War with Iran: Inflation Will Not Stop the Iran Nuclear Program

As the announcement came that the value of the Iranian real against the dollar has collapsed, the prospect of hyperinflation overcoming Iran’s economy is now assuming solid dimensions. However, while hyperinflation can indeed be debilitating for an economy, it would not stop the development of Iran’s nuclear program and, ironically, may even accelerate it. The main reason is that the business opportunities offered by nuclear power can generate enough revenue to sustain, and even expand it, even if the surrounding economy is in meltdown. There is one simple idea behind this: electricity imports can make Iran’s nuclear program self-sufficient, even if the rest of its economy is suffering from hyperinflation.

Trade in electricity is conducted like trade in oil – in dollars. While the greenback may be losing value, it is not nearly subjected to the same pressures as the real and being the world’s reserve currency means that nobody has any significant interest in destabilizing it either. Logically, then, Iran would opt for using the dollar for external trade, and if not, may opt for the rouble or yuan.

Iran is a net exporter of electricity, despite the infrastructural problems and limits, related to deficits in power generation and the quality of the energy grid, which itself creates problems related to brownouts and blackouts.

A few possibilities suggest that Iranian exports in energy are going to increase. The first is that exports to Armenia are going to increase with the completion of a new long-range transmission line and a jointly-built hydro power plant. Second, the geopolitical space offered by the American exit from Iraq offers opportunities for Iranian investment in developing oil and gas fields and infrastructure, as well as in electricity exports. Third, India’s massive blackout mere weeks ago suggests that its economy is going to need more supplies, both in electricity and infrastructure development to guarantee ongoing service and capacity. China’s insatiable economy is also an opportunity for Iran, as is Afghanistan, once NATO’s mission in the country ends in 2014.

A big problem remains that Iran’s ability to conduct transactions has been hampered by sanctions on the entities that facilitate them, such as the Noor Bank in Dubai, which used to handle the lion’s share of Iran’s oil exports.

In spite of these challenges, the global system still offers multiple options for Tehran. Mutual memorandums that might seek Chinese nuclear assistance for oil, for instance, or the option to diversify currency reserves with yuan, yen or roubles. However, dollars still remain the most attractive option, because the greenback still remains the basic monetary unit of global trade and it makes sense for Iran, irrespective of the sanctions.

Overall, electricity export in a region that experiences problems and deficits in electricity supply is an alluring niche for Iran’s energy sector, and despite potential inflation, it would still be able to generate enough hard currency to potentially make its nuclear program self-sufficient. In other words, we need to re-think the brand of diplomacy we’re doing and engage the Persians on a different basis of relations.