Iran’s leadership is not satisfied with the pace and the way in which international sanctions are about to be lifted definitively.

On the one hand, Iran still has many difficulties in having access to global financial markets by using standard procedures; on the other hand there are significant shortcomings and delays in the domestic banking system.

The current yearly inflation rate is 11.9%; the maximum interest rate has fallen from 24% to 22% while, as announced by President Rowhani, the trade surplus is now positive for the first time after 37 years.

At the end of March 2016, the oil and non-oil exports were 41 billion and 42 billion Us dollars, respectively, with an expected annual growth of 0.7% only.

The exports of the free economic zone of Anzali, in the Northern province of Gilan, are growing to an impressive level of 40 million US dollars as against the 20 million US dollars of last year.

Iran’s economy clearly needs to quickly reduce its dependence on oil sales, while the Bandar Abbas refinery will be doubled in terms of extraction and condensation of natural gas, with capital and equipment largely of Iranian origin.

Here the real problem is cultural and political: the Iranian banking system has been segregated for many years with respect to international flows and now the country’s financial leaders do not know how to handle the new, inevitable globalization of the Shiite Iran.

In the research centres of European financial companies there are those who maintain that the Iranian banking system is so badly run, and with such a dominance of political and sectarian mortmain, that the structural crisis of the sector is supposed to break out in three years, at the maximum.

Furthermore the Finance Minister, Ali Tayyebna, has long been maintaining that the government should refinance banks due to the losses resulting from the fall in international oil prices, while the Iranian Central Bank states that the government debt to banks is 33 billion US dollars or even more.

The cases of economic and financial corruption are commonplace and the Iranian banking institutions are accustomed to obscure, personal and ambiguous operations and transactions, partially because of the old closure to international markets.

An international Forum of Iranian banks is scheduled in Berlin in mid-May.

While, as is likely, a global recession will take place in the coming months, due to the fact that the US banks are not convinced of the effectiveness and solvency of the new loans and of the possible 2% inflation rate, the US bankers believe that, with the current North American growth pace, recovery will occur in 2020.

If these are the US forecasts, we can imagine Iran’s geoeconomic difficulties, especially in a much more fragmented, competitive, non-OPEC oil market than the one which has characterized the religious Welfare State since 1979.

After the end of sanctions, however, Iran’s real problem is the lack of productive investment and the weakness of internal technologies for extraction and diversification.

Either they buy them abroad, but banks are mistrustful, or they produce them inside, with higher costs and less effective technological efficacy.

Here the book by the economist Arghiri Emmanuel comes to our mind, namely the Unequal Exchange, which takes place when the economic exchange between the First and the Third World stabilizes at an internationally equalized average rate of profit.

Thus it happens that the third world country’s terms of trade always tend to decrease in real terms.

Hence a similar phenomenon happens, though in a geopolitical context very different from the one of the 1960s, when Emmanuel wrote.

Iran’s average income tends to decrease even at exchange rate parity.

Considering their low quality in terms of certifications against money laundering, Iranian banks’ debts cannot be “internationalized” and contribute to increase, up to reaching exorbitant usury rates, the interest rate for domestic loans. Or they contribute to make banks themselves go bankrupt and hence move State money which could be better used elsewhere.

Obviously, in this case, the prevailing link is the one between creditors and politicians, or between government institutions, that get money anyway, and individuals, who basically remain outside the credit market.

The non-performing loans (NPL) account for at least 20% of the total loans granted by the Iranian banks. Hence, if international finance does not trust the Iranian banking market – and rightfully so – at least 37% of the capital needed in the short term to renew and diversify Iran’s productive structure would be lacking.

If this did not happen, in three-four years, at the maximum, the Iranian banking crisis would be followed by the resumption of a free rider behaviour by Iran, which would have no reason to reduce its points of strategic friction and attrition: Yemen, the Shiite networks in the Emirates, Iraq, the Golan border, Syria and, in the future, Central Asia.

The International Monetary Fund predicts a fall in GDP by 3 to 0.5% over the next two years, which will be crucial.

As we have seen, inflation tends to decline, but it is a cyclical effect of the lower prices of food and other basic commodities.

