President Mahmoud Ahmadinejad’s regime may be more vulnerable to economic distress at home than to Israeli or American missiles
Oct 7th 2010
SANCTIONS imposed by the United States have long made it a bother to use credit cards in Iran. As a convenience to visitors annoyed by having to lug wads of cash, Iran’s savvier carpet dealers and hoteliers have evaded the blockade by collecting credit-card charges overseas, in places such as Dubai, and then wiring the funds to their local accounts.
That neat trick has now grown trickier. Complying with recently tightened international sanctions, financial regulators in the United Arab Emirates (UAE), which includes Dubai, have frozen dozens of Iranian bank accounts and clamped strict controls on currency transfers to the Islamic Republic. The sudden squeeze on foreign-currency supplies, which also hit Dubai’s large and lucrative merchandise re-export trade with Iran, sent Iran’s rial, which had held steady against the American dollar for years, into an abrupt 15% plunge late last month. Jittery citizens mobbed Tehran’s currency dealers, desperate to buy dollars before another fall.
Iran’s central bank soon intervened, injecting enough dollars to steady the market. Yet the brief panic revealed that, for all the bluster of their leaders, ordinary Iranians are increasingly worried and indeed hurt by sanctions. These now take many forms, from an outright ban on the import of Persian carpets to America that took effect last month to the targeting of individual officials for alleged human-rights abuses, the stopping of Iranian operations by big multinational firms and a growing reluctance by shipping and insurance companies to service Iran-bound cargoes.
Even taken together, the sanctions are unlikely to bring the world’s fifth-biggest crude-oil exporter to its knees. The loopholes remain big enough, and the attraction of Iran’s 75m-strong market strong enough, to keep goods and money flowing. Although South Korea joined Japan last month in slapping sanctions on a range of Iranian banks and firms, bringing it into line with other American allies, it remains keen to protect trade with Iran that topped $10 billion last year, so it quickly signed a deal to let Korean and Iranian traders settle accounts via special facilities in two Korean banks and in Korean currency. The Asian powerhouse, China, sees no need for such sleight of hand, and has rapidly expanded its share of Iran’s market, as has neighbouring Turkey.
Yet the sanctions, stiffened in June by a fourth round of UN Security Council measures intended to punish Iran for its nuclear ambitions, are inexorably adding to the cost and hassle of doing business. Almost all the biggest international traders in refined petroleum products, for instance, have stopped dealing with Iran, forcing the country to rely on costlier small-scale overland shipments for much of the petrol that it still has to import because of underinvestment in refining.
The sanctions have also stemmed the flow of much-needed foreign investment and skills, particularly to the energy sector that accounts for 80% of Iran’s export earnings. In recent months five large European oil companies that have long kept toeholds in Iran, in the hope of one day taking advantage of its vast unexploited potential, especially in natural gas, have promised to pull out for good. Inpex, Japan’s biggest oil-exploration firm, says it is likely to suspend operations in Iran. In June South Korea’s GS Engineering and Construction cancelled a $1.2 billion gas-processing project. Largely as a result of such setbacks, Iran’s oil ministry is unlikely to hit its targets of raising oil-production capacity by 35% by 2015 and launching exports of liquefied natural gas, concludes a recent report by Nomura, a Japanese stockbroker. Instead, oil output is likely to fall by 15% and exports by as much as 25%.
None of this has dented the exuberance of Mahmoud Ahmadinejad, Iran’s president, who recently repeated his prediction that capitalism is doomed. Instead he has trumpeted minor achievements, such as a free-trade deal with neighbouring Armenia and an agreement to resume direct flights between Iran and Egypt after a 30-year hiatus, as signs of diplomatic success. Iran’s foreign-currency reserves, he insists without revealing figures, can keep the rial steady for years to come
Perhaps the president is right to believe that foreign challenges are not Iran’s biggest worry. After crushing its reformist opponents, his conservative faction has broken out in increasingly rancorous internal wrangling. The biggest looming issue is Mr Ahmadinejad’s plan to slash consumer subsidies that cost his government $70 billion-100 billion a year, a quarter of GDP. Already lumbered with feeble economic growth and high unemployment, Iranians now face the prospect of sharp rises in prices of food, fuel and transport. The coming winter looks set to be harsh
Oct 7th 2010
SANCTIONS imposed by the United States have long made it a bother to use credit cards in Iran. As a convenience to visitors annoyed by having to lug wads of cash, Iran’s savvier carpet dealers and hoteliers have evaded the blockade by collecting credit-card charges overseas, in places such as Dubai, and then wiring the funds to their local accounts.
