“این عکس یک پرنده در حال پرواز است”

“This photo shows a bird in flight.”
Behzad Ahmadi Nia

In the final days of 1397 (2018-2019) and on the 68th anniversary of the nationalization of Iran’s oil industry, there have been many discussions about the future of this industry and the pillars of the country that are built upon it. Oil, which was supposed to be a source of prosperity in different eras over the past seven decades, is now facing numerous international and technical limitations and has created various concerns for the future.

Undoubtedly, oil is the foundation and backbone of Iran’s economy today, and from this perspective, any damage or harm that is inflicted upon it will affect all aspects. However, in this writing, I will try to uncover the effects of sanctions and oil restrictions on Iranian households in the simplest language possible; a set of conditions that, in five different layers, diminish the daily livelihood of the Iranian people.

Budget deficit and unemployment.

The first layer of the impact of the oil sales sanctions is a disruption in government revenue sources and as a result, an inability to fulfill commitments. Iran’s government budget has always been set with reliance on over 80% of oil revenues in recent decades, and fluctuations in the global price of this commodity have also had an impact on Iran’s economy. However, the government claims to have set the least oil-dependent budget in Iran’s history for the year 98 and has relied on tax revenues instead of revenues from crude oil sales. But this budget still assumes the sale of one to one and a half million barrels of oil per day, and its failure to materialize will paralyze Tehran. The Iranian government has close to 5.2 million direct employees and wage earners, which make up the largest portion of its expenses, and in the short term, if there is no oil revenue, it will be forced to borrow from the central bank and increase inflation to pay salaries, and in the medium

Alongside this issue, the problem of financial and contractual obligations of the government to the private and semi-private sector is also raised. The inability to repay debts to the private and semi-private sector will result in a domino effect of bankruptcy in the country’s industry and commerce, leading to increased unemployment and decreased purchasing power of citizens. For example, in recent discussions about increasing workers’ wages and minimum wage in 2019 – which continued until the last days of the year – the government clearly stated that it will not be able to pay the 400,000 Toman increase in wages, while the 167% increase in currency prices in 2018 has already exceeded the cost of living for each citizen. However, the Iranian government is currently facing difficulties in covering the expenses of its employees.

Asceticism and politics

The first child of corruption and legitimacy crisis, inflation has become uncontrollable. Iran was the first country in the Middle East to gain access to oil resources and for more than a decade, it developed its own oil industry until the arrival of its next rival. On the other hand, nationalization of Iran’s oil industry was also a pioneer in this movement in the Middle East. However, among other competitors, it is almost the most disadvantaged country in terms of this blessing. One of the most important reasons for this situation is the existence of non-expert opinions and ideologies as criteria for dealing with challenges. As mentioned in the previous section, the first effect of sanctions is the reduction of budget and lack of government income to fulfill its obligations, but over the past four decades, the Iranian government has always chosen the quickest and easiest solution – using unbacked banknotes to pay its employees – which directly results in inflation.

In times of inflation and economic recession, the prices of goods increase without creating added value, and the only way to avoid it is to accept poverty and economic austerity; something that is not feasible in times of legitimate crisis.

At the beginning of summer 97, Bijan Namdar Zanganeh, the famous Minister of Oil of Iran, issued a memorandum to all departments under his management, ordering them to reduce current expenses. Among the items in this memorandum, it is noticeable that all oil guesthouses were closed and the purchase of sweets and chocolates for meetings was prohibited. Those who have worked with the National Iranian Oil Company or are familiar with its working conditions know that this organization provided some of the best services and facilities for its employees and always emphasized on their welfare due to the government’s strong reliance on its employees. However, now the situation has become so difficult and cash flow so scarce that even the Ministry of Oil has implemented austerity measures before the official start of the new round of sanctions. On the other hand, in the spring of 97, the Ministry of Oil was forced to borrow from the central bank to cover the necessary cash flow for paying its employees’ salaries, which happened at the peak of the

Agriculture and animal husbandry, dangerous victims.

