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Emerging Markets

Turning the screw

If gas sanctions against Iran take effect, the greatest impact could be on unemployment

In one of his first public utterances, Iran’s new oil minister Masoud Mirkazemi brushed off the threat of US-led action against his country’s gasoline imports.

“God willing, we have readiness – on the one hand, reserves are available, and on the other hand, we have had agreements with countries like Venezuela,” he said. “There are other possibilities too.”

Sanctions against Iran’s gasoline imports, designed to pressurize Tehran to curb its nuclear programme, are popular with US congressmen and some European leaders as an alternative to – or perhaps a step towards – military strikes on Iran. [Hasn’t Obama gone soft on Iran?]

Iran’s vulnerability stems from subsidies that have encouraged car use and led consumption to run ahead of the output of domestic refineries. Despite the rationing of subsidized gasoline since 2007, imports account for 40% of sales.

Those supporting gasoline sanctions argue they will raise prices in Iran and so alarm the authorities – whereas critics suggest they will just enrich those prepared to continue supplies.

Richard Dalton, British ambassador to Iran from 2002 to 2006, has argued that “a combination of smuggling, lack of enforcement and rationing would see Iran through.” He also questioned the political effect, saying that “the internal reaction to what would be portrayed as an attempt to harm ordinary Iranians would serve the Iranian government’s objectives.”

Traders have expressed doubts over the practicality of an embargo, although India’s Reliance halted supplies in May, apparently for political reasons.

Iran has been importing around 128,000 barrels per day of gasoline from companies, including the Rotterdam-Geneva-based Vitol, the Lucerne-based Trafigura, Russia’s Lukoil and Malaysia’s state oil company Petronas.

Aid was promised by Hugo Chavez on a visit to Tehran last month, when the Venezuelan president said his country would supply Iran with 20,000 barrels of petrol a day, presumably in addition to existing supplies.

Iran has vast experience in circumventing sanctions since the 1979 Islamic Revolution. The Islamic Revolutionary Guard corps (IRGC) already manages informal import and export channels, which have included the export of subsidized Iranian petrol to Iraq, Afghanistan, the UAE and Pakistan.

Iran has developed timely ties with its neighbours despite three rounds of UN sanctions and US-led measures penalizing banks who deal with Iran. Especially in an economic downturn, these countries are likely to resist any curtailment of trade.

Iran and Pakistan last month agreed technical codes for a multi-billion dollar pipeline to supply Pakistan from Iran’s South Pars gas field from 2013. President Asif Ali Zardari, although friendly with Washington, has visited Iran twice since he came to office in 2008. Trade between the neighbours jumped 61% to $1.25 billion in 2008–09, with Iran now supplying 33% of Pakistan’s crude imports.

Iran accounts for almost 50% of Iraq’s imports, with bilateral trade set to reach $5 billion this year. Trade between Iran and the UAE was officially $12 billion last year – Iran’s imports are around $10 billion – with unofficial trade much higher.

But if gasoline sanctions do raise prices in Iran, the greatest effect could be on unemployment.

Inflationary pressures have ebbed, largely due to lower global commodity prices, and consumer price inflation in the summer reached its lowest level for two and a half years. But unemployment was officially 12.5% in the second quarter of 2009, up 9.6% on a year earlier.

Analysts already expect Iran’s growth to continue falling from 7.8% in 2007. The London-based Economist Intelligence Unit (EIU) estimates 2008 growth at 6.5% and projects just 0.5% for 2009. This follows an average 5.4% from 1996 to 2006, above most developing countries.

The impact of low growth on unemployment is a structural weakness of Iran’s economy. Djavad Salehi-Isfahani, currently a fellow in the Kennedy School of Government at Harvard, has calculated that each lost percentage of growth results in 100,000 fewer jobs – which means 600,000 fewer on the EIU projection.

“This is partly a question of political management, since while 0.5% is low, it’s still in positive terrain compared with other countries in the region,” says Mohammed Shakeel, Iran analyst of the EIU. “Saudi Arabia, for example, we forecast to contract by 1% after averaging almost 4% growth over the past two years.”

But vulnerability over unemployment means the potential effect of gasoline sanctions could be “extremely painful”, he says. “Suppose a worst case scenario where petroleum imports are cut dramatically. Given Iran’s dependence on petrol for both commercial and residential use, sanctions have the potential to bring ‘normal’ economic activity to its knees. Add to this the expected rise in domestic prices, meaning that purchasing power would be hit heavily reducing domestic demand and private consumption. The black market would increase, further choking economic activity.” —G.S.

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