Hard times for Iran

With oil revenues down, unemployment rising, and billions spent on supporting Syria, Iran’s next president faces a tough job.
By Marcus George
Fri 14 Jun 2013 11:37 AM

If there is an issue at the core of Iran’s presidential election next month, it is whether the next president can jumpstart the economy and ease the deep financial pressures facing the majority of Iranians.

Spiralling prices and constricted spending power have left millions of Iranians struggling against a virulent combination of Western economic sanctions and poor fiscal management.

The six candidates are locked in a battle for voters over who could mend the economy, a much deeper problem than four years ago when urban masses disputed the election result and took to the streets in protest.

“With inflation and unemployment in an upwards spiral, the main concern of voters is bread and butter issues. The average Iranian voter is now 38 years old and primarily concerned with securing a livelihood,” says Mohammad Shabani, an independent Iran analyst based in Britain.

President Mahmoud Ahmadinejad cannot stand again and will be replaced by one of the six candidates, all approved by the Guardian Council loyal to Supreme Leader Ali Khamenei. They all accuse Ahmadinejad of mismanaging the economy over his two terms in office.

“The government is like a decrepit car and it is vital that we take away all the obstacles that are slowing its performance,” hardline presidential candidate Saeed Jalili, Iran’s chief nuclear negotiator, said last month.

“Our country is one of the most powerful in the region and our missiles can reach thousands of kilometres but we’re in need of chicken meat,” said candidate Mohsen Rezaie, former head of the Revolutionary Guards, during a campaign advertisement.

Hard-hitting sanctions imposed by the United States and its allies targeting Iran’s oil and banking sectors nearly halved oil revenues in 2012 to around $50-60bn. Iranian banks were disconnected from the global financial network, making payment transfers to or from Iran extremely difficult.

As a result, Iran’s currency has plummeted in value, bringing soaring inflation and unemployment as businesses struggle to adapt. Iranians now pay up to three times more for staple foods than they did twelve months ago.

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“It is ridiculous. I never had to worry about buying fruits or groceries before but now even the middle-class citizens have to be careful,” 37-year-old Azin, a housewife and mother of two living in Tehran, says by telephone.

The rising costs have also hit Iranian business hard. “We produce from time to time to pay our workers but that is the only motivation for working. We have no money to maintain the business, it is simply a matter of surviving,” says a poultry producer who halted regular production two months ago.

Official figures say unemployment stands at around twelve percent but is double among young people. Independent analysts indicate real figures may be a lot higher.

Ali, 28, lost his job with a Tehran-based computer business after sales dried up. A fluent English-speaker with programming skills, he found a two-month project working remotely for a Canadian company. He wants to emigrate.

“Right now I’m self employed and doing business abroad, because the rial can no longer cut it. I would rather do underpaid work in dollars than wasting time working for a local company,” he says by email.

Analysts say the combination of the economic ills and little fiscal expertise in government could be lethal over time.

“All the indices are downward and the country is crawling towards collapse but it is gradual. It doesn’t happen suddenly," says Iranian-born economist Mehrdad Emadi of UK-based Betamatrix consultants.

According to estimates by the International Energy Agency, Iran lost out on around $40bn in export revenues in 2012. The IEA says sanctions halved the country’s crude exports from levels of around 2.2 million bpd in 2011.

Nevertheless, high world oil prices still help. Figures from data and traders through Thomson Reuters Oil Analytics show sales of fuel oil have increased substantially in recent months and could bring in more than $7bn for the year, if sustained. Sales of condensate, a light oil byproduct of Iran’s rising natural gas production, bring in several billions more.

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“Even with the sanctions, the government is raking in roughly double the average income from crude exports a decade ago,” says analyst Shabani.

The issue is more one of foreign currency which Iran lacks.

Instead of hard currency, Iran now accepts alternative payment from key crude customers India and China, who supply a range of commodities and goods.

“Instead of money they said ‘take some goods’ and after that they (China) said ‘not any goods but the ones we specify’,” former president Akbar Hashemi Rafsanjani said in a leaked conversation, referring to Iran’s crude oil agreements.

“India now buys our oil very cheaply but it doesn’t accept to even pay in rupees,” he said in the remarks to his campaign team a day after he was blocked by the Guardian Council from running. The remarks were reported by opposition website Kaleme.

With little currency on hand, the government has tightened access to dollars at its standard rate of 12,260 rials. Dollars sell for three times as much on the open market.

Iran’s car industry, which accounts for around ten percent of GDP, can no longer invest in key equipment because of restricted access to government dollars, say officials quoted in Iranian media. According to recent figures, production is now 50 percent of capacity, down to around 25,000 units per month.

Even as financial burdens are mounting at home, Iran is spending money abroad, prioritising support for close ally president Bashar Al Assad of Syria to maintain what it views as existential strategic interests.

