Iran: A Need for Budget Cuts

6 MINS READApr 13, 2009 | 11:03 GMT
With worldwide energy consumption bottoming out and the price of oil hovering between $45 and $55 a barrel, a country like Iran — highly dependent on oil revenues — has little choice but to cut back on its spendthrift ways. Iran has an expensive set of priorities to fund across the region, and STRATFOR has received indications that Iran is unable to follow through on its financial commitment to a key proxy, Hezbollah. Meanwhile, countries with petrodollars to spare will be doing their part to contain Iran's rise.
STRATFOR's 2009 annual forecast described Iran as a textbook example of a country that has overcommitted itself to an expensive set of policies at home and abroad, from domestic gasoline subsidies to supporting militant proxies like Hezbollah. STRATFOR forecasted in January that these spendthrift policies would have to be curtailed in 2009, especially since U.S., EU and U.N. sanctions against Iran limit the country's ability to access international loans or issue bonds. Reliable economic indicators for Iran are hard to come by, but there is little doubt that the Iranians are struggling in the current global financial crisis. As OPEC's second-largest producer, Iran depends heavily on its oil revenues to pay the bills, with oil income accounting for almost 80 percent of the country’s foreign exchange revenues. Due to economic mismanagement and lack of foreign investment, Iran has been unable to diversify its economy, much less its energy sector. Iran lacks sufficient refining capacity and is forced to spend a sizable chunk of its energy revenues on gasoline imports and subsidies to appease the populace, despite being a major energy producer. These revenue-draining policies have been exacerbated under Iranian President Mahmoud Ahmadinejad, who has raided the country's oil stabilization fund (OSF) — a rainy-day source of surplus oil revenue — to support his populist agenda. This has given his political rivals plenty of ammunition to accuse him of sinking the economy while the Arab world had made billions off of oil exports. With oil prices sinking, Iran is now scraping the barrel to pay its bills. The country is already battling high inflation — around 25.4 percent — and is expected to be hit with a deficit of $44 billion through March 2010, according to a recent parliamentary research center report. The Iranian parliament has approved an annual budget of $298 billion based on $37.5 per barrel oil. The central government says it plans to cover the deficit with overdue taxes, dividend income from state-owned firms and $11 billion drawn from the OSF. However, it is unclear whether enough funds even remain in the OSF after Ahmadinejad's raids. Moreover, with a presidential election approaching in June, Ahmadinejad will be under greater pressure to avoid tax hikes and prop up populist programs to buy political support, regardless of the drain on the economy. It is only a matter of time before Iran will be forced to go on a spending diet. Of particular interest to STRATFOR is where the country will cut back on its covert programs. In addition to its own presidential election, parliamentary elections will be held in June in Lebanon, where Iran has an interest in bolstering Hezbollah's political standing. Iran will face a litmus test in December when Iraq is scheduled to hold parliamentary elections and its closest Shiite allies — the Islamic Supreme Council of Iraq — will be under pressure to make up for losses in recent provincial elections. Afghanistan will also be holding presidential elections in August, providing Iran with an opening to increase its influence in the country through the support of anti-Taliban elements. Hamas is under pressure to rearm in Gaza after Israel's recent military offensive, while Iran has an array of unfulfilled economic projects in Latin America, where Iran hopes to irritate the United States by building a security presence in countries like Nicaragua. Iran runs covert operations to fund and arm its allies according to its foreign policy interests. Elections can get particularly expensive, since Iranian-allied political parties expect Tehran to follow through on promised funding, including bribes and support of reconstruction and development projects that will buy political support. Hezbollah, for instance, allegedly had a pledge from Iran to spend as much as $600 million to ensure that the Hezbollah-led opposition prevails in the June election. Hezbollah wants the money distributed to Maronite and Sunni electoral areas as well as predominantly Shiite areas in the south in order to support Hezbollah allies throughout the country. According to STRATFOR sources, Hezbollah is under pressure to spend more in heavily contested areas like Beirut than in the south because it is competing with wealthier political rivals like Sunni leader Saad al Hariri, who is known to have paid $500 per vote in certain areas in the lead-up to the 2005 parliamentary elections. As a result, Hezbollah is concerned that some Shiite voters in the south may become disillusioned with the party since they are not getting similar handouts. But it does not appear that Iran will be coming through for Hezbollah in its time of need. Accurate figures are difficult to pin down, but a STRATFOR source claims that Hezbollah has so far received about $100 million from Iran for the 2009 calendar year, and was told to expect less funding in the future unless oil exceeds $70 a barrel. According to the source, Iran has reneged on several of its earlier promises to sponsor Hezbollah's election campaign. Hezbollah is compensating for the decline in Iranian funds through its lucrative drug trade in the Bekaa Valley. A STRATFOR source familiar with Hezbollah's drug income says the organization netted approximately $500 million in drug dealing over the past year. Hezbollah is also acquiring additional funds (some $300 million, according to a source) from Qatar to help sponsor its political activities. Iran's inability to prop up Hezbollah financially raises the question of where else Iran might cut back on funding in the coming year. Militant proxies like Hamas and economic projects in Nicaragua sit lower on the Iran's strategic priority list, but in a place like Iraq, where Iran's closest allies face stiff competition from U.S., Saudi and Turkish-backed groups, Iran has a pressing need to consolidate Shiite influence. Meanwhile, Iran's biggest rival, Saudi Arabia, is sitting quite comfortably on its cushion of petrodollars. While the Iranians are struggling to pay the bills, the Saudis have approved a record-breaking budget for 2009 and will not be shy about using their financial prowess as a weapon in countering Iranian influence across the region, particularly when it comes to supporting Sunni allies in Iraq, Lebanon and Afghanistan and trying to buy off current Iranian allies like Syria. With the fall of Saddam Hussein in Iraq, Iran seized a unique opportunity to spread Shiite influence across the Islamic world. Iran's ability to sustain this rise, however, will depend heavily on its ability to run expensive covert programs that compensate for Iranian weaknesses in economic and military strength. STRATFOR will be watching closely for further signs of Iran's reducing expenses in other areas critical to its foreign interests. The fact remains that the financial game is where the Saudis, the Americans and other Iranian rivals have Tehran beat. The only way Tehran will be able to get its economic house in order is through a dramatic shift in its foreign policy that will provide the political opening for foreign investment in Iran. Until then, the Iranian economy will remain the country's Achilles' heel in its quest for regional dominance.

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