ft.com/ Weak Iran economy adds to pressure on leaders over nuclear deal

SHAFAQNA – Iran’s rulers are under growing pressure to secure a nuclear deal with world powers to help ease the plight of the country’s economy, which has been buffeted by international sanctions and falling oil prices that threaten to derail economic reforms.

Weak demand and oversupply have sent oil prices plunging more than 25 per cent, since the middle of June, to a four-year low.

In addition to the global pressures on Iran’s economy, EU and US banking and oil sanctions have halved the country’s crude oil exports in the past two years and complicated the regime’s access to dollars from the oil it manages to sell.

The centrist government of Hassan Rouhani, which last year swept to power on promises of helping to resolve the nuclear crisis in order to have sanctions eased – if not completely lifted – sees a nuclear deal and improving economic conditions as vital for its political future.

Reforms introduced by Mr Rouhani are designed to stimulate domestic production and generate jobs in a country with a 23 per cent youth unemployment rate, and decrease the country’s reliance on oil revenues.

The reforms have helped halve inflation from around 40 per cent last year to the current level below 20 per cent and stabilise the rial, the national currency. Iran’s budget deficit, which was IR650tn ($24.3bn) in the 2013-14 fiscal year, according to unofficial figures, is also expected to fall this year.

“Without at least some kind of a nuclear deal and with falling oil prices, more industries and businesses will face the risk of bankruptcies and lay-offs,” said one economic analyst. “This dangerous combination means there will be a shortage of hard currencies in the market soon which will cause a plunge of the rial and consequently more expensive imports and domestic production and higher inflation.”

Talks between Javad Zarif, Iran’s foreign minister, his US counterpart, John Kerry, and outgoing EU foreign policy chief, Baroness Ashton, began on Sunday in Oman to try and strike a comprehensive nuclear deal by a November 24 deadline.

The falling oil prices have also raised tensions between Iran and Saudi Arabia, Tehran’s biggest rival in the region.

Analysts say there is a conspiracy theory inside the Iranian regime that Riyadh – in co-ordination with the US – is lowering oil prices so that Tehran is forced to compromise its nuclear ambitions during the negotiations which have reached a critical stage.

The Arab kingdom allowed prices to drop in the late 1980s, which helped force Iran to end the war with Iraq because of low oil income.

Mohammad-Baqer Nobakht, the government spokesman, said recently that “the enemy’s leverage to put Iran under pressure is to bring down oil prices through some regional countries who call themselves Islamic but serve the US and the tyrant powers”.

Iran’s oil ministry, which sells around 1m barrels a day, down from 2.3m b/d before the sanctions, declined to comment.

“History is repeating itself,” said one oil analyst. “It is true that sanctions have cost Iran a drop in imports and revenues but government employees can still be paid. It is not clear what would happen if oil prices remain low or go further down and sanctions continue.”

Chart: Iranian rial

Opec, of which Iran is a member, meets at the end of the month in Vienna to review its output target. Officials say Iran would not accept a cut in its output levels but would agree with a reduction by other member states to help push up prices.

In its budget bill for the next fiscal year due to be presented to parliament this month, Mr Rouhani’s government is expected to project revenues based on oil prices of around $70 per barrel, down from the current level of $100. The sharp fall in the price Iran earns from the sale of its oil will reduce its foreign exchange reserves, currently estimated to be as high as $100bn, and put pressure on the country’s budget deficit.

Iran finds it difficult to compensate for shrinking oil revenues by using its foreign exchange reserves because they are stuck in overseas banks because of financial sanctions.

“Iran needs oil prices to be at least $125 per barrel to maintain the current economic situation and handle sanctions,” said the economic analyst.

Majlis links agreement to lifting of sanctions

Iran’s parliament has made a nuclear deal conditional on an “immediate” and “complete” lifting of sanctions.

In a statement on Sunday, the Majlis, or parliament, urged the negotiating team to preserve Iran’s “rights”, including activities “to develop and upgrade the fuel cycle” and also “not to accept any restrictions on research and development of [uranium] enrichment”.

The statement came as senior envoys of Iran, the US and EU met in Oman to try to advance efforts to defuse a standoff over Tehran’s nuclear programme.

Chart: Oil price

Analysts believe that Ayatollah Ali Khamenei, Iran’s supreme leader, who has the last say over any nuclear settlement, has prevented hardliners in the parliament and other state organisations from sabotaging negotiations so far.

In recent weeks, Iranian politicians have indicated a possibility of reaching an agreement with the so-called P5+1 countries – the five permanent members of the UN Security Council plus Germany – by a deadline set for November 24. But expectations are high inside the Iranian regime that nuclear compromises should lead to the removal of international sanctions, which have put a heavy burden on Iran’s economy.

Hardliners believe that economic troubles cannot make Iran accept what they consider an unfair deal.

“The parliament . . . expects the nuclear negotiating team to strongly defend Islamic Iran’s dignity and might, which is the fruit of 35 years of heroic resistance of the Iranian nation,” said Sunday’s statement.

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