“Syria is an ideological commitment that Iran has locked itself into but it comes at the expense of its domestic needs,” says economist Emadi. “It is a very tough choice.”

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There is little reliable data at hand for how much the Islamic Republic spends on its commitments to aid Al Assad in a civil war that has killed 80,000 people over two years. Analysts say the cost of Tehran’s economic and financial aid probably runs into billions of dollars.

“Putting a dollar number on this is close to impossible, but if Qatar really spent more than a billion dollars so far helping the Syrian rebels then Iran’s contribution must be several times greater,” says Emile Hokayem, an analyst at the International Institute for Strategic Studies.

The Islamic Republic offers up to $4bn in credit to Damascus to ease the pressures from international sanctions, which have devastated Syria’s oil exports, which are much smaller than Iran’s but still important for Al Assad.

Although cautious about discussing the topic, Iranians appear to be increasingly irritated by the extent of their charity. Last October, traders in Tehran’s Grand Bazaar shut their shops and joined impromptu demonstrations, criticising their government’s policies and support for Al Assad.

The rial had lost 40 percent of its value in a matter of days which brought their business to a standstill.

“As long as there is a single needy person inside Iran, this money should be spent domestically. Iranians are suffering from worsening economic conditions, they should be the priority,” says 32-year-old Alireza, a Tehran resident.

But with foreign policy strategy solely the preserve of Supreme Leader Khamenei, aid to Syria is one of the many areas in which the new president will have little say.

 “The question is not who will be president, but if anyone could succeed despite sanctions and widespread mismanagement and structural deficiencies embedded in Iran’s economy,” says Ali Dadpay, an Iran-born assistant professor at Clayton State University in the US state of Georgia.

“Whoever comes to office needs to know his economics 101 pretty well.”

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Iran’s declining crude receipts

Western sanctions drove Iran’s crude exports to the lowest in decades in May, according to industry sources and tanker-tracking data, even before Washington toughens measures aimed at squeezing oil sales further.

Crude shipments dropped to 700,000 barrels per day (bpd) last month, the data from sources showed, about a third of Iran’s oil exports before the current round of sanctions.

US and European sanctions aimed at pressuring Tehran over its suspected pursuit of nuclear weapons have already more than halved Iran's shipments — costing Iran billions of dollars in revenue since the start of 2012. And Washington is now seeking to cut shipments to less than 500,000 bpd.

Purchases by major Asian customers last month were about twelve percent down on April, industry sources said. Sales in April had already taken a hit after Japan, the world’s third-biggest oil consumer, almost stopped Iranian imports entirely.

Oil sanctions are one of the main tools Washington is using to choke off funding to Tehran’s nuclear programme. Countries in the West suspect its purpose is to seek the capability to make nuclear weapons. Iran says the programme is for generating power and medical devices.

With oil trading just above $100 a barrel, the decline in May exports versus April would mean a loss of more than $300m for Iran, squeezing revenue for a nation that has already seen its currency plunge.

The drop in purchases in May, if confirmed by official import data, would increase the prospect of Washington granting Tehran’s top buyers more leeway to avoid US penalties even if they maintain Iranian oil purchases.

The steepest cuts in April had been made by Japan, amid uncertainty about whether sovereign insurance for tankers carrying Iranian oil would be extended beyond March.

At just 7,549 bpd, imports from Iran were down 96 percent from the same month a year ago and the lowest since Japan imported no Iranian crude in July 2012.

Tokyo began offering insurance guarantees in June last year after top reinsurers, mostly based in Europe, halted their cover for ships carrying Iranian crude due to sanctions.

A Japanese transport ministry official in charge of the scheme said new contracts covering three tankers were signed on 1 April, compared with thirteen that were covered up to 31 March. The number has subsequently risen to eight. That indicates May imports were lower than a year earlier, because fewer ships were eligible to load Iranian oil. Loadings in May likely fell versus April, industry sources familiar with Iranian crude shipments said. One source pegged the volume at 120,000-130,000 bpd, about 60,000-100,000 bpd lower than April.

Imports in May by South Korea, another of Iran’s top customers, likely fell from April’s 139,400 bpd — already down nearly 45 percent from a year ago.

Of the two Korean refiners — SK Energy and Hyundai Oilbank — which import Iranian crude, Hyundai receives cargoes once every two months and is unlikely to have imported anything in May.

China, Iran’s biggest buyer, purchased about 371,500 bpd in April, down 4.3 percent from a year earlier. Shipments were likely to hold steady in May and June, a regular buyer said.

India’s purchases could average about 190,000 bpd spread over April and May, based on industry and a preliminary tanker arrival data. That’s about a quarter less than the 250,600 bpd imported on average in the first three months of the year.

Turkey is expected to import the same amount in May and June, roughly 100,000 bpd in three cargoes, as has been the case in the past nine months.

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