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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: 121 - (26/01/12)

Towards oil sanctions
As western powers get closer to declaring sanctions against Iranís oil trade, Tehran responds by threatening a conflict in the Persian Gulf, which it knows nobody except Israel really wants, particularly at this juncture of world economic difficulties. Apart from threatening to close the Hormuz straits, it has also been threatening retaliation against Saudi Arabia, which has volunteered to raise its production of oil to fill the gap left by sanctions against Iran. In reality the American-driven plan to impose oil sanctions on Iran is not proceeding that smoothly. Obviously some objections were expected: China has made it clear that it will resist them and that it will not accept an arbitrary imposition of sanctions on Chinese companies. China imports 10% of its oil from Iran and has increased imports of Iranian oil by 30% in 2011; clearly the Chinese decided early on that they would not support sanctions of this type. In any event, the Chinese have also been befriending the Saudis, in case sanctions or war do happen. More hurtful perhaps is Turkeyís stated refusal to join the sanctions front, unless there is a UN decision in this regard.- a shrewd objection! The country imports 51% of its oil from Iran and despite some disagreements with Tehran, its government is keen to maintain good relations with their neighbour. Replacing Iranian oil with other oil would be possible for Turkey, but it would cost more.

In the meanwhile western diplomats are trying to use such new leverage as is gained with the progress of oil sanctions, to force the Iranians to the negotiating table. On offer might be the concession of allowing Iran to continue enriching uranium at a level lower than the 20% required for nuclear weapons.

Foreign policy turns into a tool of internal bickering
However, Iranian internal politics comes into the picture here. Reportedly President Ahmadinejad has stated in public that the conservative factions opposed to him, including Supreme Leader Khamenei, has been pushing the nuclear confrontation that Ahmadinejad himself contributed to start, well beyond the point where he had planned to stop. The purpose would be, in Ahmadinejadís view, the desire to discredit him and help defeat his political faction in the forthcoming parliamentary elections. Ahmadinejad claims that the assault on the British Embassy in Tehran in November, the failed assassination plot against the Saudi Arabian US ambassador, the continuing support for President Bashar al-Assadís regime in Syria, the threats concerning the Strait of Hormuz and efforts to sabotage the relationship with Turkey, are all the work of Khameneiís group. Ahmadinejad seems to have argued that it is time to slow the pace of the confrontation with the west, despite his on-going fiery rhetoric, in part because of signs that the existing sanctions are weakening the Iranian currency, the rial, seriously: it has lost 20% of its value in a single month. The Central Bank has introduced a cap on the exchange rate, but many rials are being exchanged on the black markets against dollars; the Iraqi authorities have noted a massive outflow of dollars towards Iran (as well as Syria). While the Bank wanted to increase the base rate to 21% to contain the fall of the currency, Ahmadinejad refused to countersign the order.

Conservative wings to face off each other in parliamentary elections
At the same time the judiciary, controlled by Ahmadinejadís enemies, continues its campaign against close associates of the President: In January Ahmadinejadís aide Javanfekr was sentenced for having offended the Supreme Leader, although it was never clear what it might have said or done. It does not help that Ahmadinejad has decided to confront openly his conservative rivals in the parliamentary elections, fielding his own slate of candidates.


Forecast 2012
For all the bad news about Iran, the economic forecast for the country in 2012 is predominantly positive. The IMF sees GDP growth rising to 3.4%, from 2.5% in 2011, of course assuming no effective oil sanctions and no war. Iran will be helped by rising oil prices and a good agricultural harvest, as well as by the drastic downsizing of the fuel subsidy system. In fact the Iranian governmentís plans are even to become one of the worldís main exporters of gasoline, once the new Setareh Khalij-e-Fars goes on-stream. Iran has been exporting small quantities of gasoline since September 2010. In five years, the government plans to increase production to 186 million litres per day, from the current 42 million litres.

As already hinted, all this depends on the international political outlook. Even if no major or regional power wants a war in the Gulf, Iranís internal politics might just be leading there. Khamenei and Ahmadinejad are confronting each other and it is not clear that either of them will stop before it is too late. Iranís foreign policy might in any case suffer irreparable damage before the confrontation ends, one way or another.

