[email protected]

January 27, 2013, Sunday

Trading with Iran

Overshadowed by nuclear tension, the serious problems of the Iranian economy are overlooked. Yet for Iran, the number one issue today is not its nuclear program; it is its economy.

Unemployment is becoming endemic. Simple infrastructural problems are the norm in the daily life of Tehran. Just one example of what causes this is the lack of modern agricultural machinery.

Actually, it should not be forgotten that Iran has been subjected in one way or another to economic sanctions almost since the beginning of the 1979 Iranian Revolution. Sanctions have always been effective, and particularly so for the last 10 years. Even a casual visit to Iran will clearly reveal that sanctions are seriously damaging the Iranian economy. However, they do not fully explain Iran's economic problems. The Iranian regime is not successful in many economic areas. It can even be argued that the economy has become less important to the regime especially since the election of President Mahmoud Ahmadinejad.

Ahmadinejad symbolizes economic failure. Sanctions cannot be regarded as the only cause of Iran's current economic problems. A large part of those problems is deep economic mismanagement. The Ahmadinejad government has failed to maintain a sustainable balance between economy and politics, particularly in its foreign policy. Iranian foreign policy, has turned to economically disruptive strategies. Even many conservative politicians are critical of this regime's economy-ignorant foreign policy. Ahmadinejad has gone so far as to use certain foreign policy issues, notably the nuclear one, as political instruments in domestic politics to consolidate the nationalist support of its government. In general, the Ahmadinejad government has never been successful in devising a clever and effective economic agenda. Iran's political arguments overshadow its economy.

Naturally, economic sanctions are increasing the cost of trade with Iran for countries like Turkey. Iran is still one of Turkey's main trading partners. Turkey has tried to benefit from a sanctioned Iran through informal trading methods. However, for many reasons -- including the sanctions -- trade with Iran is now facing structural problems.

Firstly, the instability of the Iranian currency is a serious problem. To bypass sanctions, Iran accepts local currencies. The Iranian rial is continuously depreciating against the US dollar and this is not sustainable for medium-sized companies trading with Iran. Holding on to the Iranian rial even for a short time is now a type of economic suicide. Secondly, the transfer of money to Iran through informal networks is also becoming costly. The money brokers demand more cuts, yet their transfer systems are not swift. The entire informal business sector is also a security concern. There are reports that some Iranians and Turks do not abide by their own business promises as there is no formal binding mechanism. Thirdly, the use of gold is also becoming very risky. The ebb and flow of the price of gold is a major concern, again for small and medium-sized companies. Radical falls in the price of gold are precarious for businessmen who trade in gold with Iran. Besides, international monitoring is now focusing on the gold trade with Iran. New steps are expected to aggravate it.

However, no matter how tough sanctions are, the region has its traditional ability to continue trade in many informal networks. Thus, it would be naïve to expect that it is possible to stop informal trade with Iran with sanctions. Nevertheless, it is just as certain that trade with Iran is becoming costly. Thus, the critical issue is as follows: How will Iran respond to such issues in the upcoming elections. Will Iran continue its politics-first strategy, or will Tehran generate an economy-first mentality? If the mullahs continue prioritizing politics over economy in their survival strategy, the cost of trading with Iran could rise to an unaffordable level.


Previous articles of the columnist