Bloomberg’s editorial board urges US and EU officials to use more crippling sanctions to make the threat of regime change more credible:

The idea behind tightening the screws is not that we expect the regime to see the error of its atomic ambitions. Rather, it is to stress the economy to the [...]]]> via Lobe Log

Bloomberg’s editorial board urges US and EU officials to use more crippling sanctions to make the threat of regime change more credible:

The idea behind tightening the screws is not that we expect the regime to see the error of its atomic ambitions. Rather, it is to stress the economy to the point that Supreme Leader Ayatollah Ali Khamenei realizes he can no longer afford to see his people punished for such nuclear dreams.

In that quest, the West might have tapped out the oil barrel. Perhaps the U.S. could expend diplomatic and political capital to get greater cooperation from a few of the countries it says are making “significant” reductions on Iranian oil imports, such as India, Japan, South Korea and perhaps China. But pushing Iranian oil sales much below their current monthly level will be tough.

Instead, it’s time to broaden the war to other fronts: targeting the entire Iranian energy sector, making it even harder for companies to sell any nonhumanitarian commercial goods to Iran, and seeking to deplete or freeze the regime’s remaining foreign-currency reserves.

…. Sanctions are a long game, and the objective isn’t to starve the increasingly restive Iranian people but to convince them that their leaders no longer have their best interests at heart. Khamenei will only change his ways when he is forced to choose between his weapons program and the downfall of his regime. Either of those outcomes would be fine with us.

The sharp drop in the value of the rial in the last two weeks has created much excitement in Iran and abroad, but mostly for the wrong reasons. In the parallel (or free) market for foreign currencies, the [...]]]> Iran’s economy is not on the verge of collapse

via Lobe Log

The sharp drop in the value of the rial in the last two weeks has created much excitement in Iran and abroad, but mostly for the wrong reasons. In the parallel (or free) market for foreign currencies, the rial fell by 15% in one day this week, reaching its lowest value ever — 35,000 rials per US dollar — down by more than 50% compared to a month ago and 300% to last December when international sanctions tightened against Iran.

What all the related excitement overshadows is that this devaluation is not comparable to those in other countries where large devaluations caused severe shocks to the economy, such as those that swept through Asia in 1997-98. That’s because in those situations all prices were affected because all foreign exchange was traded at the same (rising) rate. This is not the case in Iran because nearly all foreign exchange is earned by the government, which has decided to sell most of it at a lower rate for the import of goods and services that it deems essential.

The rial devaluation that has created the media excitement is actually taking place in a narrow market that is shrinking in size and diminishing in importance. Iran’s Central Bank has classified a long list of goods into categories with priorities 1 through 10, leaving it to the parallel market to take of all other needs. Priorities 1 and 2 are food and medicine, receiving foreign exchange at the official rate of 12,260 rials per dollar, followed by other categories with lower priorities, which are mostly intermediate goods used in industrial production.

The government has been promising to do something for the import of these non-essential but important commodities, which account for about two-thirds of Iran’s imports, offering them some sort of preferential treatment. But the Central Bank was slow to respond and those producers who did not want to wait bought their currency needs in the parallel market, competing with speculators and people taking their money out of the country. The uncertainty about the sanctions, bewildering pronouncements from government officials in Iran, and hype over a possible Israeli attack, all combined to throw this market into chaos.

To protect Iran’s producers from what the government considers the consequences of “psychological war”, the Central Bank set up a “Currency Exchange Center” and invited licensed importers and exporters to trade their foreign currencies there, hoping that the auction rates reached there would be more stable and lower than the parallel market rate. When the Exchange Center opened just two weeks ago, the volume of transactions quickly jumped from $10 to $181 million per day, with most of the supply likely coming from the Central Bank. The Exchange Center diverted some of the supply of currency away from the parallel market, which I believe caused the rate there to soar.

Curiously, the Central Bank had predicted the opposite: that by arranging trade in the Exchange Center it would help lower the rate in the parallel market. This miscalculation added to the confusion and fear that the government did not know what it was doing. While the Exchange Center has produced a lower rate than the parallel market and can potentially shield producers from the worst psychological effects of sanctions and war, the shock to the parallel market has caused a serious political if not economic crisis for the government of Mr. Ahmadinejad.

Does all this mean that Iran’s economy is on the verge of collapse, as Israel’s Finance Minster reportedly said?  The answer is no, because most of the economy is shielded from this exchange rate, though not from the ill effects of the sanctions, which will continue to bite for a while. Would it cause sufficient economic pain that would push the Iranian government to make concessions in its nuclear standoff with the West?  The answer is not likely.  The multiple exchange rate system, as inefficient as it is, will protect the people below the median income, to whom the Ahmadinejad government is most responsive.

But the government can ill afford to ignore millions of Iranians, mostly upper income Iranians, who are affected by the gyrations of the parallel market. Among them are millions of people who are seeking a safe place for their savings, parents who send money to their children for education abroad or need to travel there to see them. They are not all importers of luxury items or those who want to take their money out of Iran. In allocating its limited — perhaps shrinking supply of for foreign currency — the government has a difficult time balancing the needs of the lower middle class and the poor with those of upper income Iranians that it cannot rely on for political support.

- Djavad Salehi-Isfahani is a professor of economics at Virginia Tech and a nonresident senior fellow at the Brookings Institution. 

As Iran faces economic unrest, discussion is intensifying over the impact sanctions are having on Iran’s economy.

But experts doubt that the current situation portends the end of the Iranian regime or Iranian capitulation to Israeli and Western-led demands that it change its nuclear stance.

“You have now a market [...]]]> via IPS News

As Iran faces economic unrest, discussion is intensifying over the impact sanctions are having on Iran’s economy.

