Iran Begins to Stumble

Desperate to fend-off the looming economic meltdown, the government has cut the value of its currency, cut its own oil consumption and cut refined oil imports, but it’s not enough.

Rostam Qasemi, the Iranian Oil Minister, may have been right when he said “there are many easy ways to sell oil”, but unfortunately for him Iran is quickly running out of them.

2012 has been a bad year for Iran: oil exports are tumbling, the western powers are not blinking, China is sitting on the fence rather than showing any support and their primary ally, Syria, is facing a civil war the government is looking increasingly likely to lose. Isolated, wounded and faced with a level of international and domestic threat not seen since the war with Iraq, Iran is starting to stumble.

The nuclear issue has become somewhat of a pyrrhic stand for Iran. Even should it win, it has long caused itself far more damage than the west will suffer should they complete an energy-producing nuclear reactor as they claim they are doing. It has come to the point that the Iranian government cannot afford to back down, and face international and domestic humiliation on the scale which could have them facing an extension of Syria’s collapse to civil unrest. But they cannot afford to keep going: Iran’s economy is crumbling. It is difficult to understate just how dire the situation Iran is facing is. Oil is absolutely crucial to Iran’s economy. They rely more absolutely on oil than most tax havens do on their tax-evasion industry and most international finance centres do on finance. Before the sanctions 88% of state revenue was oil-backed and 24% of the combined income of the entire country’s population was oil-backed. Iran was the second largest oil-producer in OPEC.

Now it is a different story. Even before the significant increase in sanctions this year the state’s oil revenue collapsed by 12.5%. The effect of a 10% cut in government spending is one many across the globe can understand in recent times. For comparison’s sake, Greece cut its spending by the same amount in 2011. Iran fell to forth amongst the OPEC producers, all before January 2012.

Since then, the pressure has stepped up. The US has increased the level and breadth of sanctions to effectively cut Iranian finance off from the outside world. Now it is increasingly difficult for any money to enter the state outside of cash and gold dealings, which of course cannot pay for large oil shipments unnoticed. The black market has blossomed to make up for the shortfall, sapping increasingly vital tax and tariff revenues from the government. The EU followed up these sanctions by cutting off London-based insurance for shipping dealing with Iran. Now no major tanker firm will touch Iran, leaving them only with their own state-owned shipping.

This would not be too much of an issue, the Iranian tankers are vast, but these sanctions are only the beginning. European states, which accounted for a third of all Iranian imports, have now cut off Iran completely. Turkey, one of the largest non-European consumers, has cut imports to 20%. Across Asia imports have been cut by 15-20%. This has largely been helped by China, which, coaxed on by the US with trade agreements and unthreatened by the precedent of economic warfare being waged on Iran, has cut imports by up to a half.

Iran claims this hurts the west more than it hurts them, but they’re wrong. No western state relies on Iranian oil for more than 10% of imports. Oil prices only rose by half a dollar following the latest raft of sanctions, a quarter of the rise shown when Norwegian oil rig workers went on strike earlier in the year. Meanwhile the Iranian government is running low on funds for everything. It can’t export its oil, but it can’t afford to store it. It can’t keep oil wells open, but closing them damages the reserves. It can’t afford to maintain the equipment for the old wells, but it can’t afford to open new ones or import the equipment necessary for them.

Desperate to fend-off the looming economic meltdown, the government has cut the value of its currency, cut its own oil consumption and cut refined oil imports, but it’s not enough. Not only the government is feeling the effects. Unable to afford many government services and subsidies the government has been unable to halt the rise of costs of everyday goods and booming inflation. Iranians on the street are struggling to get by as food costs spiral and their currency plummets, prompting many to use the black market to grab as many stable dollars as possible. The Iranian people may hate the west more than ever for the destruction of their livelihoods, but this will not comfort their government as it glances nervously towards the fate of its Syrian ally.

The stumble of Iran may well become a crawl, and prove that warfare between major powers has long shifted from that so many feared during the Cold War. Now warfare is either asymmetric or economic, fought with terrifying road-side bombs or crippling sanctions. Mahmoud Ahmadinejad and his government may well be a rat trapped in a corner, boxed in by threats they cannot possibly counter. As the government of Syria begins to face a civil war turning against them, so Iran faces an economic meltdown they cannot escape. China will watch on with apathy as Russia draws out the last life of Bashar al-Assad, but try as I might I cannot conceive of an escape plan for these leaders, and it may well be that they, like Saddam and Ghaddafi before them, cannot do so either.

Tagged Bashar al-Assad, China, Iran, Iraq, Mahmoud Ahmadinejad, Muammar Gaddafi, oil, Rostam Qasemi, Russia, Saddam Hussein, Sanctions, Syria