That neat trick has now grown trickier. Complying with recently tightened international sanctions, financial regulators in the United Arab Emirates (UAE), which includes Dubai, have frozen dozens of Iranian bank accounts and clamped strict controls on currency transfers to the Islamic Republic. The sudden squeeze on foreign-currency supplies, which also hit Dubai’s large and lucrative merchandise re-export trade with Iran, sent Iran’s rial, which had held steady against the American dollar for years, into an abrupt 15% plunge late last month. Jittery citizens mobbed Tehran’s currency dealers, desperate to buy dollars before another fall.
Iran’s central bank soon intervened, injecting enough dollars to steady the market. Yet the brief panic revealed that, for all the bluster of their leaders, ordinary Iranians are increasingly worried and indeed hurt by sanctions. These now take many forms, from an outright ban on the import of Persian carpets to America that took effect last month to the targeting of individual officials for alleged human-rights abuses, the stopping of Iranian operations by big multinational firms and a growing reluctance by shipping and insurance companies to service Iran-bound cargoes.
Even taken together, the sanctions are unlikely to bring the world’s fifth-biggest crude-oil exporter to its knees. The loopholes remain big enough, and the attraction of Iran’s 75m-strong market strong enough, to keep goods and money flowing. Although South Korea joined Japan last month in slapping sanctions on a range of Iranian banks and firms, bringing it into line with other American allies, it remains keen to protect trade with Iran that topped $10 billion last year, so it quickly signed a deal to let Korean and Iranian traders settle accounts via special facilities in two Korean banks and in Korean currency. The Asian powerhouse, China, sees no need for such sleight of hand, and has rapidly expanded its share of Iran’s market, as has neighbouring Turkey.
Yet the sanctions, stiffened in June by a fourth round of UN Security Council measures intended to punish Iran for its nuclear ambitions, are inexorably adding to the cost and hassle of doing business. Almost all the biggest international traders in refined petroleum products, for instance, have stopped dealing with Iran, forcing the country to rely on costlier small-scale overland shipments for much of the petrol that it still has to import because of underinvestment in refining.
The sanctions have also stemmed the flow of much-needed foreign investment and skills, particularly to the energy sector that accounts for 80% of Iran’s export earnings. In recent months five large European oil companies that have long kept toeholds in Iran, in the hope of one day taking advantage of its vast unexploited potential, especially in natural gas, have promised to pull out for good. Inpex, Japan’s biggest oil-exploration firm, says it is likely to suspend operations in Iran. In June South Korea’s GS Engineering and Construction cancelled a $1.2 billion gas-processing project. Largely as a result of such setbacks, Iran’s oil ministry is unlikely to hit its targets of raising oil-production capacity by 35% by 2015 and launching exports of liquefied natural gas, concludes a recent report by Nomura, a Japanese stockbroker. Instead, oil output is likely to fall by 15% and exports by as much as 25%.
None of this has dented the exuberance of Mahmoud Ahmadinejad, Iran’s president, who recently repeated his prediction that capitalism is doomed. Instead he has trumpeted minor achievements, such as a free-trade deal with neighbouring Armenia and an agreement to resume direct flights between Iran and Egypt after a 30-year hiatus, as signs of diplomatic success. Iran’s foreign-currency reserves, he insists without revealing figures, can keep the rial steady for years to come
Perhaps the president is right to believe that foreign challenges are not Iran’s biggest worry. After crushing its reformist opponents, his conservative faction has broken out in increasingly rancorous internal wrangling. The biggest looming issue is Mr Ahmadinejad’s plan to slash consumer subsidies that cost his government $70 billion-100 billion a year, a quarter of GDP. Already lumbered with feeble economic growth and high unemployment, Iranians now face the prospect of sharp rises in prices of food, fuel and transport. The coming winter looks set to be harsh
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