7 August 2020

Friday, 18:39

CURRENCY

SAFETY MARGIN

Elena DUNAEVA: “One must take into account the three-year survival experience of Iran under sanctions”

Author:

01.08.2018

A series of public protests occurred in various cities throughout the Islamic Republic of Iran over the past several months due to financial and economic crisis in the country. The government began arrests of members of municipalities and heads of import-export companies to somehow ease the situation. Detainees are accused of corruption cases. However, attempts to reduce tensions look very much like the search for scapegoats. Attorney General of Tehran Jafari Dolatabadi said that dozens of arrested were taken to the military prosecutor's office.

Interestingly, some of the arrested are from the elite Islamic Revolutionary Guard Corps (IRGC). Over ten years they dominated the municipality of Tehran. Among the arrested are also the former chief police commander, Mohammed Bakir Kalibaf. The authorities promise to punish all participants of corruption schemes regardless of who is behind them. Analysts assume that a systemic crisis has occurred in Iran, and the scandal with IRGC is just the beginning of problems.

We have requested Senior Researcher of the Centre for Middle and Near East Studies of the Institute of Oriental Studies of the Russian Academy of Sciences, candidate of historical sciences Elena DUNAEVA to tell us about the situation in the neighbouring country.

 

The wave of protests reached the eastern provinces of Iran with predominant Azerbaijani population, as well as the south of Bender Abbas and other cities. Can we assume that the public dissatisfaction with economic situation gradually evolves into the national issue similar to the course of events during the collapse of the USSR?

The main aspect of discontent in these regions is the environmental problems associated with severe drought and sandstorms. This led to a severe shortage of water, especially drinking water. It is not the first time that these regions face environmental problems. They had them before. But the situation aggravated because of the recent drought. Although the majority of population in these regions are Arabs, the ethnic factor is not the main reason of protests. It is interesting that the Iranian press explained the reason of drought by alleged theft of clouds by neighbouring states that make the clouds entering into Iran barren. In fact, Iran has not been dealing with the problem of drying rivers and the system of water resources for a long time. Numerous water canals, dams, bends were built, and all this had a very negative impact on the main water source - the navigable river Karun. Therefore, there is a severe shortage of water in southern regions of Iran.

Serious environmental problems are observed in the southeast of Iran, in the province of Balochistan. Due to hot summer season, several cities had a power outage. This negatively affects the small production units such as the poultry farms.

Protests in Tehran, Isfahan, Kermanshahr and other cities are mainly connected with the devaluation of the national currency and the general deterioration of economic situation in the country.

Is economic default and hyperinflation in Iran probable? Rial depreciates very quickly. The credibility of the national currency is so low that in Azerbaijani provinces and in the Gilan region, Azerbaijani manat is used on equal footing with rial...

According to official data, the inflation rate is no more than 10%, although the rial is devaluated for the third month. At the same time, in the last year of President Mahmoud Ahmadinejad’s term, inflation was 30%. When Rouhani came to office, it reached almost 40%. So, Iran still has a safety margin.

What is the cause of the crisis? Some say that the economic system of Iran is problematic, others claim that it is all about the high maintenance costs of the Shiite armed forces in Syria and Yemen...

When the government of Hasan Rouhani signed the nuclear deal in 2015, it hoped that significant investments and new technologies would enter the country. It turned out that Iran fulfilled all conditions of the deal as far as the enrichment of uranium, reduction of the number of centrifuges, export of nuclear fuel, etc. are concerned. But European states under pressure from the United States did not keep their obligations to fully connect Iran to international interbank system of information transfer and SWIFT payments.

Iran does not have an opportunity to use its money, which is stored in Western banks, through international banking mechanisms. Although IAEA recognised that Iran fulfilled its obligations according to the nuclear deal, not all Western companies decided to invest in Iranian economy. This also is a result of American leverage and pressure.

The plan of the Rouhani government designed to ensure the influx of large Western capital to Iran did not materialize. Therefore, it had to look for reserves. The only thing that it managed to do is to reach the pre-oil level of oil production and export, 3.8 million barrels a day. However, by that time, oil prices had fallen sharply compared to 2010-2011. Iran has missed significant oil and foreign exchange earnings in the country. And the Iranian state budget is 60% formed by selling oil. Now Tehran is trying to reorganize its economic system increasing non-oil exports. But in comparison with oil revenues, this export item is insignificant.

