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    Middle East
     Nov 20, 2008
Economic noose tightens around Iran
By Hossein Askari

Iran's economic failures since the revolution of 1979 are obvious to anyone who looks into the available statistics. The average Iranian is no better off today than in 1979. Public hospitals are overcrowded and ill-equipped; they don't seem to be in the same century when compared with the expensive private clinics in the capital, Tehran.

In comparison with 1979, Iran's oil production is about 30% lower, international reserves are lower, average real per capita income today is lower, income distribution is worse, while dependence on oil revenues is higher, unemployment and inflation are both above 25%, and the list goes on. The signs of economic failure are everywhere to behold.

While economic sanctions, the high numbers of refugees and

 

especially the Iran-Iraq war of the 1980s have had a significant effect on economic developments in Iran, economic failures have been largely self-inflicted. The regime in Tehran has pursued a radical ideology and short-term survival is a priority, as opposed to sustained economic development and basic economic justice, and in the process it has failed the Iranian people. A few are getting rich beyond their wildest dreams, while for the average Iranian there is no hope for a better future.

Over the past month or two, the regime has found itself with a tightening noose around its neck. Since 1979, a number of US administrations has openly or secretly pursued a policy of regime change toward Iran. To this end, the US has imposed blunt and ineffective sanctions.

More recently, the US has developed more targeted and effective sanctions, including measures to cut off Iranian banks from the international banking system. This is slowly taking away Iran's ability to issue letters of credit and thus increasing its cost of trade. In addition, Iran is finding that it will have no access to international capital markets; its only theoretic access to international credit will be at the International Monetary Fund and the World Bank, both of which the US can easily block.

On November 6, the US Treasury went even further by revoking Iran's "U-Turn License". Ever since the revolution, US administrations have allowed Iran to sell oil to non-US entities for dollars. Thus, when a company or a country bought oil from Iran and instructed from outside the US a US bank to issue funds in favor of an Iranian bank, a US financial institution was allowed to process such a request. The fund transfers to Iranian banks were achieved through what has been coined a u-turn, because the instructions came from abroad and the funds were credited immediately in favor of the Iranian bank.

The revocation of this license for Iran means that US banks cannot make dollar transfers in favor of Iranian banks. This effectively means that as Iran sells its oil it will receive payments in currencies other than the dollar. This reduces Iran's financial options for selling oil and cuts off all Iranian banks from the US financial system.

Up to now, the US Treasury had been persuaded of the advantage of this exception for the US because it added to the demand for dollars and afforded the US the benefits of seignorage rights (that is, the costless issuance of paper money which bought something at time of issue). In revoking Iran's license, the US is signaling to Iran that it will continue to tighten the noose around its neck to gain added leverage before potential discussions or negotiations. The US may also have been peeved by Iran's grandstanding when it intimated that it would no longer hold dollar reserve assets.

While these recent actions are beginning to take a toll on Iran, lower oil prices are squeezing it even more dramatically. Over the past three-and-a-half years, the Iranian government has spent oil revenues like a drunken sailor. As a result, the country's financial reserves have declined during this period of high oil prices and revenues. A decline of oil prices to about US$40 for a period longer than two or so years will seriously test the regime's survival.

In the face of ongoing economic woes and future developments, how can the Iranian regime maintain domestic peace and prevent the disenfranchised from taking to the streets?

There is little hope for a turnaround because the regime's inner circle has shown that it cannot adopt a comprehensive economic approach if it entails any short-run sacrifice. This has at least been the case for roughly 20 years, during which the leaders of the government have known full well what they would have had to do to effect a turnaround. The present government has lived beyond its means to buy support among the disadvantaged masses without affording them the hope of a better future. Now the possibility of meeting even the basic needs of average Iranians may be out of the government's control within roughly a year.

What can the US do and what is its best option? The military option should be dismissed out of hand. It would be costly yet carry no assurance of success. It would solidify the reign of the mullahs for another 30 to 50 years. It would increase the suffering of the Iranian people. It would turn more Muslims against the US all around the world. It would damage US interests in Iraq, Afghanistan, and Lebanon and beyond. It would resolve little while complicating many things for the US for years to come.

On the other hand, a peaceful route through patience and economic pressures more focused than those imposed under previous administrations affords a far better option.

First, with some more thought, the US could discover additional, and even more effective, economic weapons against Iran in the near future. Besides developing more effective economic options against Iran, the US could adopt a policy of benign neglect. Iran can do nothing to hurt the US. The US economy is more than 20 times that of Iran; the US population is four times Iran's; and Iran's military strength cannot be compared with that of the US.

Yes, Iran could affect US interests in the Persian Gulf region. But Iran's rapidly sinking economy, which could be further tested by declining oil prices and smarter US sanctions, will soon become the regime's only preoccupation. The regime needs to survive if it is to carry out any mischief.

While the majority of Iranians the world over may have applauded the regime's independence from the great powers, including the US, the regime's economic failures have impoverished average Iranians, weakened the country and now threaten the regime's very existence. Those in power have wasted 30 years of Iranian oil revenues.

The regime in Tehran is incapable of adopting a comprehensive economic program. It has been unable to see the light for nearly for three decades and there is no reason to believe that it will begin to see clearly any time soon. There are rumblings against the regime's economic failures. Although influential mullahs are voicing economic shortcomings, words and rhetoric will do little to pull the regime out of the fire.

While US administrations label the regime in Tehran fanatical, it is in fact nothing but practical. In the end, it will do whatever it needs to survive. It will compromise anything and everything to ensure this. In 2003, when it felt militarily threatened, it approached the US as a supplicant because it was vulnerable.

The tide is again turning for a different reason. This time the earthquake is economic in nature. When the regime sees that its survival is threatened at its very foundation it will again compromise. Then the ball will be in the US court and hopefully when in office, president-elect Barack Obama will be more thoughtful than was President George W Bush in 2003.

Our suggestion here is that the Obama administration should negotiate with Iran from a position of strength. It could be in a position to do this if it first puts on its thinking cap and develops smarter sanctions; these are available but US administrations have not looked in the right places.

The US should then wait for roughly six to 12 months to let enhanced sanctions and lower oil prices do their work on Iran. The waiting period may not be reassuring to those who worry that Iran may be pursuing nuclear weaponry and may have a crude warhead in three to four years. However, they should carefully assess the likelihood of Iran's pending economic free fall and the consequences for the regime before seeking immediate negotiations from a position of weakness.

Hossein Askari is professor of international business and international affairs at George Washington University.

(Copyright 2008 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)


Iran's economic self-mutilation
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