by Farideh Farhi
After more than a month of intense speculation in Iran, Hassan Rouhani’s nominees for 18 cabinet posts were announced on the day of the new president’s inauguration. By law, Iran’s presidents have two weeks after taking office to offer their nominees to the parliament for confirmation hearings. However, as [...]]]>
by Farideh Farhi
After more than a month of intense speculation in Iran, Hassan Rouhani’s nominees for 18 cabinet posts were announced on the day of the new president’s inauguration. By law, Iran’s presidents have two weeks after taking office to offer their nominees to the parliament for confirmation hearings. However, as an indication of the task-oriented “competent” government to come, Rouhani followed through on his promise to announce his picks on Aug. 4.
The parliament will begin the confirmation process, which should not take long, next week. There is no guarantee that all the ministers will be approved (several of Mahmoud Ahmadinejad’s ministers who were nominated in his first term were not). But as of today, the bet is that they will all pass, even if a couple face a few hurdles.
Cabinet appointments are watched closely in Iran, not only because ministers are key actors in guiding the direction and management of their ministries, but also because they say something about how the newly elected president will run the country and the compromises he is willing to or must make. In any contested political terrain, including Iran, compromises result from negotiations with other centers of power.
I will get to Rouhani’s compromises shortly but let me first say a little about the power of Iranian ministers.
Traditionally, ministers mostly have substantial control over the operation and appointment of their ministerial team. They are hence vulnerable to individual parliamentary interpellation and impeachment if deemed of insufficiently fulfilling their duties.
I say mostly because this tradition of ministerial independence was severely violated during the Ahmadinejad era, when he and members of his office routinely intervened in the internal matters of various ministries, underwriting many expulsions of top-level appointees as well as the ministers themselves.
Other presidents have also intervened in the appointment process of various ministries. Former president Akbar Hashemi Rafsanjani appointed a conservative minister of interior but then intervened in the appointment of many provincial governors, which is the prerogative of the interior minister. Driven by his interests, Ahmadinejad went much further and in effect became a meddling president at every level. Rouhani has promised to change that dynamic and the list of his cabinet nominees suggests he has mostly chosen individuals who will be agenda-setters in their own ministries and not agenda-takers. But he did make compromises and in the areas where he made major compromises, such as the Interior Ministry, he will likely act like Hashemi Rafsanjani and influence the gubernatorial appointments.
Hard Choices
The choice for the Interior Ministry is Abdulreza Rahmani Fazli, who is currently the director of the Supreme Audit Court, which is connected to the parliament. This body’s most important task is to issue yearly assessments of the financial operations of all government institutions and the extent to which their financial operations have been keeping in line with the budget as passed by the legislature.
Rahmani Fazli has been in the news for the past couple of years because of his office’s reports on missing funds that were discovered during Ahmadinejad’s presidency. But he is also a traditional conservative and a very close ally of parliament speaker Ali Larijani. His appointment was therefore a disappointment for Rouhani’s reformist backers who had hoped for someone with a clear record of support for citizens’ political and civil rights. (The interior minister also appoints the chief of police and licenses political parties and civil society organizations).
Rouhani also caved in at the last minute by nominating Mostafa Pourmohammadi, currently the head of Iran’s Inspectorate Office and Ahmadinejad’s minister of interior before he was fired at the end of the previous president’s first term. More importantly, Pourmohammadi was a prosecutor of the revolutionary courts and then deputy intelligence minister in the 1980s. He was implicated in some of the most horrific acts, including mass executions, against political prisoners.
Pourmohammadi is not a hardliner and in fact ran for president as a traditional conservative. But appointing him as justice minister does pose a question, to say the least, for a president who campaigned with the slogan of moderation and descuritization of the political environment — even if the justice minister is effectively the least powerful cabinet position.
It is true that the minister of justice is chosen among the four nominees offered by the head of the Judiciary and has no power in the selection of judges or its internal workings. It is also true that there is a saying in Iran that the justice minister is essentially the mailman between the Judiciary and the other two branches. Still, the appointment is a cave-in, likely to protect other ministerial nominees considered more important to Rouhani and effectively more essential in terms of influence.
In the arenas of foreign policy and economy, Rouhani did not make compromises and nominated individuals who are very close to him and his views. In foreign policy, Rouhani’s dilemma seemed to have been not about compromise but choice. He ultimately chose Javad Zarif over his deputy at the Center for Strategic Research, Mahmoud Vaezi, who was also considered a very strong choice. Others have written about Zarif’s appointment as an “olive branch” to the US. But it is a more important signal to the rank and file of the Foreign Ministry as well as the country as a whole.
Zarif represents the best and the brightest that the post-revolution Foreign Ministry has produced. He climbed the ranks without the help of religiously or politically important familial relations. Zarif’s important appointment is therefore a confirmation of Rouhani’s promise of a competent government. Yet to come, of course, are other foreign policy related appointments, in which Zarif will have quite a bit of say, including on Iran’s representative at the UN and a couple of deputy ministers. The latter becomes particularly important if the decision is made to return the handling of the nuclear file to the Foreign Ministry and send someone in the rank of US Undersecretary of State Wendy Sherman to talks with the P5+1 nuclear negotiating team.
Vaezi, meanwhile, went to the Ministry of Communications and Information Technology, where he was director general many years ago. I am not sure if Vaezi is happy with this appointment. There are even rumors — and rumors in Iran should never be trusted — that at the end of the day, Vaezi had to be convinced to take up the position at the prodding of former president Hashemi Rafsanjani. He does however have Rouhani’s strong backing and personality to lead the effort if the decision is made to reduce the influence the Islamic Revolutionary Guards has wielded in this ministry (an IRGC commander was leading it during the past couple of years).
This ministry’s revenues from cellular service usage is enormous. Last year it was the third highest depositor of money into the Treasury after the Ministry of Petroleum and the Ministry of Economy and Finance (which is in charge of taxation).
The question of the IRGC being engaged in too many economic activities is now front-and-center in Iranian politics. Prominent MP Ahmad Tavkoli even went as far as suggesting that the country’s leadership has to be decisive in limiting the IRGC’s and security forces’ role in the economy. Vaezi will be at the center of this fight should it take place.
Tackling Iran’s economy
In general, the desire to get state organs out of the economy seems to be the glue that holds together a largely neo-liberal economic team. It is one of the strange ironies of Iranian politics that the leftists of the 1980s were turned politically reformist and economically mostly neo-liberal in the late 1990s and continue to be so. It is true that the reaction Mohammad Khatami’s neoliberal policies elicited in the form of Ahmadinejad’s justice-oriented populism — at least rhetorically — has now been acknowledged and the economic policies pursued will try to strike a balance between “development” and “justice” and not simply assume that development will lead to the downward trickling of wealth. But the thrust of Rouhani’s center-reformist economic appointments indicates more concern with production and productivity in both the industrial and agricultural sectors.
Almost all of the economy-related ministers — with the exception of the minister of energy, Hamid Chitchian, whose political affiliation is not clear to me and seems to be a bureaucrat who has climbed the ranks of that ministry — are of a center-reformist mold. Bijan Namdar Zangeneh, who was Khatami’s petroleum minister, is nominated to return. Mohammadreza Nematzadeh, who was the co-chair of Rouhani’s campaign, will lead the Ministry of Industry, Mines and Commerce. Abbas Ahmad Akhundi will lead the Ministry of Road and Transportation, Ali Rabii will lead the Ministry of Labor, Cooperatives, and Welfare and Mahmoud Hojjati, who was Khatami’s minister of road and transportation, will return as minister of agriculture.
The only odd appointment in this list of like-minded and highly experienced officials is the minister of economy and finance, Ali Tayebnia, who comes in with little known experience and a mostly academic background. He was reformist candidate Mohammadreza Aref’s economic advisor during the presidential campaign and reportedly has academic expertise in monetary and taxation policies. It’s an odd appointment because of his dearth of experience. But perhaps the idea is that he will be part of an economic team that will be led by two key Rouhani economic advisors: Ishaq Jahangiri, a founding member of the center-reformist Servants of Construction party, former governor and minister of industry, who will be the first vice president — and Ali Nobakht, who will likely head the resurrected Management and Planning Organization. Also involved in economic decision-making is Rouhani’s chief of staff, Mohammad Nahavandian, currently the head of Iran’s Chamber of Commerce and Industry.
Not yet known is the person who will be appointed as the head of the Central bank of Iran (CBI). This position, like the positions of the first vice president and head of the Management and Panning Organization, does not require parliamentary approval. So far, the heads of Iran’s two largest private banks have been mentioned as potential CBI appointees.
