Q&A | Iran Business Expert: 'Crisis Shaking Foundations of Social Order'
by TARA MAHTAFAR
24 Apr 2012 03:02
Observing that "it is clear that the country is in a downward spiral of negative economic phenomena," many of which are linked no more than tangentially to sanctions, Khajehpour addresses not only growing inflation, poverty, and unemployment in direct terms, but also how their combined impact has "undermined the Iranian culture." As for "overall business confidence" within the country, by his assessment it is at its lowest in almost a quarter century -- since 1988 and the final months of the eight-year war with Iraq.
The SWIFT ban passed in March is an unprecedented measure in choking off Iranian banks from the global financial transfer system. How severely will the ban damage Iran's economy, from the government level to the private sector?
The SWIFT sanctions are severe, but they won't choke Iranian banks completely. First of all, the SWIFT sanctions are only targeted against those banks that have been black-listed by UN and EU sanctions. These are not all Iranian banks and there [are] a growing number of private Iranian banks operating in international transactions. Second, even before the SWIFT sanctions, the CBI [Central Bank of Iran] alongside major Iranian banks had developed Plan Bs and Cs to circumvent banking sanctions. One of the strategies had been to keep funds outside Iran. The CBI had signed agreements with a number of national and private banks across the world to keep Iran's export revenues outside Iran. This is why the sanctions against the CBI were also very disruptive for the Iranian strategy. Essentially, with that system in place, in many cases, Iran did not need to transfer funds from inside Iran, but could do so from accounts outside Iran, circumventing banking sanctions. Iran still has such accounts, especially in China and Turkey and Iranian imports are paid through so-called "back-to-back" LCs, i.e. an Iranian bank issues a letter of credit (LC) to the "executing bank" (e.g. a Turkish or a Chinese bank) and the executing bank issues an LC to the country of origin where the imports have come from.
The real impact of these sanctions is the fact that doing business is becoming more complicated and more expensive, but not impossible. At this stage, it is important to say two things:
(a) The Iranian business community has been confronted with sanctions for three decades and has always managed to find ways to circumvent them (this is the consequence of being a merchant nation for a couple of millennia); and
(b) The real problem at this stage is not the sanctions per se, but the unpredictability of behavior patterns of international players. An Iranian ship that gets stranded in a foreign port because the port authorities do not grant it permission to dock irritates Iranian businesses and the Iranian government more than the sanctions that generate temporary hiccups.
Therefore, the actual effect of the current sanctions is difficult to measure as the side effects are more damaging than the sanctions themselves. However, it is not a secret anymore that the overall impact of the sanctions is pushing a number of Iranian stakeholders to lobby for a political settlement of the nuclear issue.
The effect of the E.U. oil embargo slated for July and U.S. pressure on heavy importers of Iranian oil such as China, India, Turkey, South Korea, and South Africa is forecast to cost Iran up to one million barrels per day [in sales]. Will such an oil embargo cripple the Iranian economy?
Considering the current state of the world oil markets, especially the fact that a number of other crises (Syria, Sudan, Libya etc.) are irritating markets, I would be very surprised if Iranian oil would remain without any buyers. Actual economic and strategic realities will push new buyers towards Iranian oil. Evidently, Iran would have to find new customers, offer better terms and attract buyers, but it is valid to say that the additional expense is covered by the higher than expected oil price. However, the future of Iranian oil exports is undermined by the falling production of Iranian oil and not by the current sanctions on purchases of Iranian crude. Iran's current production capacity stands at about 3.6 million barrels per day (mbpd) which is well under the desired capacity of about 4 mbpd. Domestic consumption is about 1.6 mbpd, meaning that some 2 mbpd are available for exports (the actual export quantity is higher as natural gas and also condensates play a growing role in the domestic basket of energy as well as in exports). Experts believe that production capacity will fall to 3.1 mbpd next year, if the current trends continue (i.e. lack of modern technology in developing new fields and also in rehabilitating existing and aging fields).
So, the real problem in Iran is falling production capacity which is partly an extension of the current sanctions, but also partly the doing of the Iranian government in how it awarded major oil and gas contracts to domestic and foreign companies. In any case, if Iran seems more compromising at this stage, it is partly due to the critical situation in the petroleum sector. I don't think that we can compare the current situation to the "oil for food" program in Iraq. Iran is much more resourceful and much better integrated in the international business networks than Iraq under Saddam was. Nonetheless, current economic conditions are poor due to a host of issues including sanctions, economic mismanagement, corruption, subsidy reforms etc. Whether this will lead to an economic collapse depends on many political and economic factors, but it is clear that the country is in a downward spiral of negative economic phenomena (inflation, unemployment, budget deficit etc.).