Ahmadinejad could do well in the forthcoming parliamentary elections, in part because he has managed to organise his camp (the ĎThird Waveí) better than either the conservatives or the reformists have done. For a total 290 seats you have about 1,800 conservatives, 1,300 reformists and 442 supporters of Ahmadinejad running, as well as 1,800 others of unclear standing. So Ahmadinejadís candidates will split the vote to a much lesser extent than the rivals. The inability of the pro-Khamenei conservatives to organise themselves, might explain why they are having recourse to dirty tricks to derail the campaign of Ahmadinejadís Third Wave.


Forecast and summary 2011
Iran entered 2011 with Ahmadinejad seemingly still in a solid position, despite his growing political isolation. How many Iranians see themselves as primarily linked to a political faction? It is hard to say, but the absence of firmly established political parties means that political sympathies are quite fluid. Ahmadinejad clearly has a base of support in the rural areas and among the poorer sectors of the population. Will it be enough to keep him going? Much depends on how far he is ready to push his confrontation with Washington. This game of brinkmanship might end in a resounding success, with Teheran becoming a nuclear power and forcing the western powers to come to terms with it, or in a disastrous failure, with Iran becoming the epicentre of a new regional war. After all, in less than two yearsí time the US might have a new Republican president, just in time to intervene before Iranís nuclear weapons approach readiness!

The pressure exercised on Iran through the sanctions will not per se crush Ahmadinejad, or force him to bow to it, but it certainly has been creating trouble for him. His judgment is now questioned even by a majority of his fellow conservatives; in 2011 Ahmadinejad will very likely continue his efforts to build up a new conservatism in Iran, less clerical and more nationalist (which the Ayatollahs have spotted and voiced their disapproval). Apart from being a better fit for him, it would also make him increasingly autonomous from the wider conservative tendency.

The success of popular demonstrations in Tunis and Egypt injected a new lease of life in the Iranian Green Movement, which had completely petered out several months ago. Hundreds of thousands then hit the streets again, forcing the regime to clamp down on external media, targeting satellite dishes and the internet, as well as to issue threats of violence and even of executing the leaders of the movement. This reaction suggests that the Islamic Republic is not entirely confident that the Egyptian contagion will not hit Iran as decisively as it has been hitting the Arab world. It is hard to believe, however, that the regime will be betrayed by its own armed forces, which are more ideological than the Egyptian or Tunisian ones, particularly the Revolutionary Guards, and have a lot to lose from a change of regime. There are some rumours that some high rank officials of the Guards are increasingly critical of the regime, but this is impossible to confirm for now. Some observers believe that the regime has been shocked by the size of the demonstrations, at a time when it seemed that the opposition had been definitely defeated. Some also believe that the Iranian working class, hit hard by the recent cut in subsidies, might join the Green Movement this time, adding a whole new thrust to it. Ahmadinejad had presented himself as the paladin of Iranís lower classes in his early years, but the subsidy cuts respond more to a logic of economic nationalism.

For the time being the renewal of the Green Movement has not reunified the different conservative factions. At the beginning of February the parliament voted to impeach Transport Minister Hamid Behbahani, following yet another air crash. President Ahmadinejad resisting the move, accused the parliament of political interference and has reappointed Behbahani as caretaker. Just a few days earlier the same parliament had approved Ali Akbar Salehi as foreign minister, replacing his predecessor who had been sacked by the President without warning last year; Salehi is seen as a close ally of Ahmadinejad and his approval had seemed to signal better relations with the parliament: clearly a premature conclusion. The parliament feels that Ahmadinejad does not respect its prerogatives and wants to play a bigger role, despite Supreme Leader Khameneiís warnings that executive and legislative branches of the state have to cooperate; perhaps more importantly Parliamentary Speaker Larijani, who has been harbouring presidential ambitions for some time, is keen to discredit Ahmadinejad as much as possible. There have been also reports that US intelligence sources have identified divisions within the Iranian leadership, between those who fear sanctions could weaken popular support for the regime and stimulate popular protest.

