement itself is down to a core of just 200 people, perpetuating websites and FB feeds. Aimless and largely leaderless, it has devolved into an earnest but unorganized simmer. “Hope for reform is dead, dead, dead,” says Ali Omidyar, one of the original Green Movement organizers known as the Group of 88. We agreed to change his name for this report, as  most of his fellow organizers are in exile or in Evin prison. Ali says that with enough economic pressure, the proletariat could revolt. But the consensus among Greens is that “with just a social movement we can’t change the system, because of the regime’s money – the oil money.” IRAN IS ROLLING IN OIL MONEY – A SALVE FOR ALL ITS ECONOMIC WOUNDS… In a time of record high average oil prices, one problem Iran doesn’t have is cash flow. Iran’s break-even price of oil – the price it needs to balance its budget – is officially $81.50 per barrel, some analyst say it’s as high as $90. Oil is trading consistently around $100 since the turmoil of the Arab Spring. In less lucrative times, the Persian calendar year ending in March, Iran reportedly pulled in $80 billion in annual revenues. “The biggest sanctions loophole right now is Iranian crude,” said Avi Jorisch, the former Treasury official. “Iran can export all its wants, gas and oil. And so we’re basically trying to fight economic warfare with one hand tied behind our back.” Iran is the second-largest oil producer in OPEC, behind Saudi Arabia. Its oil money pays for those subsidies and cash handouts, and papers over failed government policies.  …BUT IRAN CAN’T EFFECTIVELY TAP THE WEALTH UNDERGROUND Higher oil prices have also offset the fact that Iran’s oil production is declining – the reserves are there, but with aging fields and infrastructure it’s not efficiently getting out of the ground. Energy analysts say it’s both sanctions and a lack of good management. Meanwhile Iran can’t unlock the big money underfoot – in natural gas. Iran has an untapped fortune in the world’s second-largest gas reserves. But the best way to get it to market, through exports of liquid natural gas, involves patented technology that Iran can’t access through the web of U.S. sanctions. Where gas does come up it’s often burned off or flared – wasted energy.  Other bottlenecks, like refining capacity, force Iran to import gasoline. That’s a lost economic opportunity and a point of vulnerability – especially under the current threat of a gasoline embargo, led by the U.S. THAT MAKES IRAN’S ECONOMY IS “UNSUSTAINABLE” – A “PATIENT WITH MANY VIRUSES” The mix of international sanctions and domestic policy have created a “fundamentally unsustainable economy,” says Karim Shirazi. “It’s a patient with many viruses.” Iran’s own leading financial newspaper, Donya-ye-Eqtesad, sees it stuck in stagflation, Kevan Harris points out.   That wasn’t always the case in the Islamic Republic – the Rafsanjani economy, a system under the former president that expanded business (including his own), was swept away at the top, with capable technocrats swapped for staunch ideologues. That’s made it harder for Iran to manage and plan around obstacles. With Iran’s economy saved by its oil revenue, and its oil revenue saved by high oil prices, Iran remains highly sensitive should prices come crashing down.  Iran regional arch-rival, Saudi Arabia, has taken notice; a senior Saudi royal, Prince Turki al Faisal, reportedly suggested flooding the market with oil, with a stated intent of hobbling Iran’s economy. BUT IS IT TERMINAL? MAYBE. NO ONE KNOWS. There’s a lot we don’t know about Iran’s economy, starting with the basic data and decent statistics.  And of course, what we do know is subject to change – especially if there’s an uptick in nuclear negotiations. In the most progressive case U.S. sanctions could still take years to lift; though EU sanctions, which involve a less complicated political process, could change practically overnight.   But then, some say, so could the Islamic Republic. “The next few years could be a slow wave or it could be a tsunami, sweeping away the regime,” said Ali Omidyar, the Green Movement activist. Iran’s fortunes, economic and political, are a function of many moving parts in an opaque system. That leaves some hope for change, but little visibility on the strength of the system or how long it can last.

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