Tag: Iran

On Iran, Would U.S. Take “Yes” for an Answer?

Since the election of relative moderate Hassan Rouhani to Iran’s presidency, there’s been a wave of events producing a newfound optimism about the prospects for a peaceful resolution of the dispute over Iran’s nuclear program. President Obama sent a letter congratulating Rouhani on his victory and mentioning other, unspecified issues, and Rouhani reciprocated. Obama told Telemundo he saw Rouhani as “somebody who is looking to open a dialogue with the West, and with the United States, in a way we haven’t seen in the past. And so we should test it.”

Iran’s Supreme Leader, Ali Khamenei, got into the act, reiterating an earlier call for “heroic leniency” in diplomacy over the nuclear program. Khamenei also told the radical and anti-American Islamic Revolutionary Guards Corps to butt out of Iran’s politics. At this time of writing, there are reports Tehran has released a number of political prisoners in Iran.

It all adds up to a period of positive trends in relations between the two countries. But it’s important not to overlook the fact that while atmospherics may help bring about talks, the countries are miles apart on the substantive issues surrounding Iran’s nuclear program. Too much attention has been spent on getting to talks, and too little on bridging the chasm dividing the parties.

A central, if not the central, problem is that the American foreign policy community has failed to lay out any conceivable way Iran could satisfy Washington other than immediate suspension of all uranium enrichment with no serious sanctions relief in return, which nearly everyone agrees isn’t going to happen. Congress seems to have two speeds on Iran policy these days: sanctions and asleep. Congress regularly piles on more sanctions to Iran, some painful, some symbolic, because it’s the easy thing to do politically, and no one seems willing to spend the political capital to provide Iran with a realistic offramp by which Tehran could lessen the pain and save face. Unfortunately, Congress’ actions and rhetoric have given the Iranians good reason to fear that our real policy in Iran is regime change, which can’t augur well for a deal.

Adding to the problems, Israeli Prime Minister Benjamin Netanyahu recently reiterated his own ultimatum to Iran, which is certain to fail. Netanyahu, whose hawkish id commands more influence in Washington than one might hope, demands zero enrichment in Iran—a formula no one believes is achievable. This formula puts Israel, and likely the United States, on a path to war with Iran.

So would Sen. Lindsey Graham, who last weekend reiterated his call for Congress to pass a war resolution allowing the Obama administration to bomb Iran when it determines bombing would be appropriate.

Free Advice from Bill Kristol

Republicans who still look to Bill Kristol for political advice will find his case that “yes” is “The Right Vote” over at The Weekly Standard today. Ignore those melting phone lines, Kristol urges congressfolk: despite what your constituents are telling you, “no” on the Authorization for Use of Military Force (AUMF) in Syria is actually “the risky vote.”

If Republicans refuse authorization, Kristol argues, “the GOP can be blamed for whatever goes wrong in Syria, and elsewhere in the Middle East, over the next months and years. And plenty will go wrong.” If they don’t want the Middle East mess hung around their necks, he says, then Republican lawmakers should vote for bombing Syria—and “consider moving an authorization for the use of force against the Iranian nuclear weapons program.” See, that’s how you minimize your political risk. With double the bombing, what could possibly go wrong?     

It’s not the most persuasive bit of political analysis I’ve ever read. But, disturbingly, Kristol’s on to something in this paragraph:

A Yes vote is in fact the easy vote. It’s actually close to risk-free. After all, it’s President Obama who is seeking the authorization to use force and who will order and preside over the use of force. It’s fundamentally his policy. Lots of Democrats voted in 2002 to authorize the Iraq war. When that war ran into trouble, it was President Bush and Republicans who paid the price. If the Syria effort goes badly, the public will blame President Obama…. If it goes well, Republicans can take credit for pushing him to act decisively, and for casting a tough vote supporting him when he asked for authorization to act. 

There’s genuine insight there into the way we war now, and how Congress shirks its constitutional responsibilities. Domestically, as David Schoenbrod has observed, broad delegations of power allow Congress “to kiss both sides of the apple,” taking credit for the benefits of the legislation they pass and railing against whatever costs the executive branch imposes.

Congress plays the same “shell game” abroad. Where possible, modern Congresses have preferred to punt to the president and reserve their right to criticize him should military action go badly—to be for the war before they were against it, or vice versa, depending on which way the political winds blow. That’s how it worked in Vietnam and in Iraq—and that’s the danger with the Senate’s loosely crafted Syria AUMF. The provisions that purport to limit presidential action are too weak to stick, but if we get a wider, bloodier war, they’ll allow legislators to say: “That is not what I meant at all.” It’s TARP with Tomahawks. 

Still, there’s always the risk that the marks will see through the shell game. And at this point, Congress seems unconvinced that a “yes” vote is “close to risk free.” 