Political boldness
Irrespective of whether one approves of the neo-liberal tendencies of these individuals, one has to marvel at the fact that three of these nominees were former presidential candidate Mir Hossein Mousavi’s 2009 campaign advisors, and one is possibly former president Khatami’s closest political advisor. These appointments come in the midst of dire warnings by Hossein Shariatmadari of the hardline Kayhan Daily against appointments of “supporters of sedition” to key positions. Indeed, there is no doubt that Zangeneh will have a tough time getting by the parliament. But he is backed by his stellar record in both the ministries of energy and petroleum and the fact that his diehard opponents have so far failed to find any financial shenanigans on his part. He is “squeaky clean,” an academic who lives in Tehran told me.
Another minister who may have difficulty getting through is the nominee for the Ministry of Science, Research and Technology, which supervises the university system. Jafar Milimonfared was not Rouhani’s first choice. His first choice was received as too reformist and elicited harsh reaction from hardline and conservative forces. Still, Milimonfared was deputy minister of the same ministry during the Khatami era and even became its caretaker for a short when it was between ministers. This position elicits sensitivity because the new minister may reverse the Islamicization trend that has been pursued in Iran’s universities and remove some of the appointed faculty in the past 8 years. So, the fight is over both ideology and pork.
Interestingly, the nominee for Irans’ Education Ministry, Mohammad Ali Najafi, is expected to pass through relatively easily. He is also a founding member of the centrist Servants of Construction party and was until recently a member of the Tehran city council. Many considered him to be a more appealing reformist candidate for president than Mohammadreza Aref, who withdrew his candidacy in order for the reformists to line-up behind Rouhani. Najafi was the director of the Planning and Budget Organization (later renamed as the Management and Planning Organization) under Khatami. He was also the minister of culture and higher education when Mousavi was prime minister,.
This leaves the three key ministries of Defense, Culture and Islamic Guidance, and Intelligence — all of which ended up with a compromise choice. Note how I say a compromise choice and not an imposed choice. If the reported names are valid, none of the three nominees – Hossein Dehghan for Defense, Ali Jannati for Culture and Islamic Guidance and Hojatoleslam Seyyed Mahmud Alavi for Intelligence — were among Rouhani’s first choices. But these individuals cannot be considered as anyone else’s imposed choice either.
All three have worked for Hashemi Rafsanjani or Khatami and all three have a good relationship with Rouhani. Dehghan is a member of Rouhani’s Moderation and Development party, and Alavi was his link to Qom during the presidential campaign. And Jannati, whose father Ahmad Jannati is the Secretary of the Guardian Council, is much closer ideologically to Hashemi Rafsanjani than his father. He was deputy minister for international affairs at the ministry of culture and Islamic guidance during Hashemi Rafsanjani’s presidency and ambassador to Kuwait during Khatami’s presidency. He has the distinction of being removed from office by Ahmadinejad twice; once as deputy minister of the interior and once as Iran’s ambassador to Kuwait. Those working in the art, music and publishing world would have preferred a more reformist-minded nominee, but they are not complaining — at least not yet. This ministry has operated in such an erratic manner — for example by granting permission for movies to be made and then refusing to allow their release after much cost and effort — that anyone who brings consistency as well as lesser interference will be appreciated for now.
All in all the cabinet seems well-balanced with regard to Iran’s widely disparate political strands as well as the electorate that coalesced to make Rouhani’s victory possible. Expectedly, it features no hardliners since they were the clear losers of the presidential election. It does include a number of traditional conservatives but the cabinet mostly bends to the middle, as promised, while some individuals who are very close to former reformist president Khatami have been slated for key positions.
We’ll just have to wait and see if they will survive their confirmation hearings. The deputy-level appointments, which for many of those who deal with the various ministries are sometimes even more important than the ministerial heads, come next. It will take quite a few months before the depth of Rouhani’s efforts and commitment to instilling change will become clear.
Photo Credit: Roohollah Vahdati
]]>by Jasmin Ramsey
Press reports about medical supply shortages in Iran, some of which have described devastating consequences, have been surfacing in the last two years, while debate rages on about who’s responsible — the Iranian government or the sanctions regime. Siamak Namazi, a Dubai-based business consultant and former Public Policy [...]]]>
by Jasmin Ramsey
Press reports about medical supply shortages in Iran, some of which have described devastating consequences, have been surfacing in the last two years, while debate rages on about who’s responsible — the Iranian government or the sanctions regime. Siamak Namazi, a Dubai-based business consultant and former Public Policy Fellow at the Woodrow Wilson Center for International Scholars, admits the Iranian government shares responsibility but says sanctions are the main culprit. Humanitarian trade may be exempted from the sanctions, says Namazi, but that isn’t enough when the banking valve required to carry out the transactions is being strangled. “[I]f [sanctions advocates] maintain the sanctions regime is fine as it is, then how come they try to promote substitution from China and India?” asks Namazi. The following Q&A with Namazi was conducted in Washington, DC.
Q: You recently authored a policy paper published by the Woodrow Wilson Center where you essentially blame medical shortages in Iran on Western sanctions. How did you reach this conclusion?
Siamak Namazi: We concluded that the Iranian government deserves firm criticism for mismanagement of the crisis, poor allocation of scarce foreign currency resources and failing to crack down on corrupt practices, but the main culprit are the sanctions that regulate financial transactions with Iran. So, while Tehran can and should take further steps to improve the situation, it cannot solve this problem on its own. As sanctions are tightened more and more, things are likely to get worse unless barriers to humanitarian trade are removed through narrow adjustments to the sanctions regime.
My team and I reached these conclusions after interviewing senior officers among pharmaceutical suppliers, namely European and American companies in Dubai, as well as private importers and distributors of medicine in Tehran. We also spoke to a number of international banks. None of us had any financial stake in the pharmaceutical business, whatsoever, and we all worked pro bono.
Q: What is your basis for this claim given the humanitarian exemptions to the sanctions regime that allow for the trade of food and medicine?
Siamak Namazi: The US Congress deserves kudos for passing a law making it abundantly clear that humanitarian trade in food, agricultural products, medicine and medical devices are exempted from the long list of sanctions against Iran. This law is the reason why the Western pharmaceuticals can do business in Iran. I sincerely applaud that gesture.
Unfortunately, what we see is a case of what lawyers refer to as “frustration of purpose.” Iran can in theory purchase Western medicine, but in practice it is extremely difficult to pay for the lifesaving drugs it needs. Despite the Congressional directive, a number of Executive Orders that restrict financial transactions with Iran remain in place, making it all but impossible to implement that exception.
Sanctions also limit Iran’s access to hard currency. The country’s oil sales are seriously curtailed and have effectively been turned into a virtual barter with the purchasing country, mainly China and India.
Q: Not all Iranian banks are blacklisted by the US and there is a long list of small and large international banks that could carry out humanitarian transactions. Why can’t Iran use these channels for importing the medicine it needs?
Siamak Namazi: The non-designated Iranian banks are small and lack the international infrastructure required to wire money from Tehran to most foreign bank accounts. They rely on intermediary banks to process such transactions. Unfortunately, it’s extremely difficult, if not outright impossible, for these Iranian banks to find such counterparts, even when they are trying to facilitate fully legal humanitarian trade.
In the end, Iran needs to go through many loops and plays a constant cat and mouse game, creatively trying to find a channel to pay its Western suppliers of medicine. Not only does this increase the costs of medicine for the Iranians, it also causes major delays. In the meanwhile, pharmacy shelves run empty of vital drugs and the patient suffers.
Q: Isn’t that just a reflection of the international banks being too cautious rather than shortcomings in US sanctions laws? In a recent testimony to the Senate, US Treasury Undersecretary David Cohen was clear that no special permission is required to sell humanitarian goods to Iran and foreign financial institutions can facilitate these permissible humanitarian transactions.
Siamak Namazi: What Mr. Cohen actually said is that all is fine “as long as the transaction does not involve a U.S.-designated entity,” meaning a sanctioned Iranian bank.
How, exactly, does an international financial institution guarantee that none of Iran’s main banks, all of which are blacklisted, were involved in any part of the long chain involving a foreign currency transfer from Iran? Recall that foreign currency allocation for pharmaceutical imports start with the Central Bank of Iran, which is blacklisted. Maybe the CBI wired these funds to the non-designated Iranian bank from monies it holds in say, Bank Tejarat or Bank Melli, potentially adding further layers of banned banks to the chain.
Given the severity of the risk involved — fines that have reached nearly $2 billion in recent months — international banks seek clear indemnity. They want legal clarification that basically says, “You will not be fined for clearing humanitarian trade with Iran, period.”
