Wednesday, August 15, 2007

Economic Warfare: Iran SitRep

There are many interesting things going on in Iran and with US Foreign Policy.

Economic Brinkmanship

Ace of Spades points out that the US is going to designate the IRGC (Iranian Revolutionary Guard Corps) as a Foreign Terrorist Organization:

The designation of the Revolutionary Guards will be made under Executive Order 13224, which President Bush signed two weeks after the Sept. 11, 2001, attacks to obstruct terrorist funding. It identifies individuals, businesses, charities and many extremist groups engaged in terrorist activities. The Revolutionary Guards would be the first national military branch included on the list, U.S. officials said -- a highly unusual move because it is part of a government, rather than a typical non-state terrorist organization.

The order allows the United States to block the assets of terrorists and to disrupt operations by foreign businesses that "provide support, services or assistance to, or otherwise associate with, terrorists."

The main goal of the new designation is to clamp down on the Revolutionary Guards' vast business network, as well as on foreign companies conducting business linked to the military unit and its personnel. The administration plans to list many of the Revolutionary Guards' financial operations.

According to the report, all known individuals and businesses related to the IRGC will be listed. This comes on the heels of continuing allegations from the the US that Iran is providing weapons and money to insurgents in Iraq and Afghanistan while Ahmedinijad denies any involvement without actually directly denying knowledge:

When asked if Iran is supplying weapons to the Taliban by a reporter from Voice of America, a U.S.-funded outlet, Ahmedinejad laughed and said the United States doesn't want Afghanistan and Iran to be friends.

"The same allegation are made in Iraq. They are saying that they discover some weapons," Ahmedinejad said at a news conference with Afghan President Hamid Karzai. "What is the reason why they are saying such things? Iran is a big country. I have serious doubts about this issue."

Per a March review of the situation, the IRGC owns and operates upwards of 50% of industries and services within Iran. It also employs about 50% of the government work force. Previous sanctions against the Iranian government, including those originally in place since the 1979 hostage crisis, were specifically against the Iranian government in Tehran. The Iranian government has been transfering industries and control of service sectors to the IRGC, it's commanders and other related individuals in an attempt to side step these sanctions. This new designation will close up the loop hole that they operate in, force tighter controls by banks, companies and states who want to do business with the US to comply and, finally, allows the US to bring to bear other important tools through state, treasury, FBI and other government organizations.

Allahpundit at Hotair has a run down of recent attempts over the last year to squeeze the Iranian government with economic sanctions:

The two rounds of UN sanctions on Iran for noncompliance on its enrichment program specifically targeted the assets of the Guard’s top commanders; a parallel track of unilateral U.S. sanctions since January (around the same time Bush informally declared war on the regime) has been aimed at squeezing foreign financial institutions who deal with Iran. Formally designating the entire Guard a terrorist group will, I’m guessing, let the feds reach far beyond the commanders and squeeze even harder. Revisit this WaPo piece from April, also written by Wright, and marvel at the massive power they now enjoy within Iran under Ahmadinejad, himself a veteran of the group.
Another economic pinch came in October of 2006 when November and December oil futures took a precipitous drop by as much as $20 per barrel (from appx $73/barrel in June 2006 to appx $56/barrel) for an estimated net loss of up to $25 billion for the Iranian State revenues (17% of revenue; total budgeted revenue $143 billion) and did not regain the top price until almost a year later. The Iranian economy is largely based on oil and natural gas exports with 70% of its revenues depending on this business stream.

At the same time, in September of 2006 the US began to quietly advise international banks of the illegal or improper transfer of funds from credit lines and accounts to Iranian agencies and companies involved in the development of Iran's disputed WMD/Nuclear programs, terrorist organizations, illegal arms purchasing and other dubious projects instead of in infrastructure, businesses, oil and natural gas development that would have provided revenues to pay these debts. Besides being illegal and against known sanctions or laws of the banks' host nations, it also made Iran a bad credit risk. Import and Export businesses in Iran were affected as well when credit lines were not extended. These businesses that included food, textiles and manufactured goods, had to scramble for cash upfront to purchase goods, driving inflation even higher.

Housing prices have doubled, resources such as gasoline and natural gas have been rationed and teachers and other government workers have been unpaid for almost a year. This is nothing new as the government under Ahmedinijad has run into cash crunches since his tenure began.

Economic Mixed Bag and Caution Over Projected Impact

Some sources believe that the current Iranian economic situation is not all that bad:

Iran’s economy has stagnated in recent months, partly because of the country’s growing isolation in the world economy, partly as a result of dipping oil prices, and partly because of the government’s statist policies which limit private enterprise. Prices on goods like vegetables have tripled in recent months, while housing prices have doubled since last summer, reports the Associated Press. Economists say the government, which oversees 7 percent of the world’s oil reserves, has failed to redistribute this windfall of energy profits. Yet Torbat says Iran’s economy is not faring poorly when compared to its Middle Eastern neighbors. After all, annual growth hovers around 5 to 6 percent, Iran has $60 billion in foreign exchange reserves, and it boasts a current accounts surplus (that is, it exports more goods and services than it imports). Unemployment figures (officially 10 percent but probably closer to 30 percent) are also on par with the region, Torbat says
. There are several problems with this analysis, though, it is important to note that the Iranian economy had slightly stabilized in the spring of 2007 when, after US sanctions and refusal to allow Iran to trade in US dollars, it switched to the EURO. The euro is strong against the US dollar and provided an uptick in value of the Iranian Rial, but decreasing oil prices are, once again, placing a cash crunch on Tehran.

