The Iran Primer

            Oil and gas account for close to 90 percent of Iran’s exports. Anything that interrupts the export of these commodities hits Iran hard. Oil shipments are already down by about 50 percent and Iran no longer has access to London’s shipping insurance market.

 

            As of 2010, gas accounted for less than four percent of Iran’s export earnings, while petroleum accounted for 78 percent of earnings. But gas is one of Iran’s few remaining exports. The European ban, coupled with the abundance of natural gas in the world market, is another peg in the coffin of Iran’s economy.

 

            The Iranian government is now reportedly taking desperate measures to deal with the crisis by applying drastically different exchange rates for purchasing imported goods. There are ten categories of goods linked with different exchange rates. For essential goods like medicine and basic foodstuffs, the exchange rate is 12,600 rials to the dollar. Non-essential goods, like consumer electronics and replacement car parts are priced according to the black market rate of 35,000 rials to the dollar.

 

            The broad thrust of U.S. and E.U. sanctions alienates middle and upper middle classes who are importing many types of goods. The economy is basically reeling from these sanctions.

 

            The panic that took hold in September- October 2012 was likely sparked by the realization that sanctions may continue indefinitely. Iran’s printing of additional rials probably contributed to the crisis.

 

            Iran is short on reserves of foreign currency since its exports have been cut in half since last year. The government is also spending money on support for the Syrian regime. At the same time, it is trying to stave off the economic crisis impact on the Iranian people. It has drawn upon its foreign exchange reserves to make up the difference in export earnings to keep importing necessary goods.

 

            But in September 2012, Tehran realized it would soon run out of foreign exchange. So the government cut back on imports in order to maintain funding for the security apparatus. As goods became scarcer and the rial’s value plummeted, people began to panic. Middle and upper class Iranians observed the leadership’s unwillingness to negotiate an agreement with the P5+1. They probably concluded that sanctions are not going to be lifted soon and that their holdings in rials will continue to lose value.
 

            There is very little wiggle room now but there are a few more ways to squeeze Iran. Asian countries could further reduce their purchase of Iranian oil since the world supply is not tight. But the United States would have to exert a significant effort to convince China, India, South Korea and Japan to cut back further on their Iranian oil purchases. That effort, even if made, is not likely to reduce Asian imports of Iranian oil to a significant extent.

 

            The United States could take additional actions against Iran’s financial sector. It could launch a cyber attack on Iran’s central bank to stop it from receiving or paying money electronically. This would be a drastic move likely to be construed as an act of war. The Pentagon has already stated that it considers cyber attacks constitute acts of war.

 

            Alternatively, Western countries could warn that they intend to blacklist any tanker carrying Iranian oil. This would force Iranian tankers to ship oil only to secondary ports, making the tankers considerably less valuable. This move would not be regarded as an act of war on par with imposing a blockade of tankers.  

 

            Iran is a bigger country and has a more robust economy than Cuba, North Korea or Zimbabwe. It also has a valuable natural resource– oil. Although Iran is not a manufacturing power house, it is much more self-sufficient than those countries. Also, Iran’s borders are long and porous so there are more opportunities for smuggling goods in and out.

 

            In those other cases, the leaders allegedly decimated the middle classes of their countries. The middle class either fled, was killed off or lost its assets.

 

            But this is not the case in Iran. There is a sizeable group of middle and upper middle class families that have prospered for the last decade or longer. They are feeling the brunt of the sanctions, so their losses may make Iran more susceptible to economic deprivation. 

 

            Iran is similar to Cuba and Zimbabwe in its attempt to deal with sanctions. Countries pressed by sanctions tend to revert back to a command and control style of economic management, often rationing goods in a manner similar to the former Soviet Union. In this sort of system, money becomes less important. Instead, people with government connections and insider understanding of the system succeed. Rationing adds tremendous amounts of inefficiency into the economy and reduces overall output. But command and control systems consolidate power in the hands of the state.

 

            The Iranian government is now reportedly assuming more control over the economy by placing items on lists linked to differing exchange rates. The government also permits certain individuals or companies to import the goods. There was not a high degree of freedom in Iran’s economy prior to this recent crisis but now it is moving towards a Cuba or Zimbabwe-style economy.

