Change in the White House looms as Washington’s political class senses that the old adversary Iran is more open to pressure. There is a tempting parallel with the collapse of the Soviet Union, when a period of high oil prices encouraged the Communist state to overextend fiscally and politically, making it vulnerable when prices fell.
A timely IMF Regional Economic Outlook, released in October, calculated Iran needs an average annual oil price above $90 per barrel (on the fund’s own benchmark) to avoid a budget deficit in 2008. Ramin Pashaifam, an Iranian central bank vice governor, said last month the economy faced “big problems” if Iranian oil — typically selling 10% under the main benchmarks — remained below $60 per barrel for the rest of the Iranian year.
The falling price of oil — remember it was near $150 in July — is a serious challenge for President Mahmoud Ahmadinejad, who faces re-election in June 2009. Critics charge that Ahmadinejad has squandered oil revenue during the good years and left the state coffers bare.
Quite how bare is hard to tell. Iran still has a cushion, with foreign reserves held at the central bank estimated at just under $82 billion in March 2008.
But the Oil Stabilization Fund (OSF), designed to collect and store windfall oil revenues for difficult times, looks threadbare. Even before Ahmadinejad, it was customary for the president or parliament to raid the OSF for pet projects, but Ahmadinejad has used the fund to finance a welter of commitments made largely on his high- profile tours around the country.
The president is hardly the man to lead Iran towards belt-tightening. From his election in 2005, Ahmadinejad encouraged popular expectation with his slogan of putting “oil money on the people’s sofreh [dining cloth].”
But what remains in the OSF has become a mystery, with the president warning that speculation equals treason. Shamseddin Hosseini, the economy minister, claimed in early November that the fund contained $25 billion, a figure doubted by economists both in Iran and internationally who put the OSF as low as $5 billion. In any case, the lines between the OSF and the budget have become very blurred.
Declining oil revenue is also reducing banking liquidity. Facing a government-imposed lending rate well below inflation of 30%, the country’s 17 state and private banks are struggling to raise capital, and the largest — Melli, Saderat and Sepah – have been hit by UN sanctions over their alleged links with Iran’s nuclear and missile programs.
Ahmadinejad has admitted there has been abuse of loans and promised a crackdown. But banks simply lack the capacity to assess or monitor subsidized lending, while their resources are drained by lending rates of 12% — only 2% of which is covered by the government.
Not only the bankers are restive. A strike by bazaar merchants had led the government to postpone introducing VAT, and an increasingly assertive parliament in October impeached the interior minister for falsely claiming a degree from Oxford University.
As far as re-election goes, Ahmadinejad has history on his side. Every president of the Islamic Republic with the exception of the first, Abolhassan Banisadr, has won a second term.
With six months left to go, he is the only clear candidate. Former president Mohammad Khatami is pondering standing just four years after he left office with his reputation in tatters. Many of Khatami’s allies believe he is the reformist best placed to defeat Ahmadinejad, which in itself betrays the reformists’ weakness. Mehdi Karrubi, leader of the reformist National Trust party, has said he will not run against Khatami.
Moderate conservatives also await Khatami’s decision. Akbar Hashemi Rafsanjani, former president and current head of the Experts Assembly, is privately encouraging Khatami to run — which means Hassan Rouhani, the former top security official close to Rafsanjani, is delaying his own decision.
Another contender may be Mohammad Bagher Ghalibaf, the mayor of Tehran, who attracted over 4 million votes in the 2005 election running as a conservative modernizer.
While the economy will dominate the election, the international situation is a secondary factor. Ahmadinejad has helped elevate Iran’s nuclear program into a matter of national pride, and there is widespread hope in the country that Barack Obama may be open to reconciliation.
Ahmadinejad wrote to Obama on his victory, but a warmer reaction has come from the reformists, with Khatami saying, days before the US poll, that it might open the way for “new efforts to establish relations.”
Controlling any dialogue with the US, and gaining credit for any success in improving relations, is as much a matter for factional conflict as the economy. Ayatollah Ali Khamenei has already signaled his fear of infighting, warning that “some candidates have launched their [presidential] campaigns hastily, distracting … attention from the country’s main issues.”
For Ayatollah Ali Khamenei, custodian-in-chief of the 1979 Islamic Revolution, things may be moving just a little too fast.
Gareth Smyth recently returned to London after seven years in Lebanon and four in Iran. He has worked mainly for the Financial Times in 15 years reporting on the Middle East.