Troubled Currencies Project Update: Syria, Iran, and Egypt

Syria Since August 26,  when U.S. Secretary of State John Kerry began laying the groundwork for military intervention in Syria, the Syrian pound (SYP) has taken a beating on the black market. Indeed, the SYP has lost 24.07 percent of its value against the U.S. dollar (USD) in the two days since Kerry’s announcement. Currently, the exchange rate sits at 270 SYP/USD, yielding an implied annual inflation rate of 291.88 percent. In countries with troubled currencies, there is no better measure of economic expectations than the black-market exchange rate. The recent deterioration in the SYP/USD exchange rate clearly indicates that Syrians are anticipating Western military intervention in the near term. 

IranThe initial weeks of the Rouhani presidency have seen renewed economic confidence, as reflected by the Iranian rial’s (IRR) black-market exchange rate. The new central bank governor, Valiollah Seif, has stated that his primary concerns are to rein in inflation and boost economic stability. Over the past few weeks, the rial has strengthened on the black-market, and inflation has moderated somewhat. That said, recent international saber-rattling over Syria clearly has spooked the Iranian public. In the two days since Secretary Kerry first made his case for intervention in Syria, the value of the Iranian rial has dropped 4.74 percent on the black market, to 32,700 IRR/USD. This yields an implied annual inflation rate of 52.10 percent, up from 44.89 percent, prior to Kerry’s announcement.

EgyptSince the fall of the Morsi government, public confidence and support for the military regime has boosted the value of the Egyptian pound (EGP). Prior to the military takeover, the black-market exchange rate sat at 7.6 EGP/USD. Since Morsi’s ouster, the pound has appreciated by 7.34 percent, to 7.08 EGP/USD. This yields a current implied annual inflation rate of 18.62 percent, down from 27.85 percent in the final days of the Morsi government. In recent weeks, the Central Bank has been auctioning off up to $40 million in foreign exchange, three times per week. This rather modest sum has adequately met the demand for foreign exchange at rates close to the official exchange rate of 6.99 EGP/USD.

 

For more information on troubled currencies in these countries and others, see The Troubled Currencies Project.

What Is Syria’s Iranian Credit Line Worth?

Last week, the press was filled with reportage about Tehran throwing a lifeline – actually a credit line of $3.6 billion  – to the Syrian regime.

The announcement of this Iranian lifeline should have changed the economic expectations of Syrians in the throes of what has morphed into a bloody civil war. Indeed, if it materializes, the $3.6 billion credit line should allow Damascus to conserve its dwindling supply of foreign exchange. This development should have thrown a positive expectation shock into the market for the Syrian pound.

So, did economic expectations receive a positive boost from the announcement of Tehran’s lifeline? Let’s go back to May 27th. That’s when the tentative credit line agreement was announced. A mini event study shows that the initial agreement had no material impact on expectations, as objectively measured by the Syrian pound/U.S. dollar black-market exchange rate. Indeed, the SYP/USD exchange rate was unmoved by the tentative agreement (see the accompanying table).

The next event in this credit line story occurred on July 30th, when it was announced that the May agreement had been finalized and signed on July 29th. Again, expectations and the SYP/USD exchange rate remained unmoved (see the accompanying table):

What, then, can we say about the Tehran-Damascus deal? Well, objective data – namely market prices – tell us that the widely-reported event had no material effect on Syrians’ economic expectations. Accordingly, the implied inflation rate for Syria remained unmoved. Using these objective black-market exchange-rate data, I estimate that Syria is currently experiencing an annual inflation rate of 190.7%.

In short, Syrians viewed the deal as irrelevant. They think that either Iranians won’t deliver on the promised credit line, or that if they do, it will not change the situation on the ground.

I often tell my students to be mindful of the late Prof. Armen Alchian’s “95% rule”: Ninety-five percent of what you read that passes for finance and economics is either wrong or irrelevant. For the time being, it appears that Syria’s Iranian credit line falls under the latter category.

I have established a page to track current black-market exchange-rate and implied inflation data for the Syrian pound, as well as for troubled currencies in Iran, Argentina, North Korea, and Venezuela. For more, see: The Troubled Currencies Project.

Syria’s Annual Inflation Hits 200%

In an attempt to beat Western sanctions and halt the fall in the Syrian pound, the Assad regime – with the help of Iran, Russia, and China – has begun conducting all of its business in rials, roubles, and renminbi. This decision supplements other existing arrangements between Syria and its allies that are keeping the Syrian economy on life-support. These include transfers of $500 million per month in oil and an unlimited credit line with Tehran for food and oil-product imports.

According to Kadri Jamil, Syria’s prime minister for the economy, this life support is necessary because Syria’s devastated economy is the target of an elaborate plot, hatched by the U.S. and Britain, to “sink the Syrian pound.”

So, what about the sinking pound? As the accompanying chart shows, the Syrian pound has lost 66.2% of its value in the last twelve months.

