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Payvand Iran News ...
11/21/10 Bookmark and Share
When Sanctions are not enough: Iran's economy and the impatience of regime changers
By Sasan Fayazmanesh

On September 14, 2010, the chairman of Iran's Assembly of Experts, Akbar Hashemi Rafsanjani, stated: "We have to be vigilant about the sanctions and not denigrate them. At no time have we faced such severe sanctions." Rafsanjani's warning was translated in the US media as "these sanctions are no joke" and was construed as a rebuff to President Ahmadinejad's dismissal of the importance of the latest sanctions imposed on Iran. Whatever Rafsanjani's intention, his warning was correct. The cumulative effect of sanctions on Iran's economy is now clearly visible, even though some Iranian officials are still trying to deny it.

Indeed, in fall of 2010 the value of Iran's currency---which is targeted by Banke Markazi (the Central Bank of Iran) using a managed floating exchange rate regime--wildly fluctuated. On September 29, 2010, Reuters reported that "Iran's rial has fallen more than 10 percent in the last two days, prompting speculation about a shortage of hard currency in a country whose financial sector has been hit by international sanctions." The report correctly stated that in two days the Iranian currency had gyrated from 10,850 to 13,000 and then back to 12,200 rials per dollar. The devaluation was actually bigger on a weekly basis. A week earlier the rial had traded at the rate of 10,500 per dollar (Financial Times, September 29, 2010). As most financial reports pointed out, the same devaluation had taken place relative to other currencies, such as euro, as well as gold prices.[1]

Speculations were rampant about what was the immediate cause of the Iranian currency crisis. Most reports concentrated on sanctions imposed by the United Arab Emirates, particularly Dubai (The Washington Post, September 29, 2010). As AFP reported on September 30, 2010, many banks in the UAE had stopped money transfers since August as a result of pressure exerted by the US. AFP stated that according to the vice president of the Iranian Business Council in Dubai, Morteza Masoumzadeh, the volume of trade between Dubai and Iran had been reduced by 50 percent. Some Iranian news media, affiliated with the opposition Green Movement, blamed the currency crisis on the government's decision to remove subsidies on fuel and basic food and replace them with fixed payments to Iranians to cushion the effect of subsidy cuts.[2]  But even if this decision, which had not been even implemented, played a role in the crisis, it was itself due mostly to severe economic sanctions. Since the Iran-Iraq war, such subsidies had existed in Iran, and for years successive governments had tried to remove them, since the prices of subsidized commodities were well below the market prices.[3] Yet, nothing was done about the subsidies until the sanctions started to seriously affect the Iranian economy and reduce government revenues.

On September 30, 2010, Banke Markazi intervened and tried to stabilize the rial. Mahmoud Bahmani, the governor of the bank, told Mehr news agency that by "next week the price of the currency will get back to its normal market rate of 10,600 rials" (Reuters, September 30, 2010). This was supposed to be achieved by offering "unlimited" amounts of foreign currency to buyers, according to a Bloomberg report on September 30, 2010. The intervention caused the rial to rise in value, but even as of October 3, 2010, the Iranian currency still stood at 10,900 rials per dollar, higher than Banke Markazi's target rate. It was not until October 5, 2010, that the Iranian currency started to rise and trade around 10,750-10,800 rials per dollar (AFP).

The crisis in the value of Iran's currency in late September and early October was not the result of any particular event in that period of time. It was merely a manifestation of uncertainty, speculation and fear that were caused by the cumulative effect of sanctions.  This was despite the fact that the Iranian government officials were assuring the public that there was sufficient foreign reserves.  On October 31, 2010, the Tehran Times quoted President Ahmadinejad as saying the "country's foreign currency reserves have been estimated at 100 billion dollars, but it is definitely more than this figure." The estimate had been made on October 23 by Mahmoud Bahmani who had referred to World Bank statistics. Bahmani also stated that "Iran has converted 15 percent of its foreign exchange reserves into gold stocks, and thus there is no need to import gold for the next ten years." But these assurances were not sufficient to stabilize the jittery financial markets that expected more sanctions and hardship in the future.

