Iran Economy on the Verge of Collapse

There seems to be somewhat of a consensus that sanctions against Iran are working. Exports are way down, revenues are suffering, and vital resources are drying up. However, most people ignore the fact that Iran’s economy has been struggling to keep its head above water since the 1979 revolution. 

Just days before new talks with the P5+1 on Iran’s nuclear program, President Ahmadinejad recently stated, “We must say to them that we have that much saved that even if we didn’t sell oil for two to three years, the country would manage easily.” He suggests that Iran has enough reserve cash on hand to weather the effects of sanctions, but this simply isn’t true.

Historically, Iran has used a series of five-year plans to manage its economy. Every plan thus far has been a failure. Recurring goals include the elimination of subsidies (finally accomplished in 2010), less state control, increasing foreign direct investment, reducing inflation, expanding non-oil sectors, and job creation. The inner circles of the Iranian government are rife with indecision based on a clash between those who favor a more progressive economic stance that would integrate more fully with world markets and a traditional, protectionist model that wants to maintain state dominance.

Due to this constant battle, economic reform moves slowly. Combine this with Iran’s resource curse and the fact that the country continues to allow its energy sector to dictate its fate, and you have a recipe for imminent disaster.

Additionally, Iran’s oil stabilization fund has been consistently low since it was created. This reserve is supposed to protect against the inevitability of oil price swings by keeping cash on hand for a rainy day. President Ahmadinejad has used this money for wasteful government spending, thus lowering the amount on hand to about 25% of its ideal level of around $80 billion. Ideally, this reserve would have been used in exactly this scenario, when Iran is experiencing a loss in revenues.

The sanctions program has had the effect of shoring up state power, especially that of the Revolutionary Guard, who own many businesses and now win the majority of government contracts since there is no outside competition. However, as revenues decrease, government spending will decrease as well, reducing the already abysmal number of jobs available for a burgeoning young work force. While some effects of sanctions have been seen immediately, the weakening of the establishment will likely take some time before it shows an overt breakdown.

As the U.S. begins the next round of talks with Iran, the waning economy and the possibility of easing sanctions in exchange for nuclear transparency should be front and center. Given that Iran's economy will suffer regardless of sanctions due to its own ailments, the U.S. may be able to reduce certain penalites in a show of good faith before any agreements are made. This would put pressure on Iran to show the same good faith with its nuclear program while not causing the U.S. to lose face. In essence, the Iranian economy could be the key to productive dialog.

Sanctions are in fact taking a harsh toll on Iran, but they are more of a final knockout punch to a system that never actually found its balance in the first place. If Iran’s economic policy were more stable, such sanctions programs would have far less lethal effects. Unless Iran shows unprecedented resourcefulness and can rapidly reform its economic policies, it will surely crack under the weight of the West’s resolve.