With inflation above 20 percent, high unemployment, the production sector working at less than half capacity, and harsh international sanctions, Iran’s economy is in trouble. Whether sanctions will ultimately encourage the regime to negotiate, however, is still a major point of contention.
Eighty percent of Iran’s foreign revenue is dependent on oil and since July 1st, the European Union, which accounts for 18 percent of Iran’s oil exports, stopped contracts with the country. Previous sanctions by the US have cut private Iranian banks out of oil trade so sales are managed by the Central Bank of Iran (CBI) and recent US restrictions on the CBI have further aggravated the economic situation. Currently any bank that operates in the US is banned from trading with foreign institutions that process payments with Iran except for China, Japan, and India. Congress passed a bill on August 1stslapping additional sanctions on Iran’s financial, energy, and shipping industries.
Sanctions have been particularly hard on the middle and lower income classes.
“The sanctions have been hurting the Iranian people particularly middle class and lower income people because the price of most of the necessities has increased significantly, for example, the price of chicken went up by almost 50% this past week. I hear from most of my friends that for prescription drugs and medications most of them can’t find what they need. Sanctions have impacted the Iranian consumers the most,” said Dr. Ali Dadpay, professor of economics at Clayton State University.
Some specialists believe that Iran’s economic troubles, though aggravated by the sanctions, are rooted in other issues.
“There’s no doubt that sanctions have hurt Iran in general but they have hurt a particular sector. It is very difficult to blame the sad state of the Iranian economy today principally on the sanctions. They are a few factors among many others,” said Dr. Nezar AlSayyad, chair of the Centre for Middle Eastern Studies at UC Berkeley.
Some of Ahmadinejad’s internal policies that redistribute wealth in certain sectors of the economy, the subsidy reform plan which pays each Iranian 455,000 rials to compensate for cuts in subsidies and the internal tax collection system, have been detrimental to Iran’s economic health alongside international sanctions.
Though Ahmadinejad’s policies have put Iran in an economically vulnerable position, pressure points created by international sanctions cannot be ignored. High inflation, high unemployment, closed businesses, restriction on oil exports, and a falling currency, among other factors, have been a strain on the economy. Despite this, few believe that the pressure will force Iran to the negotiating table or change its foreign policy.
A contributing factor is that countries such as India and China continue to buy Iran’s oil. China is Iran’s largest oil consumer accounting for 20 percent of its sales. It buys Iran’s oil exploiting loopholes where trades are routed through other countries in the Gulf. It has also swapped shipments of oil for Chinese gold and allegedly set up segregated “swap-shop” accounts that it credits when it receives oil.
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“Sanctions are increasing Iranian dependence on China and to a lesser extent on India and that will create an infrastructure of trade which will increase Iran’s ability to resist the sanctions,” said Dr. Dadpay.
The US and Europe are banking on the fact that sanctions will either create domestic pressure from within Iran to change its policies or that its limited ability to sell oil and obtain valuable petrodollars will force it to succumb to US and European demands regarding uranium enrichment.
Neither strategy is likely to work. As previously mentioned, Iran has managed to maintain customers for its oil such as China and has entered into barter arrangements in terms of local currencies with India which has shielded it considerably from European and US sanctions.
Also, though Iran depends on oil revenue, it has a relatively diversified economy and has built up substantial oil reserves (estimated at $100 billion) over the years. This provides the country with a sizeable cushion should it need to import essentials in the coming months and will help in mitigating the economic impact of sanctions.
Domestic pressure is unlikely to influence the regime’s policy. The government continues to downplay economic problems and is trying to convince the public that resisting sanctions is a matter of national pride. It portrays itself as a regime fighting to preserve Iran’s integrity and preventing the US from influencing its domestic efforts through economic pressure. If the public buys into this argument it may be willing to stomach ongoing economic hardship.
“I think from previous experiences with sanctions and in countries where people decide it is a matter of national pride, they just swallow the pill until things improve or the regime changes,” said Dr. AlSayyad.
Though Iran’s economic health is deteriorating, it is not as dire as many project. Financially, it can survive in the short term due to its reserves. It has trading partners for its oil, though revenues have suffered, and for the time being, the public is not pressurizing the government to change its foreign policy.
Iran feels singled out and is unlikely to respond positively to economic pressure. Other regimes such as North Korea, Cuba, and Zimbabwe have survived even harsher sanctions than Iran. If the international community wants Iran to curb its nuclear program it will have to look for positive ways for the country to get out of this situation – piling on sanction after sanction is not the answer.
Hina Mahmood is the Business Editor for Your Middle East.