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IRAN


 

 

Key Economic Data 
 
  2003 2002 2001 Ranking(2003)
GDP
Millions of US $ 136,833 107,522 114,100 34
         
GNI per capita
 US $ 2,000 1,710 1,680 110
Ranking is given out of 208 nations - (data from the World Bank)

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Update No: 101 - (27/04/10)

Siege slowly tightens
Washington continues in its efforts to isolate Iran economically. Even the Iranian authorities acknowledge that in recent months China, India and Japan have all curtailed their imports of oil from Iran. However, the level of Iranian oil exports has not been affected yet, as the country has been able to find alternative markets. It is not even clear how much oil Iran is actually producing, with estimates varying between 3.5-3.76 million bpd; some analysts argue that the reduction in Iranian exports to some countries might be due to the fact that the relatively low quality of Iranian oil makes it difficult to export when offer exceeds demand. In any case, several oil companies, including Russian giant Lukoil, have been reducing their activities in Iran or pulled out altogether. Lukoil announced in April that it would stop shipments of gasoline to Iran altogether, following its March decision to pull out of the Anaran oil project. In terms of imports of refined oil, Iran has been able to replace unwilling trading partners with producers from Turkmenistan, Venezuela, Kuwait and Malaysia, while Total and some Chinese refiners also continue to supply Iran. Any company which has significant interests in the US is vulnerable to US pressure: Lukoil for example owns about 2,000 gasoline stations in the US. The German government has agreed to discourage trade with Iran, but countries like Austria continue to trade enthusiastically with Teheran. The Iranian authorities remain adamant that sanctions do not place a serious threat to the Iranian regime and that Iranís purchasing power will always attract sufficient trading partners to fulfil the needs of the country, if somewhat more expensively. Even if Chinese companies are trying to protect their trading interests in the US, the Chinese government is still trying to delay the imposition of new sanctions on Iran, insisting that negotiations can still deliver a deal. Teheran seems to be trying to add momentum to the Chinese position by hinting that last yearís UN proposal concerning a swap of nuclear fuel rods might be acceptable to Teheran after all. The proposal had been rejected by Teheran initially, after careful consideration (which interlocutors read as delaying tactics).

Pre-empting opposition
After much hesitation, the Iranian authorities have finally moved in to crush the opposition movement generated by the fraudulent 2009 elections. Exploiting the divisions within the movement and a sense of weariness among the activists, the regime has disbanded the reformist political parties and limited the movements of the key opposition figures (when it has not arrested them outright), as well as banned the reformist press. Apart from exploiting a phase of weakness of the opposition movement, the Iranian authorities might want to clear the ground before the economic situation becomes serious enough to generate unrest among the workers and the poorer strata of the population. The ĎGreení opposition was mostly limited to the middle class. The authorities remain adamant that the situation is under control, pointing out positive economic data like the fall in inflation and a 17% rise in non-oil exports. Inflation indeed decline again in March, to an annual average of 11.3% from 13.5% in February, although this is as much due to economic slowdown as it is to monetary tightening by the Central Bank. Iranian officials also mention the high potential of foreign investment coming from Iranians abroad. Foreign Direct Investment did increase by 6% in 2009, but remains very low, at around US$1.6 billion per year. External observers also see some recovery in the Iranian economy, with GDP growth forecast at between 3-4% for 2010/11. However, sources report numerous industrial lay offs and workers protests in various parts of the country.


Forecast & Summary 2010
The internal political situation has not fully stabilised yet. The opposition remains defiant and continues to demonstrate occasionally. The government has been issuing warnings that its patience is running out. As the demonstrators become more radical and shift from demanding a recount of the votes towards challenging the legitimacy of the Islamic Republic, the likelihood of an escalation of the repression also increases. Ahmadinejad is now facing opposition throughout the spectrum of his agenda. Sorting out the economic situation will not be easy if he continues to face high levels of resistance in the parliament. He would like to entirely phase out subsidies to food and fuel in five years. His plan to cut subsidies highlights how his economic plans have turned around. He talks of the need to reduce the size of government and of reducing waste. Maybe he engineered the electoral fraud in order to have an excuse to crush the opposition, but he has not been very successful at that and now faces a complex situation. At the same time the regime cannot backtrack and opt for a compromise because it would then show weakness. The most likely outcome of the crisis remains a violent crackdown by the security apparatus. Some moderate supporters of the regime seem to be reaching out to the opposition in order to reach a deal; some particularly hated figures could be sacrificed, such as prosecutor-general Saeed Mortazavi, an ally of Mahmoud Ahmadi-Nejad, who has been accused by a parliamentary committee of several deaths in custody. Among the ranks of the opposition there are also voices of moderation. Mir-Hossein Moussavi himself has so far refused to call for the overthrow of the regime, while former president Mohammad Khatami in January condemned radicalism on both sides and stated that most reformists were loyal to both the constitution and Supreme leader Khamenei and did not want a secular state.

