Ahmadinejad: 'Sanction us!'
25 Sep 2009 18:50
How an oil embargo against Iran would help the hard-liners
[ opinion ] Before going to face the empty seats of the United Nations General Assembly and the angry Iranians on the New York City streets outside, Mahmoud Ahmadinejad gave a speech in an official function in Tehran. Commenting on suggested sanctions on gasoline and petroleum imports, he told his audience, "We should find a way so they do sanction us!" While for his group of followers this statement is yet another sign of his defiance, it hardly conceals his shrewdness. The fact of the matter is that Ahmadinejad needs the fuel sanction.
Although he poses as a populist and a champion of the poor and the disadvantaged, he has no misgivings about the economic realities of Iran. After defending and imposing a petroleum rationing system using smart cards and government apparatus, he quickly realized the merits of a free market approach. While he is no free market champion, Iran's current petroleum policy is driven by his pragmatism and wrong fiscal policies.
Currently, every smart card holder in Iran is entitled to 100 liters of fuel per month at a rate of 1000 Rials - roughly 10 cents - per liter. Those with imported cars are not entitled to any subsidized fuel; they purchase their fuel at a free market price of 4000 Rials - or 40 cents - per liter. According to analysts, the free market fuel accounts for only 5 percent of total fuel consumption in Iran. Sixty-five percent of the fuel purchased on the smart card ration is produced domestically, but the Iranian government has to import the remainder at international prices, which requires hard currency.
To supply the market, the Ahmadinejad government has used up its reserves, and has even spent part of its national oil revenues fund without any authorization from the Majlis, the Iranian parliament. It is estimated that his government has spent up to 2 billion dollars annually on fuel imports. Although oil is still priced at $65 a barrel, no one has any doubt as to the fragility of Ahmadinejad's government finances. His stupefying overspending has increased the public budget enormously while reducing its efficiency. His government is vulnerable to any decline in the price of crude oil. He needs to save every penny that he can. A free market approach to the fuel situation helps him by saving 2 billion dollars. This extra cash is a safety cushion and gives him a freer hand in solidifying his power base. But achieving this goal is not without drama.
Ahmadinejad cannot stop the fuel subsidies without losing face with his populous base and without angering the Majlis, and yet the need is so urgent that he tried to reduce subsidies or to drop them all together. Majlis reacted quickly to block his efforts because its members have realized such an approach would prove disastrous for them when their constituents go to the polls. They turned a deaf ear to his arguments. Neither his plan to stop fuel subsides nor his request to reduce the fuel ration to 65 liters per cardholder has been accepted by Majlis. He is cornered and he needs that extra 2 billion dollars per year that his government currently spends to keep gasoline cheap.
So there is no wonder that he looks at the United States government for new sanctions. A sanction on fuel imports would enable him to reduce fuel ration to 65 liters per card holder without losing face. In turn, this would increase the share of free market in the Iranian fuel market and middle class households would be hit by at least a four-fold increase in fuel prices. The ensuing black fuel market would provide Ahmadinejad's government with numerous opportunities to reward his followers by monopolies to import fuel and to control the fuel distribution network in Iran.
The Iranian people might lose, but Ahmadinejad is certain he will gain.
Copyright © 2009 Tehran Bureau