So far Treasury has refused to grant such a measure, though recent comments by senior officials suggest that the US government has sent out delegations reassuring the banks, without actually making any changes to the letter of the law. While this is a welcome move, and indeed one of the recommendations in the report published by the Wilson Center, it is far from sufficient.
Q: You say that Iran has a hard time finding a banking channel to pay for Western medicine. At the same time, for the first time in many years, Iran purchased $89 million in wheat from the US in 2012. Why were they able to find a banking channel to pay for wheat, but have difficulty purchasing medicine?
Siamak Namazi: My claim is supported by recent US trade statistics showing that exports of pharmaceuticals to Iran dropped by almost 50 percent, but these numbers are ultimately misleading. My understanding is that US trade data only reflects exports from an American port, directly entering an Iranian port, which is a thin slice of the overall trade. This is while most companies send their goods to Dubai, Europe or Singapore and cover the entire Middle East, including Iran, from these hubs. So, when the statistics refer to a drop of sales of medicine from around $28 million in 2011 to half that figure in 2012, the figure grossly misrepresents the scale of the problem.
Let me stress this point again: the loss of $14 million in American-made drugs does not make for a crisis. The real problem is exponentially bigger than this. We are talking about the loss of hundreds of millions of dollars worth of American and European medicine.
You must also keep in mind supplier power in trade. Wheat is a perfectly substitutable good, so Iran is bound to find one supplier that is willing to sell its wheat with extended credit terms, until it secures the hard currency and banking channel to pay for it. A vital drug is often perfectly un-substitutable; meaning that a single company — most often American or European in the case of the most advanced medicines — enjoys a 20-year patent to manufacture it. So if Iran cannot find a banking channel to reimburse the manufacturer for it, it will have to do without that medicine until it can pay.
Q: Why can’t Iran procure its medicine from China, India or Japan — the countries it’s selling oil to?
Siamak Namazi: Iran has already increased its purchase of medicine and medical equipment from all the countries you listed. However, as I stated earlier, due to the highly regulated and patented nature of the pharmaceutical business, vital drugs are often un-substitutable.
Even when there is an alternative drug made by the Chinese, Indians or Japanese, there is an additional barrier. Medicine has to be registered before its importation is permitted. Just like the US has the Food and Drug Administration, Iran, like most countries, has an equivalent body that must approve the medicine. The specific molecule must be registered after thorough testing. In Iran, this process takes an exceedingly long time and should no doubt be improved, though recently they have taken steps to expedite it by making exceptions. The Ministry of Health sometimes allows a drug that was approved for sale in another country to also be imported and sold in Iran. But this rushed process has had major consequences in terms of side-effects. There are even press reports of deaths when substandard drugs were imported.
To be honest, I don’t understand the logic of the advocates of this solution. They argue that the existing humanitarian waivers are sufficient and claim any shortage of medicine in Iran is the consequence of Tehran’s own mismanagement. I have even heard accusations that Iran is intentionally creating such shortages to create public outrage against the US. But if they maintain the sanctions regime is fine as it is, then how come they try to promote substitution from China and India? Besides denying Iranian patients their right to receive the best treatment there is, aren’t they also rejecting the American pharmaceutical companies’ right to conduct perfectly legitimate business?
Q: To be fair, Iran’s own former health minister, Marzieh Vahid Dasjerdi, also accused the government of failing to allocate the necessary resources and lost her job after doing so.
Siamak Namazi: I actually commend the former health minister for her courageous intervention and have also voiced my concern about the misallocation of hard currency in various forums.
That said, I am not in a position to know or comment on the exact nature or circumstances of her dismissal. I can only reference our direct research and findings. We found and verified ample cases where Iran had allocated hard currency for vital medicine, yet the purchase fell through because they could not find a banking channel. This includes the sale of an anti-rejection drug needed for liver transplants by an American pharmaceutical that ultimately failed. Can you imagine waiting years for a donor and when your operation time arrives, being told that you cannot have it because the drug you need is missing?
You need not take our word for it. It is very easy for the US government to verify our claims by talking to the American pharmaceuticals that do business with Iran, or even by reviewing some of OFACs own files. In fact, the US industry lobby USA*Engage recently wrote a letter refuting Undersecretary Cohen’s claims that American companies have no problems dealing with Iran. In their own words: “Despite … clear Congressional directive and long-standing policy, the U.S. Treasury implements Executive Branch unilateral banking sanctions in a manner that blocks the financial transactions necessary for humanitarian trade.”
Q: So is there a solution to all this?
Siamak Namazi: Absolutely, and I have spelled it out in my op-ed in the International Herald Tribune and also in the Wilson Center report. It simply makes no sense to say humanitarian trade is legal, but the banking channel needed to facilitate the trade is restricted. In the case of medicine, the solution is arguably simpler than other humanitarian goods. With fewer than 100 American and European companies holding patents to the most advanced drugs needed, we can craft narrow, but unambiguous exemptions to the banking restrictions, essentially allowing these companies to sell medicine to Iran without undermining the sanctions regime overall.
To address the shortage of hard currency, Iran should be allowed to convert some of its current holdings in Chinese, Indian and other banks around the world into hard currencies for the exclusive purpose of buying medical supplies. Alternatively, the US could revisit its earlier decision on the matter and allow European companies that owe billions of dollars to Iran to settle this debt by paying a pharmaceutical company on Iran’s behalf.
US policymakers are reminded that medicine is highly subsidized in Iran. Imported drugs receive hard currency allocations at a greatly subsidized rate and are again supported through government-owned insurance companies. That means that the Iranian government ultimately gains far fewer rials for every dollar it allocates to an importer of medicine than it does selling its hard currency to importers of most other goods.
– Siamak Namazi, a Middle East specialist whose career spans the consulting, think tank and non-profit worlds, is currently a consultant based out of Dubai. His former positions include the managing director of Atieh Bahar Consulting, an advisory and strategic consulting firm in Tehran. He has also carried out stints as a fellow in the Wilson Center for International Scholars, the Center for Strategic and International Studies and the National Endowment for Democracy. A frequent contributor to international publications and conferences, he has authored chapters in six books and appeared regularly as a commentator in the international media. He holds an MBA from the London Business School, an MS in Planning & Policy Development from Rutgers University, and a BA in International Relations from Tufts University.
]]>by Jamal Abdi
The notion that U.S. sanctions on Iran are supposed to act as diplomatic leverage to get a nuclear deal may be dispelled once and for all by a new Congressional action now in the works.
The House is poised to move ahead with a new round of [...]]]>
by Jamal Abdi
The notion that U.S. sanctions on Iran are supposed to act as diplomatic leverage to get a nuclear deal may be dispelled once and for all by a new Congressional action now in the works.
The House is poised to move ahead with a new round of Iran sanctions, and a slew of new sanctions proposals are set to be introduced in the Senate, even as a host of current and former senior U.S. officials — including Secretary of State John Kerry – have warned the body to hold off on new sanctions at the risk of imperiling a diplomatic resolution to the nuclear standoff.
For some in Congress, this seems to be precisely the point.
Senator Mark Kirk (R-IL) is circulating a draft measure that would make regime change, not a negotiated solution, the official U.S. policy. Kirk promises to introduce that measure shortly, but first will introduce two smaller sanction measures to cut off Iran’s foreign exchange and block its natural gas deals, all building up to the grand finale. The first was introduced this week, S.892, which is designed to cut off Iranian access to euros. It would sanction any foreign entity that converts currency held by Iran’s Central Bank or other sanctioned Iranian entities into non-local currency. Blocking off Iranian access to euros will of course make it more difficult for Iran to purchase Western medicines and exacerbate the reported sanctions-induced medicine shortage now plaguing Iran.
Sen. Kirk hopes to attach these smaller bills to another sanctions package in the House before formally introducing his regime change bill. That bill will mandate that sanctions be kept in place until Iran transitions to a democratic government — a preposterous notion given the disastrous effect sanctions are having on Iran’s civil society and democracy movement. The bill would echo the Iraq Liberation Act, which was passed and signed by President Clinton in 1998 and cemented regime change as the official policy toward Saddam Hussein. That measure all but guaranteed Saddam would not comply with sanctions — what was the point if they would never be lifted? — and was cited by Congress as the basis for authorizing war with Iraq four years later.
In the meantime, the House is considering H.R.850, a measure that would sanction U.S. allies that conduct commercial transactions with Iran. Despite existing humanitarian waivers, this could affect transactions that include food and medicine as commercial entities and banks are becoming increasingly fearful of conducting any business transaction with Iran for fear of being penalized by the United States. Congress attempted to pass a similar measure last year as part of a previous sanctions package, but removed it at the last minute after intervention by the Obama Administration. A Congressional aide told Congressional Quarterly at the time that the measure “would be impossible to enforce and only make our allies really angry. They would have endangered their cooperation with the sanctions we have now.”