Optimistically the IMF has forecast that, after the end of sanctions, the GDP should rise to a yearly 5-6% rate but – as another economist of the Emmanuel’s Marxist tradition, James O’Connor, said – the real problem is Iran’s fiscal crisis.

International banks are asking to the Iranian financial holdings and the Shiite government to pursue strong disinflation (which also increases the debt duration) and greater autonomy for the Central Bank, which is still a direct expression of the Supreme Leader.

There is also the problem – shared by many oil-producing countries in the Middle East – of the subsidies to fuel consumption, but the Iranian organization distributing them has reached the break even point since 2015.

So far Iran’s crude oil exports have risen by about one fifth earlier this year, up to 1.5 million barrels per day.

Both for geological and technological reasons, the real production cost of the oil barrel is particularly low, even 1.5 US dollars per barrel.

During the sanctions the production cost per barrel was 5 US dollars. Today oil overproduction is 2%, but Iran wants to get to 500 billion barrels per year, which account for 0.5% of world production, so as to spread its credit weaknesses on a large mass of exports and acquire “easy money.”

It is true, however, that many calculate the break even point of the Iranian oil barrel at a much higher price, namely 136 dollars per barrel, but we must not forget that, in this case, the costs also include the FOB marketing expenses, transportation costs and taxes.

Iran, however, has a break even point which is lower than Nigeria’s and Venezuela’s (which is the most expensive oil barrel in the world in terms of extraction costs), but much higher than Bahrain’s, where there are many Shiites, and Saudi Arabia’s (93.1 US dollars) where the followers of Imam Ali are the majority precisely among oil workers and in the extraction areas.

With the money from large oil sales, Iran wants to renew its infrastructure, support economic diversification and, above all, expand its domestic market.

But will it be an operation without dangers? It is too early to say so, as Zhou Enlai said to Kissinger, when he asked him what the Chinese Communists thought of the French Revolution of 1789.

But the net cost for supporting the Iranian ruling classes is such as to make it difficult to reach these goals.

Ali Khamenei, the Supreme Guide, the Rahbar, has a personal business empire of 95 billion US dollars.

Other members of the Shiite nomenklatura manage similar assets.

As is happening in Italy and in other Western countries, we are faced with the ruling classes’ corruption, which becomes the main impediment to economic growth.

Nevertheless only Venezuela, Saudi Arabia and Canada have larger oil reserves than Iran.

Iran has more oil than Iraq, Kuwait and Libya put together.

Therefore, on the basis of these data and statistics, some geopolitical options can be inferred: the contrast with Saudi Arabia is bound to increase, while Iran will have every interest in limiting the Sunni expansion in Libya and Kuwait, as a Shiite minority survives in the latter.

Hence an oil geopolitics uniting all the followers of Imam Ali under Iran’s guidance and leadership, for a clash with Saudi Arabia which will be not only military, but also financial.

However, will Iran succeed in having capital available in the short to medium term, which will be used for oil production expansion without limiting the growth of the internal market, which is the key to its political stability?

If the “power circles” step aside, and Iranian banks’ efficiency improves, something positive could happen.

Conversely, if political and private corruption increases or remain stable, either the investments for the oil upgrade or the internal market’s growth, which could trigger off many and unpredictable mass revolts, will be negatively affected.

Nevertheless, if the ruling class’ liquidity decreases, also the right and left electoral base of a large part of the regime shrinks – an electoral base that is often patronage-based

At strategic level, whatever happens to the Iranian banking issue, the end of sanctions will bring Iran closer to the United States, which will probably not fail to support some sectoral investments of the Shiite regime.

While, in this new scenario, Saudi Arabia will play some of its cards as free rider in the Middle East, by funding – despite its financial crisis which is more severe than Iran’s – some proxy wars in the Gulf, in the Maghreb region and, possibly, even in Central Asia.

Giancarlo Elia Valori
Giancarlo Elia Valori

Giancarlo Elia Valori * (twitter-logo@GEliaValori)

* Presidente della merchant bank “La centrale Finanziaria Generale S.p.A.”
– Presidente della “Cattedra sugli studi della pace, la sicurezza e lo sviluppo internazionale presso la Facoltà di relazioni internazionali della Peking University, nonché “professore straordinario” di economia e politica internazionale nello stesso Ateneo
– Honorable dell’Académie des Sciences dell’Institut de France