Is Time on Iran’s Side?

by Djavad Salehi-Isfahani

The latest round of talks between the P5+1 (the US, Russia, China, Britain, France, and Germany) and Iran in Kazakhstan concluded on Saturday without any tangible progress. While details of the reciprocal offers remain unclear, what we have learned indicates that neither side is in any particular hurry to conclude the lengthy negotiations. In the meantime international sanctions, which have plunged Iran’s economy into its deepest crisis since the war with Iraq, will remain in force and may even be tightened. An important question now is whether the delay in resolving the crisis favors Iran or its Western foes, and the answer has to do in part with what one believes is happening to Iran’s economy.

Just before the talks restarted, a report in the New York Times entitled “Double-Digit Inflation Worsens in Iran” may have strengthened the belief of those in the US who think that time is on their side. If inflation — the most obvious, if not the most painful, effect of sanctions — has gotten worse for the sixth month in a row, then waiting a few more months might weaken Iran’s position. The article was based on new data released by Iran’s Statistical Center, which, when looked at more closely actually shows that inflation has been up and down in the last six months, falling as many times as it went up, though prices go only up (see a detailed graph of monthly inflation rates here). The persistence of high inflation has as much to do with sanctions as with Mr. Mahmoud Ahmadinejad’s insistence on making good before he leaves office and ahead of the June presidential election by pushing ahead with his unfunded (and therefore inflationary) promises of cash transfers and low-cost housing.

Iranian officials who were last year denying the impact of sanctions now praise them for helping Iran wean its economy from oil. Last month, Iran’s Minister of Economy, Shamseddin Hosseini, said that “Thanks to the sanctions [imposed] by enemies, a historical dream of Iran is being realized as the oil revenues’ share in the administration of the country’s affairs has been reduced.” The Minister for Industry, Mining and Commerce also added a humbling note, “What we had been unable to achieve on our own, sanctions have done for us.” He was referring to the huge inflow of cheap imports paid for by the oil revenues over which he has presided since 2009.

As these officials have discovered lately, oil money can stock the kitchens and living rooms of the average family while keeping their educated son or daughter out of a job. While imports increased eightfold over the last ten years, many local producers in agriculture or industry have either shut down or increased the import content of their production. Either way, jobs have been lost. Between 2006 and 2011, census figures show that Iran’s economy created zero new jobs, as the working age population increased by 3.5 million.

As I have argued before, the devaluation of the rial, which many saw as the reason why Iran restarted negotiating, is actually a reason why it may not be in such a hurry to resume its oil exports. A study last week that was surprising for its source — the Washington Institute for Near East Policy, which has always pushed for tougher sanctions on Iran — admitted that Iran is doing a good job of adjusting to reduced oil revenues. It shows how the balance of trade in non-oil items is improving and how the government budget is becoming less dependent on oil.

But adjusting to the financial sanctions is an entirely different story. After being cut off from the international banking system and with limited access to global markets, Iran is finding it extremely hard to turn its import-dependent economy around. If Iran could choose which of the two sets of sanctions to lose first, oil or financial, it would definitely be the latter.

Djavad Salehi-Isfahani

Djavad Salehi-Isfahani conducts research on the economics of the Middle East and is currently a professor of economics at Virginia Tech. He is a nonresident senior fellow at the Brookings Institution and research associate of the Iran Project, at Harvard Kennedy School’s Belfer Center for Science and International Affairs.