Nevertheless, the House Foreign Affairs Committee is looking to move H.R.850 in a matter of weeks. Next Wednesday, the committee will hold a hearing with Under Secretary of State for Political Affairs Wendy Sherman, the top U.S. negotiator conducting multilateral talks with Iran, and Treasury Under Secretary for Financial Intelligence and Terrorism David Cohen, who is in charge of implementing the Iran sanctions. Committee Chairman Ed Royce ominously said the hearing was “a chance to press the Administration on critical questions surrounding U.S. participation in the P5+1 negotiations and its implications for the enforcement of sanctions.” The implication being that the U.S. could be implementing more sanctions if pesky diplomacy wasn’t getting in the way. The next step would be to move the sanctions bill.
Regardless of what Sherman and Cohen tell the chamber, it may make no difference. Secretary of State John Kerry implored the Senate Foreign Relations Committee in April to hold off on further sanctions and to not interfere with diplomatic efforts to little effect. Congress has become increasingly bold in dismissing the White House’s requests when it comes to Iran. Congress has also thus far ignored reports from senior former officials like Tom Pickering, Dick Lugar, Ann Marie Slaughter warning that sanctions were outpacing negotiations and threatening to upend the diplomatic process.
The Kirk measure on foreign exchange introduced this week, in fact, circumvents the White House and doesn’t even require the President’s signature. It pronounces that, regardless of when the bill would actually be passed, the sanctions on foreign exchange would go into effect starting May 9. This means the U.S. will retroactively issue sanctions against any bank conducting a transaction after this date, so long as the bill passes at some point. It is essentially sanctions by Congressional decree. The threat of sanctions from the Hill is now so great that they do not even need to be passed to have a chilling effect. It is a stunning display of impunity by Iran hawks in Congress and groups like AIPAC and the Foundation for Defense of Democracies that are supporting these measures.
It’s little wonder, then, that the narrative in Tehran is that even if Iran complies with U.S. demands on its nuclear program, the sanctions will continue and the President can’t do a thing about it. While Kirk’s Iraq Liberation Act for Iran may not yet be introduced, he may not have to get his final bill passed in order to lock in the sanctions as regime change policy.
The dominant narrative in Tehran is already that, much like with Saddam’s Iraq, the sanctions on Iran will never be lifted. The President has no mechanism to formally lift many of the hardest hitting sanctions — he is dependent on Congress. And Congressional hawks have indicated that if Iran compromises, it will be proof the sanctions are working and instead of easing them in a quid pro quo, more sanctions should be passed. Tehran’s narrative is being reinforced by Congress, and unless the U.S. can convey that there is an offramp from sanctions, Iran’s nuclear program will likely continue apace.
– Jamal Abdi is the Policy Director of the National Iranian American Council, the largest grassroots organization representing the Iranian-American community in the US. He previously worked in Congress as a Policy Advisor on foreign affairs issues. Follow Jamal on Twitter: @jabdi
Photo: The Central Bank building in Tehran, Iran.
]]>By Erich C. Ferrari and Samuel Cutler
Contained in the Defense Authorization Act (NDAA) of 2013, and signed into law by President Obama on January 2, are sweeping new sanctions targeting Iran over its disputed nuclear program. The new measures target foreign entities engaging in a wide array of transactions with [...]]]>
By Erich C. Ferrari and Samuel Cutler
Contained in the Defense Authorization Act (NDAA) of 2013, and signed into law by President Obama on January 2, are sweeping new sanctions targeting Iran over its disputed nuclear program. The new measures target foreign entities engaging in a wide array of transactions with Iran, including the sale of any goods supporting Iran’s energy, shipping and shipbuilding sectors, the sale of raw materials such as aluminum, steel, and coal, the provision of insurance, or underwriting services in support of any activity for which Iran has been subjected to US sanctions.
Lawmakers quoted by the Wall Street Journal said that the new sanctions move closer to a complete trade embargo on Iran. Importantly, the US currently maintains a complete trade embargo, with exceptions for humanitarian exports and a positive licensing program for divestment activities and certain academic and cultural exchanges with Iran. The new sanctions will therefore have little impact on the legality of US companies still engaging in licensed trade with Iran. Any new steps that restrict Iran’s ability to buy or sell goods and services would need to be enforced through the threat of US secondary sanctions.
Secondary sanctions, known pejoratively as extraterritorial sanctions, are designed to prevent foreign individuals and entities from conducting activities that US primary sanctions seek to prohibit by imposing various penalties, including revoking access to the US market. They have been increasingly used over the past 3 years by the United States to pressure foreign countries and entities into curtailing their business dealings with Iran. Beginning with the Iran Sanctions Act of 1996 and gaining wide spread notoriety with the Comprehensive Iran Sanctions Accountability and Divestment Act of 2010 (CISADA), the US government maintains the authority to impose secondary sanctions on a wide variety of activity involving Iran, including but not limited to the importation of Iranian crude oil, dealings with entities sanctioned under Weapons of Mass Destruction (WMD) or Terrorism-related programs and the export to Iran of refined petroleum products.
By and large, these measures have been extremely effective at cutting Iran off from large swaths of the global economy. Sanctions on Iranian financial institutions have been particularly effective as most foreign banks are loathe to risk their access to the all-important American financial system and have responded by cutting off all ties with Iran.
The effectiveness of secondary sanctions is largely dependent on buy-in from the rest of the world. Following the passage of new sanctions included in the 2012 NDAA, Iranian oil exports have dropped to under 1 million barrels per day. A number of factors contributed to the sanctions’ success. For example, international concern over the continued development of Iranian enrichment capabilities convinced some states that additional economic leverage was needed to pressure Iran to resume negotiations. While the NDAA directed countries to “significantly reduce” their purchases of Iranian oil, the European Union announced its intention to institute a full oil embargo just 3 weeks after the act’s passage.
This does not mean that all of Iran’s trading partners would have acted in the same manner without the existence of sanctions. An increase in the global supply of crude oil due to greater production levels in Saudi Arabia, Iraq, and Libya coupled with lower demand as result of the global economic slowdown has allowed Iran’s customers to reduce their purchases without dramatically increasing the price of crude. Waivers included in the law have also allowed importers of Iranian oil to gradually reduce their purchases so as not decrease the associated economic costs. So, despite repeated denunciations of US unilateral sanctions in public, China has quietly reduced its purchases of Iranian oil, as have Iran’s other East Asian customers. By complementing new sanctions with robust diplomatic engagement and managing the economic costs of compliance, the United States has been able to ensure fairly broad acceptance of its efforts to economically isolate Iran.
Indeed, secondary sanctions targeting Iran have faced roadblocks in the past when a consensus regarding their utility was lacking. In 1996, Congress passed the Iran and Libya Sanctions Act, which was renamed the Iran Sanctions Act (ISA) in 2006 following Libya’s decision to give up its WMDs. The bill directed the President to sanction foreign companies that provided investments of over $40 million towards the development of petroleum resources in Iran. The EU responded by threatening to file a World Trade Organization complaint against the US due to French petroleum giant Total SA’s involvement in a $2 billion deal to develop Iran’s South Pars gas field. President Bill Clinton was forced to issue a waiver for the project in 1998 and Secretary of State Madeline Albright later promised that similar projects would not be sanctioned. It would be another 12 years before any entity was subjected to ISA sanctions.
The reality is that the Executive’s use of secondary boycotting measures has been fairly limited. For example, only two banks have lost their ability to maintain correspondent banking relationships with the US because of the Iranian Financial Sanctions Regulations mandated by CISADA: Elaf Islamic Bank and Kunlun Bank. Moreover, the Executive branch, not Congress, is tasked with the implementation of the secondary boycotting measures. In other words, while Congress can continue to provide tools for the Executive to impose additional sanctions, the actual implementation is left to the President.
Yet the impact of numerous rounds of congressionally mandated secondary sanctions is greater than the sum of its prohibitions. Due to the confusing and oftentimes overlapping nature of different US sanctions programs, the international business community has in large part withdrawn from the Iranian market in fear of running afoul of US law. Sanctions on Iranian financial institutions have been particularly effective, as the mere existence of CISADA-authorities have convinced most foreign financial institutions to cut off all ties with Iran.
In practice, secondary sanctions are the equivalent of speaking softly, but carrying a big stick. However, the US has departed from the diplomatic strategy of Theodore Roosevelt. Indeed, the latest round of secondary sanctions are a form of neo-big stick diplomacy; the US is now speaking loudly and carrying a big stick.