The most important development in the first three months of 2011 was the ousting of Hashemi Rafsanjani from the leadership of the Assembly of Experts. The candidacy of arch-conservative Mahdavi-Kani received majority support from the 86 members of the Assembly (about 50 reportedly expressed support for the cleric) and Rafsanjani opted to withdraw his candidature to re-election. Rafsanjani however continues to lead the Expediency Council, another important organ of the Islamic Republic. Ahmadinejadís relations with other conservatives remains however edgy; in March he narrowly avoided (by one vote) another one of his ministers being impeached, energy minister Majid Namjou.

Tension between Ahmadinejad and the Iranian clerical establishment reached a new height in April, when the President sacked intelligence minister Heidar Moslehi against the advice of Supreme Leader Khamenei. The Supreme Leader then ordered Ahmadinejad to reinstate the minister, but Ahmadinejad resisted. A large majority of members of parliament came out in support of the Supreme Leader, affirming that Ahmadinejad had to obey his order. The dispute goes beyond the minister himself: he clashed with Ahmadinejad over his sacking of his deputy Abdollahi, who is close to one of the key advisers to Ahmadinejad, Chief of Staff Esfandiar Rahim Mashaei. The latter represents the revolutionary/nationalist line of thinking within the Iranian regime, arguing that the ideology of the regime and Iranian national identity takes precedence over Islam and therefore intellectuals matter more than clerics; Mashaei has been accused by other conservatives of wanting to challenge the authority of the Supreme Leader. Eventually Ahmadinejad had to give up on Moslehi, and even demote Mashaei by dropping him as Chief of Staff (Mashaei maintains other less important functions within the government). Previously Khamenei had already intervened to prevent Ahmadinejad from choosing Mashaei as his vice-president after his re-election.

After the clash with Supreme Leader Ahmadinejad last month over the sacking of Intelligence Minister Moslehi, Ahmadinejad even refused to attend cabinet meetings for two weeks and refused to acknowledge the reinstatement of Moslehi. Ahmadinejadís ally Mashaei, is now being targeted by the Supreme leader and is being accused of sedition; some of his supporters, who propose a line of Iranian nationalism and relative anticlericalism within the Iranian regime, have recently been arrested under the accusation of exorcism; among other things Mashaei says that the return of the hidden Imam is imminent, a messianic point of view that the clergy reject. Mahsaei is believe to harbour presidential ambitions and might be trying to manoeuvre to attract support from the reformist opposition; his anti-clerical message might have some appeal in the absence of a genuine reformist candidate. This month the row continued when Ahmadinejad sacked three senior ministers, believed to be opposed to Mashaei: oil, welfare and industries and mines. A day earlier Ahmadinejad seemed to have accepted mediation over the issue of merging eight ministries, including the ones of the three sacked ministers. Then he struck with the sackings. He also appointed himself caretaker Oil Minister, which might have taken him to preside over the next OPEC summit. On the whole, the rising confrontation with Khamenei seems to be taking the profile of a serious political crisis.

As a result of Ahmadinejad's unresponsiveness to the Parliament, a majority of members of Parliament filed a compliant to the judiciary against him, accusing him of illegally delaying the appointment of ministers. The Parliament is definitely on the war path against Ahmadinejad. In May a close associate of the President, Vice-president Mohammad Baghaei, was banned for four years from any state job, under the accusation of Ďmisusing state assetsí. Then in June deputy foreign minister Mohammad Sharif Malekzadeh was dismissed because the Parliament opposed his nomination. The Minister of Foreign Affairs, Ali-Akbar Salehi, tried to insist on his appointment, but himself risked impeachment by the Parliament. Although there are allegations of corruption and misconduct against Malekzadeh, most observers have no doubt that his dismissal is part of the power struggle within the regime. Supreme Leader Khamenei appears to be using the parliament to send messages to Ahmadinejad, that his prerogatives as Supreme Leader should not be touched. Foreign affairs is one of the ministries considered to 'belong' to the Supreme Leader and Ahmadinejad has claimed it for himself.

Many believe that the parliament is ready to impeach Ahmadinejad; what is preventing this from happening is the fact that Supreme Leader Khamenei has not made up his mind yet in this regard. Khamenei is no longer supporting Ahmadinejad unconditionally, as he did in the past, but seems to believe that impeachment could be a trauma that the Islamic republic cannot afford. He appears to be trying to force Ahmadinejad to play by the rules. Former President Rafsanjani advocates Ahmadinejad's removal as a way to recreate national unity and ultimately save the regime, but his influence has been in decline for quite some time. The reformists are now lying low, hoping that the conservative split will deepen and lead to a collapse of the ruling coalition. Then the reformists would stand a chance of re-emerging as a strong force. It is not clear however when Khamenei's patience will run out, or even whether Ahmadinjad can be restrained or not.