The sanctions were also exacerbating the inflation rate in Iran. Estimating the true rate of inflation in a country such as Iran has always been difficult. But according to the International Monetary Fund (IMF), the projected consumer price index for Iran in 2010 was 9.5%.[4] This was relatively a lower rate, and showed a disinflationary trend, compared to the inflation rates of 25.4% and 10.8% for the years 2008 and 2009.[5] Yet, even this lower rate was partly due to the effect of sanctions, and it was acknowledged as such by at least one Iranian official. In October  2010, the president of the Iranian Chamber of Commerce, Mohammad Nahavandian, was quoted by ISNA as saying: "Sanctions can't halt the importation of goods into Iran but estimates indicate that the cost of imports has increased between 15 to 30 percent" (Siasate Rooz, October 16, 2010).

Another indication that the sanctions were taking their toll on the Iranian economy was the anemic rate of growth. While the rate of growth in Iran's real GDP in 2007 was 7.8%, the projected rate for 2010 was only 1.6%.[6]  This rate was considerably smaller than the growth rates of other countries in the region; even the war torn economies of Iraq and Afghanistan showed higher rates of growth than Iran.[7]  The lackluster economy was also reflected in the rising unemployment rate. Setting aside the difficulties in measuring the unemployment rate in less developed countries and unreliable official data, the rate of unemployment in August of 2010 was 14.6%, according to the deputy labor minister of Iran (Mehr news agency). This was compared to the 11.9 % in the previous year. Given the resources of Iran and its economic potential, nothing can explain the weak performance of Iran's economy except for the effect of sanctions.

The Obama Administration appeared to be fully aware of the toll that sanctions were taking and was adopting a wait-and-see attitude. The administration was hoping, as Ayatollah Khamenei observed on September 7, 2010, "to frustrate the people with economic pressures so the people blame the government for them and ties are cut between the government and the people" (AFP).[8] Yet, Israel and many of its allies in the US, particularly the neoconservatives, were impatient. They wished to see immediate action to topple the Iranian government. And this, they believed, could come only by pushing the US to wage military actions against Iran. 

On September 28, 2010, the Israeli Deputy Prime Minister and Minister of Foreign Affairs Avigdor Liberman gave a speech at the UN General Assembly. In the speech he argued that those who suggest that Israeli-Palestinian conflict "prevents a determined international front against Iran" are wrong. "In truth," he stated, "the connection between Iran and the Israeli©\Palestinian conflict is precisely reversed. Iran can exist without Hamas, Islamic Jihad and Hezbollah, but the terrorist organizations cannot exist without Iran." He concluded his speech by stating that in "searching for a durable agreement with the Palestinians . . . one must understand that first, the Iranian issue must be resolved." It was clear that by resolving the Iranian issue he meant military actions against Iran.

One day later, on September 29, 2010, the Financial Times quoted Senator Joseph Lieberman as saying in an interview that:  "It's time to move from the mantra that military action is [just] another option on the table . . . There is only so long that we are going to go down a path of diplomacy and sanctions." The Financial Times also referred to the recent statements made by Howard Berman, the chairman of the House of Representatives foreign affairs committee, to the effect that the administration had "months, not years" to make sanctions work and that "military action was preferable to accepting an Iran with nuclear weapons capability."

All these were apparently intended to be warnings to President Obama who appeared to be vacillating on the issue of military action against Iran by stating on CNBC on September 20, 2010: "We don't think that a war between Israel and Iran or military options would be the ideal way to solve this problem [Iran's nuclear program]. But we are keeping all our options on the table" (Haaretz). To assure that military options remained on the table, two days later 50 House Republicans, led by Eric Cantor and John Boehner, wrote a letter to Obama urging him "to take whatever action is necessary to prevent Iran from developing a nuclear weapon" and emphasizing: "All options should be on the table in curbing Iran's nuclear ambitions." They also called upon him "to prevent Iran from funding and training terrorist surrogates that threaten our allies and undermine peace, including Hamas, Hezbollah, and Islamic Jihad---organizations which promote a culture of hatred and whose stated aim is to destroy Israel."

