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Financial Times: Sanctions fail to fuel dissent on Iran’s streets

By Gareth Smyth in Tehran
Published: July 24 2007 04:47 | Last updated: July 24 2007 04:47

When angry motorists torched petrol stations as Tehran introduced rationing last month, Iran’s opponents scented success. Ehud Olmert, Israeli prime minister, said it showed “economic sanctions are working increasingly well”.

But after three weeks of rationing, riots have given way to grumbling. Tehran’s streets are less congested, its air more breathable, and the government says it is on target to reduce a bill for imported petrol that was due to hit $7bn this year.

Meeting parliamentarians on Sunday, interior minister Mostafa Pour-Mohammadi claimed a “strategic, historic” decision had cut consumption by between 11m and 16m litres from a daily pre-ration figure of 75m litres.

Few analysts in Tehran doubt the action was prompted by a fear that importing about 40 per cent of its petrol made Iran vulnerable to international action as members of the UN Security Council consider a third round of sanctions over its nuclear programme.

Tehran’s response, analysts say, shows how sanctions do not undermine government policy but rather reinforce its tendency to choose state-led rather than market solutions. “These sanctions are like a flood that overcomes the private sector but also strengthens the state and all its network and agencies,” says Mohammad Tabibian, a prominent reform-minded economist.

“I would go as far to say Mr Ahmadi-Nejad welcomes sanctions,” says a second economist. “He says he believes in the private sector, but he doesn’t really, and the state is barely affected by these measures as long as it sells oil.”

The government opted to ration petrol rather than raise the price – among the lowest in the world – to a market level, as Mr Ahmadi-Nejad stuck to his promises to be “fair” to less affluent Iranians. “The president thinks of quantity rather than prices, of ‘social justice’ rather than markets,” says Heydar Pourian, editor of Iran Economics, a business monthly. Many private-sector companies face problems in attracting investment after the US pressed international banks to avoid dollar transactions with Iran.

But the bulk of Iran’s state-owned economy rolls on with record oil revenue that rose 13.6 per cent to $54bn in the Iranian year ending March 20.

Iranian officials and analysts dispute US officials’ suggestion that sanctions will spark unrest and undermine the government. “The people in the west who hope sanctions can lead to social unrest should know that no nation revolts when it’s hungry,” says Mr Tabibian. Not that Iranians are starving. They buy state-subsidised bread hot from bakeries.

At the macro level, the IMF predicts 5 per cent growth in 2007; overall international trade is growing as Tehran looks to the east.

Trade with Italy has fallen 20 per cent in six months. In 2006, Germany’s exports to Iran dropped 7 per cent and Japan’s fell 13 per cent.

But business with China is booming. Last year Beijing signed a $100bn deal to import Iranian natural gas and Chinese companies will be 50 per cent stakeholders in the Yadavaran oil field.

China has also become the second biggest market for Iran’s non-oil exports, taking $1.72bn in 2006-7, after the UAE with $2.5bn. Iran’s overall non-oil exports rose 47.2 percent to $16.3bn. “The situation over sanctions is a huge opportunity for China, former Soviet republics and regional countries,” says one Asian diplomat in Tehran.

The medium to long-term outlook may not be so rosy, he adds, if Iran cannot overcome problems in oil and gas production, where contracts often go to domestic companies with limited experience.

Some officials admit the energy sector faces difficulties. Akbar Torkan, managing director of the Pars Oil and Gas Company that oversees development of the South Pars gas field, said last month that more than $4bn was needed this year to develop the field, up from $2.7bn last year.

Iran faced “problems in attracting finance and foreign investment”, Mr Torkan said; a plan to sell $3.5bn bonds inside Iran, offering an 8-15 per cent return, had been sent to Mr Ahmadi-Nejad. But Iran has a poor record in raising capital by privatisation; it is doubtful bonds can replace investment offered by companies – including OMV of Austria, Spain’s Repsol and Royal Dutch Shell – which are hesitating over involvement in Iran’s energy sector.

Copyright The Financial Times Limited 2007

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