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Iran economy could limp along under sanctions

Iran economy could limp along under sanctions

With Iran's oil earnings possibly dropping and sanctions may cut GDP by 10 percent, can the country's economic diversity and self-reliance be enough to cushion the blow?

February 7, 2012 5:07 by

Tightening international sanctions against Iran look set to shrink its economy, push up inflation and further erode its currency, but they may fail to deliver a knock-out blow that forces Tehran to compromise on its nuclear ambitions.

Few areas of Iran’s economy now remain untouched by the sanctions. Because of payments difficulties, Iranian ships have in recent days stopped loading imports of Ukrainian grain. The United Arab Emirates has told its banks to stop financing Iran’s trade with Dubai. Iranians are finding it more difficult to obtain hard currency to travel abroad.

But the history of sanctions against other countries, and the strengths of Iran’s diverse and relatively self-reliant economy, suggest that as long as Tehran can find buyers for a large proportion of its oil, it will be able to limp along.

The pain will be felt throughout the country and could increase discontent with the government, but if President Mahmoud Ahmadinejad can cope with that political threat, there may be no overriding economic reason for him to back down.

“Iran can still scrape by,” said Gary Hufbauer, a fellow at the Peterson Institute for International Economics in the United States and a former US Treasury official who has written extensively about the history of sanctions.

He ranks the measures against Iran – taken to stop what the West sees as Tehran’s nuclear ambitions – as among the toughest international sanctions of the past 50 years, but not as harsh as those once imposed on Iraq, North Korea and Cuba – countries which defied economic pressure.

The latest sanctions focus on Iran’s exports of oil and gas because they are vital to its foreign trade. In its latest comprehensive assessment of the Iranian economy, published last July, the International Monetary Fund estimated energy exports would amount to $103 billion in the fiscal year to March 20, 2012, or 78 percent of total exports.

But as a proportion of Iran’s overall economy, energy exports are much smaller, only 21 percent of gross domestic product in the 2011/2012 year, according to the IMF’s projections. That is lower than ratios of 30-50 percent for the Gulf Arab oil exporters, and suggests Iran is better placed than they would be to absorb a hit to energy shipments.

The European Union, which plans to halt imports of Iranian oil on July 1, has been taking a fifth of the country’s shipments; other big buyers such as Japan and South Korea, each with about 10 percent, may be pressured into reducing purchases.

But China and India, which already take a combined 34 percent, have signalled they will not cut back, and such countries will end up buying most or all of the Iranian oil rejected by the EU.

Hufbauer said Iran might have to sell its oil at a discount of 10 to 15 percent to find buyers under sanctions. Assuming a 15 percent discount applied to all shipments and a 10 percent cut in overall shipments, Iran’s energy export earnings would shrink by around $24 billion — a heavy blow, but not a crippling one for a $480 billion economy.

The sanctions do not ban most Iranian non-oil trade, but that can be expected to suffer too as the West uses tools such as anti-money laundering laws to discourage banks around the world from financing business. This may force Iran’s exporters to rely more on costly middlemen in Asia and neighbouring states which have not signed up to tough sanctions, such as Iraq, and conceivably to use barter deals for some trade.

If non-oil exports take the same kind of hit as energy shipments, they could decline by about $7 billion from the IMF’s estimate for this fiscal year. The combined hit to trade would be around $31 billion, or 6.5 percent of GDP — enough to push the economy, which the IMF has projected will grow 2.5 percent this year in inflation-adjusted terms, into recession.

In the long run, the damage to Iran’s energy exports could increase as Western bans on the sale of equipment to its oil industry make it difficult to replace parts that wear out. This might be at least partly avoided by a determined sanctions-busting effort, of the kind run with considerable success by apartheid South Africa in the 1980s.

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