But experts doubt that the current situation portends the end of the Iranian regime or Iranian capitulation to Israeli and Western-led demands that it change its nuclear stance.

“You have now a market that is under a lot of tension” which has “created a big economic crisis for the government”, said Djavad Salehi-Isfahani, a professor of economics at Virginia Tech, during a meeting here Wednesday at the Wilson Center.

But Salehi-Isfahani added that there is a “lot of misunderstanding about the currency system in Iran”, noting that people are confusing it with huge devaluations that occurred in East Asian countries and Zimbabwe.

“Iran is nothing like that,” he said.

While expressing varying views about the severity of Iran’s economic problems, the Wilson Center’s panelists agreed that it’s still able to manage its ailing economy and the resulting unrest.

“Iran has a lot of experience with sanctions. In fact, what they did immediately is open up the books from the 1980s about how to deal with a currency crisis,” he said.

Demonstrators clashed with police outside Tehran’s central bazaar on Wednesday during protests about the Iranian currency’s declining value. The rial has lost an estimated 80 percent of its value against the U.S. dollar in the last year.

Ali Vaez, a senior Iran analyst at the International Crisis Group, told IPS that “the regime is likely to nip it in the bud to prevent (the protests) from snowballing.”

“Although it’s not clear if there will be more protests, one thing is certain: Iran will experience a much more securitised environment in the run-up to the 2013 presidential elections,” he said.

Iranians are also struggling with rising inflation and unemployment amid escalating U.S.-led sanctions linked to the Islamic Republic’s controversial nuclear programme.

Iran maintains that its nuclear programme is entirely peaceful but Western countries led by the U.S. claim that Iran is working towards achieving nuclear weapon-making capability.

Israel has been pushing the Barack Obama administration to move its previously stated “red line” on Iran, a nuclear weapon, to preventing Iran from obtaining nuclear weapons capability, something which Israel claims would seriously endanger its existence and the stability of the surrounding region.

“I’ve been speaking about the need to prevent Iran from developing nuclear weapons for over 15 years…I speak about it now because the hour is getting late, very late,” said Israeli Prime Minister Benjamin Netanyahu during his speech at the 67th annual U.N. General Assembly meeting last week.

Already under six rounds of sanctions imposed by the United Nations Security Council, Iran saw Western sanctions tighten markedly this year with an EU ban on Iranian crude oil purchases going into effect in July.

U.S. sanctions are also increasingly targeting banks that deal with Iran’s central bank, thereby seriously impeding Iran’s ability to conduct international transactions and trade.

Sanctions have not yielded tangible progress toward a diplomatic solution over Iran’s alleged nuclear ambitions, but the protests Wednesday and protests in July in the northeastern city of Nishapur over the rising price of chicken – a main food staple for the Iranian working class – indicate that segments of Iranian society will express their dissatisfaction when faced with serious pressure.

“The chicken prices got the government’s attention,” said Salehi-Isfahani, adding that the “government made a wise move in trying to stabilise the chicken market and not worry about the dollar.”

“The aim of sanctions is to raise pressure against the regime in order to solve the nuclear crisis in a peaceful manner,” Alireza Nader, a senior international policy analyst at the RAND Corporation, told IPS.

“But as we’ve seen, sanctions are also leading to major unrest in Iran and weakening the regime at home and abroad,” he said.

Bijan Khajehpour, an Iranian businessman and specialist on the Iranian economy, explained during the Wilson Center event that a number of factors have been harming Iran’s economy.

“It’s not just the sanctions…Iran’s economic developments have been undermined by sanctions, subsidy reforms, mismanagement and corruption,” he said.

“The degree of instability has reminded many citizens of the days of the Iraq-Iran war” and “public anger is reflecting itself in sporadic unrest, strikes, blogosphere protests and critical comments by artists,” he said.

But Khajehpour disagrees with reports suggesting that the Iranian economy is collapsing. “The current deterioration of the Iranian economy is less a period of economic collapse and more a period of economics adjustment,” he said.

“The citizens are suffering, but the macro economy could potentially benefit,” said Khajehpour, noting that sanctions which have impeded Iran’s ability to purchase the equipment it needs to develop key industries have forced it to produce them itself.

Khajepour added that, “The future story of Iran is in (its gas industry),” which is projected to grow over the next five years despite sanctions.

“The additional gas capacity will generate the potential of investments in gas-based industries with export potential,” said Khajehpour.

Suzanne Maloney, another panelist and Iran analyst at the Brookings Institute, said it’s “incredible and tragic” that “Iran’s economic horizons are more limited today than the last 50 years.

“There are huge constraints on Iran’s growth and development and that presents tremendous political vulnerabilities,” she said.

“Sanctions are working, but we’re not getting anywhere on the nuclear programme and that cannot be lost on anyone,” she said.

Michael Singh, the managing director of the Washington Institute, echoed the consensus among a number of well-known neoconservative analysts Wednesday by writing that more aggressive pressure and punitive measures are needed to change Iran’s nuclear calculus.

“Rather than hoping that giving current sanctions “time to work” will force Iran back to the negotiating table, the United States and our allies should add further pressure to the regime and the elites who comprise it, including through additional targeted economic sanctions, diplomatic isolation, bolstering the credibility of our military threat to the regime, and support for the Iranian opposition,” he wrote in an op-ed for Foreign Policy.

According to Trita Parsi, the president of the National Iranian American Council, more pressure alone will not bring about favourable results. “I don’t find it likely that the regime will capitulate due to the sanctions as long as sanctions relief is not part of the mix,” he said.

“The possibility that sanctions will lead to general regime change exists, but the question is what type of regime change would the devastation of the Iranian economy generate?” Parsi asked.