Sanctions will not bring Iran’s economy to its knees

Evidence shows that the global economy has weathered the 2007-2009 recession in the past year. Signs of change can be seen in the US economy. It is estimated that next year US will have an economic growth of about 3 percent, the UK will be at about 2 percent, China more than 10, India close to 9, and Japan nearly 2 percent. The result of these growths lead to an increase in the consumption of raw material, especially oil. 

Global oil prices have a firm base for now, and there is prospect of higher prices for next year. In the international arena, this was perhaps the most important economic development that happened in the last year. Of course, this has increased the inflation rate in the economies of some countries, thus raising the price index of raw materials 50 percent above what it was last year.

We can generally say that three factors were the main reasons behind the increase in oil price. The first reason, which is of the least importance, is the recent developments in Northern Africa, and especially the Libya conflict. This element is not very important because these developments are political and psychological and therefore they cannot last long. If Libya is able to continue exporting its oil despite the recent uprisings, or if Saudi Arabia is able to compensate for Libya’s exports, we will not witness any decrease in the global crude oil supply.

Another element, which is more important compared to the previous one, is global economic growth. Statistics and surveys show that this economic growth will continue in 2011 and will become a firm infrastructure for increasing or stabilizing high oil prices globally.

The third element is the fluctuation of the dollar compared to the euro. Whenever the dollar drops in value against the euro, the price of oil and gold increase in the global market. Right now, we see that the price of the euro is 1.4 US dollars, which is one of the highest figures within the past two or three years. Gold is also at a peak price and is close to its global record, and the price of oil has reached its pinnacle once again. In fact, these two elements are of greater importance.

The value of the euro against the dollar is more stable compared to the developments in Northern Africa, and the global economic growth is even more stable compared to that; and this factor is in favor of Iran. If the price of the euro increases against the dollar, the price of oil will increase as well, but that will only compensate for the inflation of the dollar. When Iran’s oil revenue increases due to a euro price rise, it will have to import goods at a higher price at the same time. Nevertheless, we naively think that we have benefited. Strangely, we would benefit the most when the US economy is strong and the dollar remains a powerful currency. In other words, the Islamic Republic’s interest is in a strong and powerful US economy and dollar. For example during last year, we had an 18 to 20 percent increase in imports’ value while the volume remained almost constant. This shows that we have to pay more for the commodities we purchase as our foreign currency income increases.

Another important development in this field during the last year was the imposition of more economic sanctions against Iran; these sanctions have already reached unprecedented levels. However, as I had predicted and emphasized before, these sanctions can not bring Iran’s economy to its knees. In other words, economic sanctions have surely damaged Iran’s economy, but as mentioned before they were not detrimental or crippling.  

To explain why I believe that these sanctions are not able to bring Iran’s economy to its knees, I have to say that Iran’s economy is basically not sanction-able. Iran’s geography, climate and geopolitics will not allow an international consensus for sanctions to form against it. If this consensus does take place, then it is not applicable, because Iran is located between 14 countries, half of which are poorer.

International sanctions have no other result in terms of the economy except increasing tariffs. In other words, they increase customs tariffs, which stimulate the formation of a smuggling market in the country. It is said that this market is worth about 20 billion dollars a year, and I do not think this number is exaggerated. If one travels to Iran’s borders, one can easily witness the phenomenon of smuggling. Currently, smuggling is a major problem for Iran’s economy. Therefore, this illegal market is one of the obstacles seriously affecting the sanctions.

Another important issue is Iran’s enormous oil revenue. It seems like Iran has set a new record in terms of oil revenues last year, and yet signs indicate that it will set an even higher and exceptional record in the coming year. Iran’s foreign currency income in March was equal to its total foreign currency income during the 60’s. In other words, the Shah’s third and fourth civil programs were conducted with Iran’s current monthly income!

In my view, if the sanctions on Iran would include an oil embargo, they would be impossible to maintain, and if they do not include oil exports, then they will be pointless. Because currently Iran has the purchasing power of 90 billion dollars annually through selling its oil, but no one is allowed to sell any goods to it. It is obvious that no businessman can ignore these 90 billion dollars, as they already have not. However, this situation has caused much damage; for example, the import of consumer goods has increased in Iran. We buy our goods at a higher price compared to the same time last year, and customs figures confirm this fact. Furthermore, it seems as if we are in a rush to purchase foreign goods.

Therefore, due to many elements including the global increase in crude oil prices, sanctions are not applicable in Iran. However, if these elements are eliminated, sanctions would still not be able to bring Iran’s economy to its knees. When I gave this prediction, many criticized me but we were able to see last year that Iran’s economy is more vulnerable to domestic managerial decision-making than to any external development. Overall, it appears that in the absence of domestic mismanagement, even tougher international sanctions can not bring Iran‘s economy to its knees. These sanctions will surely damage Iran’s economy, but they are not crucial or crippling.