Problems with the above analysis include a comparison to other ME neighbors, two of which (Iraq and Afghanistan) are war torn nations as opposed to Iran's comparably stable and industrial nation. Second, regardless of "growth" that "hovers around 5 to 6 percent", it is offset tremendously by the rate of inflation that is somewhere between 16% and 22%. Inflation trumps economic growth. Third, Iran may "export more goods and services than it imports", but that is complete misdirection. Iran is a net importer of several essential goods and resources including gasoline (they only have one refinery) and manufactured goods like household and industrial equipment, cars, cooking oil, etc. In terms of food, Iran has been pressing subsidized farmers to export wheat and other agriculture, forcing the price of food to increase substantially as it must be imported to provide for the general population.

However, some companies and nations continue to invest in Iran including China, Canada and Gulf nations like Dubai. Creating some jobs, but far below Ahmedinijad's campaign promises to create almost a million jobs a year. There are also deals with European nations and Turkey for natural gas and a recently inked deal with Iraq for a pipeline to refine oil and sell the finished product back to Iraq.

This deal precipitated the replacement of Iran's oil minister:

Reuters noted on August 13 that the Oil Ministry was also accused of agreeing to provide Pakistan and India natural gas through the "Peace Pipeline" project at a disadvantageously low price. Vaziri-Hamaneh recently rejected claims by parliamentarians that Iranian negotiators had agreed to sell gas at a 30 percent discount. He said there has been no agreement on price, so no discount could have been given. The daily "Etemad" cited regional gas sales as a factor suggesting Vaziri-Hamaneh had been removed. The same paper on August 13 observed that Vaziri-Hamaneh had also failed in the past two years to attract investment from major international oil companies.

The last is a little disingenuous as ongoing and increased sanctions keep most companies from investing anything beyond $20 million/year per US Law and UN sanctions. There is also a problem that Iran has consistently overspent its budget and has borrowed heavily against future oil revenues while US efforts with international banks have made Iran a much higher risk for investment. Further, the aging oil infrastructure requires many expensive updates just to maintain status quo, much less increase its viability. Finally, Iran has not been a good partner by providing its share of the costs for infrastructure development. This makes oil companies reluctant to invest heavily and undercut their own profits.

Another recently replaced minister notes other issues:

Ahmadinejad has been criticized across the political spectrum in Iran for the country's high inflation, and for ploughing extra revenues from high crude oil prices into high-spending infrastructure projects.

In his letter, Tahmasebi cited an "emphasis on the freezing of prices of industrial goods such as cement, sugar, dairy products, vehicles, and home appliances, while the cost of all the other elements in their production has increased."

He also complained that "the ministries of energy and oil could not give factories the necessary water, electricity, and gas. This emanated from a lack of investment in their expansion."

"Other infrastructure" includes new military buildings and the Bushehr Nuclear Plant that costs $25 million/mo just to continue work. According to Atomstroiexport:

Russia has said it will stick to the project, worth about $1 billion. But Atomstroiexport said Iran was still paying just a fraction of the $25 million a month needed to finish the plant.

"Confidence in the project has been undermined," said Atomstroiexport spokeswoman Irina Yesipova. "It is an unstable situation where there are lots of announcements but no money."

Iranian officials insist they have made payments on time and say Moscow is delaying because of Western pressure.

"There is just not sufficient financing and that has influenced confidence, the confidence of the Russian side and Russian subcontractors towards the Bushehr project and towards Iran," Yesipova said.

Other money has gone towards Iran's conventional weapons build up, the financial and material support of terrorism and dubious programs to create "jobs" that are state programs without any revenue stream or return for the government.

The outgoing industry and mines minister, Alireza Tahmasebi, has faced more concrete problems. Tehran-based economist Said Lailaz wrote in "Etemad" on August 13 that figures provided in recent years by Iranian Central Bank hinted at weak -- and declining -- industrial output. Lailaz wrote that the growth in the Persian year to March 2007 of the value of industrial output was the lowest in seven years despite significant state investment each of the past two years. Lailaz forecast continuing industrial decline, leading him to conclude that "for the first time since the [Iran-Iraq war of 1980-88], the engine of Iran's economy, the industrial sector, has effectively broken down." Lailaz did not lay the blame solely on Tahmasebi; on the contrary, he pointed out the role of what he described as "contradictory" government policies. He said the government apparently preferred to pour money into its own job-making schemes, rather than into existing industrial enterprises. Lailaz also argued that industry was hurt by the government's tampering with tariffs, and by its liberalization of some imports while the prices of some domestically made goods were fixed. Moreover, he noted the inflationary effect of the spending of billions of petrodollars inside the country.

Unstable Economics and Consolidating Power

Like Putin's move to place former KGB compatriots in key government and industry positions, Ahmedinijad has been replacing ministers with former IRGC and known hardliners as well as stacking the election certification board in time for the upcoming parliamentary elections. An obvious move to insure that parliament, as well as other government sectors comply with his programs.

As the economy lists from one side of the line to the other, Ahmedinijad, with the support of certain elements on the governing council, continues to consolidate power. the US, in turn, continues to put pressure on every point of the Iranian economy. Iran, in return, ratchets up its rhetoric and support for terrorists in a proxy war against the US. Their sole intent is to force the US out of the region and provide much needed breathing room from the ongoing economic destruction of their regime.

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