Al-Ahram Weekly Online   23 - 29 September 2010
Issue No. 1016
Published in Cairo by AL-AHRAM established in 1875

Can Iran beat the sanctions?

With the international sanctions regime against the country beginning to bite in Tehran, Iran has been developing ties and friendships abroad, says Amani Maged

Three months after Iran came under renewed international sanctions, the signs of unease are not hard to detect in the country, with Iranian reformers increasingly worried about the future of the country's economy.

According to Ali Akbar Rafsanjani, former Iranian president and the head of the country's Assembly of Experts, the reinforced economic sanctions against the country "are no joke" and are the worst the country has experienced since the Islamic Revolution in 1979, former Iranian presidential candidate Mehdi Karroubi saying much the same thing.

For her part, US Secretary of State Hillary Clinton has pointed out that the sanctions are doing what they were supposed to do, namely hurt Iran's banking system and development prospects.

The question remains, however, of how far the new sanctions are in fact harming the country. Iran has already suffered from nearly 30 years of sanctions, and even though it is an oil- rich country it has long had to import 40 per cent of its gasoline needs from abroad because it does not have enough refineries.

Over the past three years, Iran has been handing out 60 litres (15 gallons) of petrol to each automobile owner at a subsidised rate of $0.10 per litre.

Now, however, it is tired of paying, and the government of Iranian President Mahmoud Ahmadinejad wants to abolish the fuel subsidies, a dangerous move that could invite a repeat of the 2007 protests that prompted the government to introduce the current subsidised fuel system in the first place.

Yet, the price of doing nothing would be costly as well, since Iran is believed to be spending nearly $100 billion annually on subsides on energy and essential goods, a situation that the current government hopes to change.

The danger is that the removal of subsidies could push up inflation, currently running at 10 per cent, slow down an economy that is growing at 1.8 per cent, and propel unemployment above its current rate of 14 per cent.

However, the removal of the subsidies, risky as it is, has the blessing of Ayatollah Ali Khamenei, the country's supreme guide.

The Iranian government is also thinking of tightening up foreign currency controls. Currently, businessmen leaving the country are allowed to carry $5,000, and a further tightening of foreign currency regulations would be a blow to foreign investors.

With the currency reserves of Iran's Central Bank dwindling, the government's options are narrowing. The bank does not have access to accounts abroad because of the sanctions regime, and Iranian commercial banks are stuck with $40 billion of bad loans. With the government owing the banks a further $60 billion and in dire economic straits, the situation is likely to worsen.

Should credit tighten further, businessmen would be unable to buy equipment and raw materials, production would suffer, and more companies would be likely to fold.

In response, the government is trying to slash expenditure by turning its subsidies on gasoline, wheat and rice into monetary form. Under the proposed system, each citizen would receive $17 in social aid instead of the current system of subsidised goods, saving the government an estimated $0.5 billion.

Such measures are not confined to domestic spending, and imports are also planned to be curbed under a so-called "dual urgent need" law planned by the government.

Perhaps in order to shore up his domestic situation, silence his critics, or reverse his country's isolation, Ahmadinejad is currently also trying to make friends abroad. From Africa to Latin America and the Arab world, Iran has been proposing deals, signing cooperation agreements and boosting bilateral trade.

Last week, Iran hosted a dialogue with African countries, many of which are already engaged in close economic cooperation with Tehran.

For the past three years, Iran has been building ties with Venezuela, Nicaragua and Bolivia, financing new port facilities in Nicaragua to the tune of $350 million, giving Bolivia $1 million in economic aid and opening a Bolivian embassy in Tehran. Both Nicaragua and Bolivia have subsequently voiced their support for Iran's nuclear programme.

Algeria and Iran are also drawing closer, the two countries cooperating in construction and energy projects, as well as in building petrochemical and power plants and even factories to produce train carriages.

During a recent visit by President Ahmadinejad to Algeria, the country's President Abdel-Aziz Bouteflika praised bilateral relations between the two countries and promised to forge closer links with Tehran.

Turkey is another friend of Iran's, with Turkish Prime Minister Recep Tayyip Erdogan saying that cementing relations with Tehran was a Turkish priority in statements made following the recent referendum on constitution amendments in Turkey.

Finally, while Iran seems to be plodding at home, with its economy sagging and its prospects narrowing, internationally the country is by no means as isolated as the US might wish.

Iran is developing friendships that may prove helpful in times of need. Or so Ahmadinejad hopes.

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