The past six years of increasingly harsh sanctions from the U.N. and U.S. have taken a severe toll on Iran's economy, most visibly in rampant inflation and devalued currency. What are the human costs of these sanctions?
The social and human costs of the current economic developments are very high and only partly visible. We have a growing number of Iranian families under the poverty line (a recent report suggests that 60 percent of the workers are living under the poverty line). The most vulnerable groups are workers and civil servants. Unemployment, underemployment and youth unemployment are all very high generating a degree of frustration among the youth. Crime is certainly on the rise, even though there are no official statistics, and then one witnesses phenomena such as the sale of body organs and other methods of generating additional income for the household. Increasing efforts to migrate to foreign countries can also be added to the list of social phenomena. The general preoccupation with economic issues has also undermined the Iranian culture as well as the society's ability to engage in the political developments -- i.e. a sense of de-politicization and frustration.
As I said, the current situation is not just a result of external sanctions. There are also internal phenomena that have contributed to the crisis. Fortunately, the Iranian society still provides for non-governmental social security networks (around families, mosques, religious foundations, etc.) which is easing some of the social tensions, but the overall trend is negative. At the same time, the current crisis is shaking some of the basic foundations of social order. The society as a whole, particularly the youth have no confidence in government, law and in clerical institutions. This loss of confidence translates into social behaviors such as disregard for the law, disrespect of cultural norms etc. which will further irritate Iranians with long-term consequences.
If sanctions begin to be lifted, how long would it take for the country's economy to recover to a pre-sanctions state?
It is very difficult to say how long it will take for Iranian society to regain a certain degree of normalcy once sanctions are lifted. As mentioned, the problems go beyond sanctions and adjustments and reforms will be needed in many areas. The one fact that makes me optimistic is that the society is young and dynamic and able to adjust once some of the bottlenecks are removed.
Iran's Supreme Leader named this year on the Persian calendar the year of "National Production and Supporting Iranian Labor and Capital." Is this indicative of the Iranian authorities' view on the ratcheting up of sanctions -- whether they foresee withstanding deeper economic isolation, rather than, as Western analysts argue, that sanctions may push the Iranian economy to collapse?
This slogan is an extension of Ayatollah Khamenei's desire to address current economic issues. It is evident that the combination of all domestic and external challenges have undermined Iranian businesses and led to a low level of business confidence in the country. It is important to understand that in Iran jobs are mainly created by private businesses. The government sector has a negative net impact on employment due to privatization, therefore, if business confidence is low, jobs won't be created and socio-economic problems will further deepen. I believe that the overall business confidence (which is a reflection of general and specific conditions in various economic sectors) has not been this low since the final year of the Iran-Iraq War (1988). In 1988, the regime had the sense of accepting the cease-fire with Iraq which revived the Iranian economy. I believe something similar will be needed this time and the slogan is a first step in that direction.
In your experience, how do Iranians from various social segments regard the sanctions -- as an imposition by the West or as consequences of the regime's actions? Has this negatively impacted sentiment toward the U.S.? Has it changed public support for the country's nuclear program?
There are no opinion polls that we can rely on in such questions. My assessment is that one needs to distinguish between various social groups. A considerable segment of the Iranian society relies mainly on the official news sources (especially the Iranian television) and is fed a narrative which is mainly based on the greatness of the Islamic Republic and the evil nature of foreign powers who always conspire against Iran. Within that narrative, the Iranian government is never at fault. However, even in that segment of the society, more and more people blame the government for inflation and corruption. The news of a $2.6 billion banking embezzlement had nothing to do with foreign conspiracies and people are witnessing that the government is at fault.
However, once you move to the segments that have access to a diverse set of news (Internet, satellite programs etc.), the views become more nuanced. I believe the more informed social groups have a view that blames both sides, i.e. they see the shortcomings of Iranian policies and decisions, but they also believe that the United States and the EU are applying double-standards. In any case, I would argue that the net effect of western policies of the past decade towards Iran has been negative, i.e. the average Iranian distrusts the western governments more than before. This may also be connected to the fact that the nuclear issue has touched an important chord of "national pride" which should not be underestimated in assessing the views of Iranians and how they would react to further escalations in the future.
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