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.
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