Oil Minister Bijan Namdar Zanganeh went on record, earlier this year, when the government revised its draft budget for fiscal 2015 so that the assumed crude oil price became USD 40 a barrel rather than USD 72, with the assertion that the country’s oil industry was not threatened by this development and that Iran is strong enough to withstand a deeper slump in prices, even if it had to sell at USD 25 a barrel. The truth is that the economy has been seriously hobbled by Teheran’s aid to Syrian President Bashar al-Assad, which is costing Iran billions of dollars, by the plunge in oil prices, which has had a price tag of tens of billions, and by 35 years of sanctions, which have caused the loss of hundreds of billions of dollars.
The first sanctions, it is worth recalling, date back to 1979, when the United States froze Iranian assets in response to the seizure of its embassy in Tehran during the Islamic revolution. Further restrictions on trade followed in the 1980s and 1990s, and the European Union and the United Nations imposed still more sanctions later, in response to Iran’s nuclear program. The Persian nation’s economic isolation became suffocating after the UN asset freezes in 2010 and, more importantly, the disconnection of Iranian banks from the SWIFT interbank messaging network in 2012. Iran has continued doing business, selling oil to China, India, Japan, South Korea and Turkey. But new embargos targeting insurance for the country’s petroleum shipments took total exports down to 1.1 million barrels a day by 2013 and this oil has to be sold at steep discounts and with sharply increased transportation costs and expenses for middlemen.
Meaningful economic statistics are, of course, extremely difficult to come by, but it is evident that the authorities have made some progress in stabilizing key variables. The devaluation of the rial helped the government pay outstanding debts to banks, if at the cost of further fuelling inflation and raising the prices of basic goods. Still, inflation, which was 35%, seems to have stopped accelerating and is currently reported at about 20%. The economy is said to have reversed a two-year recession and, reportedly, scored a gain of 1.5% in the fiscal year that ended in March. Sanctions relief agreed with the West a year ago has unlocked USD 4.2 billion of oil money and made it easier for Iran to sell oil and import food.
Besides, there are numerous ways for Iran to get around some of the remaining international embargos. There are plenty of middlemen in neighboring countries, such as Turkey, and front companies across the Gulf, in Dubai, ready and willing to promote business with Iran, albeit at a steep cost. Smuggling US dollar banknotes into the country through a variety of intermediaries is one of the effective practices, and reports speak of more than a billion greenbacks having been brought into Iran in such a fashion – although this can only soften the effects of the embargos, not eliminate them.
American diplomats have been warning business delegations to Iran from European and other countries to be careful and not to sign any preliminary contracts with Iranian counterparts, or risk access to US financial markets. The thought of having dollars frozen under American sanctions, of being locked out of America’s capital markets, is usually enough to persuade companies and banks not to do business in Iran at this time.
Yet, there are companies around the globe champing at the bit to resume interaction with an oil-rich market of 80 million people. This includes not only energy companies such as the Anglo-Dutch Group Royal Dutch Shell, Spain’s Repsol, Statoil of Norway and France’s Total, which pulled out of Iran in 2010, but manufacturers of all kinds who are just waiting for the Iranian market to be reopened once a nuclear pact is in place. Some may not even wait for such a pact but assume that the “framework agreement” that supposedly has been reached in the talks between the five permanent UN Security Council members and Germany (P5+1) is sufficient progress for considering the sanctions as lifted.
This is nonsense, given that the Supreme Leader Ali Khamenei described the fact sheet proffered by US Secretary of State John Kerry as “fanciful.” There are still wide disagreements on virtually all the main subjects, from the permissible uranium enrichment to what will happen with the Arak reactor and the terms of international inspections. Above all, the Iranians have made it clear that they will not budge from two bedrock principles that make any final agreement useless, namely that (1) all economic sanctions must be lifted on the day any such pact is signed, and (2) military sites have to be strictly off limits for foreign inspectors.
What one needs to remember is that economic difficulties will not soften the regime’s determination to develop a nuclear bomb, nor end its financial and military assistance to allies such as Syria’s Pres. Al-Assad, since these are matters seen by the ruling clerics as religious and strategic priorities. In fact, Iran has gone on a massive offensive under the cover of the US-led war on terrorism, to gain a strategic depth that has extended its area of control all the way to the Red Sea and the Mediterranean. Tehran now effectively controls four Arab capitals, Baghdad, Damascus, Beirut (through Hizbollah) and Sanaa (through the Houthis).
A loss of confidence that the US Government seriously wants to halt this trend was one of the reasons why Saudi Arabia struck out on its own to forge a coalition of ten Arab nations to do battle against Iran-backed Houthi rebels in Yemen. It will also be the reason for a nuclear arms race in the Middle East that will be fraught with enormous risks not only for the region but for the rest of the world as well. The stakes are high, too high for what some people in the White House like to refer to as “strategic patience.”