- Samuel Cutler is a policy adviser at Ferrari & Associates, P.C. and Erich Ferrari is the principal of Ferrari & Associates, P.C., a Washington, DC boutique law firm specializing in US economic sanctions matters.
]]>In the past few days there have been a string of reports regarding the harmful impact of sanctions on the Iranian population. Issues related to rising prices, the inability to import medicine for life threatening diseases because of financial sanctions and even life threatening pollution caused by domestically-produced gasoline, [...]]]>
In the past few days there have been a string of reports regarding the harmful impact of sanctions on the Iranian population. Issues related to rising prices, the inability to import medicine for life threatening diseases because of financial sanctions and even life threatening pollution caused by domestically-produced gasoline, have all received ample attention in the Western press. On Saturday, two additional airlines — KLM and Austrian Air — announced the suspension of flights to Iran (Austrian Airlines by January 13 due to a lack of demand and KLM by April).
Inside Iran, one parliamentarian went so far as to suggest that Western sanctions are moving toward the direction of the Iraqi food for oil program. Meanwhile, political institutions seem to be in complete deadlock over the direction of economic policy. The government is once again late in forwarding its budget to the Parliament despite complaints. The Parliament in turn has voted to suspend the second phase of the government’s much touted Targeted Subsidy Reform Act, fearing fuel price increases will worsen the already out of control inflation rate which according to the Central bank of Iran now stands at 27.4 percent (more independent observers think that it could be higher than 40 percent). Even Iran’s Chamber of Commerce, Industries, and Mines is siding with the Parliament. In a public statement it called for the suspension of the second phase until the government fulfills the obligations it had in the first phase to the industrial and agriculture sectors. According to the head of the Chamber, Mohammad Nahavandian, the government has yet to pay 30 percent of its commitments to these sectors. The country is awash with rials due to the expansionist fiscal policies of the past few years but industry and agriculture are faced with liquidity shortages due the government’s lack of payment for services preformed, he said.
Mahmoud Ahmadinejad thinks otherwise. He went to the Parliament on Wednesday to make his case for implementing the second phase of the subsidy reform but there was even conflict over whether the president should have just given a speech or also face questions from MPs. Iranian television announced that it would have a live program debating subsidy reform on Sunday, followed by a poll. But the program was cancelled at the last minute on the pretext that this action was intended “to create a tranquil environment for the airing of the president’s views.”
All this brings attention to the questions of how bad the economic situation really is in Iran and whether we are finally witnessing a country that is on the brink. However, a study done for the Oxford Institute for Energy Studies suggests that these are the wrong questions to ask; they lead Iran watchers to ignore important debates and changes that are taking shape in order to counter the impact of sanctions. Conducted by William Yong and Alireza Hajihosseini, the study is not very instructive in terms of the extent to which these debates and changes will be successful in countering the preponderant force of sanctions. But the authors are rather persuasive in their criticism of the infatuation with the one-sided impact of sanctions without giving due attention to “how sanctions are being absorbed by Iran’s political elites in a dynamic and continuous fashion.” They suggest that the portrayal of Iran as perpetually “on the brink while confounding us with the fact that it has not yet tumbled” prevents us from examining the dynamic manner in which the Islamic manner is trying to respond to challenges posed.
The force of sanctions has surprised the leadership of the Islamic Republic, but Yong and Hajihosseini argue that it’s now in adjustment mode with both the short and medium term in mind. In the short term, the fight will play out over the budget. Rather than bemoaning the president’s performance, the focus has shifted to “fiscal management that reflects new realities.” The fight will be over the extent of budget contraction, how to increase revenues, and what the estimated oil price in the budget should be and at what currency rate. This budget fight happens every year, but it has taken on new urgency in the midst of “new realities.” Yong and Hajihosseini suggest that the Petroleum Ministry will be a more important player as it becomes increasingly wary of being a hollow structure overseeing companies (including the National Iranian Oil Company) that have been treated as cash cows for the government. It will be pushing for a greater share of oil revenues for investment purposes.
None of this may work. After all, Iran has been trying to wean itself from oil revenues since forever. But necessity may indeed turn out to be the mother of all inventions. The heated debates and efforts suggest that the Iranian political class has now turned its attention to domestic economic restructuring and economic resources that can be generated from inside the country in order to address shortfalls and problems caused by sanctions. Despite their acknowledgment of severe economic difficulties, they are behaving as though they do not believe that Iran is on the brink.
Photo: Adam Jones (Flickr) (CC BY-SA 2.0)
]]>via Sanctions Law
This was a big year for sanctions. Although 2012 isn’t over yet and there is some pending legislation threatening to impose more sanctions against Iran and a forthcoming set of regulations from OFAC on some of the additional Iran sanctions we saw in the late summer/early fall, [...]]]>
via Sanctions Law
This was a big year for sanctions. Although 2012 isn’t over yet and there is some pending legislation threatening to impose more sanctions against Iran and a forthcoming set of regulations from OFAC on some of the additional Iran sanctions we saw in the late summer/early fall, I thought I would recap some of the big sanction developments of 2012. I may update this list if additional events do come to pass.
December 31, 2011: President Obama signs into law the National Defense Authorization Act (NDAA) of 2012 (NDAA), which includes Section 1245, calling on the President to block all Iranian banks and the Central Bank of Iran.
January 23, 2012: Bank Tejarat is designated under Executive Order 13382 for its involvement in Iran’s weapons of mass destruction proliferation efforts. Tejarat was frequently used to initiate payments for U.S. exports of agricultural commodities, medicine, and medical devices. That same day the European Union (EU) institutes an oil embargo against Iran and targets the Central Bank of Iran for sanctions.
February 6, 2012: President Obama issues Executive Order 13599, effectively blocking all Iranian financial institutions.
February 23, 2012: Designations under the Transnational Criminal Organizations sanctions program applied to a number of individuals believed to be members of Brother’s Circle and Yakuza.
February 27, 2012: The EU applies sanctions to the Central Bank of Syria.
February 28, 2012: The first NDAA deadline passes.
March 15, 2012: EU prohibits SWIFT from providing financial messaging services to EU designated banks.
March 20, 2012: First NDAA exemptions are announced. Eleven (11) countries receive sanctions waivers.
April 23, 2012: The Grave Human Rights Abuses by the Governments of Iran and Syria Via Information Technology (GHRAVITY) executive order is issued.
May 1, 2012: Foreign Sanctions Evaders Executive Order is issued.
May 16, 2012: Yemeni Sanctions Executive Order is issued. EU suspends sanctions targeting Burma.
May 22, 2012: Belarus based JSC CredexBank is targeted as a financial institution of primary money laundering concern under Section 311 of the USA PATRIOT Act.
June 6, 2012: The United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) announces $619 million sanctions settlement against ING Bank. The announcement marks the largest settlement in the history of OFAC.
June 11, 2012: 2nd NDAA exemptions are announced.
June 28, 2012: 2nd NDAA deadline concerning oil activity and public/private banks.
July 1, 2012: EU Oil Embargo against Iran goes into effect.
July 11, 2012: OFAC issues two general licenses which significantly ease U.S. sanctions targeting Burma.
July 17, 2012: U.S. Senate releases report and holds hearing on the activities of HSBC which includes evidence of money laundering and sanctions violations.
July 31, 2012: First designations under the Comprehensive Iran Sanctions Accountability, Divestment Act of 2010 (CISADA). Kunlun Bank and Elaf Islamic Bank added to the new Part 561 List. President Obama also issues Executive Order 13622 implementing further sanctions against Iran, specifically targeting the National Iranian Oil Company, and Naftiran Intertrade Company.
August 6, 2012: New York Department of Financial Services announces violations of banking laws and sanctions by Standard Chartered Bank.
August 10, 2012: The Iran Threat Reduction and Syria Human Rights Act of 2012 (“TRA”) is signed into law.
October 9, 2012: Executive Order 13628 issued. U.S. parent companies become liable for their foreign subsidiaries dealings with Iran.
October 11, 2012: MS-13 is designated under the Transnational Criminal Organizations sanctions program.
October 15, 2012: EU bans dealings between EU financial institutions and Iranian banks.
– Erich Ferrari an attorney specializing in OFAC matters. If you have any questions please contact him at 202-280-6370 or ferrari@ferrariassociatespc.com.
