Accessibility links

Breaking News

Sanctions And Iran's Achilles Heel

The author says the new set of UN and U.S. sanctions, although intended only to force the suspension of Iran's nuclear and missile programs, could nevertheless aggravate the existing economic hardships.
The author says the new set of UN and U.S. sanctions, although intended only to force the suspension of Iran's nuclear and missile programs, could nevertheless aggravate the existing economic hardships.
The UN sanctions on Iran that are being voted on today would be followed by a package of economic sanctions, expected to be confirmed in the U.S. Congress by late June, in the hope of coercing Iran to suspend its controversial nuclear program.

Today's UN Security Council vote is the result of months of brinksmanship and intense diplomatic efforts by the United States and its allies to persuade Russia and China to support the new resolution.


Following an unscheduled telephone conversation between U.S. Secretary of State Hillary Clinton and Russian counterpart Sergei Lavrov on June 4 about the content of the new measures, the Russian foreign minister announced that a draft resolution on Iran that does not entail "crippling" economic sanctions was almost complete.

The new measures are primarily intended to target the Islamic Revolutionary Guards Corps (IRGC) commanders and affiliated organizations. But, if adopted, they could further harm Iran's already badly weakened economy.

Subsidies Reform

The new set of sanctions could take effect prior to the implementation of a subsidy reform package in the second half of the current Iranian year, which begins at the end of September. President Mahmud Ahmadinejad has described that reform plan as "Iran's greatest economic project of the last 50 years."

The economic plan passed by the Iranian Consultative Assembly (Majlis Shora-ye-Islami) in January 2010 is designed to reform public subsidies.

The Islamic government of Iran has been subsidizing the prices of more than 16 different consumer goods and products for the last 32 years. The costs of government subsidies for the current year are estimated to be in excess of $90 billion, which is equal to 25 percent of Iran's annual gross domestic product (GDP). Refined oil products, natural gas, and electricity top this list.

Due to the current fuel shortage, the Iranian government imports 40 percent of the domestic market's needs which account for 25 million liters of gasoline and 11 million liters of diesel fuel per day. In 2009 alone, Iran spent paid $11 billion on imported fuel.

The price to consumers of refined oil products in Iran covers barely a fraction of the production costs, and is therefore well below international market prices.

Energy Efficiency

Subsidizing fuel prices has been the primary factor accounting for a 500 percent rise in Iran's domestic energy consumption over the past three decades, while the size of the population has doubled over the same period.

The disproportionate increase in the rate of energy consumption relative to the rate of population growth could only be justified if translated into increased economic productivity. However, per capita production in Iran has increased only 1.5 times in the last 30 years (5 percent per year on average).

According to the International Energy Agency, per capita energy consumption in Iran is 15 times higher than in Japan and 10 times higher than the European Union. Iran's energy efficiency, or so-called energy intensity, is the highest in the world at three times the global average. Even in comparison with the oil-rich countries of the Persian Gulf region, Iran's energy efficiency (2.5 times the Middle Eastern average) is excessively high. Energy intensity is a measure of energy efficiency of a country's economy and is calculated as units of energy consumed per unit of GDP.

The lavish consumption of cheap energy resources has caused environmental hazards in towns and cities all over Iran. Consequently, air pollution in Tehran, Isfahan, and Tabriz is among the highest in the world, concurrent with the decline in living standards.

Oil Revenues

Crude oil exports constitute 85 percent of Iran's foreign income. Over the last 18 months, oil prices have fallen by 50 percent. In the meantime, Iran's oil production capacity has dropped from 4.2 million barrels a day in 2009, to less than 3.6 million. As a result, Iran's hard currency earnings in 2010 are expected to be substantially less than in 2009.

Iran's oil exports are currently less than 2 million barrels per day (bpd), 378,000 fewer than in 2009, which adds up to a $9.5 billion deficit in the country's foreign revenues. Iran is no longer the fourth largest oil exporter in the world.

Economic Indicators

The most optimistic estimates suggest that Iran's economic growth rate by the end of this year will be just about zero. The rate of inflation, however, is currently 15 percent, thanks to the economic stagnation of the past two years. That at least is an improvement compared with last year's figure of 25 percent.

With the implementation of the new economic plan and deep cuts in subsidies, the cost of living in Iran, according to the Majlis Research Center, could rise by up to 60 percent. The International Monetary Fund, however, has predicted a more moderate rise in inflation of just 32 percent as a result of those measures.

The new set of UN and U.S. sanctions, although intended only to force the suspension of Iran's nuclear and missile programs, could nevertheless aggravate the existing economic hardships.

The recent statement issued in Tehran on 17 May followed by the nuclear swap deal proposed to the International Atomic Energy Agency (IAEA) on 24 May seem to have pushed the Iranian government over its own self-declared "red lines." Under any other economic circumstances, the hard-liners in Iran wouldn't have volunteered to send 1200 kilograms of their low-enriched uranium abroad. Perhaps the new set of sanctions could serve to push the Iranian regime to make further concessions, without the need to resort to military force.

Reza Taghizadeh is a regular contributor to RFE/RL's Radio Farda. The views expressed in this commentary are the author's own, and do not necessarily reflect those of RFE/RL