Falling Oil Prices Hamstring Iran’s Economy

01.22.15

Falling Oil Prices Hamstring Iran’s Economy

01.22.15
Hassan Rouhani

By Peter Reisenauer for Global Risk Insights

Hassan Rouhani’s election as president of Iran came about because he was able to convince conservatives and reformists alike that he would be successful in promoting their interests. Rouhani realized that for Iran to remain a regional power it needed to shed the weight of the economic sanctions and alter some of the more restrictive laws while adhering to the wishes of the more hard-line members of his country’s government, including Ayatollah Khamenei, Iran’s Supreme Leader.

Rouhani’s campaign promise was to solve rising unemployment and give greater personal freedom to the Iranian people. While Rouhani has been partially successful in taking on the hardliners in his country, the Iranian economy has stagnated due to the recent oil collapse as well as lingering economic sanctions.

Sharp decline in oil prices furthers economic instability

In the past year, the world’s oil prices have taken a drastic downward turn with Brent crude currently at $48 per oil barrel. Iran is one of the countries most affected by the freefall in prices.

Some conspiracy theorists, including President Rouhani himself, have blamed the price drop on Saudi Arabia. Iran believes that Saudi Arabia manipulated the prices to ensure that there would not be a Shiite crescent running from Lebanon to Iran creating a potential oil monopoly and pushing the Saudis out of business. While it is true that Saudi Arabia has chosen not to decrease its oil production since the drop, there is not enough evidence to suggest that the price drop was political gamesmanship on the Saudis’ part either.

What is more important than the reasons for the collapse is the effect it has had on the Iranian economy. Due to the price fall, Iran has dropped the price for a barrel from $72 to $40 in its 2015 budget, after it was $100 in 2014.

The move by the Saudis to continue flooding the market with supply has forced Iran to attempt to increase its own supply, and Iran has recently reached out to begin discussions with South Korean and Japanese oil and gas companies to build new refineries and pipelines. This represents money which Iran was hoping to use to build up other parts of its economy.

Meeting Rouhani’s electoral promises tougher than anticipated

One of the tenets of Rouhani’s election campaign was creating more equality throughout Iran. He has had some success in inducing growth in the country after two years of stagnation, but about one-fourth of Iranian households do not even have one employed member.

Moreover, about 4 million people, or approximately 10% of the population, remain unemployed in Iran and about 4 million more unskilled university graduates will be joining the workforce in the near future. Currently the minimum wage sits at one-third to one-fourth of the poverty level in big cities. If Rouhani is to be true to his promises he must take drastic steps to help spread the wealth.

Rouhani’s major obstacle comes in convincing certain parts of the government to stop competing with the private sector, namely the Revolutionary Guard. Since the Revolutionary Guard answers to Ayatollah Khamenei, Rouhani is finding it difficult to convince the Guard to focus only on those large projects that are not competitive.

These internal considerations must be addressed for Iran to reach its true economic potential. But the real obstacle remains the economic sanctions.

Sanctions hindering potential economic growth

For the economic sanctions to be lifted, a viable nuclear deal must be reached, and quickly. There was hope at the end of the last round of talks in November 2014 that a deal was close, but the sides parted with only an agreement to extend the deadline.

With the parties recently convening again in Geneva, it is possible that a deal could be forthcoming shortly. However, in the wake of these talks, Congress has threatened harsher sanctions despite U.S. President Obama’s assurances that he would veto any such additional measures while talks are ongoing.

With a recent report from the Tehran Chamber of Commerce, Industries, Mines and Agriculture delegation suggesting that Iran could absorb $500 billion in foreign investments, any relaxation of the sanctions could be instrumental to the growth of Iran’s economy.

Since January 2014, approximately $8 billion of blocked overseas Iranian assets have been released with more to be made accessible in installments in June. It is further estimated that nearly $100 billion in assets will be immediately accessible as soon as the sanctions are lifted.

Internal and external forces have converged to prevent Hassan Rouhani from fulfilling his election promise to stimulate the economy. If the sanctions are lifted in the near future, perhaps no country in the Middle East is more primed for a large influx of foreign capital than Iran.

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