CAIRO, Egypt (AP) — The latest U.S. sanctions on Iran have exposed both the depth of the country’s economic pain and new fault lines within the government.
In the two days after President Barack Obama approved sanctions targeting Iran’s central bank and oil sectors, the value of currency plunged 13 percent. The central bank chief followed that with public criticism of the government for interfering in markets. Adding to the pressure on Iran over its nuclear ambitions, the European Union on Thursday was weighing similar sanctions in tandem with the U.S.
Analysts say the new measures may not force the hardline government to back down on its nuclear program, which the West suspects is aimed at developing weapons while Iran maintains it is for peaceful purposes. But they look certain to heap more misery on ordinary Iranians already struggling under the weight of previous rounds of sanctions.
“In seeking regime change, it’s unclear that cutting off Iran completely from what it’s most dependent on (oil), that’s going to be achieved,” said Gala Riani, an Iran expert with IHS Global Insight in London. She added that the Islamic Republic has often been described as a “suicidal regime … willing to sacrifice the welfare of the people in order to … not succumb to foreign pressure.”
With Washington concerned about pushing up oil prices during a global economic crisis, it delayed implementing the sanctions for at least six months. Nevertheless, just the prospect rattled oil markets. Crude spiked above $100 per barrel late last week when Iran threatened to close a strategic oil route, the Strait of Hormuz, if the sanctions were imposed.
The EU’s consideration of similar measures prompted Iran’s economy minister to blast the world for declaring “economic war” on the Islamic Republic.
Heated words aside, the depreciation of the rial and the remarks by the central bank head reveal that Iranian officials are no longer able to mask the deepening strains on the economy from sanctions in the world’s fourth largest oil exporter.
For years, critics have argued that President Mahamoud Ahmadinejad’s populist economic policies do little more than adopt a reckless Robin Hood approach — taking money from the wealthy to distribute to the poor — his core constituency.
The latest economic crisis is erupting just two months before parliamentary elections in March likely to bolster the control of the ruling clerics. The economy factored overwhelmingly in the 2009 presidential election, and could again become a major issue.
Last time around, critics blasted Ahmadinejad for squandering the country’s oil wealth on rural and industrial projects that did little to boost the overall economy. The economic despair, in turn, help fuel the opposition Green Movement and the largest protests Iran had seen since the 1979 Islamic Revolution. After months of crackdowns, it was brutally crushed.
The ruling theocracy vets candidates and is likely to use its powers to heavily seed the parliamentary election with supporters and exclude backers of Ahmadinejad, who has been locked in a power struggle with the clerical leaders.
Since Ahmadinejad’s re-election in 2009, economic distress appears to have worsened.
Against the advice of economists, Ahmadinejad slashed subsidies on food and energy in order to cut government spending and distribute the savings directly to the neediest in the country.
That pushed up inflation, with food prices increasing about 30 percent over the past few months. Overall annual inflation climbed from 13.2 percent in March to 19 percent, according to official figures. Economists believe that actual inflation is significantly higher.
Other macroeconomic indicators tell an equally worrying tale.
International Monetary Fund projections released in October showed that Iran’s projected economic growth for 2011 was 2.5 percent, the lowest of any other major oil producer in the region.
The discomfort is evident on the ground where, for example, the price of milk has climbed 100 percent over the past year.
The sharp depreciation of the currency relative to the dollar this week is likely to further stoke inflation and continues a trend over at least the past two years.
Since December 2010, the rial has shed about 50 percent of its value on the unofficial market, a slump that economists in Iran and elsewhere attribute in no small part to the effects of four previous rounds of sanctions since 2006 and misguided fiscal management by the government.
The government lowered interest rates, which tends to fuel inflation, when economic experts thought rates should be going up.
“In less than a year, rial has lost 40 percent of its value while the banks offer only a 14 percent interest rate,” said businessman Ali Dowlatabadi. “There is no reason to keep money in the bank.
The pressure on the currency is also making it increasingly difficult to do business. Businessmen complain that the tightening of the sanctions on the banking sector — a key part of the U.S. sanctions — means it will be hard to get letters of credit and they will, instead, have to rely on cash.
On Wednesday, Central Bank Gov. Mahmoud Bahrami indicated that officials would seek to reverse earlier policies by raising interest rates, a step aimed at stabilizing the rial and curbing inflation.
The semi-official Fars news agency also reported that he threatened to resign if the government meddles more in fiscal policy.
Still there is some doubt about whether the U.S. will ever implement the sanctions, given the potential for driving up oil prices and further crippling an already struggling world economy.
Iran appeared to be banking on that reluctance and has blasted the West for what officials say are sure to be futile efforts to bring it to its knees.
“The enemies of the Islamic Republic’s regime, with all their efforts, have not been able to chain the nation and now they want to chain the economy,” Economy Minister Shamseddin Hosseini said in comments carried by IRNA.
At the same time, other officials played down the impact of the looming EU ban, saying demand was so high for Iranian oil that they would have no trouble selling it elsewhere.
China, Iran’s third largest buyer of crude, on Wednesday blasted the sanctions and said they would not affect its dealings with Tehran. Iran’s gross exports from January to November 2011 to China increased by 124,000 barrels per day, the highest barrel per day increase of any of China’s crude suppliers, according to figures by oil industry analysts Argus Media. Those figures compared to the same period in 2010.
The EU is also a major importer of Iranian crude, taking in 450,000 barrels per day last year, the second largest buyer after China, according to Commerzbank in Frankfurt, Germany.
Analysts say that while the sanctions may not have the overall desired impact, they will hit hard.
“I don’t think we’re going to see a sudden shut off (of oil exports) and a complete economic collapse,” said Riani. “But certainly the outlook is not positive in the long term.”