by Djavad Salehi-Isfahani

Four months after the collapse of the rial earlier this fall, Iran’s economy is still reeling from its effects. The rial lost 40% of its value in one week late last September, succumbing to accumulating pressures from free spending by the Ahmadinejad government, overvaluation caused by years of [...]]]> via Lobe Log

by Djavad Salehi-Isfahani

Four months after the collapse of the rial earlier this fall, Iran’s economy is still reeling from its effects. The rial lost 40% of its value in one week late last September, succumbing to accumulating pressures from free spending by the Ahmadinejad government, overvaluation caused by years of booming oil revenues, and international sanctions.

Financial sanctions imposed by the United States against third-party countries that trade with Iran have seriously disrupted Iran’s international trade, reducing its ability to sell its oil or spend the revenues from what it can sell. Sanctions have inflicted enormous pain on millions of Iranians, who have watched the boom of the last decade deteriorate into stagnation, inflation triple and critical items such as medicine disappear from stores. Iranians are meanwhile unsure who to blame, those who have imposed the collective punishment or their own government.

For the moment, there is no sign that what the West was hoping sanctions would do — soften the position of Iran’s leaders as a result of rising dissatisfaction — is actually happening. There are three reasons for this. First, the government has so far skillfully protected the poor from the worst aspects of the economic crisis. It has done so by offering cash payments (amounting to half the minimum wage for a family of four), and by keeping the price of basic necessities like food and fuel from rising as fast as inflation.

Second, those who suffer most — the salaried middle class — are least likely to pour into the streets in protest. And third, even those who believe that sanctions are the root cause of the current economic mess are not likely to ask their government to capitulate to Western demands.

Bringing inflation down and reviving investment are the two biggest challenges that the Iranian government currently faces. There are signs that inflation, after jumping to 4.5% per month (equal to an annual rate of 70%) during October and November, is coming down. Monthly inflation was 2.5% in December and fell to 1.7% in January 2013.

The moderation in inflation is no thanks to Iran’s free-spending president, whose two most important programs — cash subsidies and an expensive low-cost housing program — have been largely financed by printing money. The parliament has been trying to rein him in, and even tried to fire his Central Banker last month on a charge that he had raided the reserves of member banks, a move that had ironically helped reduce inflation.

But success in harnessing inflation will not shield the population from the worst effects of the sanctions. The government has done well in fighting them by finding alternative sources of supply for basic imports, and has successfully engaged in bilateral trade with several countries that are willing to withstand the wrath of Washington such as China, India, Turkey and Argentina, but it will have a very hard time getting private investment back on track with cumbersome arrangements for international trade.

Iran’s private sector is the main source of jobs for the country’s 20 million youth, and the only hope for its 4 million unemployed. The more realistic value of the rial after devaluation has done much to bring the productivity of these youth closer to their wages, which should boost their employment. But uncertainty surrounding the future of the dispute with the West will keep private money on the sideline and in liquid assets, waiting for a sign that normal times are about to return.

Remarks by US Vice President Joe Biden and Iran’s Foreign Minister Ali Akbar Salehi this past weekend that raised the prospects of direct talks between the US and Iran was perhaps a sign, for it immediately sent the rial up against the dollar by nearly 5% in the free market for foreign exchange. If this means that Iran’s private investors have not given up on the country’s future, it should serve as an inducement for Iranian leaders to do their best to reduce tensions with the West — even better, to resolve the nuclear standoff once and for all.

by Sara Vakhshouri

Sanctions against Iran by the European Union and the United States, which aim to change Iran’s attitude toward its nuclear program, have increased pressure on its oil export and revenue. This resulted in the reduction of Iran’s oil exports from 2.2 million barrels per day (bpd) in late 2011 [...]]]> via Lobe Log

by Sara Vakhshouri

Sanctions against Iran by the European Union and the United States, which aim to change Iran’s attitude toward its nuclear program, have increased pressure on its oil export and revenue. This resulted in the reduction of Iran’s oil exports from 2.2 million barrels per day (bpd) in late 2011 to around between 900 thousand to slightly above 1 million bpd until October 2012. On 30 January 2013, Reuters reported that Iran’s crude oil exports hit its highest level in December, at around 1.4 million bpd since EU sanctions took effect last July. What was the reason for this sudden hike?

Seasonal Demand

Winter and summer months traditionally mark peaks in global fuel demand. The cold weather during November and December, compared to September and October, usually creates higher energy demand and consumption. As expected, heating fuel consumption increased during the last two months of 2012, particularly in the US, Japan and other members of the Organisation for Economic Co-operation and Development (OECD), due to colder than normal weather conditions. According to the Energy Information Administration (EIA), the global demand for liquid fuels surpassed production in November and December 2012 due to seasonal increases in consumption. This caused a 1.4 million bpd draw from the global oil stocks. The average global demand for liquid fuels in November and December 2012 was estimated at around 90.2 million bpd, or about 0.9 million bpd higher than the consumption of September and October. However, the global supply outside of Iran was about 86.7 million bpd during this period.

Easing of Shipping Restrictions

Iran has increased its shipping capacity by purchasing super tankers from China. It also decreased its oil production, which eased the country’s shipping capacity. Beginning with the EU oil embargo in July 2012, Iran had to use some of its tanker capacity to store its extra production while searching for buyers. After it made an adjustment between its production, domestic consumption and average monthly export, this shipping capacity was free to transport crude oil. Increases in Iran’s tanker capacity allowed Iran and its customers to skirt the EU ban on tanker insurance. Iranian tankers could, in some degree, transfer oil to its customers. Market data suggest that China, Iran’s biggest oil customer, imported 593,400 bpd of oil in December. According to Chinese officials, an easing of shipping delays was the reason behind this increase. This could suggest that some of this amount might have been from purchases made in previous months that reached China with a delay.

US Waivers

The US State Department grants 180-day waivers on Iran sanctions to countries that prove they have reduced their Iranian purchases. State Department officials, though, have not insisted on any specific percentages for these waivers. Countries are expected to reduce the average amount of their purchases from Iran compared to previous purchases. These countries can adjust their purchase amount from Iran based on their monthly demand and the available supply in the market. This means they can increase their purchase of oil during high demand season and adjust it during the months when demand is relatively lower.

Senators Robert Menendez, an architect of US sanctions legislation, and Mark Kirk, have urged President Obama to require oil importers to reduce purchases by 18 percent or more to qualify for further waivers. Iranian oil customers are expected to maintain the average of their purchase from Iran at around at least 18 to 20 percent lower than pre-sanctions purchases during each period of 180 days in order to have their waivers renewed. We are therefore expecting the average Iranian oil exports to remain at around 1.1-1.2 million bpd throughout 2013.