Iran: Economic Troubles and International Sanctions

A panel of experts discussed the effects of sanctions and other economic pressures on Iran, as well as possible economic and political outcomes.

On October 3, 2012 the Middle East Program at the Wilson Center hosted a meeting on "Iran: Economic Troubles and International Sanctions" with Djavad Salehi-Isfahani, Professor of Economics, Virginia Tech; Bijan Khajehpour, Managing Partner, Atieh International; and Suzanne Maloney, Senior Fellow, Foreign Policy, Saban Center for Middle East Policy, Brookings Institution. Haleh Esfandiari, Director of the Middle East Program at the Wilson Center, moderated the event.

Salehi-Isfahani opened the discussion with an overview of the challenges currently facing Iran's economy. Asking the audience, "Is the rial really collapsing?" he argued that sanctions may not be having too much of an effect on daily life in Iran. The Iranian government's approach so far has involved fixing a 12,000 rial/dollar import rate on food, medicine and other prioritized commodities to keep their domestic costs low. Importing goods at the actual exchange rate (which is difficult to determine) would lead to "riots everywhere, all across Iran." However, as demonstrated by the "chicken crisis" of this past summer, the Iranian government has shown they are willing to pay more to subsidize the food market, thus maintaining a measure of stability and thwarting the intent behind the imposition of sanctions - that is, to foment rebellion. In keeping with Ahmadinejad's election promises from 2005, the government has been increasing subsidies on basic goods and engaging in income transfer programs that have been benefiting the poor and middle classes, in most cases reducing poverty and inequality, factors which unchecked might have led to greater domestic unrest. Salehi-Isfahani outlined "two paths for the resistance economy" the Iranian government could pursue to combat the effect of sanctions. One would be a liberal, free market approach that would engage the private sector to produce more goods domestically and would raise interest rates, but would require a greater level of economic transparency. The other approach is to shift towards a command economy; this would close foreign markets to foreign exchange and lead to government administration of currency exchange and imports. This approach would likely see a rise in black markets seeking to take advantage of arbitrage opportunities inherent in the artificial exchange rate and could, at its worst, lead to government takeover of failing businesses and overall rations, which is the "nightmare of the middle class." 

Khajehpour discussed the impact of foreign sanctions in greater detail, pointing out the unintended benefits they grant Iran in the long term. Although short term economic development has been "undermined" by sanctions, subsidy reforms, mismanagement, and "pre-election paralysis," "different sectors are reacting differently to sanctions" with some seeing benefits. Khajehpour noted that Iran has "too big of an economy, too complex" to collapse, despite growing public discontent and decreasing exports. He argued that the drop in the rial's value can also be seen as a result of "a major shift in financial flows" in past years that has contributed to "enormous growth in the money supply." In contrast, Khajehpour also noted that sanctions have "shifted trade away from the official banking system" to foreign exchange bureaus, increasing demand for hard currency that outs more pressure on Iranian small businesses and the private sector. Meanwhile, the petroleum sector, while currently experiencing slowed production, is seeing a shift towards producing energy-related goods and services for domestic consumption, lowering Iran's costs on energy overall. Saying also that "the future of Iran is in gas," Khajehpour argued that growth in these sectors, attributable in part to the squeeze of sanctions, would boost Iran's economy in the long run. Although industry is "suffering" at the moment, partly due to the increased cost of transportation, "the devaluation of the rial can lead to new opportunities." One such opportunity is increasing domestic production, which would reduce Iran's reliance on imported goods and make its own exported goods more competitive on the global market. Short-term pressures will continue through this "hiccup period," Khajehpour concluded, but will ultimately contribute to greater Iranian self-reliance and a shift to a free market approach.

As a political economist, Maloney focused on the impact of sanctions on Iranian domestic and foreign politics and the implications of this impact for the United States. Noting that sanctions have sparked an "intensification of trends that have been underway for at least twenty years," Maloney saw the current situation as the "start of a social contract" between the Iranian government and people. This contract is based on the government's "performance legitimacy," its ability to deliver goods to citizens despite international economic pressure. Maloney also saw a command economy approach to combat sanctions as most likely, given that Iran is "more comfortable with oppression as a response." In contrast to Khajehpour, she felt that Iran has limited economic horizons today and cannot survive on merely occasional oil and gas exports, which opens up "tremendous political vulnerabilities." However, saying that "sanctions are clearly not a strategy," Maloney pointed out that so far they have had no effect on nuclear negotiations and "may actually complicate the negotiating process." Sanctions - which are "unwieldy" and "self-escalating" - are also not having an effect on Ayatollah Khamenei's policies, as Khamenei doesn't "get it" that a better economy is "contingent upon better relations with the rest of the world."

By Laura Rostad, Middle East Program