Bankrupting Iran is not enough

According to a spate of recent media reports, Iran’s economy is on the skids. It works out that aside from being a messianic, genocidal killer, Iranian President Mahmoud Ahmadinejad is also an economic dunce.

Ahmadinejad entered office two years ago after running a populist campaign pledging to share Iran’s oil and gas revenues with the Iranian people. As his campaign slogan put it, Ahmadinejad would "put petroleum income on people’s tables." But two years into his tenure, the economy is failing. While the government places inflation rates at 12-13 percent, Radio Farda reported that Iran’s Parliament Research Center indicates that the rate is actually closer to 20 percent.

Interviewed on Radio Farda, Iranian economist Fereidun Khavand explained that most of Iran’s economic woes are the direct result of Ahmadinejad’s economic foolishness. The chaotic economic situation, Khavand noted came after Ahmadinejad "shifted the circle of economic decision-making from the Ministry of Finance and Economics, the Planning and Management Committee, and the Iranian Central Bank to the presidential administration solely."

Ahmadinejad’s economic mismanagement, which includes discouraging international investment by destabilizing the region politically through his bellicose rhetoric and frenetic advance of Iran’s nuclear weapons program and support for global jihad, has singled him out for opprobrium by Iran’s intellectual elites. In June, 57 Iranian economists signed an open letter condemning Ahmadinejad’s policies and accusing him of "ignoring the basic principles of economics." The economists warned that "government mismanagement is inflicting a huge cost on the economy and underscores that high oil revenues over the last two years can only delay the imminent economic crisis."

The basic problem with Iran’s economy is that the government spends more subsidizing prices than it takes in from oil and gas revenues. The government sells gasoline to the public for one-fifth the cost of production. As the Associated Press reported on Sunday, in 2006 Iran earned $50 billion in oil and gas revenues. But it spent $60 billion on fuel and other subsidies.

Iran would be able to cover its costs more successfully if it were able to attract foreign investors to develop its increasingly antiquated oil and gas fields. While there is much foreign interest in developing Iran’s oil and gas sectors, two factors work to depress such investment. First there are the US efforts to discourage foreign investment in Iran’s energy sector. Second, as AP reported, Iran itself discourages foreign investors in its energy sector by offering deals with low rates of return. Mikkal Herberg, a former oil executive, told the wire service that Iran today offers rates of return of between 6-10 percent to foreign investors. As Herberg put it, "In a very low-risk environment, you want to see 10 to 12 percent returns. In a high risk environment [like Iran], you need 15 percent plus to make sense."

Iran’s low-ball offers have put off investors who have no problem with investing in a nuclear-proliferating rogue state. China’s Sinopec’s deal to develop the Yadavaran oil field is being delayed because the rate of return Iran offered the Chinese was too low.

For its part, Iran maintains that foreign investment is high. Last week Iranian parliamentarian Ahmad Nejabat boasted that Iran had secured some $10 billion in European investment in its oil and gas sectors in recent years. Iran also announced that from March 2006-March 2007, its volume of non-oil trade with the Arab world stood at some $16 billion.

Yet even if the picture is mixed, it is clear that Iran’s economy is on a downward trajectory. That this is the case has caused many to believe that the Iranians’ economic dissatisfaction will cause the Iranian regime to take a more conciliatory position toward the international community by putting its nuclear program aside. It is similarly argued that Iran’s economic woes will bring Ahmadinejad’s more moderate political opponents to power in next year’s parliamentary elections. Additionally, for the past several months, it has been forecast that Iran’s economic weakness will eventually cause the regime to collapse and so end the specter of a nuclear-armed Iran.

Unfortunately, the probability that in the foreseeable future Iran’s economic problems will cause the regime to moderate its policies or bring regime opponents to power in Iran’s parliament is not high.

Sunday, the regime’s Guardians Council appointed four radical mullahs to form Iran’s elections panel. This panel is responsible for approving political candidates and overseeing the voting processes. In 2004, the elections panel disqualified moderate candidates from running and so ensured that that hardliners would control the parliament. Sunday’s announcement by the Guardians Council ensures that the 2008 elections will similarly maintain the power of the radicals.

