Economic Warfare: Iranian Economic Crisis and the British Sailors

We're not going to attack Iran unless they actually put on trial or kill any Brit. Then, all bets are off.

In the mean time, I haven't had time to post on it previously, but Iran is about to implode Soviet Style. I'm not going to suggest a date, but the writing is on the wall if you know where to look and are looking at something other than British Tars and jollies, Iran's "sovereign waters" or their Nuclear ambitions.

Long before the current sanctions, the US was already pressuring banks and other financial insitutions to limit transactions with Iran starting back in Sept. 2006. Largely because Iran was acting like any rogue regime and not being forthcoming about where the money was going. Iran was also trying to cover its tracks, keeping the Iranian name off of many transactions.

In a Washington Post article from March 25, the details of this program were laid out, including comments from the Iranian Oil Minister about how damaging its been to their oil infrastructure (already old and decrepit) as well as the Minister of Trade discussing the difficulties importers are having in getting goods in to sell (Iran having all sorts of problems that require net importing of basic goods) because they now have to pay in advance to obtain these goods instead of relying on revolving lines of credit.

The recent UN sanctions simply formalize what the US has been trying to get done on an Ad Hoc basis.

The other signs are there, too. March 22 report from lebanon indicates that Hezbollahs South Lebanese constituents are unhappy because Hezbollah has yet to begin providing promised compensation for damage or building much needed infrastructure. Of course, the two week fight with Israel didn't help Hezbollah's wallet, but they usually have money coming in from their major terror supporter, Iran. No such thing is occuring right now.

The second, and most obvious, is the Iran/Russia dispute over the lack of payment for the monthly construction fee on the Bushehr nuclear facility. The Russians are saying it's one month, the Iranians said they were not behind, but suddenly were able to scrape together a half month's payment? The Russians pulled out all their people and said they'd be back when they got "all" the money.

The third tell are the recent, continuous teacher protests for almost two months, every week. The Iranian teachers union has been protesting the lack of payment of their salaries, the low salaries (compared to the rest of the government) and the generally bad facilities.

What really killed them was the precipitous drop in oil prices (from $72 to $58) last November right after many banks stopped giving them "credit". This was because short term, high risk oil future traders divested themselves of a lot of future shares. Winter weather projections did not sustain the need for high reserves (and, since they were all American traders, may have had a whisper in their ear).

Even though oil has risen back to $62/bbl, the entire loss to Iran is about $13 billion and counting. Not much to us, but for Iran, that's 10% of their entire yearly revenue of 143 billion. When their yearly "official" budget is $168 billion (2005), not including extraneous support to Hezbollah, Iraq Shiites and other terrorists, and annual revenue is 143 billion, they are about 25 billion short on a good year (previous years may have been more or less underfunded).


Since Iran is based on an Islamic economic structure, where they can neither invest in interest baring bank products, nor except loans with interest attached, getting the difference to make up this shortage leaves little choices. In an Islamic economy, they get around this somewhat by paying or accepting "management" fees or "rent" on loans.

At least half of the reason for the original Islamic Revolution in Iran was based on economic reforms making it more "Islamic" and thus more "equal and just". During the time of the Shah, there were extreme differences between the highest and lowest classes and with the strain from the Shah's forced "westernization and industrialization", it simply exacerbated the situation as the poor congregated it even greater communities in the cities seeking low paying manufacturing or oil industry jobs.

Like most "revolutions", it is not solely (or ever) about ideology so much as it is about finance. Thus, the Iranian Mullahs are adamant about complying with the Islamic model. If they don't, the entire cornerstone of the revolution ceases to exist and so do they.

In that case, the only way for the Iranians to meet their obligations as well as maintain their Islamic financial system is to take advances on their oil revenue from the oil companies. Some experts believe that Iran has already taken up to 10 years of revenue in advance.

Oil production has plateaued and may begin falling due to the inability or lack of desire in investing in this infrastructure. Previously complicated by US laws that penalized companies for investing more than 20mil in Iranian business, fortified with US actions in September and new sanctions on March 24, the ability to maintain Iran's oil economy is becoming impossible. Iran now produces 3.5 mil/day. At the height of the Shah's reign, it produced over 6.6 mil/bbl/day Even with a slow increase the price of oil, Iran will be hard pressed to recover because 50% of its revenues are directly related to oil and natural gas and 70% comes from exports.

If you can't pump out enough, if sanctions keep investments from coming in, if you have to pay for things "in advance", if you continue to take advances on future oil revenues that you probably cannot afford to pay back and your economic system prevents you from making investments or making loans that could cover your expenditures, you are in bad financial shape.

