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Solutions for Thwarting Western Sanctions: Transition from Maintaining Industries to Building Industries

Friday, July 13, 2012

Gholamreza Kiamehr
University Teacher & Economic Expert

Iran can adopt three main policies to face and thwart international sanctions imposed on it by the Western countries.

1. Preventing Fuel Price Hike in the Country

The Iranian government’s prowess in preventing fuel price hikes inside the country has been a major feat which should have been done at this juncture despite the implementation of subsidies reallocation plan. If the government actually achieves this goal by postponing fuel price hike as long as the Western sanctions are in place, inflationary and economic pressures on the society will subside and people will be more ready to withstand negative effects of those sanctions.

2. Mobilizing Oil Industry Capacities

At present, some member states of the Organization of Petroleum Exporting Countries (OPEC) have increased their production while developed countries which are the main consumers of crude oil have also started to beef up their strategic petroleum reserves. As a result, the balance between supply and demand has changed in favor of supply and prices have, therefore, taken a downturn. Reduction in oil prices is not good news for economic systems which are highly dependent on the black gold. Therefore, countries which aimed to take part in sanctions against Iran have started to stockpile oil. There are a number of reasons for the reduction of oil price.

A) Iran does not account for a high share of oil supply to industrialized nations because it only exports about 1-1.5 million barrels of oil per day. As a result, if some OPEC members, such as Saudi Arabia, Kuwait, or even the United Arab Emirates, decided to increase their output by 500,000 barrels per day each, they would easily fill Iran's void in the market. This is a reality. The oil market, on the other hand, is simply based on supply and demand.

B) Industrialized nations have started storing oil. This factor has also been able to further reduce oil prices in global markets.

C) The economic stagnation which governs member states of the European Union, including Spain and Greece, and even the United States, is also another reason. At times of economic recession, industrialized countries need less oil. As a result, economic system of countries like Iran which are dependent on oil sales for as much as 70 percent of their revenues cannot remain immune to these changes. Oil, however, is not a commodity to be easily made subject to sanctions because it does to have physical bulk to make it totally vulnerable to sanctions. In other words, Iran is a country with access to the Persian Gulf and Sea of Oman and other bodies of international free waters. Therefore, it can easily carry its oil to free waters onboard its own tankers and therefrom transfer the oil to tanker ships carrying national flags of other countries. However, in this situation Iran will have to use the dumping policy; that is, it will have to sell oil at a lower price compared to official global price. This approach, in turn, will reduce Iran's oil revenues. At any rate, sanctions are by no means able to totally bar Iran's oil sales for the reasons mentioned above and this issue stems from the very nature and quality of oil as a commodity. It can be easily transferred from one tanker ship to another in the high seas under the national flag of a third country. This makes a great difference between Iran and landlocked states. In addition to about 2,000 km of sea border, Iran has also long common borders with such countries as Afghanistan and Pakistan, which most probably, will not remain totally committed to Iran sanctions. As a result, sanctions will have an effect, but that effect will not be lethal to the Iranian economy.

3. Changing Direction of Bank Exchanges

This means that the Iranian banking system should devise and launch a new money exchange system to replace the Society for Worldwide Interbank Financial Telecommunication (SWIFT). This system can only be used with friendly countries, but within countries which follow suit with Iran's international sanctions, no other system can be replaced with SWIFT. The SWIFT is a global interbank system. Iran may be able to reach an agreement with a few neighboring countries such as Afghanistan or Pakistan, or other friendly states like certain Latin American countries, including Venezuela, Bolivia, and Ecuador to replace another network for SWIFT, but that network cannot be used with other countries which have agreed to sanctions against Iran. Therefore, the system will have a limited scope and will be restricted to a few friendly countries which reach an agreement to use a common code. That code, however, cannot be generalized to all countries.

At present, the best way to counter sanctions is making a drastic cut in the Iranian government’s expenditure and downsizing the government. If the government could use the ongoing crisis and threats resulting from sanctions as an opportunity to reduce its economic responsibilities as well as the bureaucratic red tape, it would greatly reduce the government’s expenses and subsequently decrease the country’s overall dependence on petrodollars. In general, the key to countering Iran sanctions is to reduce the size of the government and this would need a national determination within the government. State officials, for their part, should know that they hold the key to this problem. If this trend is completed successfully, sanctions will not have a lethal impact on the Iranian economy. Unfortunately, the historical experience has shown that the body of the government is not willing to get thin. I believe that the present juncture is the best time to transfer control of economic affairs to the private sector and reduce government’s control on the economy. If this is done in practice, the outlook for counteracting sanctions will be quite positive.

Sanctions, An Opportunity for Iran

Will sanctions actually provide Iran's oil-dependent economy with an opportunity to reduce its dependence on petrodollars? This theory would have been actually true if Iran enjoyed high-end technology. Unfortunately, overdependence on oil has historically put Iranians in such a state of ease of mind during the past decades that the country has mainly turned into a consumer of technology. Therefore, if Iran was an industrialized nation like South Korea, Japan or even China, which own and create technology, it would have been needless of oil revenues by relying on its technological capacities. Iran, however, has gotten used to relying on oil revenues for all purposes while considering any spending on powerful technological systems a surcharge. Therefore, if Iran starts to create technology at this point, perhaps, it would be able to indigenize technology within the next 10 years and create technology instead of just consuming it. In that case, its dependence on oil revenues will decrease.

Of course, Iran has relatively indigenized some industries and this process should continue in the future. If Iran takes practical steps, away from sloganeering, and decides to acquire technology, it will be a good way for defusing sanctions.

Iran is a country with industry. In other words, it has industrial abilities in many fields, but is still not a creator of industry. This means that Iran has not completed ten stages of industrialization, especially one stage which is more important than the others; that is, industrial design. As a result, Iran can strive to achieve technology through reverse engineering just like what Japanese did following the World War II when the country took rapid steps to become an industrial power. In practice, however, Iran just imports a production line and starts to produce something. When that production line goes down with a major problem, the country has to import it from the original country again. This is what they call industrial dependence and in this state, we will be always dependent on countries which design industries. In conclusion, let’s hope that instead of maintaining industries, Iran will turn into a country capable of designing industry and creating technology.

Key Words: Western Sanctions, Maintaining Industries, Building Industries, Fuel Price Hike, Oil Industry, Bank Exchanges, Kiamehr

Source: Iranian Diplomacy (IRD)
http://www.irdiplomacy.ir/
Translated By: Iran Review

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