The push for attacking Iran intensified in late October and early November of 2010 as more Israeli and American officials and media pundits appealed to President Obama. On October 31 Washington Post columnist David Broder wrote an op-ed piece on how "Obama might recover" from the woes brought on by a declining economy. His proposed solution was: "With strong Republican support in Congress for challenging Iran's ambition to become a nuclear power, he can spend much of 2011 and 2012 orchestrating a showdown with the mullahs. . . as tensions rise and we accelerate preparations for war, the economy will improve." The same solution had been offered to Obama much earlier, when on February 2, 2010, the crazed neoconservative Campus Watch Director Daniel Pipes had published in the National Review Online his "How to Save the Obama Presidency: Bomb Iran."

Similarly, on November 6, 2010, according to AFP report, at Halifax International Security Forum, Republican Senator Lindsey Graham stated that if Obama "decides to be tough with Iran beyond sanctions, I think he is going to feel a lot of Republican support for the idea that we cannot let Iran develop a nuclear weapon." The report went on to say that the Senator advocated attacking Iran "not to just neutralize their nuclear program, but to sink their navy, destroy their air force and deliver a decisive blow to the Revolutionary Guard, in other words neuter that regime." According to the report, Israeli Defense Minister Ehud Barak, who was attending the same conference, followed suit by saying that "Iran is a major threat to any conceivable world order." Two days later Reuters reported that in his meeting with Vice President Joe Biden in New Orleans Israeli President Netanyahu stated: "The only way to ensure that Iran will not go nuclear is to create a credible threat of military action against it if it doesn't cease its race for a nuclear weapon."

The regime changers are becoming impatient. Even though sanctions are biting the Iranian economy and inflicting pain and misery on ordinary people, those who pushed for the invasion of Iraq are unwilling to wait and see if the suffering in Iran would translate into riots and revolution. They want blood, and they want it sooner than later. To them, the death of hundreds of thousands of people means nothing, if the end result is turning the West Bank into "Judea and Samaria" by removing the last bastion of effective support for the Palestinians.

1. The rise in gold prices in Iran was, of course, made worse by two other factors. Not only gold prices were rising around the world, as dollar weakened, but in Iran the government levied a value-added tax on bazaar merchants and they, including gold merchants, protested by closing their shops.

2. On October 2, 2010, Jonbeshe Rahe Sabz, one of the most popular websites associated with the Green Movement, stated that the financial crisis was benefiting the Iranian government and had been created by it! The Washington Post similarly stated on September 29, 2010, that the "analysts say the rate increase means that the government¨C widely seen as on a drive to boost its income¨Cwill receive more rials for its petrodollars, even as the currency drop could contribute to inflation."

3. As AP reported on November 6, 2010, the price of gasoline in Iran was 3,700 rials or about 37 cents per gallon. According to the report, after the removal of the subsidies the price was expected to rise 400 percent. The removal of subsidies and price distortions had, of course, the full backing and blessing of the International Monetary Fund (see for example: "Energy Price Reform: Iran to Cut Oil Subsidies in Energy Reform," IMF Survey Online.

4. This projected rate did not reflect the effect of subsidy cuts that are planned by the government and are expected to increase inflation rate considerably.

5. World Economic Outlook, International Monetary Fund, October 2010, p. 189. The Central Bank of Iran estimated the inflation rate for 2010 to be 9.4% (Tehran Times, July 4, 2010).  

6. World Economic Outlook, International Monetary Fund, October 2010, p. 183.

7. The projected rates of real GDP growth for Iraq and Afghanistan for 2010 are, respectively, 2.6% and 8.9% (International Monetary Fund, October 2010, pp. 182-183).

8. Similar statements were made by Congressman Brad Sherman on August 9, 2010: "The recently enacted sanctions legislation is likely the most significant measure on Iran that Congress has ever passed. . .  The goal of the bill is to drive Iran's economy into a crisis." He further stated that critics have "argued that these measures will hurt the Iranian people. Quite frankly, we need to do just that."

Sasan Fayazmanesh is Professor Emeritus of Economics at California State University, Fresno.

The above essay is based on a book that is being prepared as a sequel to the author's The United States and Iran: Sanctions, Wars and the Policy of Dual Containment (Routledge, 2008). 

... Payvand News - 11/21/10 ... --


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