Don't Underestimate Iran's Resilient Economy

Published November 27th, 2019 - 08:19 GMT
Tehran University , 2017 /AFP
Tehran University , 2017 /AFP

Iran, pundits tell us, faces its most difficult crisis of political authority since the revolution which toppled Mohammad Reza Shah in 1979.

Protests have broken out throughout the country following announced hikes in petrol prices by at least 50%; Iran finds itself more diplomatically isolated as ties with European powers, which had refused to adopt US President Donald Trump’s no compromise  position on the Islamic Republic, deteriorate.

 

Iran’s precarious economic situation is at the heart of the present crisis. To Mr Trump and his advisors, current events suggest that a strategy of so-called ‘maximum pressure’ is paying dividends. Yet given the myopic state of reporting on Iran, few consider the resilience of the Iranian economy and its political structure.

To be sure, a punitive international sanctions regime has made conditions more difficult in Iran. Businesses reliant on exporting or importing foreign raw materials have seen profits fall significantly, those in need of medicine and medical equipment from foreign providers face acute difficulties.

Protests against fuel price hikes have revealed popular dissatisfaction against a regime of economic austerity in the face of sanctions. As Mohsen Tavakol, a Non-resident Senior Fellow at the Atlantic Council notes ‘for many it’s a matter of survival on a daily basis without being able to plan a solid future’. Yet Iranians are reluctant to place the blame solely on the administration of Hassan Rouhani, the parliament and Iran’s Supreme Leader.

Mr Tavakol suggests that ‘Iranians are equally frustrated, agitated, angry and disappointed about the imposed sanctions led by the US that in fact started the crisis and put them in this situation in the first place when the US walked away from JCPOA, which was slowly putting many things back on a normalized course for the benefit of all sides’.

Mr Tavakol suggests that ‘Iranians are equally frustrated, agitated, angry and disappointed about the imposed sanctions led by the US that in fact started the crisis and put them in this situation in the first place when the US walked away from JCPOA, which was slowly putting many things back on a normalized course for the benefit of all sides’.

As others have suggested, the effect of economic sanctions, particularly those as perceived as being unreasonable and overly punitive may have the opposite effect to that intended- turning Iran’s frustrated population against its foreign punishers rather than their own government.

Iran’s business class also finds itself in a shaky position due to a closing down of channels of international finance. Mr Tavakol suggests that ‘the biggest problem that the sanctions have caused for Iran is severing international banking channels making formal international transactions impossible, which in turn halts trade between Iran and its foreign business partners as almost no foreign bank is willing to deal with funds originating from Iran’.

This situation has forced both Iranian businesses and their foreign counterparts to use expensive informal transaction channels, which Mr Tavakol notes ‘increases the risks of exposure to the Office of Foreign Assets Control (OFAC- the USA’s financial intelligence enforcement agency), as well as to EU authorities to end up on OFAC’s Specially Designated Nationals list.’

However, only 17% of the Iranian GDP in 2018 depended on oil exports. Mr Tavakol notes that although oil exports have fallen, ‘China, India, Turkey, Korea and other countries are still buying oil from Iran.'

Yet Iran’s government and economy has proven surprisingly resilient in the face of decades of sanctions, international ostracization, and domestic political upheaval.

Though many argue that Iran, as an oil exporter, will be uniquely affected by this round of economic pressure. However, only 17% of the Iranian GDP in 2018 depended on oil exports. Mr Tavakol notes that although oil exports have fallen, ‘China, India, Turkey, Korea and other countries are still buying oil from Iran’.

Iranian Foreign Minister Mohammad Javad Zarif meets Chinese State Councilor and Foreign Minister Wang Yi in Beijing, May 2018

Additionally, Iran has ‘huge cash funds and reserves that it can use to manage possible shortfalls in the budget’. Iran has long made plans to forge a formidable ‘resistance economy’ and will stay afloat by stepping up exports of non-oil products, already a focus of the national treasury.

Mr Tavakol notes that informal avenues have opened up for Iran to import and export vital goods with the country ‘’doing bartering, smuggling, and back-room deals with certain countries’.

Additionally, Iran has ‘huge cash funds and reserves that it can use to manage possible shortfalls in the budget’. Iran has long made plans to forge a formidable ‘resistance economy’ and will stay afloat by stepping up exports of non-oil products, already a focus of the national treasury

Mr Tavakol also suggests that Iran is prepared to take more serious action to combat its difficult economic situation. The first plank of such an agenda is already in place: ‘for the next 20 months or so, until the next Iranian presidential election, the government will manipulate and control the Iranian Rial against the US Dollar to control inflation’.

It is also likely that the government will ‘further freeze several domestic development projects to which it has allocated funds to handle more pressing issues such as securing food availability to the population’.

As Mr Tavakol suggests, Iran’s economy has proven surprisingly durable: ‘Iran- despite the fact that many won’t like to admit it-is the world’s 18th largest economy. Hence, overcoming the ongoing financial crises can be doable’.  

As a last resort, Iran may contemplate reducing its financial commitment to regional allies Hezbollah, and the governments of Syria and Iraq. As Mr Tavakol suggests, Iran’s economy has proven surprisingly durable: ‘Iran- despite the fact that many won’t like to admit it-is the world’s 18th largest economy. Hence, overcoming the ongoing financial crises can be doable’.  

Iran faces troubled waters ahead. The Revolution of 1979 built off decades of political and social repression but its short-term catalysts were economic -mired by stagnation and suffering from an intolerable chasm between rich and poor, millions took to the streets to demand a new social contract. Such memories will focus the minds of Iran’s secular and religious authorities.

Yet if any country is able to weather the storm of international pressure, it will likely be the one most used to a hostile environment. Iran has grown used to its difficult position, so don’t expect it to cave easily to more months of maximum pressure ahead.

The views expressed in this article do not necessarily reflect those of Al Bawaba News.

 


© 2000 - 2019 Al Bawaba (www.albawaba.com)

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