On How Despite the Currency Crisis Iran’s State Revenues are not Collapsing

The steep decline of the Iranian rial against the dollar has produced a lot of extravagant claims about the collapse of the Iranian economy. While there is no doubt that Iran is seeing a form of hyper-inflation that is devastating to the people there, the government is in no danger of not having money.

Because of slowed demand attendant on the bad world economy and because some producers (including Saudi Arabia, Iraq and North Dakota) have managed to produce some extra petroleum, the US/European Union/ Israeli financial blockade on Iranian petroleum has had some success for the first time in 2012.

However, things are not as bad as all that for the Iranian government, as opposed to the people. As Djavad Salehi-Esfahani explains, Iran is cushioned from the worst effects of a declining rial by the government’s ability to use its oil income to subsidize essential imports. The situation is therefore not comparable to other instances of hyperinflation where all imports had to be imported by consumers at the new, higher prices (vis-a-vis the local currency).

The Iranian government is coming off several years of magnificent oil profits. In 2004, the government earned $37 billion from its petroleum, and no one thought it was in crisis then. It could arguably go back to that level and get along just fine. But in 2005-2006 the income rose to an average of $46 billion a year. Then the oil price boom began. In 2007 and 2008, they brought in a little over $80 bn a year, each year! That is almost a doubling of their normal income earlier in the decade. In 2009-2010 the price fell a bit and Iran brought in about $70 bn. a year those two years. But 2011 saw another big run-up in oil prices, and Iran received an astounding $95 bn. last year.

The Europeans started refusing to buy Iranian petroleum as of July 1, and world supply and demand is such that in the short term, Iran may just export less oil this year. But 60% of its market is in Asia, and they are buying. The US estimates that Iran will have an oil income of $70 billion in 2012. That is par for the course in recent non-boom years, and even if it were less, it would still be above 2006 levels. 2006 levels probably wouldn’t be a hardship for the government (just as they weren’t in 2006).

So far from collapsing, the Iranian state oil income has been incredibly high in recent years and continues to be high compared to a decade ago. See this chart:

Moreover, the likelihood that Iran can be driven into penury over the next couple of years by a Western oil boycott strikes me as low. The US Department of Energy expects world production to rise from 89 million barrels a day in 2012 to 90 million barrels a day in 2013. But if Asian demand returns (and if more Indians and Chinese buy cars, as they have in fact been doing), then world demand could easily exceed production. Even now, demand is historically high, producing Brent crude prices that have been over $100 a barrel for a long time. A year or two from now, the world may soon end up wanting the half a million or million barrels a day it is now telling Iran to keep in the ground. Saudi production cannot be increased, and it is unclear that near-term Iraqi increases are likely on any kind of scale. Many oil producers face constant threats of disruption from labor actions and other causes. Betting on no interruptions of production anywhere, significant production increases and continued low demand– all them necessary if the oil blockade on Iran is to be effective in the medium term — would in my view be foolish.

Some of Iran’s reduced exports come from having to find new ways of shipping the oil (it had been exporting roughly 2.5 million barrels a day out of a 3.8 million barrel a day production, and the government claims, at least, to be exporting 2 mn. b/d in September, way up from the July dip when Europe cut Iran off).

Iran is now sending petroleum to China and South Korea in Iranian-owned tankers and covering the insurance on the shipments itself. But Iran had a limited tanker fleet and so the shipments are sometimes late. Iran is solving this problem by simply buying 12 supertankers from China (the first has just arrived). Supertankers are $50-$100 million and so well within Iran’s ability to purchase and run. South Korea has just started back up its oil imports from Iran, of 200,000 barrels a day, after the insurance problem was solved. The US wants South Korea and others to cut back on Iran imports; but since Europe is snarfing up petroleum from other sources now that it is boycotting Iran, South Korea and others may find it difficult to fulfill their needs without buying from Iran.

Because the US Department of the Treasury has kicked Iran off most international bank exchanges, Iran may have to accept payments in Chinese currency or even in a relatively soft currency like the India rupee (which, however, is hardening). That arrangement would lock Iran into buying Chinese and Indian goods where at all possible, in preference to European ones (or finding exporters willing to take rinminbi). So Europe’s step in ceasing imports of Iranian oil may cost the EU member nations dearly in lost exports to Iran (nor can a lot of European countries afford to lose the Iranian market).

The long and the short of it is that the Iranian state’s external revenues are still perfectly healthy, despite the rial currency crisis and all the damage it is doing to the Iranian middle and business classes. Because of the state’s currency reserves, moreover, it can mitigate the impact of the currency crisis on key imports.

