Iran Will Not Bow to Economic Sanctions

Tuesday, March 29, 2011

Saeed Leilaz; Economic Expert

Global economic boom was the most important international economic development last year. It had direct effects on global oil prices and those of raw materials which greatly increased Iran’s foreign exchange revenues.

Based on the existing evidence in 2011, the world economy has totally gotten out of the recessive state which strained it from 2007 through 2009 and early signs of new economic impetus are already on the horizon in the United States. The American economy is expected to grow by about 3 percent in this year with corresponding figures for UK, China, India and Japan respectively standing at about 2 percent, more than 10 percent, 9 percent and about 2 percent. This growth will greatly increase demand for raw materials, especially crude oil.

Global price of crude oil is currently strong enough to delineate an outlook of even higher prices for the coming year. This was perhaps the most important economic development at international level last year though it was ensued with high inflation rates in many parts of the world. At present, index of raw materials prices is 50 percent higher than last year.

On the whole, three factors have pushed oil prices up. The first factor, which is also the least important one, is recent political upheavals in North Africa, especially in Libya. This is a less important factor because these developments are mostly political and psychological in nature and cannot produce lasting effects. Therefore, if despite clashes in Libya, export of the Libya crude continued or Saudi Arabia made up for the shortage, we would see no decrease in overall international oil supply.

A more important factor, which is more lasting than others, is the global economic growth rate. Based on the current statistics, the soaring growth will continue into 2011 and form a powerful ground for further increases in oil price.

The third factor is fluctuations in dollar parity against euro. Whenever dollar loses ground to euro, oil and gold prices are sure to shoot up. Every euro is now being traded for 1.4 dollars which is a record in the past few years. Thus, gold prices are also hitting new records as does the oil price. In fact, the last two factors are more important.

Euro’s parity against dollar is more important than the North African developments and is also the most lasting factor affecting global economic growth. It is also in Iran’s benefit. If euro gains against dollar, oil prices will increase, though the increase may only make up for inflation in dollars. As Iran’s oil revenues in euro rise, Iran will also have to buy foreign goods at higher prices while we simplistically thought that it was in our benefit. It is ironic that our economic interests can be met the best when the American economy is at its best and dollar is strong. This means that economic interests of the Islamic Republic of Iran depend on the economic power of the United States and its dollar. In 2010, for example, imports to Iran increased 18-20 percent in value while their volume remained relatively constant. Therefore, as foreign exchange revenues rose, we have had to pay more on imports.

Another important development was intensification of international economic sanctions against the Islamic Republic of Iran which has elevated previous sanctions to an unprecedented level of austerity. However, as I had predicted before, the sanctions have fallen short of bringing Iran to its knees. In other words, economic sanctions against Iran are sure to have harmed the Iranian economy one way or another, but they have not made the country bow.

The main reason that has grounded economic sanctions to failure is the special structure of the Iranian economy which defies sanctions. Geographical, climatic, and geopolitical structure of Iran does not allow international consensus to be actually reached on sanctioning the country. Even in case of such consensus, Iran’s geographical situation among 14 countries half of which are poorer than her forestalls success of sanctions.

Apart from raising tariffs, international sanctions have had little effect. In economic terms, such sanctions increase customs tariffs and this will lead to a parallel rise in goods smuggling and bootlegging. Smuggled goods are said to be worth up to 20 billion dollars a year and I think this is no exaggeration. A short visit to Iran’s border crossings will prove this. In fact, smuggling is currently one of the main challenges faced by the Iranian economy, though it is also a means of rendering sanctions ineffective.

Another important issue is Iran’s hefty earning through oil sales. It seems that the country has hit a new record in 2010 compared to 2008. More importantly, however, are signs of exceptional rise in Iran’s oil revenues in 2011. Iran’s foreign exchange revenues from February 19 to March 20, 2011, were equal to total earning in 1960s. That is, a month of Iran’s current revenue was enough to fund the former Shah’s third and fourth economic development plans.

As for sanctions, I believe that it is impossible for sanctions to include oil while they would be also ineffective in the absence of oil embargo. Iran’s oil sales allow it to an annual purchasing power of about 90 billion dollars, but foreign sellers have been forbidden from selling goods to Iran. Obviously, no businessperson or company can easily close their eyes to that hefty figure and they are not doing so. Of course, this situation has been also quite detrimental. For example, price of consumer goods imported to Iran has greatly increased. We are now paying more on such goods than last year and customs reports substantiate this. In addition, we seem to be in a hurry in foreign sales.

Therefore, international sanctions have not been influential for a variety of factors, including sharp increase in global oil prices. Even in the absence of those factors, sanctions would have still failed to bring the country to its knees. When I forecasted this for the first time, many friends were critical of me, but the situation in 2010 clearly proved that managerial shortcomings are more detrimental to the Iranian economy than any foreign development. On the whole, in the absence of domestic mismanagement, even the toughest international sanctions will not be able to run the Iranian economy aground. They are sure to harm the economy, but not in a decisive and destructive way.

Source: Iranian Diplomacy
Translated By: Iran Review

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