Iran has suffered from high inflation, a currency collapse and international sanctions for years. New Western measures and a prolonged military conflict could pose enormous challenges for the country.

While the United States and the EU are considering new sanctions against Tehran, Iran is boasting a success story: the country has exported more oil than ever in the last six years. And this despite new US sanctions that then-President Donald Trump put into effect in 2018.

Iran's Oil Minister Javad Owji announced in March that oil exports in 2023 would have brought “more than $35 billion” to Iran's coffers. The “enemies of Iran” wanted to stop its oil exports, “but today we can export oil wherever we want and with minimal discounts,” the Financial Times quoted the Oil Minister as saying.

The billions of dollars raised are enormously important for the country to guarantee social peace internally. A large part of the population suffers the consequences of international sanctions: they have caused a fall in the national currency, the rial, and have significantly increased inflation.

Inflation is already high lately, around 40 percent, and any worsening of geopolitical tensions puts additional pressure on the value of the rial, Djavad Salehi-Isfahani, professor of economics at the American university Virginia Tech, explains in an interview with DW. .

In recent weeks, as the conflict with Israel was expected to worsen, the dollar has gained about 15 percent in value against Iran's national currency. This has caused the rial to lose a quarter of its value against the US dollar in recent months, Isfahani estimates. “This exchange rate devaluation is very quickly reflected in higher prices because Iran imports many goods.” In addition, many goods produced in the country also have an import component. “Therefore, I think the country has to prepare for higher inflation.”

Living standards at 2005 levels

As Iran cannot supply itself with food, the falling currency value and high inflation are driving up already high food prices even further. “This will have a great impact on the well-being of the poor, because food represents approximately half of their spending,” says the expert on the Middle East economy.

The economic situation has also deteriorated noticeably for the middle class over the past two decades. “The standard of living has returned to what it was 20 years ago because of the sanctions,” Isfahani said. Economic performance, on the other hand, is “about the same level or maybe a few percent higher.” However, it would also react very sensitively to new falls.

According to figures from data services provider Statista, agriculture contributed approximately 12.5 percent to Iran's gross domestic product (GDP) in 2022: industry contributed around 40 percent and the services sector around 47 percent.

The economic situation depends on oil exports.

The country is extremely dependent on crude oil exports. With more than 90 percent of oil shipped to China, Western sanctions are becoming increasingly ineffective. Those in power in Tehran are even more concerned that the oil sector, as the most important source of foreign currency, could become the target of military retaliation by Israel.

“I'm sure they are very worried because a war that damages the oil export infrastructure would be a huge blow to the economy,” Isfahani says. Following the impact of the sanctions imposed by Trump in 2018, Iran has now recovered 80 percent of its export volume from then. Most experts attributed this to the easing of sanctions since Joe Biden came to power, Isfahani said.

“In fact, Iran's economy has grown in part due to increased oil exports. Not all of the increase in GDP, which amounts to around five percent annually, compared to what was seen in the region in its set after the Covid Pandemic “What is happening is not bad,” explains Isfahani.

However, the Iranian expert emphasizes that this has not translated into a higher standard of living for the population. Many financial resources were allocated to expanding the army and other measures of the regime.

Corruption and lack of transparency

A lot of money is seeping into the opaque structures of Tehran's Shiite rulers. In Transparency International's index, which measures perceived corruption, Iran ranks 149th out of 180 countries. Germany is in ninth place and the United States is in 24th place.

The role of the Revolutionary Guard (a parallel army) and religious foundations, which control central parts of the economy, is particularly opaque. They do not pay taxes, do not have to present balance sheets and, above all, are subordinate to the political and religious leader of the Islamic Republic, Ayatollah Ali Khamenei.

For Middle East expert Martin Beck of the University of Southern Denmark (SDU), Iran's economy is characterized by “a mixture of the political and economic spheres, which promotes state distribution and clientelistic policies associated with high levels of corruption”.

Low economic output per capita

But while oil export revenues have increasingly stabilized in recent years, Iran is anything but an economic heavyweight. Although its population of around 88 million is almost ten times that of its arch-enemy Israel (nine million), its economic output in 2022, at $413 billion, was significantly less than that of the Jewish state's $525 billion. Dollars.

The gross domestic product per capita in Iran in 2022 was estimated at around US$4,043, far behind Israel (US$54,336) and its regional rival Saudi Arabia at around US$34,441.

The development of the country's economy depends above all on whether new Western sanctions can significantly reduce Iranian oil exports.

Oil exports are crucial

Tehran managed to sell an average of 1.56 million barrels (one barrel is equivalent to about 159 liters) of crude oil per day in the first three months of the year, almost all of it to China. According to information from data provider Vortexa, this was the highest value since the third quarter of 2018.

“The Iranians have mastered the art of evading sanctions,” said Fernando Ferreira, of the US group Rapidan Energy, quoted by the Financial Times. “If the Biden administration really wants to make a difference, it must focus attention on China.”

The United States is now much more independent of Middle Eastern oil exports. However, rising oil prices due to tightening sanctions against Iran would also push up global market prices (and thus inflation) even further. This would be more than unfavorable for US President Joe Biden in an election year and a great opportunity for his rival Donald Trump.

But it doesn't matter whether the sanctions are toughened or not. Would the Iranian economy currently be prepared for a possible military escalation with Israel?

Djavad Salehi-Isfahani's response is clear: “In general, they are not prepared for a prolonged military conflict. That is why they (those in power in Tehran, editor's note) have been very careful not to get too involved in Gaza “And the attack on Israel was more symbolic than one intended to cause harm.”

Author: Thomas Kohlmann

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