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Iran’s Failing “Mullahnomics”

ISTANBUL – As the stand-off between Iran’s government and opposition continues, one factor that may determine the outcome, but which is rarely discussed, is the rickety state of the Iranian economy. Will its sclerotic performance ultimately turn out to be what tips the balance?

Iran’s economy has struggled ever since the Islamic Revolution, partly because of the economic embargo imposed by the United States three decades ago. Today, with Iran starved of technology and spare parts for existing equipment, OPEC’s second-largest oil producer in 2006 has become a net importer of refined petroleum products. Indeed, conditions in Iran’s oil industry had so deteriorated in 2007 that gasoline rationing was introduced, opening the way to a thriving black market.

Such shortages, no surprise, have stoked inflation. In November 2009, the Iranian Central Bank (Bank Markazi) reported a 22% annual rise in the price level. To spur investment, new measures have been undertaken to allow foreign banks to enter the Iranian financial system. Many have applied, but no license has yet been granted.

A clear sign of the rot in Iran’s economy can be found in economic relations between Iran and Turkey. Trade links between the two countries are old and deep-rooted, and they were supposed to benefit after Iranian President Mahmoud Ahmadinejad’s visit to Turkey in 2008, when it was decided that bilateral trade should double, to $20 billion, by 2011, and reach $30 billion in 2012. Turkey’s government even allowed Turkish exporters to bill in Iranian rials.