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Iran: Oil leaves Iran high and dry

Ideologically the US and Iran are far apart, but economically they are uncomfortably linked. As the US recession spurs an oil-price crash, Iran’s populist financial policies might be set to face substantial obstacles.

What international sanctions against Iran were not able to achieve might come about through a funding crisis.

The oil boom helped the Iranian government to bolster its popularity with cash handouts. Partly because of this, imports ballooned to almost $50 billion during the past Iranian year. Imports rose 20% during the first quarter of the present Iranian year (which began on March 21) compared with the same quarter the previous year, according to the latest central bank figures.

Conventional economics would say this growth in imports has made Iran’s home industry less competitive, creating an advanced form of Dutch Disease dependency.

With a presidential election due in summer 2009, the oil boom might have ended too soon for President Mahmoud Ahmadinejad. Iranian oil revenue might not have been significantly affected yet by the oil-price crash, as some price agreements made before the price fall are likely still to be in force. However, by mid-2009, spot prices of $40 a barrel and lower, together with lower expected prices, will certainly have begun to kick into the state’s revenue stream, as oil is exported under lower price agreements.

Iran’s government knows that its financial difficulties will be watched with attentive glee by its diplomatic foes.

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