Published on December 5th, 2012 | by Richard Javad Heydarian1
Iran Shows Signs of Resilience Ahead of Potential Bilateral Talks
By Richard Javad Heydarian
A key foreign policy consequence of President Barak Obama’s reelection is the growing possibility of face-to-face talks between the United States. and Iran. Both the US Secretary of State Hillary Clinton and Iran’s Foreign Minister Ali Akbar Salehi have expressed, albeit conditionally, their respective governments’ openness to engage in comprehensive bilateral talks — for the first time in almost three decades — to primarily resolve the ongoing nuclear standoff.
Beyond the issue of urgently resolving the Iranian nuclear question, purportedly to prevent an Israeli pre-emptive strike and an Iranian nuclear bomb, the Obama administration’s growing interest in directly engaging Iran may have something to do with timing, opportunity, and leverage.
There is a feeling in Washington that the recent transatlantic sanctions may have created enough pressure — and damage to Iran’s economy — to potentially extract major unilateral concessions from the Iranian regime. Namely, a “stop-shut-ship scenario”, whereby Iran would curb its enrichment capacity, open up all aspects of its nuclear program, shut down its heavily-fortified nuclear facilities, and ship out its stockpile of above 3-5 percent enriched uranium in exchange for some nominal — yet to be clarified — incentives from the West.
Since the imposition of Western sanctions against Iran, beginning in late-2011 and intensifying by mid-2012, the Iranian economy has begun whimpering on an unprecedented scale. Iran’s oil output is at its lowest in more than two decades, while oil exports have been halved; the inflation rate has surpassed the 25 percent barrier, while the budget-deficit is reaching its highest level in the last decade; and, the Iranian currency (rial) has lost about 80 percent of its value in less than a year. The sanctions against Iran’s ports, shipping industry, financial sectors, and central bank, Bank-e-Markazi, have also made it increasingly difficult to conduct even the most benign kind of international transactions, from the import of medicines, to food, diapers and medical equipments.
However, there are some recent indications that Iran’s economy is not exactly in a desperate shape, or at least not as frail and fragile as the Obama administrations hopes it to be.
According to the Paris-based International Energy Agency’s (IEA) most recent report, Iran’s oil exports have rebounded sharply – by around 30 percent – after seven months of steady decline, thanks to new contracts with giant Asian customers, China and South Korea. With oil exports constituting more than three-quarters of export earnings, Tehran is now in a relatively better position to defend its falling currency. In fact, the rial has indeed experienced some recovery in recent weeks, appreciating from the record-low of 37,000 rials against 1 dollar in early October to around 27,000 rials against 1 dollar today. Of course, the most recent financial and hydrocarbon sanctions by the European Union will further complicate the process by which Iran intends to translate its rising exports into a stronger local currency.
Another surprising development is in the tourism sector, which has also experienced an unexpected spike. “Although most sectors of Iran’s economy are struggling and oil revenue has steeply declined, foreign purchasing power is at an all-time high in Iran due to a plunge in the value of the Iranian currency, the rial,” reported Jason Rezaian of the Washington Post.
The Iranian government has circumvented transatlantic sanctions by an ingenious mixture of manifold countermeasures. It has negotiated sovereign insurance deals with major customers such as China, India, Japan, and South Korea, while considering barter deals (sweetened by heavy discounts and flexible payment arrangements) to woo major customers and continue large-scale oil trade. Iran has also expanded its tanker storage capacity by purchasing/building new oil-transporting vessels, smuggled oil through neighboring countries like Iraq, and stealthily transported oil — with off-the-radar and/or or ‘foreign flagged’ ships — from its ports to major destinations in East Asia. This explains Iran’s ability to increase oil exports by almost 30 percent in November, compared to previous months.
Moreover, the government has instituted some draconian measures to stave-off the impact of sanctions. It has further slashed imports, postponed its subsidy cuts, reduced money supply, raised interest rates, and jailed so-called ‘currency manipulators’. It has also encouraged domestic manufacturing. Aside from the government’s recent ban on imports of around 77 luxury products, atop reductions in 52 other non-essential goods, the fall of the Iranian currency — especially in the black market – has also eroded the competitiveness of imported capital goods, which have hammered local producers in recent years.
It’s important to note that the Iranian government has considerable foreign exchange reserves, estimated at between $80-100 billion, giving it significant ability to sustain imports for an extended period and defend its currency amid growing international restrictions. With a multi-tiered foreign exchange system, the government has an ability to cushion the most vulnerable sectors — incidentally, the backbone of the regime – against major disruptions in the import of basic commodities. After all, Iran’s structurally high inflation more the product of a loose monetary policy and major subsidy cuts that begun in 2010.
In some ways, it is Iran’s relative resilience — and ability to avoid a total collapse — that may explain its willingness to explore direct talks with Washington. Tehran feels that it has enough wiggle room to avoid total unilateral concessions and negotiate a more mutually-favorable, face-saving outcome — perhaps, before it’s tool late.