It is a sad, desperate scene for consumers, but the ayatollahs are still rolling in dough.

8 Responses

  1. Here in Iran the general feeling is that things are spinning out of control. Price of galvanized steel tubes just jumped from 18,000 per kilo to 31,000 Rials per kilo within less than two months.

    My guess is that the central reason for the huge jump in the price of the dollar is because of a lack of supply. Iran has billions stuck outside of Iran that it can not bring back into the country. China is holding onto 20 billion dollars for some unknown reason and not paying back to Iran.

    And given the acceleration of inflation in Iran over the past few months people want to park their money into something that will generate a return or keep its value and that means land, gold, and dollars, and the latter is obviously the most attractive given its rate of increase. So it’s too many Rials chasing after too few dollars that is the main cause for the current crisis.

    I would suggest that the Iranian government change its interest rate it grants to dollar bank accounts (currently 7.5%) to 16% and make this an investment opportunity to overseas investors, charging them only 5% on capital gains, with the freedom to withdraw their money within two years with any penalty. This will create an inflow of dollars into Iranian banks and restore the Rial’s value. Would this work and can the government implement something like this quickly? I have no idea.

  2. your linked article brecorder is really informative

    it says


    Asian countries including China, India and South Korea are among Iran’s biggest oil customers, but, to get around a European Union ban on shipping insurance imposed since July 1, they must use the fleet of the National Iranian Tanker Co (NITC) to bring the crude home. ‘

    and

    “The US Treasury, however, said there was not enough information to conclude that NITC was linked to the revolutionary guards, which industry sources said boded well for the shipping firm, for now. “NITC will carry on trading and it seems the US government obviously does not want to kill all trade in oil as otherwise, why was NITC not targeted?,” said a European industry source. ”

    This makes no sense to me. so then, are the sanctions just world stage political theatre?

  3. Well okay but the Iranian regime has little legitimacy and has had to repeatedly crush popular unrest. Does Prof. Cole think there is any possibility they will lose control of the populace? However cynical and morally depraved (i.e., using the suffering of the people as a means to an end), could the sanctions succeed in weakening the regime due to internal unrest? That seems to be the objective of the policy.

    • That’s what I’m afraid of. If cowardly weapons like these sanctions can be used to impose a nuclear double-standard only on countries that the United States hates, then the United States has enslaved the world without having the courage to fight it in an honest battle. Iran’s nuclear ambitions are treated differently than Pakistan’s and Israel’s. Why? Because the world relies on the CIA to tell them whom the proliferation threats are, and conveniently the US ignored and thus covered up Pakistan’s and Israel’s (and thus apartheid South Africa’s) programs.

      Thus the US gets to serve as detective, judge, and executioner at the trial of any country based entirely on its own biases. This makes international law into nothing more than arbitrary hegemony.

      For this hegemony to be broken by US capitalist allies like South Korea is magnificent. South Korea certainly is opposed to proliferation given its own neighborhood, but it’s saying the US can’t be trusted to run the enforcement effort.

  4. cervantes, how can you claim that it has little legitimacy?It definitely has more legitimacy than an us puppet govet in the region.

  5. Cervantes,
    Love them or loathe them, I don’t think the Iranian regime ‘really’ has little legitimacy, as is reported to us by our media organisations. When I see the oceans of people annually come out to celebrate the anniversary of their Islamic revolution of 1979 this for me is an immediate nullification of all the sensational claims imposed the ‘Western Fear Industry’. I don’t necessarily agree with their customs but nor do I reject them totally, but truth be told they are definately demonised and very unfairly so.

  6. IRI ponzi scheme unraveling … simple as that
    by Shazde Asdola Mirza on Sat Oct 06, 2012 07:33 AM PDT

    For the past 12 years, the IRI regime had artificially kept the Rial-Dollar exchange rate at 10,000 to 1.

    Meanwhile, in Iran the inflation rate was on average 23%, while in US it was only 3%!

    How can one country peg its currency to another country’s, with 20% disparity in inflation rate?

    The IRI banks were paying on average 25% interest on long-term deposits … You could put in $100 in year 2000 and get $1,000 in year 2010!

    If that was not a Ponzi scheme, then nothing is.

    Now the jig is up. The IRI banks were paying interest using other people’s principle. The IRI banks were taking in more dollars through outside investments, by greedy Iranian expats; than was shipped out by the Mullahs and the IRI officials. Now the flow has reversed.

    Tabrik!

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