For the past four decades, the efforts of various governments in Iran have always been focused on achieving food self-sufficiency. In this path, only the second government of Khatami was successful in briefly reducing the need for wheat imports to zero, but in the following years, extending this policy to other agricultural sectors led to the waste of water resources and the creation of an environmental crisis in the country. Now, with oil sanctions and the increase in exchange rates, another challenge awaits this sector in 1398 (2019-2020).

Urea is one of the by-products of petrochemicals, but it is so important that some petrochemical companies only produce urea. The main use of this product is in the production of herbicides and nitrogen fertilizers, as well as the production of some plastic products for packaging and disposable items. In 2018, due to the difference in exchange rates between the government and the free market, petrochemical companies and urea production units engaged in uncontrolled exports of this product. In December, the Ministry of Agriculture warned that the supply of chemical fertilizers would not meet the needs of the following year, and petrochemical companies are refraining from selling this product domestically. This problem could lead to a severe decline in agricultural production and especially animal feed, resulting in great difficulty in providing basic necessities for families.

On the other hand, the shortage of packaging materials has caused many food production units to shut down, resulting in increased unemployment and poverty alongside food shortages.

Currency fluctuations and one-way street prices

As mentioned, oil is the sole source of foreign currency and financial support for the government in Iran, and not having access to the revenues from this product will result in bankruptcy. The biggest and fastest impact of oil sanctions can also be seen in this area.

Inability to meet the domestic market’s needs with foreign currencies leads to an increase in demand and a sharp decline in the value of the national currency. In the first wave of this situation last year, the exchange rate grew by more than 160%. In these circumstances, the government is forced to control demand, and one of the measures taken is limiting customs orders for imports. This leads to the suspension of commercial activities and consequently, a decrease in the number of employees in these companies. This will also have a negative impact on unemployment and in the long run, various items will be removed from the Iranian consumption basket, similar to what we witnessed in the 1960s, where items such as bananas, chocolates, and even foreign drinks were considered luxury items in Iran.

At the same time, in the first wave of reaction to these actions, the prices of consumer goods in Iranian retail stores are experiencing a steep increase for two reasons. The first reason is that almost all products are dependent on imports, or imported raw materials, and the second reason is due to the psychological wave in society. Experience has shown that the increase in the rial price does not follow a decrease in the exchange rate and future stability and adjustment will not be effective in restoring purchasing power to society.

Overview

Although each of these paths of the impact of sanctions on the smallest elements of society are currently observable, the most important effect, which is the combination of all of these, will be the most important. The government’s inability to take action in any of the above measures will lead to the formation of a social distrust towards the economy and its institutions, which will not easily be restored. The society’s distrust in the government’s ability to secure its future will have a significant impact on accelerating these changes and will create real and virtual factions against any supply; similar to what we saw during the time of gasoline rationing and the shortage of foreign currency. This false demand will disrupt the estimated equations of the government more than ever before and will even affect sectors that are not facing any problems. Examples of this have been seen in 1997 and even before the start of sanctions, such as the record-breaking daily consumption of gasoline, the smuggling of live animals and tomatoes to Iraq, and the reserve of foreign currency

At the same time, the government hopes that by closing the budget, which relies on taxes instead of oil, it will be able to compensate for the decrease in foreign income with domestic income in the year 98. However, it is not clear how the private sector, which is the main target of these taxes, will be able to pay them with the existing limitations, and how public dissatisfaction and distrust will allow this income to be realized.

With this explanation, the best and only way out of this impasse is active negotiation and diplomacy, which unfortunately has been removed from the agenda of the Iranian government, and internal political struggles over issues such as anti-money laundering laws have also hindered the necessary steps for these negotiations. Now we must see what miraculous solution the Islamic Republic will come up with to sustain its economic livelihood after the end of the oil sanction exemptions.