Iran’s Troubled Economy

  • Middle East Policy

    Middle East Policy has been one of the world’s most cited publications on the region since its inception in 1982, and our Breaking Analysis series makes high-quality, diverse analysis available to a broader audience.

Nathaniel Kern, Matthew M. Reed

Earlier this month, the Iranian rial closed at a record low of 22,300 per dollar at currency trading houses on Tehran’s Ferdowsi Street, having lost 9 percent of its value in one short week. Currency traders reported that demand for dollars tripled in early August. Over the past year, the rial has lost more than 50 percent of its value, as sanctions constrain Iran’s economy, and average Iranians flee the currency because they fear it will soon be worthless. July inflation reached 23 percent according to the Central Bank of Iran.

Some blamed the rial’s recent plunge on Central Bank Governor Mahmoud Bahmani, who first announced that the official exchange rate of 12,260 to the dollar would be realigned to reflect the currency’s declining street value. He backed away from the plan on August 9, however, and has yet to make clear what measures might be taken next—if any. Iran’s economic woes were unavoidable for both authorities and the public during the holy month of Ramadan.

Resistance Economy and Ramadan

This summer Supreme Leader Ali Khamenei called for Iranians to create a “resistance economy” under which the country would rely on its own production—not oil export revenues. Since then, Majles members and government ministers speak about the necessity of resisting the impact of sanctions and liken the task to hardships Iranians endured during the eight-year war with Iraq.

On August 3, the interim Tehran Friday prayer leader, Ayatollah Ahmed Jannati called on the people to stand behind the government in the “economic war” the West was waging on the Islamic Republic. “This is a war in which the enemy, which has suffered defeat in other wars, is trying to regain its lost face through victory,” Jannati told worshipers. He promised that economic problems will only last for a short period.

At an August 7 iftar reception for journalists, Iran’s Minister of Industry and Trade reminded reporters that they must stop publishing stories about the exchange rate or any other negative economic news. In a “resistance economy” the public’s psychological state is much more important than the shortage or absence of goods, Minister Mehdi Ghazanfari told the journalists. “We are in a situation where the enemy makes decisions on the spur of the moment and creates problems for us.”

The Chicken Crisis

Chicken prices inside Iran doubled between March and July. Leading up to Ramadan, vegetable prices soared along with bread. The resulting outrage led the Majles to hold a closed-door session with top economic officials on June 25. The chicken crisis, which received the most attention both in the West and Iran, has been covered extensively, including lengthy panel discussions on Iran’s official television channels.

While only one demonstration in one provincial town was reported, the widespread public outcry is notable because any other public discussion of the effect of sanctions has been criminalized. On July 11, media outlets were banned from publishing any news that was deemed incompatible with Iran’s “national interests.” According to a government website, Iran’s Minister of Culture and Islamic Guidance, Mohammad Hosseini, said, “The situation regarding sanctions and other pressures, especially on the economy… requires more cooperation by the media so the country is not hurt.” Unions have also been banned from commenting on inflation.

Authorities have blamed rising chicken prices on the illegal smuggling of chickens out of the country, price fixing by merchants and the poultry industry, and excessive consumption.

Last month, Grand Ayatollah Makarem-Shirazi devoted part of his first Ramadan sermon to the subject of chicken prices, announcing that he would refrain from issuing a fatwa banning the consumption of poultry. “People should not get fixated on buying certain foods. Many people complain about the high price of chicken; but it is not a very important problem if they do not eat chicken,” the Ayatollah said, according to the Iranian Student News Agency. More and more Iranians are buying chicken this year because they can no longer afford red meat.

Also in July, Ghazanfari, the Minister of Trade and Industry, promised the Majles that the government would import frozen chicken to relieve the crisis. Other countries in the region are facing rising poultry prices due to rising prices of corn, wheat, and soy meal. But Iran’s predicament has been worse because of the currency’s instability and the government’s refusal to intervene decisively.

The Blame Game Heats Up

Mohammad Yusefi, executive director of the Union of Poultry Farmers of Tehran, told Iranian television that a shortage of soy meal was the main cause of soaring chicken prices. He blamed the State Livestock Affairs Logistics Company for failing to import the volumes of soy meal that the poultry producers had ordered, beginning at the end of March. The head of that company declined to appear on television. Instead he issued a statement saying that there was enough corn available for the poultry producers.

If the Iranian government applied itself efficiently, it could provide ample quantities of soy meal for its poultry producers for a total of about $1.4 billion per year. The import bill for soy and other grains like corn would probably not exceed $3.2 billion per year judging by today’s prices. If, as now seems likely, Iran can reach a deal to fulfill its 100,000 b/d contract with India’s Mangalore Refining and Petrochemical Ltd., its gross revenues per year from that contract alone would amount to $3.65 billion per year at $100 per barrel—more than enough to pay for feed.

Another way of looking at the cost is to calculate that Iran would have to spend about 9 percent of its annual oil revenues on chicken feed if its oil exports are limited to 1.1 million b/d, as the most recent estimates suggest. For now, inefficiency, incompetence, corruption, or some combination of those factors explains the chicken crisis. It is possible that Iranian leaders prefer to weather the chicken crisis rather than pay so much of their oil revenues for feed.

Asian Crude Exports Set to Rebound

Iran’s oil exports are on track to recover slightly from very low levels in July. Japanese refiners plan to lift 226,000 b/d in August. Deliveries of that size will be twice the level of Japanese liftings in July but some 20% below last year’s levels. If the refiners pay for the increased volumes of oil 30 days after it is lifted (as can be expected), then revenues will not increase until September.

Hyundai Oilbank and SK Energy, the two South Korean refiners who have contracts to buy Iranian oil, say they are still in discussions with Iran about having Iran’s tanker fleet deliver crude. Any shipments to South Korea are not expected to leave the Gulf until September. Both refiners stopped loading tankers with Iranian oil in June because of the European Union’s ban on reinsurance. Refiners feared that a tanker loaded earlier in the month might arrive too late for it to be covered by adequate insurance in case of an accident.

South Korea will soon import 200,000 b/d or more for the balance of the contract year, with volumes rising to 270,000 b/d if refiners are forced to make up for lost time. Any jump in exports to South Korea will be welcomed by Tehran but deliveries will still shrink compared to last year by about 15 percent.

India represents Iran’s second-largest market for crude although Indian refiners have had trouble arranging shipments. New Delhi, under pressure from domestic shippers, initially told refiners that they must use Indian-owned vessels to transport Iranian crude. However, one after the other, the big Indian shippers—both state-owned and private—decided that the $100 million in insurance which the Indian government had offered was insufficient. State-owned refiners have been given permission on a case-by-case basis to ask Iran’s tanker company to deliver the crude to India. But even then, Iran’s crude export volumes to India will shrink compared to 2011.

Iran’s economic woes will not go away even if oil exports rise modestly in the coming months.


Foreign Reports is a Washington, D.C.-based consulting firm that writes and distributes timely intelligence reports on political developments in the Middle East relevant to oil markets. Oil companies, governments, and financial institutions rely on Foreign Reports for their insight and analysis on key issues affecting the world generally and the Middle East specifically. The firm was founded in 1956 and the current President is Nathaniel Kern.

  • Middle East Policy

    Middle East Policy has been one of the world’s most cited publications on the region since its inception in 1982, and our Breaking Analysis series makes high-quality, diverse analysis available to a broader audience.

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