The confrontation over the 11 February celebrations of the Iranian Revolution ended up in a defeat for the opposition to the regime of President Ahmadinejad. The heavy security mobilisation discouraged protesters; the government strategy of blocking the streets also prevented many from attending. The opposition movement is now looking for a new strategy, but the lack of a unified strategy means that developing it is very problematic. Many believe that the opposition movement will now disintegrate and disperse, if a charismatic leader does not emerge to lead it. The predominantly middle class base of the opposition precludes the shift towards other forms of struggle. Efforts to call for labour strikes have been dismal failures, despite the harsh impact of the economic crisis n the workforce. The more moderate wing of the opposition, figures such as defeated presidential candidates Mir-Hossein Mousavi and Mehdi Karroubi, oppose strikes, but perhaps more important is the tight control exercised by the regime on labour and labour organisations. Many small strikes have occurred in recent months, but they have all been crushed; attempts to form independent unions have led to arrests and sentences to prison terms. The Islamic Labour Councils, which represented labour interests to a degree under Khatami, have been turned into a puppet of the government under Ahmadinejad.

On the international front Iran will try to buy more time, but the net around it is tightening. In December the Americans went a step further in tightening sanctions involving Iran, in response to the lack of any progress on the issue of the countryís nuclear programme. The Iran Refined Petroleum Sanctions Act expands existing US restrictions to companies that sell and insure refined oil shipments to Iran. Iran is in principle vulnerable to such sanctions, as it still imports 40% of its refined petroleum and 11% of its diesel. Most of Iranís imports have been coming from European firms, including Vitol, Total, Trafigura and BP. However, Iran has increasingly been switching to China for its refined petroleum import; given the burgeoning trade relations between the two countries, it seems unlikely that China will agree to abide by any sanctions. The Iranians claim not to be worried by the development and indeed have been showing their defiance by announcing the forthcoming deployment of a new model of more efficient centrifuges for the enrichment of uranium. The biggest threat to Teheran appears now a Russian-American dťtente, although the Americans have been moving slowly on this front too. The Russians seem intent to extract as many concessions as possible by the American giant being caught off balance.

The real problem for Ahmadinejad might be that if he cannot bring the situation under control, the belief that the Islamic republic is there to stay might be undermined even among the friendliest foreign powers, such as China and Russia. Supreme Leader Khamenei is also quite silent these days, which may not augur well for Ahmadinejad. Indeed for some time there were hopes in the west that China and Russia might subscribe to tougher sanctions against Iran on the nuclear issue, but such hopes are dissipating after China demanded that Iran be given more time. There is still some hope that China, fearful as it is of diplomatic isolation, would eventually distance itself from Teheran. As Mohammed Al Baradei stepped down as head of the IAEA in November, and new evidence concerning the Iranian nuclear programme which emerges all the time, the position of the IAEA vis-ŗ-vis Iran has been hardening. Yukiya Amano, the new IAEA chief, has produced a report which is positive about the possibility of Iran being engaged in the development of nuclear weapons. The report, which has been leaked to the press, provides new ammunition to those who want to tighten the net around Iran.

The Russians seem increasingly open to the possibility of new sanctions against Iran. Russian Foreign Minister Lavrov stated that Moscow is very alarmed about Iranís lack of cooperation with the IAEA. Although discussions of new sanctions are not yet underway, they might start soon; the Israelis are placing very heavy pressure on Washington in this regard. Iranian government sources admit that the current sanctions have some effect and have pushed up transactions costs, but also state their belief that there will always be willing trading partners to deal with Iran, particularly in Asia. Trade with China might have already exceeded trade with the whole EU and is estimated at US$31 billion.

As gasoline sanctions are beginning to be tightened around Iran, the Iranian government is fastening the pace of its efforts to reduce consumption. Some large traders have already stopped dealing with Iran and other may follow soon. The first measure announced by Teheran sees the reduction of the monthly discounted quota assigned to each driver to 15 gallons, down from the previous 21. The measure is cast as a temporary solution, but it is very likely that it will be renewed beyond the initial 3 months. In reality the Security Council is nowhere near a consensus on new sanctions; the Chinese are opposed and the Russians argue that US demands are too harsh. Apart from targeting gasoline, the new sanctions are also meant to limit Iranís international trade finance and make it more difficult for it to export its oil. Some signals emerging from China do not bode well for ĎIran toughí: Beijing has halved its imports of Iranian oil over the last year, presumably viewing reliance on Iran as high risk. Insurers like Lloyds are also now refusing to insure oil cargos from Iran. Iran is increasingly importing its gasoline from China, Malaysia and a few other countries, but its reduced options are driving the price of imports up. All in all, the most likely short-term outcome is a somewhat cut-down plan which tightens the siege around Teheran but not too much. Teheran seems not to exclude a violent confrontation, even if probably it believes it will fall short of all-out war. Reports that the Americans have begun to stockpile bunker-buster bombs in Diego Garcia surely will have attracted the Iraniansí attention; maybe it is just a precautionary measure or an example of psychological pressure, but the Iranians cannot be sure. A new commander has been appointed to the ground forces of the Revolutionary Guards, a veteran with experience of Lebanon and therefore of asymmetric warfare. Now both the general commander and the commander of the ground forces are specialists in asymmetric warfare. Perhaps this too is a measure of psychological warfare more than of anything else; perhaps not.

