Iran forms economic emergency committee as crisis appears on the horizon

According to recent reports in the Iranian media, four of Iran’s top economic decision-makers met for an extended emergency session on the impact of sanctions this Wednesday at the Central Bank of Iran. The top officials at the meeting including central bank governor Mahmoud Bahmani, economic affairs and finance minister Shamseddin Hosseini, minister of industry, mines, and trade Mehdi Ghazanfari, and oil minister Rostam Ghassemi. This emergency committee is said to have assessed the impact of recent economic sanctions and submitted a report to President Mahmoud Ahmadinejad who, along with the regime’s other senior leadership, will be looking for ways to lessen the impact of these sanctions.

According to the Iranian Students’ News Agency (ISNA), Hosseini described the threat of sanctions as being twofold. The first was the material impact on the economy, which Hosseini viewed as already being exhausted. But he warned that the psychological impact of sanctions could still send Iran’s foreign exchange market into a tailspin, with the purchase and sale prices of the United States Dollar (USD) closing at 19,900 and 19,990 rial per dollar respectively. Yesterday’s closing prices approached record levels only seen earlier this year when the European Union oil embargo against Iran was first announced.

The formation of this economic emergency committee marks a new high point in the intensity of sanctions against Iran, with the regimen of harsh economic and financial measures taking a massive toll on the Iranian economy. US financial sanctions over the last two years have made it more difficult for Iran to conduct basic financial transactions by forcing third parties (mainly financial institutions) to choose between doing business with the US or Iran. The EU oil embargo, set to go into effect on 01 July 2012, prohibits EU members (with few exceptions) from purchasing Iranian oil and prevents European insurers from covering Iran’s maritime shipping. The net result has been a precipitous drop in Iranian oil exports and difficulty receiving payments for oil that has already been exported.

It is increasingly becoming apparent that if Iran cannot sell its oil (its main export) on a large scale and continues having difficulties conducting basic international financial transactions, its economy could soon face crisis. An economic crisis combined with existing social and political tensions could lead to large scale unrest, threatening the stability of the regime. Can the regime overcome this impasse, and if so how?

As the founder of peace and conflict studies Johan Galtung has pointed out, the existing logic of economic sanctions often underestimates the ability of nation states to adapt to even the harshest of sanctions. Just as states adapt to war by creating a “war economy” better suited for the exigencies of wartime, states are also able to combat an economic siege by creating a “sanction economy”. If the Islamic Republic calculates that it is in its favour to continue its nuclear program despite sanctions, it can take a number of measures to sanction-proof its economy.

As Risa Brooks has argued, authoritarian regimes often redistribute the welfare effects of sanctions to reinforce their ruling coalitions or create new ones. The Islamic Republic could thus raise barriers to trade to reduce imports (ameliorating potential foreign exchange problems) and protect domestic manufacturers and their workers, creating a potentially powerful new constituency with an interest in maintaining economic isolation. It could also continue to shift power and resources to key supporters such as the the Islamic Revolutionary Guard Corps (IRGC), reinforcing the loyalty of this vital national security body. While these key constituencies would become stronger, other segments of society (for example the groups that made up the Green Movement) would potentially become more economically and politically marginalized.

The regime could also continue to refocus its trade away from the EU and North America toward eastern markets such as Russia, China, India, Japan, and South Korea. While many of these countries have been complying with US measures that calls on them to reduce importation of Iranian oil or face US secondary sanctions, they still maintain strong ties with Iran. Maintaining such a high level of political and economic pressure on Iran uses up much of the West’s diplomatic capital, which they can only maintain for so long before other crises demand their attention. Finally, Iran’s economy could continue its slide toward black markets, relying more on smuggling, front companies, and shady middlemen to sell its oil and import needed goods.

If the Islamic Republic can marshal its forces to quickly create a sanction economy, it may just weather this crisis and emerge stronger (at least internally). If this happens, the West would be facing an Iran less susceptible to foreign economic pressure. The sense of “economic siege” and the need to rely on a politically narrower coalition could also lead to the emergence of a more hardline leadership than exists today. Such an Iran would potentially be a more difficult negotiating partner if and when negotiations restart.

There is however another possibility. As Solomon Major has argued, while authoritarian regimes are in general somewhat less susceptible to sanctions, there are “windows of opportunity” when sanctions could potentially destabilize such regimes. Iran has suffered from economic mismanagement and deeply-seated corruption since the Islamic Revolution of 1979. Its social, political, and economic problems (including high inflation and unemployment) have only become worse in recent years, and there is only so much Iranians can take.

Moreover, if as some have suggested, global oil prices also fall from their record highs since the 2000s, Iran could be facing an economic contraction of epic proportions. Recent reports have indicated that even the well-placed IRGC has had trouble paying its employees. Under such circumstances, the regime could face an economic crisis which could quickly snowball into a political crisis.

It is interesting to note that Shah Mohammad-Reza Pahlavi faced just such a short-fall in oil revenues beginning in the late 1970s, and the economic crisis that ensued is believed to have been one of the causes of the revolution in 1979. Whether the Islamic Republic will weather this or face revolution remains to be seen.