Virginia Tech economist Djavad Salehi-Isfahani’s recent explanation of the rial situation in Iran generated a lot of attention, and much in the way of non-expert criticism, likely because it sways considerably from the prevailing narrative on Iran’s economy: it’s about to collapse. But Salehi-Isfahani is sticking to his guns. [...]]]>
Virginia Tech economist Djavad Salehi-Isfahani’s recent explanation of the rial situation in Iran generated a lot of attention, and much in the way of non-expert criticism, likely because it sways considerably from the prevailing narrative on Iran’s economy: it’s about to collapse. But Salehi-Isfahani is sticking to his guns. He elaborates on his reasoning and the effect of sanctions on his personal website:
]]>Admittedly, the situation in Tehran is both confusing and shrouded in secrecy– for understandable reasons –and I do not claim to fully understand what is going on between oil exports, frozen and unfrozen Central Bank of Iran (CBI) accounts abroad, and rupees and yuans. But some reporters I talked to in the last few days did not know that Iran had a multiple exchange rate system, or that currency crises in oil exporting countries are different from those in which private sector earns the bulk of the foreign exchange. So, it seemed there was reason to say something.
With its diminished oil revenues the government can still shield large sections of the economy from the adverse impact of large devaluations in the the parallel market. The import classification system put into place last December was precisely for that. I do not know how much of the CBI forex goes to basic goods, how much to the Exchange Center, and how much, if any, to the parallel market. My guess is that, for obvious reasons, this market is not near the top of the list CBI priorities for cash infusion. I am not sure if any central bank faced with the same difficulties would use its foreign currency to calm a currency market gripped by fears stemming from tightening sanctions, even war. Any politician who decides otherwise would have to answer to voters (or people in the streets) when the country runs out of foreign exchange for essential imports.
In my view, given the sanctions and the emergency conditions that the country faces, the rise in the value of the rial in the parallel market is not at all surprising It should be no more a source of shock or surprise to see high ticket prices outside sports or entertainment events, especially when the quality of the event is uncertain beforehand. There are people who believe that scalpers should not be allowed to buy and sell concert tickets, and there are those who believe that such trades at the curb even at very high prices have their place. I happen to belong to the latter group. However, I fear that with the hoopla over the “rial’s collapse,” the government may run out of patience with the free market and send it underground. That would be unfortunate.
Some readers of my Lobelog post thought that it painted an overly optimistic picture of the situation. I had said that the currency crisis did not amount to economic collapse. It is also true that, as a matter of habit, I did not discuss conspiracy theories (which I rarely believe), such as those that would blame the government for creating this mess on purpose in order to make more rials, or those that blame a few ringleaders for corrupting the system. (But, as they say, just because you are paranoid it does not mean that they are not out to get you!)
Sanctions are not a game. They are designed to inflict pain on the people of the country they are imposed on, and as we have seen they are doing just that in Iran, and not all social strata feel the pain at the same rate. Iran’s government is in a position to decide who gets hurt more and who get off with less pain. For example, it has decided that keeping chicken production going is more important than paying the tuition of thousands of students abroad. That is a choice that many would disagree with, but to say that it makes sense from the point of view of Iran’s government is not to minimize the gravity of the situation or the level of pain on those who lose more than others. If the economy has not collapsed, economic growth has and with it the hopes of young people for finding a job and setting up new families.
By Jahangir Amuzegar
*Dr. Amuzegar is a distinguished economist and former member of the IMF Executive Board.
During the last 12 months, and particularly since January 2012, the erratic and unhinged behavior of the Iranian currency, the rial, has been added to the Islamic Republic’s other thorny and protracted [...]]]>
By Jahangir Amuzegar
*Dr. Amuzegar is a distinguished economist and former member of the IMF Executive Board.
During the last 12 months, and particularly since January 2012, the erratic and unhinged behavior of the Iranian currency, the rial, has been added to the Islamic Republic’s other thorny and protracted economic woes. After nearly a decade of relative stability in both the official and free market, the rial experienced a precipitous plunge in late December 2011, and subsequently lost nearly half of its value within a short time. With far-reaching effects not only on external trade, but also on domestic prices, interest rates, savings, investments and capital flows, the rial’s value has become the Mahmoud Ahmadinejad administration’s biggest daily economic headache.
While the explanations, reasons, and guesses so far offered for the upheaval have ranged from the probable (eg deteriorating business climate and political uncertainties) to the bizarre (eg sabotage by government “enemies”, manipulation by local currency dealers, and the administration’s own stratagem to make up for budget deficits), the real reasons are more numerous and far more complicated. This review attempts to seek the underlying causes of the recent events in a number of deeper-rooted and interrelated phenomena not so far sufficiently scrutinized.
The Unfolding Drama
The fall of the rial’s value has a long history. On the eve of the 1979 revolution, Iran’s domestic exchange rate for the US dollar was IR70.6. The revolution’s subsequent economic disasters – the bureaucracy’s massive upheaval, wholesale nationalization of banks, industries, and commercial enterprises, the exodus of nearly all experienced industrial managers, and massive capital flights exerted relentless daily pressure on the rial. The ruinous 1980-88 Iran/Iraq war and the drastic fall in Iran’s annual oil exports, accompanied by lower oil prices in the mid 1980s, imposed further heavy burdens on the Iranian currency. A series of misguided economic policies followed by Mir Hossein Mousavi’s left-center government during the 1980s, designed to control prices and wages, resulted in the rise of a multiple exchange rate system. So, by the end of the war, the Islamic Republic had 12 different official exchange rates for the US dollar. Subsequent attempts by the postwar government of President Hashemi Rafsanjani designed to cope with rent-seeking activities, spreading corruption, and economic injustices gradually reduced the exchange number to four. Under President Mohammad Khatami’s “reformist” government, the last four exchange rates were finally unified in 2002.
During 1978-2002 the rial lost its foreign exchange value steadily year after year. While the official dollar rate – announced by the Central Bank of Iran (CBI) under its so-called “managed float” system – started weakening from $1=IR70 in 1978 to $1=IR1,750 in 2001, the free market rate rose from $1=IR100 to $1=IR7,920 during the same 23 years. As the free market rate had reached $1=IR8,000 by 2002, the new unified rate was set at $1=IR7,950 and was periodically raised by small increments.
In the meantime, the free market rate’s difference with the official rate was virtually eliminated until September 2010 when a relatively modest difference of about IR1,300 began between the two rates, and repeated attempts to eliminate the daily difference were not successful. On 7 June 2011, the rial unexpectedly crashed on the open market and traded near $1=IR11,800. The CBI, moving to eliminate the difference and unify the two rates, raised the ongoing official rate from $1=IR10,590 to $1=IR11,740 – a 10.5% devaluation. In a matter of days, due to the CBI’s massive market interventions, a new stability was established. In order to minimize future rate differences, the CBI opened a “secondary” exchange window designed to deal with dollar demands for services (eg travel) at a third rate between official and free.
In early November 2011, while the foreign political climate became cloudier, the dollar rate in the secondary and free markets registered IR12,800, and IR13,300 respectively while the official dollar rate was fixed at IR10,850. By 30 November, while the official rate was $1=IR10,900 the free market rate climbed to $1=IR13,300. In the third week of December 2011, the free market rate climbed to $1=IR14,300 and by 30 December it reached $1=IR15,480. On 2 January the US currency sold at IR18,000 and climbed to $1=IR22,100 by 24 January. A series of panicked reactions by the CBI (eg frequently adjusting the official rate up and down) were of no avail, and market volatility intensified. Failing to calm the situation through monetary interventions and a sizeable injection of dollars in the market, the government resorted to a coercive policy. The Majlis passed legislation forbidding street venders (ie unlicensed money changers) from selling foreign currencies, ordering licensed dealers to sell dollars at no more than the specified rate, and blocking websites that reported hourly dollar prices. The Judiciary chief threatened execution of currency manipulators.
On 18 January 2012, failing to stop the currency’s continued decline, the central bank lowered the official rate by 8.5% to $1=IR12,260, and promised to offer unlimited dollars for current transactions. Then the Council on Money and Credit on 25 January 2012 changed its long-held policy of fixing deposit interest rates, allowing both government and private banks to set their own competitive rates. While the official rate was kept unchanged, the rial continued to slip and slide in the free market as the CBI was not prepared to meet all daily dollar demands. Powerless to maintain parity between official and free market rates, the CBI finally sanctified the coexistence of the “dual markets” on 14 March 2012, and let private money changers handle dollar demands for “non-essential” imports. The free market rate in late March 2012 fell to $1=IR19,000, or about 55% of its 2002-11 value. Five months after the previous high in January, the dollar rate was ranging between IR17,000 and IR19,000, surpassing $1=IR20,000 for a brief period. It has hovered around $1=IR19,000 since, with no particular direction and responsive mainly to current political events.