Former President and leading reformist Khatami recently hinted in a speech to the war veterans that given certain conditions the Reformists would be ready to go back to politics and take part in the next parliamentary election. Another reformist, Ali Mazru'i, even spoke of a reconciliation between the Green Movement and certain factions of the 'Principalist' conservatives. The thinking is clearly that with the growing gap between Ahmadinejad and Khamenei there might be a chance for the reformists to drive a wedge in between and be admitted back into the political game. More radical reformists are however incensed by what the moderates are saying and even accuse them of betraying the democratic movement. Khatami had to backtrack in public, but the message was launched.

Khamenei, apparently out of distrust towards Ahmadinejad and his cronies, has transferred much of the nuclear programme from the Defence Ministry to the control of the Revolutionary Guards. Ahmadinejad too is trying to bring the Revolutionary Guard into government and therefore increase their power. After ventilating the idea of appointing his former aide Mohammad Aliabadi as Minister of Oil and receiving warning signals from Parliament that it would be war, Ahmadinejad seems now to be going to appoint in that position Rostam Ghassemi, a member of Iran's Revolutionary Guards Corps and commander of the IRGC Construction Camp. Ghassemi at least is technically a more credible candidate than Aliabadi.

The emergence of a major bank scandal in Iran is turning into a tool of political infighting. A branch of the Saderat Bank has been caught in a US$3 billion fraud, which has involved another seven banks as well. This is reportedly the largest case of embezzlement in Iranian history. Investigations have been going on for several months and the contours of the case are not clear. What is clear is that some political commentators and conservative politicians are using the case to hit out at Ahmadinejad, accusing the government of involvement in the scandal, and in particular Ahmadinejadís ally Mashai, a pet hate of the so-called 'principalist conservatives' because of his unorthodox views. Although Ahmadinejad has sided with Mashai and defended him from the allegations, the President has clearly been weakened by the campaign. The fact that the scandal only started being discussed in public recently, despite having been long ongoing, and the unusual step of washing the Islamic Republicís dirty laundry in public, all suggest that the conservatives have deliberately chosen to attack Ahmadinejad on this front. The President after all had campaigned against the economic interests of some of the conservative groups, and their corrupt practices. Transparency International however does show a dramatic worsening of corruption in Iran under Ahmadinejad, with the countryís ranking falling from place 58 to place 180.

Despite these deep divisions among the conservatives, the reformist opposition lacks leaders and a strategy and is being very ineffective; not even the impulse of the Arab Spring has managed to kick-start the rise of the opposition. That allows the regime to claim immunity from the wave of turmoil which is investing the region and cast itself as a regime of a different breed from the waning Arab dictators. In September the Iranian regime appears to have given up hope that its key ally Syria could emerge unscathed from the crisis that started months ago; high level Iranian officials have been issuing statements concerning the need for reform in Syria and the need for President Assad to listen to the people. Clearly the Iranians are worried about their deteriorating image in the Arab world. Opinion polls, for what they are worth, show a decline of the popularity of Iran, to the advantage of Turkey, within the public opinions of the Middle East.
These developments do not seem to imply that Iran is about to adopt a more moderate foreign policy, even if among the Iranian conservatives many believed that Ahmadinejad has in mind some deal with the Americans. In September the Iranians have announced the transfer of its uranium enrichment activities in a new location in Fordo, where they would be better protected against an external attack.

The Israelis believe (2011), that following some technical problem with the nuclear programme, an Iranian atomic bomb might still be 3 years away. 2014 curiously enough was the CIA predicted date during the Bush/Cheney administration and viceĖpresident Cheney, building up with the Israelis the imminence of an Iranian bid to take over the world (read the Iraq playbook), went ape at US Intelligence shooting his fox. At the time, some observers like us, thought that given the chaotic Iraq invasion discovering no WMDs being blamed on faulty intelligence, the CIA pre-emptively got the word out about Iran as they did. Indeed one wonders if the same phenomenon might be in play in Israel. The prediction that Iran was three years away from a nuclear weapon came from the retiring chief of Mossad. No doubt they too were embarrassed when no WMDs were found in IRAQ. Israelis are not all hawks, even if that is how they are often portrayed.

