by Siamak Namazi

The United States Treasury has issued a new explanation for the shortage of medical drugs and equipment in Iran. They claim the Iranian government is intentionally trying to exploit the problem for political purposes. A senior US Treasury official recently pointed to just-released US International Trade Statistics (USITS) [...]]]> via Lobe Log

by Siamak Namazi

The United States Treasury has issued a new explanation for the shortage of medical drugs and equipment in Iran. They claim the Iranian government is intentionally trying to exploit the problem for political purposes. A senior US Treasury official recently pointed to just-released US International Trade Statistics (USITS) to support this claim, arguing that while these figures show falling medicine exports to Iran, the export of wheat has gone up, therefore, Iran could use whatever banking it used for the wheat to procure medicine.

Not really. At least the data that’s being referred to proves no such thing.

The USITS data showed a drop from $31.2 million to $14.8 million in US pharma exports from the US to Iran between 2011 and 2012. These figures are highly misleading and seriously discount the scale of the problem. I checked the sales figures of a single large US pharmaceutical company (on the conditional of anonymity) with the person in charge of them out of Dubai. Well, this American company alone experienced a drop of sales to Iran from around $50 million to $20 million during the same time period.

The USITS data simply shows what goods left the US directly for Iran. This is while the US pharma company is likely to have supplied Iran with drugs from a manufacturing or storage facility in Europe, Dubai or Singapore.

The food figures are just as inconclusive. Sure, they went up because of an $89 million sale of wheat in 2012. Keep in mind that $89 million is nothing; it’s peanuts for a country that often imports over $1 billion of wheat. Such a figure probably amounts to one or two single orders at best. When did that take place? Early 2012, before the tightening of sanctions? Was it part of the $1.4 billion Shell-Cargill deal allowing Shell to pay its debts to Iran by crediting Iran’s account with Cargill (if that actually went through?).

All in all, the trade figures of the USITS are irrelevant to the debate at hand.

There are many arguments among pundits when it comes to the overall effectiveness of sanctions against Iran and whether or not they will ultimately persuade decision-makers in Tehran to change their nuclear policies.

But the effect of sanctions on the shortages of medical equipment and drugs in Iran is much easier to assess. Talk to the people in charge of the Iran account among the American and European pharma companies and ask them where the problem is. It’s not that hard to understand: these companies need to get paid and banking channels are very limited while Iran has a shortage of hard currency (I mean Euros and Dollars, not Rupees and Yuan); therefore, the amount of trade is curtailed. Perhaps the fact that only one international bank remains willing to brave the wrath of US sanctions — even though we are talking about fully legal trade under humanitarian exemptions — lends further testimony to where the main problem exists.

Let me be perfectly clear: sanctions are not the sole problem here. The Iranian government deserves stern criticism for its maladroit handling of the shortages of medicine and medical products. It must dramatically improve its foreign currency allocation competence and transparency, as well as governance of the sector, and it must crackdown on corrupt practices.

However, the Iranian government alone cannot solve the issue of Western medicinal shortages. Sanctions are a major impediment and unless Washington and Brussels rethink the humanitarian waivers — specifically by removing the banking bottleneck and allowing Iran to convert some of the money it earns from oil sales to Euros and Dollars for the narrow purpose of clearing trade debt related to medical drugs and equipment — this problem is going to get worse, not better.

A recent study that a group of independent consultants conducted for the Wilson Center explains this issue’s various complications and their solutions in more detail.

– Siamak Namazi is a Dubai-based consultant and a former Public Policy Fellow at the Woodrow Wilson Center for International Scholars. 

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. 

