[R-G] Iran's Economic Conditions Deteriorate

[Yoshie Furuhashi]

<http://www.usatoday.com/news/world/2007-02-06-iran-economy_x.htm>
Iran's economic conditions deteriorate
Posted 2/6/2007 9:53 PM ET
By Barbara Slavin, USA TODAY

WASHINGTON — U.S. and Western pressure on Iran is squeezing its
economy, feeding the inflation and joblessness that have swelled under
its controversial president, Mahmoud Ahmadinejad.

Trade figures and other data have begun to reflect deepening economic
isolation taking place as a result of U.S.-led efforts to penalize
Tehran for what the United States alleges is the pursuit of nuclear
weapons and sponsorship of terrorist groups.

For example, Iran's imports from Germany fell 14% in the first eight
months of 2006, the German-Iranian Chamber of Commerce says. European
Union countries account for 40% of Iran's imports, and Germany is
Iran's largest European supplier, providing machinery, steel and
electrical equipment, along with other goods.

German government export credits, used to finance trade, also fell by
a third last year and are expected to drop again this year, said
Ulrich Sante, a spokesman at the German Embassy in Washington.

"People who want to pursue legitimate commerce with the West will see
that the policies Ahmadinejad is pursuing are leading to isolation and
painting a more bleak economic future for the country," said Stuart
Levey, U.S. Treasury undersecretary for terrorism and financial
intelligence.

The United Nations Security Council imposed sanctions on Iran in
December after Tehran failed to suspend uranium enrichment. The
sanctions block exports that can be used in Iran's nuclear and missile
programs and freeze assets of officials linked to those programs.

Separately, the Bush administration has cut off two Iranian banks from
access to the U.S. financial system and dollar-based transactions on
grounds that terrorists and weapons programs used accounts at those
banks.

The United States has had no diplomatic relations with Iran and has
restricted trade with Tehran since 1980, when Iran took U.S. Embassy
personnel hostage.

Iran's economic challenges include:

•Banking restrictions. A half-dozen European banks have ended or
restricted dollar dealings with Tehran to avoid jeopardizing business
with the United States. Mohammad Jafar Mojarrad, vice governor of
Iran's Central Bank, said most of the lenders continue dealing with
Iran in other currencies.

Peter Pietsch, spokesman for giant German bank Commerzbank, said the
institution halted dollar transactions with Iran on Jan. 31 but still
conducts transactions with Iranians in euros.

Credit Suisse, a major Swiss-based financial services firm, stopped
taking new clients in Iran in late 2005 "in light of the developments
in the country … as well as to safeguard our reputation," spokeswoman
Esther Gerster said.

•Rising import costs. Saeed Laylaz, a Tehran business consultant, said
exporters require Iranian buyers to deposit the full amount of a
transaction to obtain letters of credit, and that has added 8% to 12%
to the cost of imports.

•Declining oil production. Oil Minister Kazem Vaziri-Hamaneh told the
Iranian Student News Agency last year that Iran's annual oil output
had declined by half a million barrels per day as the country
struggled to pump from aging fields. Iran produces 3.9 million barrels
per day and exports 2.4 million. Roger Stern, an economist at Johns
Hopkins University, has predicted that Iranian oil exports could
decline to zero by 2015 without a significant increase in investment
or a decline in domestic consumption.

Mojarrad said Iran was taking steps to encourage new investment. He
cited a $10 billion deal signed last month by Spain's Repsol and Royal
Dutch Shell to develop an offshore Iranian field.

The Iranian economy continues to grow at a rate of more than 5% a year
in inflation-adjusted figures, Mojarrad said. He said sanctions will
hurt Americans more than Iranians by undermining the use of the dollar
as a reserve currency, depressing its value and making U.S. imports
more expensive.

Even before the latest sanctions, the Iranian president's rhetoric —
calling for Israel to be destroyed — and defiance on the nuclear issue
appeared to have a chilling effect on investment and trade.

Iran faced "a cooling off of the business environment in the last year
because of the nuclear issue and the rhetoric" of Ahmadinejad, said
Adam Pener of the Conflict Securities Advisory Group, a
Washington-based consulting firm.

Laylaz said the sanctions have added to problems caused by
Ahmadinejad's free-spending policies. Inflation — officially 12%,
according to Iran's Central Bank — is likely to rise to 15% this year,
Laylaz said.

Unemployment was 11.5% in the year ending in March, 1.2% higher than
the previous year, according to the Iran Statistical Center. Food
prices rose by a third from March to August, the cost of housing went
up 14%, and the cost of medical care increased more than 18%, said
Iran's Karafarin Bank, which provides overviews of the Iranian economy
to the International Monetary Fund.

Joblessness rose in spite of a 37% increase in Iran's hard currency
earnings, derived mainly from oil. Iran's oil revenue was $50 billion
last year. Oil revenue, taxes on oil and other oil-related income
financed more than 70% of Iran's government spending, according to
Karafarin Bank.
-- 
Yoshie
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