The Americans now believe that Iran has achieved the ability to produce highly enriched uranium, as required for the production of weapons. Now the focus of the effort to slow if not halt the programme is shifting towards preventing Iran from having access to other, important components such as centrifuges. It is believed that many of Iranís first generation of centrifuges have been retired and that the model being used (of Pakistani design) has proved unreliable. If Iran could be prevented from developing a new, more advanced generation of centrifuges, the whole programme could be slowed considerably. Carbon fibre in particular is one centrifuge component that the Americans have been targeting for some time, trying to prevent it from reaching Iran. Another school of thought insists that clever Israeli geeks, or US hackers employed by the Pentagon for cyber-warfare, or both, had sabotaged the programs of Iranian centrifuges and that this is the cause of the delay. If that is true than it would be logical to expect reprisals from clever Iranian hackers!

However, at the current rate of progress, even by then negotiations over a civilianisation of the nuclear programme might not have made much progress. The last Istanbul talk with the Western powers in January did not achieve anything. Iran insisted that it wants to enrich uranium and instead wanted (embarrassingly), to use the occasion to discuss Israeli nuclear weapons, which automatically puts the Americans on the back foot, since there is probably nothing they can say.

Meanwhile, Western powers are discussing additional sanctions to be developed outside the UN framework, where Russian and Chinese opposition would make it difficult to achieve an intensification of the sanctions. The talk is of more financial sanctions and also sanctions affecting the oil and gas sectors. Incidentally the latest economic data shows that in January inflation continued to rise, reaching an annual rate of 10.8%, compared to 10.1% for the year to December; this was largely expected because of the massive subsidy cuts. For the time being the net around Iran is not tight enough to prevent Teheran from scoring a few goals. Most recently an agreement was signed with neighbouring (FSU) Armenia, with whom they share a short frontier, to build a pipeline and supply oil to the trans-caucasian country. Ahmadinejad reacts to the internal trouble by re-launching his strategy of provoking international condemnation and using that to mobilise Iranian national sentiments behind himself. Most recently it was announced that he was to send a couple of warships through Suez into the Mediterranean, superficially to visit Syria. Obviously it attracted Israeli protests, but as we pointed out in our March Overview, Israel had done exactly the same thing not long ago, sending two warships in the opposite direction through the canal into the Red Sea, and on another occasion an Israeli submarine made a return trip.

Perhaps the recent reluctance of the US to get involved in Libya is encouraging the Iranians to think that they in Iran can make it. Recently Iran has started replacing its old and primitive centrifuges with more advanced ones, which will allow for faster productions of enriched uranium. Some intelligence agencies now believe that President Ahmadinejad is pushing to break open with an announcement that Iran is going for nuclear weapons. The intelligence community, however, is still divided on the issue and many believe that Ahmadinejad is in fact relatively moderate on the nuclear issue, compared to Supreme Leader Khamenei. Yet others still however believe that Khamenei himself is very worried about the implications and consequences of Iran going nuclear. The Iranians continue sending signals that are open to interpretation that the nuclear programme is effectively an effort to force Washington to talk to them. According to a recent statement of Iran's Foreign Minister Ali Akbar Salehi, what the Iranians want is Washington agreeing to negotiations among equals and without preconditions.

If Ahmadinejad can contain his own enemies at home, he also faces the welcome prospect of a friendlier Middle East in the foreseeable future; if the promise of free elections in Tunisia and Egypt are kept, governments influenced by Islamist parties are likely and Iranís stance on Israel and hostility towards the US might be more appreciated. Another benefit for Ahmadinejad is that he can now easily point to Western double standards in dealing with Arab revolutions: intervention in Libya against a dictator, silence on the repression unleashed by the Yemeni and Bahraini dictators. Bahrain, with its Shiite majority being at the centre of social mobilisation and with Saudi troops deployed to prop up the regime, now handing out Life sentences to protestors is perfect for Ahmadinejadís propaganda. Iran will probably try to stir up trouble in Bahrain, if it can, and it is openly encouraging the opposition to resist the bloody crackdown. Of course there is a high degree of hypocrisy in Iranís condemning the brutal treatment of street protestors in Bahrain when Iran itself is probably the worldís worst culprit at this time, in the violent repression of street protest and the torture and killing of those that it arrests.

