With oil prices falling, Iran's good times are almost over

McClatchy NewspapersDecember 11, 2008 

Surveillence equipment is for sale at a mall in downtown Iran.

WARREN STROBEL / MCT

TEHRAN, Iran — Visiting a mall full of high-end electronics shops in the Iranian capital one recent day, printing shop owner Mohammad Torabi was in the market for surveillance cameras to protect his property. He expressed satisfaction at the selection: stack after stack of Asian-made close-circuit TV cameras designed to work in daylight or darkness.

"God bless China!" declared Torabi, 54, sneering at the U.S.-led economic sanctions that are meant to crimp Iran's economy and force its leaders to abandon any effort to develop nuclear weapons.

Buoyed by a vast pool of oil income as prices soared to near $150 a barrel, Iran has until now been able to blunt the sanctions' pain. And, all but cut off from the world financial system thanks to the U.S. Treasury Department, it's watched the global economic crisis from splendid isolation.

Oil money has fueled runaway imports of foreign goods and services, $75 billion worth this year alone. In upscale north Tehran, BMWs, Mercedes and SUVs share the streets with rows of Peugeots and Kias made domestically. Late-model Japanese high-definition TVs replay the animated movie "Ice Age" in shop windows. Some familiar U.S. and European consumer brands are said to be cheaper here than in the U.S. or Europe.

For Torabi and 70 million other Iranians, however, the good times are about to end.

Crashing prices for crude oil — Iran's main export — will ravage the country's economy in 2009, according to Iranian economists and businessmen, and European diplomats.

With oil now hovering around $40 a barrel (and Iran's lower-quality crude selling even cheaper), bad news is just over the horizon, they say. Foreign imports will be throttled, incomes will drop, Iran's currency will weaken and inflation will grow even worse. Iranian President Mahmoud Ahmadinejad's populist spending programs, which have bloated the government budget but bolstered his popularity with poor Iranians, could sputter to a halt.

"We will start feeling the shock in the next three to four months," predicted Mehdi Fakheri, the vice president of international affairs at Iran's Chamber of Commerce.

"We will face social unhappiness," he said, and if the global crisis persists and oil prices stay low, "maybe social unrest."

Rocky Ansari, a managing partner at Cyrus Omron International, which advises international and Iranian firms on doing business here, said Iran's government "should really act now rather than later" to deal with the coming crisis.

In fact, he said, "It may be a bit too late."

Iran's economic future is of intense interest to the incoming Obama administration and European governments. Washington has led the drive that imposed sanctions in a bid to stop Iran's enrichment of uranium that could be used for nuclear weapons.

The U.N., European Union and unilateral U.S. sanctions are designed to pinch Tehran's access to high-tech military goods and the international financial system. (U.N. sanctions do not specifically target consumer goods. U.S. sanctions bar most companies, with exceptions such as food and medicine, from doing business here, but U.S. products are readily imported from nearby Dubai and elsewhere).

No matter how tough conditions get, few observers here expect Ahmadinejad and Iran's supreme religious leader, Grand Ayatollah Ali Khamenei, who has the final say in such matters, to surrender on the nuclear issue.

"The regime cannot afford to say, 'OK, we give up'," said a Western diplomat, who requested anonymity to speak more frankly. Nuclear development is "the only topic on which they have a national consensus."

High oil prices, along with the U.S. removal of Iran's two neighboring enemies, Saddam Hussein in Iraq and the Taliban in Afghanistan, also have fueled Iran's increasing assertiveness. It backed Lebanon's Hezbollah in its 2006 war with Israel, supported anti-U.S. militias inside Iraq and has courted U.S. antagonists such as Russia, Venezuela and Cuba.

Iran's dependence on oil money is staggering. Oil funds 60 percent of the government budget, economists say, supporting billions in public subsidies of goods such as gasoline, sugar and bread. A research center affiliated with Iran's parliament reported this week that the government depends on oil at $80 a barrel to keep its accounts balanced.

Iran's oil income has dropped from $300 million to $100 million a day, and if oil prices stay in the $30-$40 a barrel range, the country could see more than $70 billion in expected funds evaporate — and with it a significant chunk of Iran's gross domestic product, economists say.

"It's a huge oil shock in reverse for Iran," said oil historian Daniel Yergin, author of a Pulitzer Prize-winning history of oil. "It places tremendous pressure on the Iranian economy."

Poorer Iranians are likely to be hardest-hit. In the long run, the shock could help the country's economy if it sparks structural reforms and a revival of the country's moribund domestic industries.

However, the reforms, which will be painful and unpopular, seem certain to be postponed until after Iran's presidential elections in June.

Criticism of Ahmadinejad's handling of the economy is rampant, from the salons of wealthier Tehranis to the shops in the city's poorer southern districts.

"Every new idea from his side has made a catastrophic disaster for the country," said Saeed Laylaz, an independent economist who served under reformist president Mohammad Khatami and runs an economy focused newspaper, which he said faces the threat of government closure.

While international economic pressure so far has merely raised the cost of doing business, "the sanctions are going to be more painful" because of the crash in oil prices, Laylaz said.

Critics say Ahmadinejad's spending, which has revived thousands of infrastructure projects, many dating from before Iran's 1979 Islamic revolution, has fueled inflation and waste. Promised economic reforms have yet to materialize. His decision to convert Iran's foreign exchange reserves from dollars to euros to evade the sanctions has cost the country as much as $5 billion as the dollar has strengthened.

The Iranian president has responded with his trademark bravado, welcoming the financial crisis that began in the U.S. as the death throes of capitalism.

In an interview this month on state television, however, he acknowledged that his program faces a hit. "Naturally, we should abandon lots of projects if the oil is $30" a barrel, he said.

The fact that the crisis hasn't hit Iran yet has produced a mirage that it could escape the effects, said the Chamber of Commerce's Fakheri. "And that is not true."

(Kevin G. Hall in Washington contributed to this article.)

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McClatchy Newspapers 2008

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