Opinion |

As Its Economy Tanks, Iran May Have to Talk With America

The regime is growing desperate as the forecasts tumble from a bit of growth to deep bear territory, and other options just aren't there

David Rosenberg
David Rosenberg
In this picture released by the official website of the office of the Iranian supreme leader, Supreme Leader Ayatollah Ali Khamenei waves to the crowd while attending a ceremony marking 30th death anniversary of the late revolutionary founder Ayatollah Khomeini, shown in the poster at rear, at his mausoleum just outside Tehran, Iran, Tuesday, June 4, 2019
Supreme Leader Ayatollah Ali Khamenei: May have no choice but to talk with the Americans.Credit: ,AP
David Rosenberg
David Rosenberg

Perhaps the arguments in the west over who attacked those tankers in the Gulf is bringing a smile to Ayatollah Ali Khamenei’s face. Apart from that, there’s no joy in Mullah-ville. If it is sniping at the world’s petroleum supply on top of pursuing the even more dangerous strategy of testing the limits of the nuclear accord – that just shows how desperate the regime has become. In the words of one analyst, Iran’s economy has gone from “dire to disastrous” in short order.

From predicting that the Iranian economy will grow by 3.6% in 2019, thw World Bank now forecasts contraction by 4.5%. The International Monetary Fund is even more bearish, projecting that the Iranian economy will contracting by no less than 6% -- and that estimate was made before the U.S. decided not to renew oil-sanctions waivers. Unemployment is well into the double digits and inflation is officially at more than 50%, and quite possibly more than double that.

By 2020, the World Bank and IMF both think that Iran will start showing some very modest growth. But even if that happens it will be too little, too late. In the meantime, its prospects for relief are slim.

How many pistachios can anybody eat

Apart from crawling on hands and knees to the nuclear negotiating table, the only hope Iran has for sanctions being lifted is U.S. President Donald Trump exiting the White House. In the highly unlikely scenario that Trump is impeached, he’ll be replaced by Mike Pence, who’s not exactly a charter member of the Ayatollah Fan Club.

In the more likely scenario that Trump is not re-elected, Iran still has a very long 19 months to a Democrat taking office. A lot can happen in 19 months, like regime change.

Iran’s paramount problem is that the world doesn’t need its oil right now, so the world's temptation to resist American sanctions is very small. Also, there has been no fallout in the form of rising oil prices. Quite to the contrary, oil prices are down 20% from their peak in April as U.S. shale oil production heads to record levels. Global demand for energy is weakening and inventories of oil are growing because the world economy has been slowing, and also because of the U.S.-China trade war.

Inside Iran, the Iran Revolutionary Guard Corps and other hard-core supporters of the regime are urging a return to the “resistance economy” of the Obama sanctions years.

Resistance means sanctions-busting smuggling and replacing imports with locally produced products. It may be a highly profitable policy for the IRGC and insiders, but it’s a non-starter for everyone else.

Whatever else you might say about 40 years of Islamic rule in Iran, economically it’s been an abject failure. The country remains almost wholly dependent on oil exports and otherwise produces nothing apart from carpets and pistachio nuts that the world wants. The economy doesn’t even make things Iranians want, as long as they can buy imported products.

That fundamental weakness of the Iranian economy has become clear as Europe struggles to create mechanisms to get around the American sanctions.

European officials can do as they please, but for businesses, the risk of incurring American wrath for sanctions-busting are simply too big versus the paltry rewards of doing business with Iran.

Faced with this dilemma, Khamenei last month called for economic reforms. Unfortunately, he’s a few decades too late to fix matters. Insider business interests and government corruption are too deeply entrenched and the regime too reliant on them to risk alienating them by imposing free market reforms.

In any case, even if the Majlis suddenly got courage, it typically takes years for reforms to have an effect and Iran doesn’t have that luxury.

In spite of all the economic pressures they face, it’s by no means certain that ordinary Iranians will act out the Trump White House dream and pour into the streets to demand nuclear talks and/or the ayatollahs’ heads. It could happen, but the record of sanctions causing economic distress and political change aren’t that good -- just look at Russia and Venezuela.

Moreover, the demands of the Trump administration strike at the heart of the regime and its aspirations. It would not only entail giving up forever its nuclear aspirations but its drive to be a regional hegemon. In exchange, Iran would be invited into the world system of trade, investment and tourism, but from Iran’s leaders’ point of view, the stick is painful and the carrot isn’t very tempting. Openness to the world economy isn’t a high priority.

Right now, however, Iran has the worst of everything -- a suspended nuclear program and a sinking economy, and no solutions on the horizon. The ayatollahs may feel that the risk created by economic distress is small. But it isn't small enough for them to risk living with it. That leaves no out, except for negotiations.

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