Leading Causes
The official explanations of the rial’s turbulence are few, far between and occasionally even bizarre. Despite reams of theoretical proofs, and decades of practical evidence to the contrary, President Ahmadinejad has linked the currency upheaval to a conspiracy between private exchange dealers, opposition politicians and the hostile press. The Central Bank governor has called it the reflection of a mob mentality, and the product of a “defective exchange market” where “hoarders, smugglers and soulless speculators” are trying to create “a false demand” for dollars as a “venue for investment”.
An objective and realistic look at the recent events, however, seems to show that the real factors behind the precipitous fall in the rial’s exchange value should be traced to: (1) a mistaken belief in the high value of the national currency as an economic desideratum; (2) a series of wrongheaded economic policies pursued by the Ahmadinejad administration to deal with both inflation and unemployment; (3) the perseverant pursuit of a national nuclear power policy, inviting the West’s wrath and resulting in a series of hardening economic sanctions; and (4) significant loss of public confidence in the government’s ability to support the official exchange rate in the face of external pressures.
The ‘Strong Currency’ Myth
The strength of the national currency and the high exchange value of the rial has always been more of a political, rather than a monetary or market phenomenon, in Iran. A strong rial, in the eyes of both the man in the street and the seasoned politicians, has always been a clear sign of economic vigor, and a symbol of political power and prestige. The intensity of faith in this myth has also been related to the believers’ economic literacy. Keeping the dollar/rial rate deliberately (and artificially) low, while one of the clearest economic policy mistakes of the past decade, is still widely demanded and revered. A current Persian website – Asr-e Iran – nostalgically laments that while the Iranian national currency unit – the Shahi – was equal to one shilling or one-twentieth of the English pound in the 16th century, the value of today’s rial is officially equal to 1/19,500 of the British currency and its free market rate as little as1/30,000.
Due to the pervasive influence of this myth, there were neither any effective business demands, nor any urgent political will, to adjust the exchange rate to its proper level after the 2002 rate unification – although all leading economic indicators warranted such realignment. There were faint voices of advice by private economists, and desperate pleas by disadvantaged exporters for the rate adjustment. The first group was contemptuously ignored by the authorities, and the second was partly silenced through the so-called “export prizes” and subsidies.
Neglecting Realities
Handicapped by the nostalgic feeling about the high national currency value, and obsessed by certain “out-of-the-box” economic convictions, President Ahmadinejad began his tenure in 2005 by following a populist and welfare-oriented economic policy, promising to “put the oil money on everyone’s table.” His economic agenda included: (a) an expansionist fiscal policy aimed at “eradicating poverty;” (b) a distinctly overvalued rial to reduce imports’ cost; (c) a mandatory low interest rates policy to minimize capital costs of business; and (d) the use of bank loans, bond issues, and sale of state enterprise to finance budget deficits – instead of tax hikes or more efficient tax collection.
The expansionist binge began with: (i) extensive and poorly supervised loans to the so-called “quick-return projects” in order to increase employment; (ii) an immense nationwide housing project (Maskan-e-Mehr) to increase home ownership; (iii) hundreds of half-baked local development projects to satisfy the crowds who greeted the president in his countrywide tours; and (iv) a “subsidies reform program” involving monthly cash payments to nearly the entire population to make up for higher energy and bread prices. As a result, the national budget rose from IR1,590 trillion in 2005 to IR5,100 trillion in 2011 – or more than three times in seven years. With annual budget deficits running at more than 4% of GDP each year, total liquidity rose from IR921 trillion in 2005 to IR3,720 trillion in 2011, or nearly fourfold.
Protracted budget deficits and liquidity expansion during 2005-11 caused the average officialcost of living index to rise by nearly 17% a year – with the most conservative privateestimate showing 22%. During the same period, Iran’s main trading partners had price increases of 2-4% a year. By a simple calculation, the difference between Iran’s cumulated inflation during the seven-year period compared with those of its trade partners would have warranted some 90% devaluation of the Iranian rial. In actuality, the exchange rate only rose from $1=IR9,025 in 2005 to $1=IR10,445 before the December crash, or a total correction of less than 16%. Thus, the government not only ignored the facts; it also violated the clear mandates of both the Fourth and Fifth Economic Development Plans, requiring annual adjustments of the rial’s exchange rate in line with the differences between domestic and foreign inflation rates. Curiously enough, in December 2010, while announcing his subsidies reform program, President Ahmadinejad asked the head of the CBI to come up with a new and “realistic” exchange rate in view of Iran’s “ample foreign exchange reserves” – an order which some of his aides at the time interpreted to mean revaluing the rial towards $1=IR5,000!
The same incongruous treatment greeted the government’s regulations of bank interest rates. During the first six years of the Ahmadinejad administration, the authorized interest rate on short term savings deposits frequently trailed the annual inflation rate, eroding the net value of the depositors’ wealth. The maximum interest rate (called “profit share” to comply with Islamic principles) payable by commercial banks on short term (less than five years) deposits during 2005-10 averaged 13% per annum, while the corresponding inflation rate registered 17-22%. In the highly inflationary year 2008, the negative spread reached 10%. As a result, there was a steady decline in the growth of savings deposits during the entire period. Despite these warning signs, however, and even ignoring the mandates of the Fifth Economic Development Plan (2010-15), requiring periodic adjustments of the deposit rates in line with the inflation rate, the Council on Money and Credit, chaired by the president, refused to budge. Even when faced with continued turmoil in the exchange market in early January 2012, the Council (in the absence of the president) allowed interest rates paid on savings deposits to be left at the individual bank’s discretion (in order to divert liquidity from gold and dollars markets). The decision was vetoed once the president returned from a foreign trip. It was only after strong public pressures that on 25 January 2012 the president finally approved the rate adjustments.
President Ahmadinejad’s third gamble with the teetering economy was to fight a virulent and cumulative inflation with the wrong weapon. Instead of controlling consumer prices through conventional means, eg balancing the budget, raising interest rates, reducing bank borrowings, controlling liquidity, or raising factor efficiency, he chose the easy way. Blessed by the best six years of oil export receipts from Iran’s 106-year-old oil industry, he opened the imports’ floodgate. Iran’s revenues during the first six years of the Ahmadinejad administration reached $560bn, compared to only $433bn by all the eight previous governments since the 1979 revolution. In the same six years, imports amounted to $330bn – three times those of the Khatami and Rafsanjani administrations. Yet, during the same six-year period, the government debt to the banking system rose from IR113 trillion to IR403 trillion – or four times. The pernicious policy of trying to fight domestic inflation through cheap imports required the rial to be kept highly overvalued.
Sanctions As Catalyst
The Islamic Republic’s nuclear development program has been the third factor in the exchange rate drama. Widespread suspicion in the West regarding the ultimate objective of Iran’s uranium enrichment activities initially led the United Nations Security Council to issue four consecutive sanctions resolutions. And the move was subsequently followed by the US, the European Union and others. Thus, the original “targeted” and “smart” penalties gradually morphed into the current “crippling” restrictions. They currently consist of stiff and extensive restrictions on travel, trade, banking, finance, shipping, insurance, investment, and transfers of nuclear technology involving hundreds of individuals, businesses, and agencies associated with the Tehran government. Their sole objective has been to dissuade Iran from pursuing its nuclear program – a program which Tehran claims to be for purely civilian energy research and production, but the “sanctioneers” suspect it to involve certain military objectives and possibly even nuclear weapons ambitions.
Although the current sanctions have not targeted the exchange rate in any direct way, their indirect impact on the rate’s movement has been notable. While the rial’s equilibrium exchange rate was due for a substantial correction and for a long time, the plunge would not have occurred without a catalyst. The currency could still have remained out of equilibrium for a while thanks to rising oil export earnings. The trigger for the precipitous plunge was supplied by the news of forthcoming new crippling American and European sanctions in early December 2011 – particularly the oil embargo. The exchange market was visibly rattled. And, on 31 December, when US President Barack Obama signed into law the new (and unprecedented) sanctions involving Iran’s central bank, the exchange dam burst, and the downward movement began.
In the same vein, while negative interest rates on bank deposits were not unique to the Ahmadinejad administration, and never a lever for a game change, two specific factors related to sanctions heralded a dynamic change. The first was a shift in the investment climate, shaken by the threatening sanctions. Prior to 2010, when there was relative political calm, the real estate market was flourishing, and rising liquidity would flow into land, apartment building, and the Tehran Stock Exchange. With the news of ominous times ahead, the funds started to invade the gold and foreign exchange markets as far safer and better havens. The second factor was a bewildering and untimely decision by the Council on Money and Credit, aimed at compensating the effects of sanctions, to lower short term interest rates from 16% in 2008 and 13% in 2009, down to11% in 2010 and 10% in 2011, at the very time that consumer prices had begun to rise from 12% towards 22%!
