Can sanctions stop Iran's nuke program?
Analysis: For the time being, Khamenei appears unfazed by soaring inflation, currency depreciation, price hikes and record-low oil production rate
Iran's lower classes and the urban middle class, whose members can't make ends meet and see their savings being depleted on a daily basis, are suffering most from the economic turmoil. As reported by Ynet's Dudi Cohen, citizens in northeast Iran recently protested against the sharp rise in poultry prices. In another incident, a woman was killed while waiting in line for chicken at a government distribution center.
But this does not seem to faze Ali Khamenei. According to reliable information obtained by Israeli and western diplomats, Iran's supreme leader has ordered authorities to move forward with the uranium enrichment program. Khamenei believes that for the time being the sanctions are not causing significant financial distress among Iran's citizens and therefore do not endanger the regime. However, data obtained by the Foreign Ministry indicate that Iran's economy has been hit hard by the sanctions:
Currency depreciation: Since the beginning of 2011, the rial has lost 60-70% of its value against the dollar. The expectation that Iran's currency will continue to depreciate as a result of the sanctions is causing major price hikes – though there does not appear to be a shortage of key commodities.
Soaring inflation: According to official data, Iran's inflation rate has fluctuated between 23% to 25% this year. Western economists who are familiar with the situation in Iran estimate that the real inflation rate has exceeded 40% and continues to rise. The prices of basic goods, such as milk and poultry, have increased by over 100%. A kilogram of beef, for example, costs $23 dollars.
Oil production at all-time low: Over the past six months Iran's crude oil production rate has dropped from 3.5 million barrels a day to 2.7 million. The UN has determined that in April alone Iran's oil production rate fell 20-40%. Experts estimate that this downward trend is continuing and that Iran will eventually produce 2 million barrels a day.
Apart from stifling the Iranian economy, the sanctions are also affecting the citizens' frame of mind. For example, the Tehran Stock Exchange reacted positively to the launch of nuclear negotiations with the West in Istanbul last June, but when the negotiations collapsed, the market fell. A recent poll found that 60% of Iranians support halting the uranium enrichment program in exchange for a gradual removal of international sanctions.
Iran's economy has also suffered from a flawed subsidy policy, bad management and corruption. Iranians, including Khamanei and members of the conservative parliament, are holding President Mahmoud Ahmadinejad accountable for the country's economic woes. Ahmadinejad, for his part, was able to cover up some of the economic failures through subsidies that were financed by Iran's oil export revenues.
Today the government is trying to contain the sanctions' psychological and economic effects by granting subsidies for the middle class, offering direct welfare stipends to the poor and physically repressing any attempts to protest against the regime's policy. The question is what will happen when Iran's foreign exchange reserves, which finance the subsidies and imports, shrink even more.
Moreover, country's that continue to purchase Iranian oil are doing so at a discount and are paying with their local currency. India, for example, pays in rupees instead of dollars, so Iran can use this money to purchase goods mostly in India itself. The ban on insuring tankers carrying Iranian oil has led to the closure of a shipping company jointly owned by India and Iran. Iran has similar trade relations with South Korea and even China.
Iran has resorted to creative measures in an effort to bypass the sanctions. The regime in Tehran and the Revolutionary Guards are smuggling crude oil to the West with the help of Turkey and other countries.
Crude oil that is smuggled from Iran through the Kurdish region in Iraq is sold to Europe as Turkish or Iraqi oil. The Obama administration is working to put an end to this phenomenon, or at least reduce it – in part due to pressure from Israel.
The Gulf States, headed by Saudi Arabia, have contributed greatly to the success of the sanctions policy by increasing their oil production to fill the void left by the shrinking Iranian oil industry – thus preventing a rise in global oil prices.
'Sanctions not working fast enough'
Iran has also suffered from the continued drop in global oil prices, which is attributed to the recession that has hit the US, Europe and China. According to the CIA's calculations, Iran has to charge a minimum of $80 a barrel in order to pay for its imports and amass considerable foreign exchange reserves.
Iran has also a hard time storing the oil it has not been able to sell. The New York Times reported recently that Iran has been forced to store some 40 million barrels of oil that "that no one is willing to buy" because of the crippling embargo on a fleet of about 65 tankers "floating aimlessly" in the Persian Gulf.
The newspaper quoted international oil experts as saying that Iranian exports have already been reduced by at least 25% since the beginning of the year, costing Iran roughly $10 billion so far in forgone revenues.
Experts estimate that in addition to the millions of oil barrels stored on the "floating storage facilities," another 10 million oil barrels are being stored on land. This predicament has forced the regime in Tehran to reduce the production rate at its oil fields– a move that will cause long term damage to the ability of these fields to produce oil.
The Americans are using these statistics to try and convince Israel to give the sanctions a chance and put the military option on the back burner. Senior Israeli officials, for their part, claim that at least a year will pass before the sanctions begin to significantly decrease Iran's foreign exchange reserves and endanger its oil industry. By then, they warn, Iran will be capable of producing enough uranium to build 5-10 nuclear warheads. This means that Iran will become a nation "on the brink" of nuclear capabilities - and in this situation an Israeli or American strike on its nuclear facilities would be futile.
