Here is a quiz. You have a country whose foreign exchange reserves are at the highest levels in two decades, with prospects of rising prices for its principal export while over $200 million pours into its coffers each day. Moreover, the nation’s budget deficit, a persistent though occulted feature for the past eight years, has turned into a surplus, freeing the hands of the government to throw money at its more pressing problems. The logical consequence of all this should be a dramatic rise in the value of the nation’s currency.
And yet the opposite seems to be happening in Iran. Why?
The short answer is that more and more people are selling rials, the Iranian currency, and buying whatever foreign currency they can get their hands on, including the new Iraqi dinar. This, in turn, translates into a massive flight of capital from Iran.
Last Sunday Hashermi Shahroudi, a mullah who heads the High Council of Judiciary in Tehran, warned that what had started as a small haemorrhage may be building up into a flood. He estimated the total of Iranian owned capital abroad at a staggering $700 billion, accumulated over the past quarter of a century. But, more significantly, he claimed that capital flight is now proceeding at an unprecedented cadence.
Shahroudi offered other interesting bits of information, presumably available to him and a handful of other senior figures in Tehran.
He said that there are now over 10,000 Iranian-owned companies in Dubai alone. To these must be added a further 3,500 companies that operate from “free trade zones” on the islands of Kish and Qeshm in the Persian Gulf where the Islamic Republic’s trade laws do not apply. An unknown number of Iranian privately-owned companies have also sprung up in other neighbouring countries, notably Turkey, Azerbaijan and Armenia.
That leads to scenes that are comical at times.
For example, the Islamic Republic awards a contract to a firm registered in Dubai or Turkey but, is in fact, owned entirely by Iranians. In some cases, these “offshore” Iranian companies are partly or wholly owned by influential figures within the regime.
The significance of these figures becomes apparent when we remember that the total number of private companies registered for tax purposes by the Ministry of Finance in Iran itself stands at only 18,000. Moreover, the formation of private companies inside Iran has been on a descending curve since 1997. The message is clear: while trading with Iran is profitable, it is prudent not to keep assets in Iran.
Originally, the flight of capital from Iran was largely prompted by fears of arbitrary expropriation.
In the early decade of the revolution practically any mullah could issue a fatwa transferring your house or business to whomever he wanted. People who had gone away for business or holiday could return home to see someone else living in their homes, brandishing a fatwa from a mullah as proof of ownership. There were also wholesale nationalisations, especially between 1979 and 1983. In 1978, months before the mullahs seized power, the public sector accounted for just over 54 per cent of the national economy. By 1990 that figure had risen to 78 per cent. Since then private investment has been largely limited to real estate in major cities, notably Tehran, and small service companies with little initial capital outlay.
But, if Shahroudi’s warnings, corroborated by reports from all over the country, are justified, Iran may be heading for an unprecedented economic crisis.
There is, of course, the possibility that Shahroudi is prompted by sour grapes. His faction suffered a decisive defeat in the last presidential election and has since lost a number of key positions as part of President Mahmoud Ahmadinejad’s purge of the administration. Both Shahroudi and his political mentor, former President Ali-Akbar Hashemi Rafsanjani, are expected to lose their own jobs sooner rather than later.
Nevertheless, Shahroudi’s warnings could not be dismissed as a mere political swipe at Ahmadinejad.
The new administration has implicitly admitted that something is going wrong by asking all banks, which are government-owned, to observe a moratorium on all loans above a 300 million rials limit. This is prompted by fears that individuals and private companies may be borrowing solely to buy dollars or other foreign currencies as a hedge against further drops the value of the Iranian money.
Since 300 million rials amounts to no more than $45000, the decision shows that even very small savings are being turned into foreign currency.
The real reason for economic uncertainty in Tehran is the war drums beaten by the new administration.
Hopes that Ahmadinejad’s visit to the United Nations might help defuse the diplomatic crisis over Iran’s alleged nuclear weapons project were dashed by the new president’s performance in New York which even his well-wishers describe as “awkward.” He not only did nothing to cool things down but also went out of his way to antagonise the Europeans who were desperately trying to keep the diplomatic process alive.
Tehran’s new cocky attitude is seen by many as a sign that the Islamic Republic leadership is seeking a limited military confrontation with the United States and is confident that it can win it.
Ibrahim Asgharzadeh, a leader of the “students” who seized the US embassy in Tehran in 1979, and a reserve officer of the Islamic Revolutionary Guards Corps (IRCG), claims that the new administration under Ahamdinejad is “actively seeking war”. Similar warnings came from Rafsanjani and former President Muhammad Khatami in separate private meetings with foreign dignitaries in the region earlier this month.
The dramatic militarization of the administration, partly by appointing IRCG officers to civilian posts throughout the country, adds weight to those warnings. There is also the fact that what looks like massive preparation for war is taking place in several provinces, especially on the border with Iraq.
Shahroudi is right to draw attention to the economic consequences of a policy that, rather than seeking détente, is designed to heighten tension.
But Shahroudi and others who understand the pitfalls ahead must also inform the people about the political and military consequences of such a policy. Although humiliated in the last election, Rafsanjani, Shahroudi, and Khatami still have a constituency within the ruling establishment if not in the nation at large. They should mobilise their constituencies around a demand for a public discussion of the alleged “war policy”.
There is no reason why Iran should be led into a military conflict with anybody at this point in time. Nor is there any guarantee that a conflict would not do lasting damage to Iran’s legitimate national interests.
If, as Shahroudi and Rafsanjani are suggesting, the new administration in Tehran is “sleepwalking towards war” it is everyone’s duty to sound a wake-up call before it is too late.