Iran’s financial strength is nothing else but oil:

Iran’s secret weapon isn’t bombs but oil
by David Blair

When oil prices are high, the world’s anti-western regimes can afford to rub their hands with glee. Like a global whirlwind, the price of crude scoops up the pattern of wealth and power between nations and throws it back to earth in a wholly different order.

Russia’s oil-fired belligerence is now plain for all to see. Less noted is the crucial link between expensive oil and Iran’s stance on its nuclear programme.

When it comes to being singled out for United Nations sanctions, no country can compete with Iran. So far, the Islamic republic has been the target of three resolutions squeezing its economy, and the Security Council will probably consider a fourth in October.

Yet president Mahmoud Ahmadinejad’s regime remains stubbornly resilient in the face of this mounting pressure. America and the European Union have imposed their own financial countermeasures, far more serious than the UN’s penalties and designed to isolate Iran from the world banking system and paralyse its entire economy.

With every passing day, doing business in Tehran becomes steadily more difficult and costly - but Ahmadinejad’s government remains devoted to its nuclear programme and, in particular, to the vital process of enriching uranium which could be used to make the essential material for a nuclear weapon.

To grasp why Tehran feels confident enough to shrug off the sanctions and press on with its nuclear-tipped ambitions, you need only understand a handful of crucial figures. At present, oil trades at around $115 per barrel, a fall of over 20 per cent in the last two months.

Yet Iran’s national budget for 2008 presumed an oil price of only $40 per barrel. As the proud possessor of 130?billion barrels of proven reserves - more than anywhere else in the world except Saudi Arabia - Iran can produce about 4.2?million barrels of crude every day.

Hence the oil price is the crucial determinant of how much cash the regime has at its fingertips. With a display of prudence that Gordon Brown in his heyday as chancellor would have admired, Iran’s financial boffins read the runes for 2008 and chose a deliberately pessimistic forecast of the possible course of oil prices.

As a result, Ahmadinejad’s government is awash with money. Exactly how much surplus cash he has in the kitty is hard to calculate, but in February this year, Iran’s foreign exchange reserves were thought to total about $60?billion.

This piled up during the course of last year, given the earlier prudence of Iran’s finance ministry. The national budget for 2007 assumed an oil price of only $34 per barrel. In fact, crude sold for an average of $72 throughout that year.

Thanks to this combination of good fortune and prudent management, Iran’s regime now has a giant cushion against the full impact of international sanctions and a sense of security which outsiders may find hard to comprehend.

The central fact is that oil prices would have to fall by another $75 in order to reach the level presumed by Iran’s financial bureaucrats. The price would have to go still lower, below $40 a barrel, for Tehran’s national coffers seriously to feel the pinch - the chances of this happening are extremely low.

The prudence of Iran’s officials might have given Ahmadinejad his surplus, but the president and his cronies have leapt on the chance to blow the windfall. Tehran is criss-crossed by new highways and a glittering international airport has appeared in the desert outside the capital.

The Revolutionary Guards Corps, forming the largest component of Iran’s armed forces, has grabbed its share by acquiring a wide array of commercial interests.

With the approval of Iran’s Supreme Leader, Ayatollah Ali Khamenei, the Guards now run everything from airports to factories and oil and gas pipelines. Their commanders have become rich men and their alliance with Khamenei is a crucial factor in Iranian politics.

But ordinary people have seen precious little benefit from the oil boom. Instead, Ahmadinejad’s wasteful spending has driven up inflation, which now runs at about 35 per cent, and damaged the living standards of millions.

Rents in Tehran have rocketed, an especially painful development in a country where two thirds of the population are under 30 and countless young couples want to set up home together.

Moreover, the imposition of financial sanctions limits the use that Iran can make of its oil windfall. The world’s biggest banks will not handle cash from Iran, rendering it extremely difficult to hold the proceeds of oil exports in major world currencies.

Most European and Japanese banks have joined their American counterparts and stopped accepting deposits from Iranian clients, whether individuals or companies.

Increasingly, Iran has been forced to keep its oil money in its own currency, safely secreted in its own central bank. As western financial centres pull down the shutters, Dubai has become the new focus of Tehran’s currency dealings.

Despite the US embargo, some businesses in Iran will still take American Express or Visa credit cards. But the sum will be deducted in dirhams, the currency of the United Arab Emirates, and your bill will probably show that your cash has gone to a mysterious clothes shop in Dubai.

Yet despite everything, Iran’s national coffers are still overflowing - and this would surely give any government a sense of security.

If the nuclear confrontation is ever to be settled, numerous conditions would have to be met. Iran may want guarantees against attack by any outside power and proof of the bona fides of any western concessions.

But the oil price would also have to fall, perhaps below the magic figure embraced by Iran’s bureaucrats of $40 per barrel.

Unless this happens, the prospect of Iran compromising on its nuclear programme seems about as likely as any other hopeful event in the Middle East.

(C) The Telegraph Group London 2008