Until now, pro-Iranian sentiment among the Bahraini Shiites has been minoritarian, but a radicalisation of opposition might occur now. At the same time the task of Iranís internal opposition gets more complicated. Ahmadinejad in any case took no chances and cracked down on the Greens leadership even before the Saudis deployed to Bahrain, turning house arrest for Kharrubi and Moussavi into full detention.

Forecasting the Iranian economy is particularly difficult because of issues with the reliability of the data. The IMF forecast for the final 2010 GDP growth data is 1.6%, which is expected to rise to 3.1% in 2011. This will be mainly due to rising oil prices; the Iranian government continues to announce discoveries of new oil and gas fields, but its data about recoverable oil and gas are a bit suspect given the lack of foreign investorsí involvement. It is not clear whether Iran and its few remaining foreign friends have the capacity to exploit the new fields. The end of the fuel subsidies regime in Iran turned to be smoother than expected, without major disorders. The savings made by the Iranian government might not be the originally planned US$70 billion, due to the decision to use Iranian petrochemical plants to produce gasoline, but they are nonetheless substantial. What seemed to be an impossible task might therefore have been achieved. The immediate rationale is to defeat the sanctions regime, but the gains would go much beyond that if it is sustainable, freeing massive resources for investment. Following the subsidies cut, consumption reportedly fell from 61 million litres a day to 52-53 million litres, reducing the impact of sanctions on Iran considerably. In fact the Iranian government claims that it no longer needs to import any fuel due to the combined impact of reduced consumption and increased internal production. Teheran has also been using a series of tricks to remind the west of its potential for bringing disruption to its vulnerable neighbours. It blockaded fuel supplies to Afghanistan in January, creating a crisis in its eastern neighbour; it despatched Muqtada As-Sadr back to Iraq to campaign against the US for a couple of weeks, before he returned to Iran. Ahmadinejadís determination to greatly reduce the almost US$100 billion which Iran spends on subsidies of various kinds has been such that even the chief of the IMF, Strauss-Kahn, had to praise the Iranian government for its achievements, according to Iranian government sources [if we were plot-sniffers what could we make of that?] As of April 2011, the Iranian government had already cut subsidies by US$20 billion, with another US$5 billion to be cut in the next financial year. Ahmadinejad was given two years to implement the US$20 billion cut, but he implemented the cuts straight away in the first year. His original plan was to cut at last twice as much in two years, but the parliament forced him to slow down. In reality Ahmadinejad has kept going much faster than agreed. However, in his tug-of-war with the Iranian parliament, Ahmadinejad recently suffered a major defeat when the latter voted to extend welfare payments (meant as replacement of the subsidies) to virtually the whole population, whereas Ahmadinejad had meant to limit them to the poorest strata of the population. This means that monthly welfare payments are now estimated at US$2.9 billion/month, exceeding the value of the cuts made so far. The government is therefore expected to reduce entitlements soon, cutting off the middle classes from the benefits.

Imports of refined fuel are down 95% and Iranís dependency on fuel imports is down from 40% before the slashing of the subsidies to 5% today. Because Western sanctions against Iran were focused on fuel imports, identified originally as a major Iranian weak spot, this success of the Iranian regime in reducing imports and ramping up internal refining has reduced much of the impact that the sanctions might have had. Although there are now twice as many vehicles in circulation as in 2006, daily consumption of gasoline is down from 76 million litres to 60 million.

The IMF continues to issue endorsements of the economic policies of the Ahmadinejad government. The latest forecast sees inflation coming down to 12.5% next year after having risen rapidly this year. By the end of 2011 inflation is expected to reach 22.5% and then come down. Once the subsidies system has been stabilised, inflation could be coming down further to reach 7% in 2013, according to the IMF. GDP growth in 2011 is forecast at 2.5%, not too bad considering the international economic environment, while GDP could reach 3.4% in 2012.

