Can Iran Survive 2020?

When the Trump administration, ignoring the advice of the Great and Good, reimposed sanctions on Iran, few expected the swift validation of such a policy. Yes, it was understood that Iran would have trouble selling its oil abroad, but some assumed that the E.U. and other customers would find a way around the American sanctions and continue to buy Iranian oil. But the American government not only scared away almost all of Iran’s customers, but ratcheted up other kinds of sanctions – including freezing assets abroad of Iranian leaders and institutions — to add to Iran’s distress.

Iran has just published its budget for the  next fiscal year, and the scale of its economic woes – and the likely large-scale protests those woes engender — is now clear. The Financial Times has

the details here:

Iran is to reduce its reliance on oil exports by increasing taxes, borrowing more money and cutting energy subsidies, as President Hassan Rouhani vowed on Sunday that the Islamic republic could withstand the pressure wrought by tough US sanctions and the most violent unrest seen in decades. With oil revenues expected to fall by 70 per cent, the budget for the next Iranian fiscal year “is designed to resist against sanctions and to announce to the world that we run this country despite sanctions”, Mr Rouhani told parliament on Sunday as he unveiled the budget for the fiscal year that starts in March. “The budget will not depend much on oil revenues because of the [difficult] conditions we foresee.” The coming year’s budget, which needs to be approved by parliament, is now expected to total 4,845 trillion rials. This equates to $115.3bn at the official government-approved dollar exchange rate used for some commodity imports or just under $40bn at the unofficial free market rate. The Islamic republic has forecast that its crude exports will generate about 482 trillion rials next year, almost 70 per cent less than this year. This equates to a sale of about 500,000 barrels of oil a day, domestic media suggest, down from 2.8 million barrels per day before the reintroduction of sanctions in May after Donald Trump withdrew the US from the landmark nuclear deal agreed with world powers. The government will also sell more Islamic bonds in the domestic market to make up for the shortfall in oil revenues and expects to raise 114.8 trillion rials from the sale of state-run companies. The government also plans to increase revenues from taxes by 13 per cent to 1,950 trillion rials, a further blow to businesses already struggling in a slowing economy. The IMF has forecast that the Iranian economy will shrink by 9.5 per cent this year. “We can clearly see in the budget bill that the government’s revenues have hit bottom because of sanctions,” said an economic analyst. “Iran is squeezing all sectors to generate income but it is not clear if putting pressure on other sectors will bear fruits when private businesses feel squeezed too.

The most startling fact is this: The reduction in exports of crude oil, from 2.8 million barrels a day just before President Trump reimposed sanctions in May 2019, to 500,000 barrels a day in the next fiscal year, a reduction of 70%, has led to the current disaster. There is little Iran can do to make up for the shortfall in oil revenues. It can sell more bonds domestically, but how many Iranians will still be willing to make such a bad bet on an economy that has been disintegrating before their eyes? The malaise and dissatisfaction run deep in Iran, as the latest nationwide protests — the largest since the Islamic Revolution in 1979 — show. Those protests were prompted by a stiff increase in gasoline prices by 50%, with even greater increases for amounts customers bought above 60 liters monthly. The government’s decision in November to increase gasoline prices by half prompted the worst unrest since the Islamic revolution in 1979. Hundreds of thousands of Iranians took to the streets, prompting a severe crackdown. Thousands were killed (the government claims there were “only” several hundred dead, but no observers inside Iran agree). What makes the Iranian government think it can handle the even greater protests that are sure to result from another rise – through a cut in subsidies — in gasoline prices?

And that’s not the only price rise the long-suffering Iranian people will have to endure. The Iranian government is determined to raise money by reducing subsidies for natural gas, electricity, and gasoline, as well as for  the fuel used in petrochemical plants. In order to ease the burden on poorer families, it will give cash handouts to the worst affected. But will those handouts to the poor – the amounts are carefully unspecified – possibly be enough to make up for all those reductions in subsidies on gasoline, electricity, oil,and natural gas?

“We are aware that people feel under pressure because of sanctions and their purchasing power has declined . . . but we are trying to ease the pressure,” Mr Rouhani said. “Under the current circumstances, we face numerous difficulties in imports and exports and financial transactions and have problems in oil exports.” The welfare measures, however, may not make the difference that many people expect. ‘You may think bread is cheap but I have customers who cannot afford bread and postpone payments,’ said a baker in a lower class neighbourhood in Tehran. ‘More well-off people give me some money [as charity] so that I can give bread to the poor for free.’”

When the price of energy goes up, all other prices follow suit. A rise in the price of gasoline translates into a rise in the price of moving goods about by delivery truck or car; the price of commuting by car rises, too. A reduction in subsidies means a rise in the cost of electricity which affects the cost of lighting, of cooking, of running home appliances — washing machines, dryers, computers, television sets — of every kind. A rise in the price of natural gas and oil will lead to a rise in the price of home heating.

In Iran, right now, the nationwide protests have not subsided. The iron fist of the state has not subdued the rioters, whose numbers have only increased in response to violent government suppression. The size of the destruction has been impressive: about 750 banks, and nearly 100 gas stations, have been destroyed nationwide. $800 million dollars worth of destruction has so far been admitted by the Iranian government. These 2019 riots were prompted by the 50% rise in the price of gasoline. But there is much worse to come for the Iranian people: the effective rise in prices, from a reduction in subsidies, for the most essential of goods: oil, gas, electricity. There will be more, much wider and more violent protests to come. And the more the Iranian security apparatus crushes the protesters, the more others, previously sitting on the sidelines, will become enraged enough to join the protests themselves.

Meanwhile, the Iranian government still continues to spend large amounts on its military, especially the Revolutionary Guards, in their adventures abroad. Iran has reduced the amounts it gives Hezbollah to pay its members their salaries – reducing them by half, with some Hezbollah members complaining that they “haven’t been paid in months” — but it continues to pay for top-of-the-line missiles and drones for Hezbollah’s armory  in Lebanon. Iran continues to build bases in Syria, at great expense, but many of these expensive installations, and the missiles they contain, have been bombed to smithereens by Israel’s air force. Iran supplies weapons and training to certain Shi’a militias in Iraq. Iran still supplies its Houthi proxies in Yemen with weapons. The Islamic Republic could save billions a year if it halted its aggressive and costly policies abroad, in Yemen, Syria, Iraq, and Lebanon. The protesters have made the government money sent abroad the subject of one of their most widespread chants: “Yes to Iran, No to Hezbollah.”

The economic woes of Iran keep growing, as the oil revenues, having declined by 70% in the last fiscal year, show signs of continued decline, and the government’ s only plan to make up for the shortfall in its budget is to sell bonds domestically (few Iranians will want to buy them them) and to slash subsidies for the most essential commodities — natural gas, oil, and gasoline — which will hit the poor the hardest, and lead to even greater protests than are now underway in Iran. Economic distress has been wide and deep, and with these planned cuts in subsidies, will become even worse; those suffering no longer do so in sullen silence, but immediately protest, often violently – as those 750 destroyed banks testify — in the Iranian street. The Islamic government, as ever maladroit in its tactics, has tried violent suppression, but that has only led to more anger, and ever larger and more violent protests.

Will the Islamic Republic of Iran survive 2020? It’s hard to see how.