Other issues that compound the situation and lend credence to Irans current financial crisis are the 11% "official" unemployment rate ("official" because most economists believe it is understated and closer to 16%) and the 16% quarterly inflation (again "official" because some experts place inflation at 20-21%). This inflation offsets most gains from the increase in oil prices. For any other country, that's a depression.

Add to that 44% of the population is employed in the "service sector", including government, military, education, health, hotels, airport, police, etc, that are all run and operated by the government or its agents (the Iran Revolutionary Guards Corps operate the air port and various other service sectors under contract). The IRGC also manages most of the construction business in Iran, limiting foreign investment and distribution of income among the populace. Another 30% of the population is also employed in the oil and natural gas sectors, largely owned and operated by the Iranian government. Banking is also controlled by the Iranian government.

That leaves approximately 10% of the population that owns and operates private businesses. Most of these are small "mom and pop" businesses such as bakeries, tailors, bookshops, etc. Very little manufacturing or other industries can flourish in Iran. In fact, Iran is a net importer of just about every kind of everyday goods from agricultural items, food stuffs, basic machines (TVs, washers, driers, even cooking utensils, cooking oil and pans), hygiene, textiles and so on.

It's a recipe for disaster and it is quickly looming for the Iranian government and economy.

In the March 25 WP article, a US treasury official was quoted saying that they had no idea the Iranian economic condition was so bad. Clearly, they weren't looking very hard.

Many editorials and blogs have been attacking the UN sanctions as "toothless", but that is far from reality when you take into account the Iranian economy. Excluding them from regular banking practices and available credit places them in a very bad situation.

In fact, while everyone is distracted with the question of whether the British Sailors and Marines were taken due to the sanctions and its effects on the Iranians nuclear ambitions, the real issue is the effect on their economy.

Very likely the Iranians are looking to extract some concessions from England to let some of the pressure off of their financial situation. Especially, because the British bank HSBC is one of Irans major banking partners and "lenders". It's the same tactics the Iranians tried in June 2004 when they took 8 Brits hostage and released them after 3 days of negotiations directly after the Brits have drafted the first "rebuke" to Iran from the IAEA (International Atomic Energy Agency).

The Iranians are playing a very high-stakes game. Aside from this act of war (considering it is the second time they have done it), or at least a revision of the Barbary Pirates holding British sailors for ransom, they have bit off more than they can chew politically and economically.

The Iranians are trying everything to reverse their economic spiral. Ahmadinejad recently visited Hugo Chavez in hopes of making a trade agreement with Venezuela as well as looking for an ally in OPEC. Venezuela currently chairs OPEC. The Iranians were hoping to get an emergency meeting with OPEC to reduce oil production among OPEC nations in order to further inflate the price of oil and help Iran out of its financial crisis.

This is the other reason that Iran has been trying to get a toe hold in Iraq. It desperately needs economic partners and OPEC partners to offset the Saudi/Gulf Arab influence. Finally, the Iraq alliance would cement an "arch of influence" from Hezbollah in South Lebanon, Syria, Iraq to Iran, isolating US allies in the south.

Unfortunately, the Saudis and Other Gulf Arab nations aren't interested in saving Iran since they see them as THE major destabilizer in the region now that Saddam is gone.

That means that Iran is in a hole with very few (if any) friends.

In fact, the Saudis and Egyptians are helping it along by even their mild or unbelievable threats of meeting Shia aggresion with their military or financially supporting Iraqi Sunnis. The Iranians responded by first financing more Shiite weapons and militias in Iraq to try to solidify control.

The final indicator of the Iranian economic crisis is reflected in the disappearance of al Sadr from Iraq, the Mahdi army from the streets and the uptick in inter-sectarian violence in Basra in South Iraq where SCIRI and DAWA are once again fighting for control of the region now that their benefactor's (Iran's) money is starting to slow down.

Just another sign of Iran's current cash crunch.

War is most likely not necessary. Even if Iran wins some concessions from England, even if oil prices continue to rise due to the current crisis, none of it will save their economy and none of it will save the Mullahs.

On the other hand, it is hard to know what the Mad Mullahs will do when backed in the corner and going down for the count. Still, they'd have to be really "mad" to risk open warfare.

One must wonder why the US congress is willing to leave Iraq, allow Iranian dominated Shia political parties to gain unchecked control, provide Iran with an economic and political ally when Iran is just this side of a Soviet Style Implosion?

Wall Street Journal: French Total and the Bribed Iranians

Other related posts:
Economic Warfare: Axis of Evil
Russia-Iran Matrix
Iranian Kursk (money and parts for military equipment maintenance lacking)China-Iran Matrix
Economic Warfare: Send them Levis
Iranian Dissidents use Nuclear Crisis to press for freedoms
Freedom is the Fire

Cross referenced at the Castle