For what they are worth, Iranian official statistics do not suggest a country on its knees because of economic sanctions. The Teheran stock exchange index rose 86% over the last year, while trade with Asian countries burgeoned, with imports up 15% and now accounting for 61% of all Iranian imports, against 34% for Europe. Teheran also claims to have increased its exports of petrochemical products from US$6.5 billion to US$8.6 billion last year, a 30% increase. The Iranian government tries to project an image of self-confidence and optimism by continuing to announce the discovery of new oil fields all the time. The most recent announcements in May concerned the discovery of five fields, for a total value of 5 trillion cubic feet of gas and 500 million barrels of oil. However, no detail whatsoever over the new discoveries was distributed, reinforcing the feeling that there might be some manipulation involved. What the government is less keen to discuss is the mess that the replacement of the subsidies system with a welfare system is turning into; or the state of the banking system. The Iranian banking system struggles with under-capitalisation and is afflicted by a mountain of bad loans, estimated at 20% of their capital. From this point of view there is little difference between state and private banks, which in any case have been taken over by the foundations linked to the regime. The exception is represented by a few new private banks, which have emerged recently.

The Iranian government acknowledges that it needs to invest US$48 billion in the oil and gas sector. The South Pars gas field alone is said to need US$16 billion and Iran will prioritise it in terms of investment, because it is shared with Qatar and any delay in extracting gas from there means that Qatar will extract more at Iranís expense. The government wants to increase oil production to 5.2 million bpd from the current 3.92 million and has recently announced that its estimated reserves stand at 158 billion barrels, up from the 150.3 billion estimate of a year ago. The government also plans to more than double the gas output, to reach 1.2 billion cubic meters annually at a cost of US$38 billion by 2014-15. The problem is that Iran continues to struggle in reaching agreements with even the most friendly of foreign investors. It recently cancelled a deal with Russian Gazprom over the Azar oil field, which is shared with Iraq. The reason appears to be that Gazprom was delaying negotiations in order to obtain better conditions, but Iran knows that delays in developing oil field shared with its neighbours cost output. Similarly for the North Pars gas field, a contract with Chinese CNPC was suspended in retaliation for the same companyís slow progress in South Pars, shared with Qatar.

The petrochemical sector continues doing badly, because the government prioritises internal consumption over exports and therefore does not feed enough gas and oil into the petrochemical industry, whose capacity is 30% under-utilised. The main problem with the petrochemical industry is however bad management. President Ahmadinejad replaced Mohammad-Reza Nematzadeh as its manager, despite his outstanding record, and replaced him with his own associates, none of them showing much success in developing the industry. One of the latest ideas is to start producing jet fuel, which should start within a few months.

It is not only the oil and gas sector which suffers from the sanctions. The steel industry is the object of an ambitious government plan to expand production to 50 million tons of steel by 2015, so that the country could export a substantial amount. Instead, at the moment because of the sanctions making it difficult to replace spare parts and buy new machinery, production is just 11.9 million tons, not even enough to meet internal demand (18 million tons).

In July inflation reached 16.3%, up from 15.4% a month earlier. The continuing rise of inflation is a worrying aspect of Iran's economic predicament, but quite a few external observers believe that all in all the Iranian regime has managed its plan to reduce subsidies quite successfully. Inflation rose by 6 percentage points overall after the scrapping of the subsidies, which is less than what most economists had predicted. At the same time, thanks mainly to the increased oil revenue, GDP growth has accelerated to 3.2% in the last Iranian financial year, a good result compared to the 0.6% growth recorded in 2008-9. The main benefits of cutting subsidies worth 15% of GDP should be seen in the future, in terms of improved economic efficiency. The abolition of the subsidies should lead this year to flat GDP growth, but the rewards would come in 2010 with a forecast 3% growth. The IMF forecast is that inflation will continue to accelerate and reach 22.5% this year, before falling back to 12% in 2012. Among the first effects of economic reform, some observers see a revitalisation of small towns thanks to the new welfare system, benefiting the lower classes.

