826974_orig

The Islamic Republic moves to stockpile “strategic commodities” as Iranians protest shortages

In a recent announcement, deputy minister of industry, mines, and commerce Hossein Radmard declared that Iranian president Mahmoud Ahmadinejad had issued a special order to create a stockpile of certain “strategic commodities” including wheat, rice, sugar, chicken feed, and cooking oil that would meet three months of Iran’s demand if critical shortages arise. This move comes as a number of factors have cause the domestic supply of some essential goods to drop and prices to rise, causing a noticeable deterioration in the standard of living of the Iranian people. Signs of social unrest have already appeared.

On 23 July, residents of the north-eastern Iranian city of Nishabur held demonstrations over short supplies of government-subsidized chicken and long lines to purchase them. Although the protests ended peacefully after police came out onto the streets, the situation in Nishabur may be representative of what is happening in the country as a whole. As the price of red meat has risen over the last two years, many Iranians have switched to chicken to make typically meat-rich Iranian dishes. This has strained stocks of government-subsidized chicken, and pushed the free-market price of chicken significantly higher.

What is behind the shortages of certain essential goods and the rise in prices in Iran? Economic sanctions and the Iranian government’s recent economic reforms may be to blame. Financial sanctions have made basic international financial transactions very difficult. An EU crude oil embargo and US secondary sanctions on importers of Iranian oil have decreased Iran’s export revenues by up to 40 percent already in the first half 2012. A provision of the EU oil embargo also denies Iran EU-based maritime insurance making it difficult for the Islamic Republic to actually ship its oil. Finally, sanctions have contributed to the decrease in value of Iran’s currency, the rial, which has lost nearly 70 percent of its value since December 2011. Taken together, sanctions have made it substantially more difficult for Iran to import, contributing to the shortages in essential goods.

Another factor, however, may also be playing an important role in the inability of Iranians to purchase some essential goods in the same quantities they did in the past. In December 2010 the Islamic Republic implemented the first phase of the Targeted Subsidy Plan (TSP) which has significantly reduced subsidies on some essential goods. Although the TSP has mainly focused on reducing energy subsidies, the knock on effect of increased energy prices in addition to cuts in some other commodity subsidies has fueled inflation and the rise of prices across the spectrum of essential goods. The TSP has saved the government billions of dollars even as it has forced Iranians to live with less. The regime has redistributed some of the savings in cash allowances to Iranians, but it is unclear if the handouts are sufficient to compensate for the cuts in subsidies and impact of sanctions.

Economic sanctions and the TSP have exacerbated deep structural problems in the Iranian economy, including systematic mismanagement and corruption. While the existing problems had led to high rates of unemployment and inflation, among other things, economic sanctions and the TSP since 2010 have pushed Iran into an economic crisis which the regime is struggling to deal with. Can the Islamic Republic manage, or will economic problems spark wider social and political unrest that could shake the foundations of the regime?

Editor’s note: As discussed here in IranPolitik, the Targeted Subsidy Plan and other economic reforms in Iran since 2007 may in reality be a coping mechanism against economic sanctions. The logic is simple. By systematically reducing subsidies and other forms of social welfare, the regime impoverishes society but saves billions of dollars which it can allocate as it sees fit. Thus, while the aim of economic sanctions may be to limit the resources the regime has to develop its nuclear program, the regime can continue its program and resist Western sanctions through these economic reforms. The creation of the “strategic commodity” stockpile may be a precursor to much further reaching actions such as rationing, much as the country was forced to do during the Iran-Iraq War (1980-1988). Long lines for chicken are already reminding Iranians of the years of hardship they endured that bloody eight year conflict.

While the regime’s survival isn’t inevitable, if the experience of comprehensive economic sanctions in Iraq is any indication, the regime may be able to contain the situation. In the case of Iraq the regime survived and even became domestically more powerful while society as a whole was impoverished. Could we see a repeat of the experience of Iraq with Iran?