Moreover, Ahmadinejad has responded to his economic failures by further strengthening his control over the economy. Sunday the Iranian media announced that Ahmadinejad had sacked the country’s oil and industry ministers. Both men had worked to prevent Ahmadinejad from completing his takeover of the economy. With the two powerful ministries now under his full control, there is little doubt that he will intensify both his consolidation of power and his repression of his critics.

While it is possible that Ahmadinejad’s economic mismanagement may at the end of the day capsize his regime by bankrupting the country, there is no reason to believe that this will occur before Iran acquires nuclear weapons. Today Iran is enriching uranium in some 3,000 centrifuges at its nuclear installation in Natanz. Last month, an Iranian official stated that this is sufficient make a nuclear bomb.

If Iran acquires nuclear weapons, the desirability of investing in its oil sector may rise. European countries eager to appease the Iranians in the hope of removing themselves from the nuclear-armed mullahs’ enemies list may decide that a 6- or even 3-percent return on their investment is a deal to be had. And so a nuclear-armed Iran may be more economically viable than a non-nuclear armed Iran.

Finally, even if the regime collapses as a result of its economic incompetence, it is far from guaranteed that a new regime would be more friendly to the outside world, or pose less of a threat to global security in the medium and long term than the current regime. To understand why this is the case it is worth considering post-Soviet Russia.

The collapse of the Soviet Union did not cause the Russian people to revisit the basic ideological and moral assumptions on which the Soviet regime was predicated, or link those assumptions to the eventual implosion of the Soviet empire. As Reuben Johnson noted this week in the Weekly Standard, the Russians attributed the fall of the USSR to betrayal – by disloyal officials and by the outside world. By scapegoating others for the collapse of the regime, the Russians spared themselves the need to accept the moral failure of the Soviet model and to strike out on a new course.

The fact that the Russians have not come to terms with the evil nature of Soviet Communism was brought to the fore in 2003, when 53 percent of Russians claimed that Josef Stalin was a great leader and 36 percent said that he was more good than bad. As Boris Nemstov, the former deputy prime minister and current regime opponent wrote recently in theVedemosti newspaper, the fact that "40 percent of Russians are prepared to vote for whomever [Russian President Vladimir] Putin supports" in next year’s presidential elections is testament to the fact that the Russian people themselves oppose democracy.

Russia today is challenging the US on every conceivable level. It is pushing out in a neo-imperialist direction. This is brought home most clearly in its assertion of sovereignty over the North Pole, its treatment of the former Soviet republics and its stated aim to build a permanent naval station in Syria. In light of Russia’s hostility, and its rejection of democracy, it is evident that the fall of the Soviet Union did not foment a change in Russia’s moral or psychological make-up.

Noting Russia’s refusal to reckon with the legacy of the Soviet Union, Russia scholar David Satter presciently warned in the National Review in 2002 that "The ‘era of good feelings’ in US-Russian relations… may prove short lived… Geopolitical interests notwithstanding, the Russian leadership has made no real effort to adopt Western values, particularly respect for the individual and the value of human life."

The same could easily be the case in Iran if economic failure, unaccompanied by moral rebuke, foments the fall of the regime. To prevent a successor regime in Iran from looking like an Iranian version of Putin’s Russia, it is insufficient to weaken Iran’s economy. The US, Israel and other outside forces should be actively cultivating, supporting and organizing an alternative leadership that can take charge and move Iran in a new moral and ideological direction after the regime falls.

From all of this it is clear that while Iran’s economic failure is a positive development which should be capitalized and built upon, it alone is no indication that Iran’s threat to global security is weakening. To prevent Iran from acquiring nuclear weapons and threatening the world in the long run, the promotion of its economic failure must be accompanied by military policies aimed at destroying its nuclear facilities, and political policies aimed at ensuring that Iran’s next regime will be better than the current one.