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Admitting it hurts

Relenting to reality, Tehran tells the toll of sanctions

by Gareth Smith

After months of denial that this year’s new United States and European Union sanctions were having any effect, Iran’s leaders have changed their tune and are acknowledging that moves to stifle oil exports are biting.

In August, state media reported rahbar (‘leader’) Ayatollah Ali Khamenei calling for an “economy of resistance” to use “the nation’s full potential” to “break the illusions of the arrogant powers”.

The theme was taken up by many analysts in the Iranian media, and last month Mohsen Rezaei, a weathervane loyalist and former commander of the Islamic Revolutionary Guard Corps, spoke of a “new economic system” involving barter deals with other countries, lower taxes and reduced dependence on oil.

It would have been impossible to deny much longer the effects of US sanctions that threaten to bar from the American market any country or entity dealing with Iran’s central bank, the usual conduit for trade including oil, and the EU embargo on buying Iranian oil or selling insurance for Iranian trade.

Iran’s oil sales have been fluctuating a little, but have basically halved to between 1 million and 1.1 million barrels per day from double that late last year, curbing a revenue stream that has accounted for some 80 percent of Iran’s foreign earnings and 50 to 60 percent of government revenue. And it gets worse. The depreciation of the rial, from less than 10,000 to the dollar in late 2009 to an estimated 18,265 over the Iranian year 2012-13, has slashed the international value of Iran’s gross domestic product: calculations by Iqtisad Iran, the leading Tehran-based monthly, have it down from $406 billion in 2010-11 to $350 billion in 2012-13.

Even according to official figures, inflation is running at 23.9 percent and unemployment at 28.6 percent. Probably the most serious consequence for Iran in the medium term is a shortage of funds for productive investment, because without this, unemployment will rise further. The Oil Stabilization Fund (OSF), established under the previous government of Mohammad Khatami to collect windfall oil revenues for investment, is treated as a matter of national security and shrouded in the secrecy that has grown as tensions have increased over the nuclear program. But many suggested the OSF has been emptied to cover current spending. And fears of alienating the wider public at a time of international pressure have dogged the International Monetary Fund-backed program, begun at the end of 2010, to phase out at least $50 billion worth state subsidies of everyday items.  Hence subsidies on fuel and bread have been replaced with ‘targeted payments’ that, in going to almost all Iran’s 75 million people, are effectively cash handouts.

The government’s intention was to phase out subsidies and target payments only at the poor, and yet the current payment of 485,000 rials (around $40 by the official exchange rate) per person per month is, as a near-universal payment, contributing to fiscal imbalance.

Calculations from Iqtisad Iran, based on an Economy Ministry report from February, estimate that from the introduction of the program until last month the government has saved 400 trillion rials on subsidies while spending 700 trillion rials on ‘targeted payments’, giving an overall loss of $20 billion (at an average rate of 13,000 rials to the dollar). This is not to say the Iranian economy is likely to collapse any time soon. Remarkable figures on gold imports from Turkey — with $6.2 billion in gold sales in the first seven months of 2012, five times the total of 2011 transactions — suggest the central bank may be seeking yellow liquidity for the government and private businesses to pay for imports without the problems of using dollars. They also suggest Iranians are retreating to their traditional safe haven of cold coins stashed at home. Neither is Iran about to cave in on the nuclear program. As one would expect, Rezaei breathed defiance in an interview with the Financial Times last month, vowing that Iran’s reaction to an Israeli attack “would be so severe that nobody would ever dare think of attacking us again”.

The real question is: are sanctions a prelude to war or an alternative? The strategy of sanctions was put forward in the West, not least by the Obama administration, as a prelude to talks. So, as the measures bite, the time for a serious diplomatic initiative, if there is to be one, has come.

Gareth Smyth has reported from around the Middle East for nearly two decades and was formerly the Financial Times correspondent in Tehran

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Gareth Smith

Gareth Smyth has reported from around the Middle East for more than two decades and is the former Financial Times correspondent in Tehran.

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