IRAN'S ECONOMY RUNS OUT OF STEAM
By Dr. Michael Rubin
The Iranian leadership may rue their words. Ahmadinejad has run Iran's economy into the ground. On October 11, just a day after Ahmadinejad declared prices in decline, the Central Bank reported inflation above 30%. Such figures are still likely low. Both Shahab News and Aftab-e Yazd have noted the tendency of Iranian officials to pull numbers from thin air.
Parliamentarians and journalists might complain, but, as the Islamic Republic reverts to a Soviet-style command economy, regime intolerance toward technocratic expertise grows. Hojjat al-Eslam Ha'eri Shirazi, the Supreme Leader's personal representative in the city of Shiraz, explained:
Non-oil sector production is stagnant. Factories may remain open, but many do not pay workers. On October 2, for example, tire factory workers staged a protest in front of the Ministry of Labor seeking six months' unpaid wages. In recent weeks, wild cat strikes have occurred in Tehran, Isfahan, Qazvin, and Sanandaj. Purchasing power has plummeted.
To mitigate such trends, the government has imposed price controls. On June 11, the daily Resalat reported that the paramilitary Basij, a subdivision of the Islamic Revolutionary Guard Corps, would enforce low prices. Over subsequent days, the Iranian press featured photos of Basij beating merchants whose prices were too high.
The combination of high liquidity, sparked by Ahmadinejad's arbitrary decree lowering interest rates to single digits, no-interest banking, and inflation has led wealthy Iranians to pour money into real estate. Housing costs have skyrocketed; Tehran real estate prices rival New York's. The average Iranian family now pays 60% of its income for rent, while the Ministry of Housing estimates 1.5 million Iranians are homeless.
To fight economic malaise, Ahmadinejad has raided Iran's foreign reserves. In the past two months alone, Iranian papers have reported more than $15 billion in withdrawals from the reserves to import refined gas and several additional billion dollars to subsidize industrial schemes. Ahmadinejad's reinstatement of subsidies has meant Iran once again must import 40% of its refined petroleum needs.
He will need to continue spending. Last Winter, Iran ran out of gas. Food prices more than doubled and the Revolutionary Guards had to deploy on the streets of towns and cities to keep order. On October 1, 2008, the Parliament's Energy Commission predicted another "severe gas shortage" again within months.
As oil prices plummet, Iranian pessimism grows. In 2006, Tehran planned its budget assuming an oil price of $60/barrel. High oil prices masked Ahmadinejad's incompetence. While Iran's budgetary process has grown more opaque, it appears that Ahmadinejad constructed his budget with the assumption of oil price stability. Now that oil has plummeted, the Islamic Republic is in trouble.
On October 7, Asr-e Iran asked:
The paper's fear is justified.
While Qatar, Saudi Arabia, the United Arab Emirates, and Kuwait now boast Sovereign Wealth Funds worth hundreds of billions of dollars, on September 15, an unreleased Central Bank report leaked by an Iranian parliamentarian estimated the Islamic Republic's own future fund to be only $7 billion.
Iran's strategic challenge and nuclear ambitions will be the most immediate foreign policy challenge facing the new U.S. administration. The National Iranian American Council, Tehran's de facto lobby in Washington, urges a relaxation of sanctions. So, too, does the Council on Foreign Relations. Condoleezza Rice offers a defiant Tehran financial incentives.
Such strategies are wrong. Throwing an economic lifeline to a terror-sponsoring regime dedicated to the acquisition of nuclear weapons capability would be nothing short of diplomatic malpractice on a Carter-esque scale. Not only has the Islamic Republic squandered billions on nuclear weapons, destabilizing Iraq and Afghanistan and sponsoring terrorism, but it has also pitched itself to countries like Venezuela, Nicaragua, Bolivia, Sudan and Senegal as a pillar of an ideology that will defeat Western constitutional democracy. Nothing would be a more powerful signal to those applauding Ahmadinejad's rhetoric than watching the Islamic Republic collapse under the weight of its own follies.
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Dr. Michael Rubin, a Ph.D. in History (Yale University) and a specialist in Middle Eastern politics, Islamic culture and Islamist ideology, is Editor of the Middle East Quarterly, a senior lecturer at the Naval Postgraduate School, and a resident scholar at the American Enterprise Institute for Public Policy Research. Dr Rubin is author of Into the Shadows: Radical Vigilantes in Khatami's Iran (Washington Institute for Near East Policy, 2001) and is co-author, with Dr. Patrick Clawson, of Eternal Iran: Continuity and Chaos (Palgrave Macmillan, 2005). Dr. Rubin served as political advisor to the Coalition Provisional Authority in Baghdad (2003-2004); staff advisor on Iran and Iraq in the Office of the U.S. Secretary of Defense (2002-2004); visiting lecturer in the Departments of History and International Relations at Hebrew University of Jerusalem (2001-2002); visiting lecturer at the Universities of Sulaymani, Salahuddin, and Duhok in Iraqi Kurdistan (2000-2001); Soref Fellow at the Washington Institute for Near East Policy (1999-2000); and visiting lecturer in the Department of History at Yale University (1999-2000). He has been a fellow at the Council on Foreign Relations, the Leonard Davis Institute at Hebrew University, and the Carnegie Council on Ethics and International Affairs.
The foregoing article by Dr. Rubin was originally published in Forbes.Com, October 17, 2008, and can be found on the Internet website maintained by the Middle East Forum, a foreign policy think tank which seeks to define and promote American interests in the Middle East, defining U.S. interests to include fighting radical Islam, working for Palestinian Arab acceptance of the State of Israel, improving the management of U.S. efforts to promote constitutional democracy in the Middle East, reducing America's energy dependence on the Middle East, more robustly asserting U.S. interests vis-à-vis Saudi Arabia, and countering the Iranian threat. (Article URL: http://www.meforum.org/article/1997)
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