The Cabinet has also made a number of mistakes. As for the cost of supporting pro-Iranian forces in Syria and Yemen, they do not play an instrumental role in the economic crisis. The crisis is a complex of problems from government failures to corruption, export of capital, manipulation of currency sales in the domestic market, etc.

Will Trump succeed in stopping the purchase of Iranian oil in the world market? In November, the U.S. will apply sanctions against countries that purchase Iranian oil. What will happen in Iran in this case?

I do not think that it will be possible for Washington. Firstly, one must consider the three-year experience of Iran's survival under the Western sanctions in 2013-2016. The main buyers of oil from Iran are China and North Korea. It is unlikely that the U.S. will be able to dissuade these countries from buying Iranian oil. The States can only track the volume of purchases. As to China, Iran takes a part of payment for oil in yuan; Turkey directly buys oil through a pipeline from Iran. Iran can also sale products on credit and barter. In other words, the U.S. will not be able to completely block the sale and purchase of Iranian oil.

The Iranian state system supports major social programs. Teachers and low-income families, for example, get various benefits and social payments. In many respects, the authority of the Supreme Leader rests on this social support of the population. How will the situation affect the authorities of the clergy if the state simply cannot bear this social burden?

Indeed, almost 80% of Iranian population is by social assistance and subsidies. Since 2008, the state has been implementing a policy of targeted material assistance through banks. A huge number of people receives this help. Now there is a question of reducing the number of people receiving subsidies. The parliament still refuses to approve the government's plan to reduce the social support package. It is interesting that targeted assistance program does not take into account family incomes. In other words, if a person wants to get help, he applies to the government, which then transfers to his bank account 40 or more US dollars.

Currently, the government is holding discussions on the possibility to reduce social programs by stopping state support to families with high incomes. Most likely, the Iranian government will have to revise the system of social support. By the way, a huge portion of this material aid goes through Islamic funds, which accumulated all the property of the family and closest associates of the Shah after the Islamic revolution in 1979. These funds have hundreds of enterprises from agricultural to airlines and other commercial structures. According to the charter, they should allocate a part of their income to charity both within the country and to Muslims abroad. There are also Islamic waqfs, or charity organisations. The largest of them is the Imam Reza Waqf, foundations organized by religious scholars who are also engaged in economic activities and channel funds to charity. Also, there is a tax paid in favour of the respected religious leader Khamenei and other ayatollahs. Anyone in need can seek help from these funds or the religious leader and get help.

So far, there is money for social support. It all depends on whether the government will be able to get money from Western banks. Iranian authorities appealed to Germany in order to get back several million euros. This is just an example. It all depends on whether the EU countries show solidarity with the U.S. or continue cooperating with Iran.

Iran threatens to close the Strait of Hormuz. Can Tehran do this?

Theoretically, Iran can close the strait. The passage is only 40 kilometres long; Iranian naval bases are located on three islands. Iran can actually attack tankers or other vessels that pass through the strait.

Can Iran opt for liberal reforms in public life in response to protests? This may include liberties for the women, youth, etc.

The Rouhani government supports liberalization of the country. This is the only way to solve all the problems in Iran both in the socio-economic and political spheres. On the contrary, by “tightening the screws”, the authorities can only postpone the growth of the protest potential for a short time. Still, there will be protests. We did not see the urban intelligentsia and the national bourgeoisie on the streets yet. Only the lower strata of population, which has the worst financial situation, was protesting. Tough rules will take the most intelligent and educated middle class to the streets. Then the protests will take a much more massive character.

By the way, the fact that the Iranian media mentioned the name of the former President Khatami can be regarded as a sign that liberalization is possible in Iran. The media has already disseminated information about his meetings with reformers, youth and even his comments about the situation in the country. Khatami believes that there are still opportunities for reforms to preserve the Islamic regime. Whether the top leadership of the country will go to this is a question. In view of the aggravation of the economic situation, Iran simply has no other way.

How likely is the war between Iran and the U.S.?

I think that neither Tehran nor Washington consider a military scenario. This does not serve the interests of both countries. Destabilization of situation in the Strait of Hormuz will lead to negative consequences on the world energy market. No insurance company will cover the risks associated with the delivery of oil from the region. This will hit not only Saudi Arabia, Oman and other countries, but also Qatar, which exports all its liquefied gas through the Strait of Hormuz.



RECOMMEND:

150