 

            Sanctions have historically lost their efficacy over time because the targeted country scrambles to find alternative avenues to sell exports and buy imports. On the other hand, the countries imposing the sanctions will likely step up enforcement measures. In this case, the Iranians could step up their evasion tactics as the West ratchets up sanctions, resulting in an approximate standoff.

 

            But a drastic change in the price of oil could be a game changer. If the price spikes for reasons unrelated to Tehran’s nuclear program, countries that are lukewarm about enforcing sanctions could buy additional Iranian oil. India and China would be important players but other importers could also change the dynamics of the situation. The spike would need to be sizeable though, perhaps a jump to $120 per barrel of oil from the current price of $90 (West Texas intermediate). On the other hand, Iran’s economy would suffer more in the event of a price drop to $60 or $70 per barrel.

 

            Maintaining international focus and cooperation on the Iranian nuclear issue for another year or two may prove increasingly difficult, as it did in Iraq during the 1990s. We will likely hear stories about Iranian infants and elderly citizens in dire straits. The outpouring of sympathy could prompt a relaxation of sanctions to help those vulnerable parts of society. Iranian state media may manipulate this picture as well.

 

 

 

MR. CARNEY:  I wanted to say that the United States welcomes the adoption today by the European Union of significant new sanctions against the Iranian government in response to the Iranian government’s continued violation of its international obligations regarding its nuclear program.
 
This action, which includes additional sanctions in the financial, trade, energy and transport sectors, as well as additional designations on entities in the oil and gas industry, further strengthens international efforts to pressure and isolate the Iranian government for its continued refusal to comply with its international obligations and fully cooperate with the IAEA.
 
As you know, rallying the world to isolate Iran and increase the pressure on its leadership so that they stop pursuing a nuclear weapon has been a top priority for the President since the day he took office.  Thanks to that leadership, Iran is under more pressure than ever before.  The Iranian government is responsible for the state of Iran’s economy and the isolation of the country.  Iran’s leaders have made conscious choices about how they manage their economy, how they prioritize their budget and how they respond to the concerns of their people.  The regime has chosen to spend money to pursue nuclear activities in violation of its international obligations, to support Bashar al-Assad’s brutal regime, to enable terrorist acts around the world, and to undertake destabilizing activities around the region. 
 
Iran knows the kind of concrete steps we are looking for to bring it back into full compliance with its international nuclear obligations, to address the proposal tabled by the P5-plus-1, and to cooperate fully and transparently with the International Atomic Energy Agency…

 

 

MS. NULAND:  Well, we saw those reports today, reports that everything from shoes and clothing to foreign-imported wallpaper, the Iranian regime is now trying to restrict in terms of the way their citizens use their foreign exchange.  Again, from our perspective, this just speaks to the extreme economic mismanagement, the extreme political mismanagement of the Iranian regime and the fact that the Iranian people are now feeling the full effects of the bad decision that their government has made.  And these sanctions are designed to continue to pressure the regime to make another choice.  And from our perspective, the onus remains on the regime.  The door is open, the table is set; they have to just make better choices if they truly care about their people.

 

QUESTION:  So you think this has nothing to do ultimately with the sanctions themselves?  You think that the fact that they have less foreign exchange to spend on shoes or whatever is in no way related to the sanctions?

 

MS. NULAND:  Obviously it’s [the crisis] a function of both their own internal mismanagement, but also the fact that the sanctions are biting into their ability to export, other countries’ willingness to trade with them, et cetera.  So it’s obviously having an economic impact, but so is their own internal mismanagement.

 

QUESTION:  …Do you feel any responsibility or – for what presumably will eventually become hardship if it is not already hardship for ordinary people who can’t – can no longer get ordinary consumer goods?

 

MS. NULAND:  Well, let’s start with reminding that under the sanctions policy – U.S. sanctions policy, international sanctions policy – we grant exceptions for medicine and for foodstuffs, and the United States still exports foodstuffs and medicine to Iran, and we don’t preclude or ask anybody else to stop those kinds of imports.  So we are not looking to hurt the Iranian people.

 

Second, I will say what we have said all the way along:  We do not have any beef with the Iranian people.  We do have serious concerns about the choices that their government has made, and the Iranian people have to understand that the choices their government has made have consequences.  In this case, they’re seeing it in the decision by the government not to allow them to import foreign shoes and clothes and wallpaper.