Iran in troubled waters as oil plunges

Economic mismanagement and international sanctions add to nation's woes and undermine its drive to be seen as a regional superpower.

The Tehran Bazaar was shut down this month by its influential merchants in a strike over a plan to impose a value added tax in Iran.

Alarm over plummeting oil prices has stifled gloating by Iranian leaders that the global financial meltdown is humbling the "arrogant, greedy and power-intoxicated" United States and its western "lackeys". Tehran's attention now is instead focused on persuading Opec to cut production and boost prices at the cartel's emergency meeting on Friday. The Islamic republic has particular cause for concern. Its budget is heavily reliant on income from oil exports while its economy is more vulnerable than most producers because of international sanctions that have snared its access to financial markets. A further decline in energy prices could have far-reaching diplomatic, political and social ramifications for Iran. High prices had bolstered its drive to project itself as a regional superpower while blunting the effectiveness of UN sanctions that were imposed to rein in Tehran's nuclear programme. Washington now will hope that lower oil prices will increase western leverage on Iran and weaken its swaggering, hardline president, Mahmoud Ahmadinejad, as he prepares to fight a bruising battle for re-election next June. Oil prices have halved from their peak of US$147 (Dh540) a barrel in July to a level where many economists believe Iran's government will need to shrink its bloated budget to balance its books. The International Monetary Fund was expected yesterday to publish a new regional economic forecast estimating that Iran needs average oil prices above $90 a barrel to avoid a budget deficit and to remain above $75 a barrel to cover its import bill. Deutsche Bank also recently estimated that Iran and its fellow anti-US ally, Venezuela, need an oil price of more than $95 a barrel to break even compared with $55 for Saudi Arabia. The IMF said the Saudi budget remains in balance unless oil falls below $50 a barrel; its "break-even" figure for the UAE is a mere $23 a barrel and $33 for Kuwait. Members of the Gulf Co-operation Council, which groups the UAE, Saudi Arabia, Qatar, Bahrain, Oman and Kuwait, are "better able to weather lower oil prices than Iran because their coffers are full and they have better access to funding," said Melanie Lovatt, the finance editor of Middle East Economic Survey, an authoritative Cyprus-based newsletter. "Years of heavy and mostly wise investment have also put the GCC in a much better position than Iran ? which will need dramatic political change to allow it to tap funds internationally," she said. This is grim news for Mr Ahmadinejad. The economy was his Achilles heel even before oil prices tumbled. Posturing as a champion of the working class, the son of a humble blacksmith won a surprise landslide election three years ago on populist pledges to put the country's "oil income on people's tables". But the social gap has widened under his wayward stewardship of Iran's economy - a discipline in which he prides himself of knowing little. His hero, the late Ayatollah Khomeini, famously told an adviser that the Islamic Revolution that he led, was "not about the price of watermelons". Profligate spending of petrodollars from earlier record oil revenues has stoked inflation in Iran, which topped 29 per cent last month, compared with 12 per cent when Mr Ahmadinejad took power. With oil prices now falling, he is likely to blame Iran's economic problems on external forces rather than his own mismanagement, which has come under growing fire from conservative rivals as well as reformists and the country's media. "But as his domestic critics point out, the last two years of high oil prices should have given the government of Iran ample opportunity to save for rainy days," said Farideh Farhi, an Iran analyst at the University of Hawaii. "Instead, Ahmadinejad's repeated budget supplements led to the constant raiding of Iranian reserves. So today there are real worries that a drop to even $80 or $90 a barrel would spell trouble for Iran." The IMF urged Iran in August to tighten its economic policies to reduce inflation. Iranian technocrats have offered similar advice, but were shunted brusquely aside. Mr Ahmadinejad recently sacked his central bank governor because he had challenged him on bank lending rates, which the president has kept well below the rate of inflation. But he has been unable to withstand pressure from other quarters. Bazaar merchants, a potent force in the middle class, went on strike this month, humiliating Mr Ahmadinejad into scrapping plans to impose a value added tax of three per cent. Significantly, Iran's bazaaris had last gone on strike in the run-up to the 1979 Islamic Revolution, when they played an influential role toppling the US-backed shah. Iranian reformers have urged the headstrong president to prepare for lower oil revenues by slashing subsidies on such commodities as sugar, cooking oil and wheat. He is deeply reluctant to do so. An outpouring of popular anger followed his imposition of petrol rationing last year to cut debilitating expenditure on imported fuel. Despite being one of the world's biggest producers of crude oil, Iran relies on one-third of its petrol from abroad because it lacks refining capacity. Iranian motorists still can fill their tanks for an enviable $0.099 a litre, provided they keep within the heavily subsidised rationing quota. Thereafter, petrol quadruples in price. Some Iranian commentators had predicted Mr Ahmadinejad would shelve the unpopular petrol-rationing quota to seduce voters before next summer's elections. That now looks increasingly unlikely because reduced oil export earnings and sanctions-hit foreign investment have scuppered Iran's hopes of investing $20 billion to boost domestic refining capacity. Ayatollah Ali Khamenei, Iran's supreme leader, trumpeted last week that western capitalism was collapsing just as Marxism did in eastern Europe two decades ago. Iranian technocrats, though, are deeply concerned that the "Great Satan's" globalised capitalist "empire" - however humbled - is about to hit back. [e-mail]