Iranís oil exports seem safe for now. China has renewed its oil import agreement with Iran, maintaining import levels at 460,000 bpd. Banking sanctions are making it difficult for European buyers to have access to Iranian oil, but some companies, like Italyís ENI receive Iranian crude because of their investments in Iran. Also some Russian and Chinese banks trade with Iran and allow Iranian exports of oil. In total, Europe receives only about a quarter of Iranís exports; almost another quarter goes to China and the rest to a range of Asian refineries. India, second only to China among buyers, is still locked in a payment row with Iran and it is not clear whether it will renew its deal; Indian refinery sources say that supplies of Iranian oil have not been disrupted and that the intention is to continue buying Iranian oil, probably using banks not concerned by the sanctions regime. South Korean and Japanese buyers reduced purchases last year but it is believed that they will not further reduce it this year. The Chinese however do not have the advanced technology that Iran needs to keep its oil fields efficient; official sources acknowledged recently that oil production dropped by 25,000 bpd in the last year, while external observers believe that the drop might have reached 400-500,000 bpd over the last six years.

Ahmadinejad knows that he is soon going to benefit from rising oil prices: oil revenue for the current year is expected at US$80 billion. Certainly Ahmadinejad would be able to fix a few at least of the economic problems affecting Iran, with that new cash. Ahmadinejad presented his budget for the coming Iranian year to the parliament in March. He proposes a massive increase in expenditure, particularly investments to reduce Iranís dependency on oil revenue. From US$368 billion in the previous year, the budget should rise to US$539 billion, including state-affiliated companies. Ahmadinejad claimed that under his leadership Iranís non-oil exports have already increased from US17.7 billion in 2008-9 to an expected US$30 billion this year.

Iran's aggressive tactics within OPEC (in alliance with Venezuela), derailed the June meeting of the organisation. The Saudis, who were demanding a rise in production, saw their proposal rejected and derailed the meeting as a reaction. With no quotas agreed, the Saudis are actually free to increase production as they see fit. If Saudi proposals for adding 1.5 million bpd to production had been accepted, the extra production would have been distributed among all OPEC members. This way, they will almost all come from Saudi Arabia itself. Therefore, the Iranian victory might be a very temporary one. Iran's aggressive tactics are however not as foolish as they might seem. The Iranians oppose higher production levels also because they are already producing all they can, in contrast to the Saudis who can add over 1 million bpd. President Ahmadinejad certainly has plans for the country's oil industry; in June he appointed a close loyalist as caretaker Minister of Oil, despite that fact that he had been rejected by the Parliament as Minister of Transport and that he has no experience in the oil industry.

Although the sanctions are being felt, Iran is trying hard to maintain clients for its oil and gas exports. The friction with India over its failure to pay for its oil is being resolved after the Indians found a new way to route payments to Iran, through Turkey. The two countries have even discussed the possibility of India paying for its purchases with gold. The Pakistanis seem to have determined that the easiest route to cheap energy is Iran and are now trying to mobilise the resources necessary to building a gas pipeline with the western neighbour. More in general the Pakistanis seem intent on improving their ties to Iran, probably as a reaction to worsening relations with Washington. The Indonesian government now says that it is ready to import liquified gas from Iran. Indonesia is already importing oil and gas from Iran and its imports have more than doubled in value over the last two years. Trade with the UAE has also been expanding dramatically in the wake of the sanctions, with much of the US$15 billion worth of trade between China and Iran now going through the UAE. The sanctions have favoured the expansion of the black market, rather than reducing the volume of trade. Iran has also announced that the Kish International Commodity Exchange, Iran's oil and gas bourse, has concluded its first contract after having opened in July. The shipment of 500,000 barrels of crude follows three previous failed attempts to sell crude in Kish. The main characteristic of the bourse is that it does not trade in dollars, but primarily in Euros, Rials and some other non-US$ currencies.

The Iranian Rial is fluctuating rather wildly against the dollar; just in 2011 it has moved between 10,700 and 12,500 to a dollar. The fluctuations are the result of the market being increasingly undersupplied with foreign currency. An indicator of the economic difficulties of the regime can be found in some recent initiatives of Supreme Leader Khamenei. He has been urging the press to report positively about the economy and avoid discouraging news. He also published a plan to fight unemployment. The plan is nothing radical, rather a series of prescriptions on how unemployment could be contained with a series of technical improvements. It is unlikely that such improvements would be enough and more importantly their implementation would imply that the ineffective Iranian bureaucracy is turned around and becomes much more capable. NaÔve thinking perhaps. 

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