The economic situation can only get more precarious. Iranís industry is now running well below its capacity at around 40%, according to some sources. Many businesses claim to be on the verge of bankruptcy as high interest rates are strangling them. Up to 40% of all businesses in the country are reported to be in trouble to some extent. The private sector in turn accounts for about 20% of Iranís economy. Businessmen complain that the Presidentís policy of conceding loans at low interest rates to small businesses and short-term projects has diverted loans away from more solid businesses and pushed up interest rates towards 20-25%. Ahmadinejad is trying to stimulate internal production in a number of ways. He recently appointed former Tehran prosecutor general Saeed Mortazavi to lead the effort against the smuggling of goods into the country, highlighting the importance of the problem. In the meanwhile the Revolutionary Guards have been expanding their control over the economy, replacing reluctant foreign companies in some oil projects, like South Pars phases 15 and 16. As foreign investments become less and less likely, the role of the Guards may expand further in the oil sector. In December Iran stopped its talks with Total over South Pars, phase 11, for example. The Guards are also expanding in other sectors of the economy: in September they bought a majority share in the state telecommunications company.

At the same time Teheran is experimenting with innovative ways of raising cash for investment in the oil and gas sector. The parliament authorised the issue of US$6.78 billion of energy bonds to be then invested in South Pars; the amount exceeds the expectations as Teheran had previously been talking of at least US$1 billion worth of bonds to be issued. Teheran is also courting Islamabad, which has dire energy needs of its own, and talks about the construction of a gas pipeline from Iran into Pakistan and maybe India are well advanced. Washington is displeased by Islamabadís inclination to sign a deal with the Iranians, but Pakistan has few viable alternatives to resolve its energy shortages.

An interesting development in January was the approval by Iranís constitutional watchdog of a new law aimed at gradually eliminating fuel and food subsidies. The law is noteworthy because it comes at a time of great tension in Iranís streets already and inevitably risk adding fuel to the fire once implemented. Already the modest cuts in fuel subsidies implemented in 2007 led to protests and riots and the cuts had to be postponed. The current bill establishes that the savings deriving from the cuts should be spent for 50% on helping the poorest households, for 30% on improving Iranís infrastructure and for 20% to the discretion of the government, without any parliamentary supervision. The problem with the plan is that the government lacks accurate records of the wealth of its citizens and therefore effectively targeting money to the poor will be difficult.

Further plans to scrap energy and food subsidies altogether are becoming increasingly controversial and President Ahmadi-Nejad is now proposing to hold a referendum in order to decide over his plan of cuts. The parliament resists the plan and proposes to halve the planned cuts to US$20 billion, fearing among else a catastrophic inflation. Ahmadi-Nejad is adamant that he has the support of the economists and that the plan should go ahead unchanged, not least in order to avoid regional disparities. However the latest inflation figures for February show already inflation rebounding after many months of decline, with an increase of 1.1 percentage points on the previous month.

According to official figures, year-on-year inflation came further down to 12.2% in January from 13.5% in December, seemingly making the target of 11% by March achievable. However, the commodity price index has shown an increase of 0.4 percentage points over the previous month, stoking fears that Ahmadinejadís planned cuts to government subsidies might push inflation up again. Official figures also show a sharp rise in unemployment, which reached 11.3% in December, up from 9.5% a year earlier. The debate on subsidies continues in Iran, not least because of inconsistencies between the new five-year plan and next yearís budget, both of which are waiting to be discussed by the parliament. The government seems now to be heading for a fast cut in subsidies, to the tune of US$40 billion in just one year, contrary to the US$10-20 billion initially discussed. That would mean a steep rise in prices; for example gasoline would end up costing 4 times as much. The latest GDP figure show that growth declined to 2.5% in 2009 according to official figures, as a result of the global economic crisis and of sanctions. Nonetheless the government of Ahmadinejad maintains ambitious economic plans, as highlighted in the new 5 years plan. The target is an average GDP growth of almost 8% over the five years. That should be achieved through a US$20 billion investment in the oil and gas industry, as well as through the development of other sectors of the economy. The share of oil and gas out of total exports is expected to decline by 10%. However the IMF estimates 2009 GDP growth at just 1.5% and does not expect more than 2.2% growth in 2010; the 8% would be dependent on substantial foreign investment, but unless Iranís international positions changes radically it is not clear how that could happen.


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