The rout of the Syrian pound has been widely reported in the press.  But, Syria’s inflation problems that have accompanied the collapse of the pound have gone largely unreported.  That’s because, beyond the occasional bits of anecdotal evidence, there has been nothing to report by way of reliable economic data.

To fill that void, I employ standard techniques to estimate Syrian’s current inflation. Currently, Syria is experiencing an annual inflation rate of 200% (see the accompanying chart).

Indeed, Syria is experiencing a monthly inflation rate of 34%. To facilitate the monitoring of the quickly deteriorating situation in Syria, I am creating a resource which will allow readers to view up-to-date data on the Syrian pound and the country’s inflation problems. Soon, black-market exchange-rate data and ­inflation estimates for countries with troubled currencies like Syria will be made available via the “Troubled Currencies Project” – a joint Cato Institute-Johns Hopkins collaboration under my direction. In consequence, the days of Syria’s plunging pound and raging inflation being covered in a shroud of secrecy are soon coming to an end.

On Iran’s Inflation Bogey

With Friday’s Iranian Presidential election fast approaching, there has been a cascade of reportage in the popular press about that opaque country. When it comes to economic data, Iran has resorted to lying, spinning and concealment – in part, because of its mores and history, and more recently, the ever-tightening international sanctions regime. In short, deception has been the order of the day.

The most egregious example of this deception concerns one of Iran’s most pressing economic problems – rampant inflation. Indeed, while the rest of the world watched Iran’s economy briefly slip into hyperinflation in October of 2012, the Statistical Centre of Iran and Iran’s central bank both defiantly reported only mild upticks in inflation.  

It is, therefore, rather surprising that the major international news outlets have continued to report the official inflation data without so much as questioning their accuracy. Even today, with official data putting Iran’s annual inflation rate at a mere 31 percent, respectable news sources faithfully report these bogus data as fact.

As I have documented, regimes in countries undergoing severe inflation have a long history of hiding the true extent of their inflationary woes. In many cases, such as the recent hyperinflation episodes in Zimbabwe and North Korea, the regimes resort to underreporting or simply fabricating statistics to hide their economic problems. Often, they stop reporting economic data all together; or, when they do report economic statistics, they do so with such a lag that the reported data are of limited use by the time they see the light of day.

Iran has followed this course – failing to report important economic data in a timely and replicable manner. Those data that are reported by tend to possess what I’ve described as an “Alice in Wonderland” quality. In light of this, it is fair to suggest that any official data on Iran’s inflation be taken with a grain of salt.

So, how can this problem be overcome? At the heart of the solution is the exchange rate. If free-market data (usually black-market data) are available, the inflation rate can be estimated. The principle of purchasing power parity (PPP), which links changes in exchange rates and changes in prices, allows for a reliable estimate. Indeed, PPP simply states that the exchange rate between two countries is equal to the rates of their relative price levels. Accordingly, if we can obtain data on free-market exchange rates, we can make a reliable estimate of the inflation rate.

In short, changes in the exchange rate will yield a reliable implied inflation rate, particularly in cases of extreme inflation. So, to calculate the inflation rate in Iran, a rather straightforward application of standard, time-tested economic theory is all that is required.

Using this methodology, it is possible to estimate a reliable figure for Iran’s annual inflation rate. At present the black-market IRR/USD exchange rate sits at 36,450. Using this figure, and a time series of black-market exchange rate data that I have collected over the past year from currency traders in the bazaars of Tehran, I estimate that Iran’s current annual inflation rate is 105.8 percent – a rate almost three and a half times the official annual inflation figure (see the accompanying chart). 

Iran’s Search for a “Master of the Economy”

Iran’s Guardian Council announced yesterday that former president Ali Akbar Hashemi Rafsanjani has been barred from Iran’s presidency poll—reportedly due to his old age and debilitating health. In recent weeks, speculation over a Rafsanjani comeback bid had spurred some optimism among Iranians who recognize that their broken economy desperately needed a jolt. Some Iranian voters have described him as a “master of the economy” and the solution to their economic woes. However, a closer look at Iran’s misery index shows just how fatally flawed this perception is.

There is little doubt that the economic policies of current president Mahmoud Ahmadenijad have been a disaster. Even before the United States and European Union imposed economic sanctions over Iran’s nuclear program, Iran’s economy was hardly in good shape.

For decades, the Iranian economy has been cobbled together by a coalition of conservative clerics and Revolutionary Guard commanders. The resulting bureaucratic monstrosity has employed mandates, regulations, price controls, subsidies, a great deal of red tape, and a wide variety of other interventionist devices. Not surprisingly, Iran ranks near the bottom—145th out of 183 countries—in the World Bank’s Doing Business 2013 Ranking, which measures the vitality of free markets and the ease of doing business.

You might wonder, with all this sand in the gears, how has the Iranian economy been able to sustain itself and grow (until recently)?  The answer is—you guessed it—oil.