Loss Of Market Confidence
The fourth factor in the rial’s declining value has been the loss of people’s confidence in the CBI’s ability to cope with the crisis. The bank officials’ frequent empty promises, inadequate determination to follow declared policies, insufficient action to deal with the crisis, and inadequate supply of dollars to stem the growing speculative demand have all been major sources of popular disappointment. To wit, when the free market rate for the dollar dropped by more than 10% in less of a day in late December 2011, the CBI governor responded with a firm promise to bring it back even below the official rate. Yet nothing happened. On 5 January 2011, the bank ordered private exchange dealers to charge no more than IR14,000 for the dollar. The order was totally ignored. And the rate by the street vendors jumped to $1=IR16,250. The governor said he had firm plans to stabilize the market, but it was not in the public interest to reveal them. On 25 January 2012, the governor said the four demerged exchange rates (reference, official free, travelers, and open market) would be unified in 48 hours, and there would be no limitation in the dollar supply for various current transactions. It proved to be an empty gesture. And there was mistake after mistake. For example, one of the reasons for the people’s rush to buy dollars in the first days of the new year was their lack of confidence in the CBI’s claim of ample gold and dollar reserves. Yet, instead of reducing this skepticism by showing resolve to meet all dollar demands, the central bank on 6 January 2012 cut the travelers’ ongoing $2,000 allowance down to $1,000 – thus reinforcing the people’s conviction that the bank was running out of dollars. As a result, the public was convinced that due to hardening sanctions, Iran’s oil exports would be drastically reduced, and higher oil prices caused by global tensions would not be enough to compensate for total receipts, thus, sooner or later, forcing the CBI to ration foreign exchange sale.
The Ideal Exchange Rate
The hottest current economic issue in Iran is the proper exchange value of the rial in terms of the US dollar. In the absence of an objective determinant of the equilibrium exchange rate, suggestions about the right number abound. Private analysts, on the basis of rapid inflation and sluggish exchange rate adjustments in the last few years, argue for a rial devaluation towards the current free market rate of about $1=IR19,000. Government officials, aware of the devaluation’s effect on import costs and further domestic inflation, favor the opposite course and hope to bring the free market rate down towards the official rate. Traders are also divided on the basis of strict self-interests. Exporters and domestic producers of tradable goods are demanding a lower rial rate in order to become more competitive abroad. Importers, on the other hand, argue that since the bulk of Iran’s imports consist of raw materials and semi processed goods, a strong rial is in the national interest as it keeps down producers’ costs. Anti-devaluation groups also argue that since Iran is dependent on imports for 30% of its food consumption, any upward adjustment of the exchange rate would add to the already high domestic consumer living costs. They similarly allude to the low price elasticity of both Iran’s exports and imports as a significant disincentive for devaluation.
Private market analysts also argue for substantial devaluation, pointing to the fact that due to cheap dollars, Iran’s imports have increased from $18bn in 2001 to more than $64bn in 2010 (not including payments of $19bn for services, and an estimated $20bn in smuggling). The latest imports roster, mostly from China, comprises items that have never been on Iran’s import list. As a result, not only have traditional exporters been unable to compete in foreign markets due to the overvalued national currency, domestic producers have also lost their competitive power, gone bankrupt, or become packagers and handlers of foreign articles. Domestic industry has become increasingly hallowed.
Determining the right rate of exchange for the Iranian currency, however, is difficult due to the country’s heavily oil-based economy, and the unpredictable effects of sanctions. Iran’s oil industry – responsible for more than 85% of the country’s annual foreign exchange earnings – is state-owned. The government is the sole arbiter of daily oil extraction, and the sole dispenser of oil export receipts (ie injection into the economy). The government’s decision to sell more or less oil thus influences the exchange rate automatically. The small “free market” plays only a marginal role. In such a case, where the main provider of the foreign exchange is the treasury, and the major users of the foreign money are state enterprises, whatever rate the central bank might set would be arbitrary and not necessarily the “equilibrium” rate. The rate that is determined in the “free market” by private importers, travelers, students, smugglers, and capital movers is marginal. The free market’s difference with the official rate at any given time is only indicative of the fact that the official rate is “out of range” and that the government is not willing (or able) to meet the entire “discretionary” demand.
Searching For The Right Exchange Number
Already five months into the Persian New Year, there is still no clearly declared exchange rate policy by the CBI, and the dollar rate is drifting up and down with no clear direction. On 27 July 2012 the deputy director of Iran’s Export Promotion Organization announced a “consensus agreement” among the CBI and other government agencies to divide the entire imports list into 10 main categories, with the first five (comprising a list of specific consumer staples and industrial necessities) eligible to receive dollars at the official rate, and the other five (discretionary and luxury items) supplied with the dollars earned from non-oil exports and other free market sources. The secondary market is closed, and foreign exchange at the official rate will now be sold only for travel to religious destinations.
A successful and orderly administration of such a complex exchange regime is highly difficult in normal times. It would be extremely complicated and hazardous in the present domestic economic conditions. Under the strain of biting sanctions, Iran’s economy is experiencing an unprecedented anemic economic growth, disturbing double-digit inflation, worsening youth unemployment, falling oil output, reduced oil exports, and lower oil prices. GDP growth this year is estimated to be no more than 1%. Unemployment among 18-25 year-olds is officially 29.1%, with many analysts estimating much higher rates. Press reports point to a large portion of the production sector operating at half-capacity, with a wave of bankruptcies and business closures. The latest CBI data show wholesale prices up by 33.4% and the consumer price index by 22.4%, with certain food items (eg chicken, red meat, and milk) up by a staggering 30-80%. OPEC and other sources report Iran’s daily oil production (the economy’s life blood) at 2.9mn b/d, down from 3.9mn b/d last year. Oil exports (the country’s main foreign exchange source) are reportedly at 1.2mn b/d, compared to 2.3mn b/d prior to the oil embargo. Oil export earnings (the annual budget’s major source of income) are reduced considerably due largely to the European oil embargo, and partly to lower oil prices (from the record $126/B in March to $96/B in June). According to reliable estimates, the Islamic Republic needs a $117/B price to finance its current fiscal budget, while market prices have lately been running at $105-111/B.
The sanctions’ role in these setbacks is coming to light as days go by. After years of defiantly denying the stiffening results of universal restriction, and in fact welcoming them as a spur to national self-sufficiency, a chorus of influential voices is now openly showing concern. Supreme Leader Ali Khamenei himself still remains defiant, and claims that Iran is currently “100 times stronger” than before, and that “Westerners” themselves have “vaccinated” the country against sanctions through their 30 years of censure – arguing that an oil-less, and knowledge-based economy could well resist any sanctions. But a growing group of top civilian and military leaders, Majlis lawmakers, and even high-ranking clergy show clear signs of unease and openly bemoan current economic hardships. President Ahmadinejad has recently acknowledged serious financial impact of what he called the “toughest” measures ever imposed on the Iranian economy. The Minister of Industry and Trade has called them “devastating.” The Majlis speaker has acknowledged the sanctions’ share in the current plight.
The Insoluble Dilemma
The central bank’s latest de facto acceptance of a multi-tiered official exchange regime has now reopened the old Pandora’s Box of economic rents, appropriation of cheaper dollars to insiders, and widespread corruption – reminiscent of the 1980s as a major source of ill-gotten wealth for the Islamic Republic’s current financial moguls. There are already press reports regarding industrial producers complaining about lack of access to the official rate, the necessity of bribing bank officials to receive cheaper dollars, and the growth of under-the-table deals. The current IR7,000 difference between official and free market rates, if continued, would promise to generate billions of new “rent” to materialize in the next few months to be grabbed by insiders.
However, despite strong verbal objections to the current multiple exchange system by certain influential groups in and out of the government, and strong popular demands for the return to currency unification, the dilemma continues insoluble. An early return by the CBI to a single rate around the current official rate would seem out of the question without prior easing of the crushing sanctions, eg the oil embargo and central bank operations. On the other hand, a more logical realignment towards the free market rate would also be nearly impossible at this juncture without first taming the intolerable high domestic inflation.
What seems certain is that in the next few months and beyond, the Islamic Republic is going to face its toughest and most troublesome economic challenge since the end of Iran/Iraq war, with unprecedented major headwinds. The fate of the rial also will, by more than any other factor, be directly tied to the course of Tehran’s relations with the 5+1 group, and the resolution of the nuclear issue.
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