Writing in Al-Monitor, Mark Fitzpatrick, an expert on Iran’s nuclear program, explains why the International Atomic Energy Associations’s new report on Iran isn’t good, but doesn’t amount to disaster either:

In a pre-emptive move of their own, White House officials gave their own spin to the latest developments several days [...]]]> via Lobe Log

Writing in Al-Monitor, Mark Fitzpatrick, an expert on Iran’s nuclear program, explains why the International Atomic Energy Associations’s new report on Iran isn’t good, but doesn’t amount to disaster either:

In a pre-emptive move of their own, White House officials gave their own spin to the latest developments several days before the IAEA released the report. While not underplaying their concern over Iran’s continued defiance, the Obama team noted that the new numbers are not a “game changer.” The new centrifuges are not (yet) being used for enrichment and the stockpile of 20% enriched uranium has not grown since May because half of it has been converted to an oxide form for use in fuel plates.

The danger posed by Iran’s nuclear program is heightening incrementally: The numbers grow arithmetically, not by orders of magnitude. In response to those advocating military action, one must ask how it is justifiable to launch a war, with all the predictable costs, over a 10% increase in centrifuge machines.

A proportionate response would be to incrementally increase the sanctions pressure on Iran. The EU, for example, is likely to tighten its sanctions against the Iran Central Bank, which to date have been partial. Additional companies associated with the Iranian Revolutionary Guard Corps and the Islamic Republic of Iran Shipping Lines may be subject to an asset freeze. The US also will likely impose sanctions on more Iranian institutions, adding to the designations announced on July 31.

The International Atomic Energy Agency’s (IAEA) eagerly awaited report on Iran’s nuclear program delivered few surprises and, while offering details of a number of dual-use technologies under development in Iran, did not assert that Iran had resumed a full-scale nuclear weapons program. Eager to capitalize on [...]]]> Reposted by arrangement with Think Progress

The International Atomic Energy Agency’s (IAEA) eagerly awaited report on Iran’s nuclear program delivered few surprises and, while offering details of a number of dual-use technologies under development in Iran, did not assert that Iran had resumed a full-scale nuclear weapons program. Eager to capitalize on the media coverage of the IAEA report, congressional hawks are pushing to impose “crippling” sanctions on the Iranian central bank, a step that would have devastating economic and political effects in Iran and, potentially, send oil prices skyrocketing.

The White House indicates that such measures are “not really currently on the table” but some of the more right-wing voices in Washington are eager to impose such drastic sanctions.

Sen. Mark Kirk (R-IL), who has threatened to “take food out of the mouths” of Iranians, issued a statement on Monday, announcing he will lead a bipartisan campaign of 92 senators to enact sanctions against Bank Markazi, Iran’s central bank.

Rep. Howard Berman (D-CA) issued a statement saying:

Time is short and options are limited. Last week, I proposed moving forward and sanctioning the very core of Iran’s financing of its nuclear program: the Central Bank of Iran. I urge President Obama to make the Central Bank of Iran’s proliferation activity the target of coordinated multilateral sanctions.

And GOP presidential candidate Mitt Romney said that, as president, he would impose “crippling economic sanctions” on Iran’s central bank.

But a closer look at what central bank sanctions might entail raises serious questions.

Central bank sanctions may disrupt oil markets and damage U.S. and global economic recoveries; weaken multilateral sanctions efforts if U.S. allies are unwilling to sign on; and extract a shocking humanitarian toll on ordinary Iranian civilians.

In fact, central bank sanctions may run counter to U.S. interests and actually strengthen the Iranian regime. Mehdi Karroubi, an influential reformist politician in Iran, warns that “sanctions have given an excuse to the government to suppress the opposition by blaming them for the unstable situation in the country,” and CNN’s Fareed Zakaria writes, “[Sanctions'] basic effect has been to weaken civil society and strengthen the state — the opposite of what we should be trying to do in that country.”

Proponents of central bank sanctions say that it is the only way to prevent a nuclear armed Iran and a military confrontation. But the reality is that central bank sanctions have a bad track record of failing to achieve their aims and, according to University of Chicago Professor Robert Pape, “economic sanctions are often a prelude to using military force.”