Tag: Iran

Yemen’s Chronic Instability

The last few days have brought dramatic news from Yemen: rebels occupied the presidential palace, initially forcing constitutional concessions and then the resignation of President Abdurabuh Mansur Hadi. The president was, at least nominally, a U.S. ally, cooperating with U.S. forces on drone strikes against Al Qaeda in Yemen (AQAP).

Yemen itself had even been hailed as one of the few successes of the Arab Spring, with a negotiated transition resulting in steps toward democracy. But such an interpretation glosses over Yemen’s long history of instability, as well as intervention by foreign powers. The current conflict is not only a popular uprising, it’s a proxy war, one that has been worsened by U.S. policy in Yemen.

Yemen has experienced chronic instability throughout its history, in large part because of interference from Saudi Arabia, which has long been worried about Yemeni influence. The first Saudi king, Abdulaziz, is reputed to have called his senior sons to his deathbed, admonishing them to “keep Yemen weak.” The Kingdom has at various times provided funds not only to the Yemeni government, but also to various opposing tribal leaders.

The most recent iteration of Yemeni instability is a decade-long civil conflict between the Saudi-backed Yemeni government, Sunni militias, and a Zaidi Shi’a militia group known as the Houthis. This latter is also known as the Shabaab al-Marmineen (or the Believing Youth), and is believed to receive large quantities of funding and arms from Iran (and formerly Syria). The insurgency has spanned a decade, with only sporadic ceasefires, resulting in widespread death and displacement. The Houthis even initiated cross-border attacks against Saudi Arabia in 2009, which led to a large-scale Saudi invasion of Northern Yemen.

The Houthis were also heavily involved in the 2011 protests against Yemeni dictator Ali Abdullah Saleh, although they rejected the Saudi-negotiated transfer of power to then–Vice President Hadi. Since late last year, the Houthis have controlled large parts of the capital Sanaa, although power has remained nominally vested in the hands of the Hadi government.

The crisis in Yemen is thus not only a civil conflict, but also a proxy conflict between Saudi Arabia and Iran. In this, it is similar to the early Syrian civil war, which was initially driven by Saudi support for rebel groups and Iranian support for the Assad regime. While the situation in Yemen is unlikely to deteriorate in this way, it is worth focusing on the fact that many conflicts in the Middle East are actually driven by larger regional actors, some of them U.S. allies.

U.S. involvement in Yemen has also helped to worsen this crisis. The Hadi government’s support for U.S. drone strikes against AQAP contrasts strongly with Yemeni popular opinion, which has been widely outraged by the killing of innocents. Such unfortunate killings are driven by U.S. reliance on Yemeni targeting data: Yemeni leaders have a tendency to present political rivals as terrorists in order to engineer their demise. These deaths have driven growing anger at the Hadi government.

Ironically, the Houthi fighters are themselves strongly opposed to AQAP and actively engage in combat against the group. There is even evidence that the United States has cooperated with the Houthis on targeting AQAP.

The situation in Yemen remains fluid. The country appears to have no leader, and it is unclear whether the Houthi occupation of the capital constitutes a coup or not. But in either case, the United States should stay out of the conflict, evacuating the embassy if Sanaa becomes too dangerous. The crisis in Yemen is typical of the country’s long-running instability, and the pressures it faces from regional powers. U.S. involvement won’t help.

Iran’s Economy, With and Without a P5+1 Agreement

The haggling between Iran and the so-called P5+1—the permanent members of the United Nations Security Council, plus Germany—is scheduled to come to a close on Monday, November 24th. The two parties each want different things. One thing that Iran would like is the removal of the economic sanctions imposed on it by the United States and its allies.

After decades of wrongheaded economic policies, Iran’s economy is in terrible shape. The authoritative Economic Freedom of the World: 2014 Annual Report puts Iran near the bottom of the barrel: 147th out of the 152 countries ranked. And the “World Misery Index Scores” rank Iran as the fourth most miserable economy in the world. In addition to economic mismanagement, economic sanctions and now-plunging oil prices are dragging Iran’s structurally distorted economy down. So, it’s no surprise that Iran would like one of the weights (read: sanctions) on its economy lifted.

Just how important would the removal of sanctions be? To answer that question, we use the Institute of International Finance’s detailed macroeconomic framework. The results of our analysis are shown in the table and charts below the jump.

Oil Price Blues (Read: Dangers) for Some

As the price of crude oil continues its downward tumble towards $80 per barrel, I am reminded of a similar scenario from near the end of the Cold War in the 1980s. When Saudi Arabia announced in 1985 that protecting oil prices was no longer its main priority, oil production surged and prices fell off a cliff, briefly plunging below $10 per barrel, as I had correctly predicted.

Lower prices delivered a fatal blow to the Soviet economy, which ended up seeing $20 billion per year in oil revenues evaporate. The resulting fiscal shortfalls proved to be a dagger in the heart of the U.S.S.R.

On October 1st of this year, Saudi Arabia’s national oil company announced that it had abandoned a policy of price protection and would start to focus on protecting its market share. Combined with falling global demand and rising supplies elsewhere, oil prices have fallen accordingly. This has put a squeeze on eight of the world’s top oil producers. States like Iran, Venezuela, and Iraq can only balance their current budgets at oil prices ranging from $110 to $135 per barrel (so-called break-even prices).

If oil prices stay below $90 per barrel for any length of time, we will witness massive fiscal squeezes and regime changes in one or more of the following countries: Iran, Bahrain, Ecuador, Venezuela, Algeria, Nigeria, Iraq, or Libya. It will be a movie we have seen before.

Falling Oil Prices Put Producers Between a Rock and a Hard Place

Over the last few months, the price of Brent crude oil lost over 20% of its value, dropping below $90 just yesterday and hitting its lowest level in over two years. In consequence, oil producers will no longer be able to rely on oil revenues to pay their bills. The fiscal break-even price – a metric that determines the price per barrel of oil required for a nation to balance its budget at current levels of production – puts the problem into perspective.

Using data from Bloomberg and Deutsche Bank, I prepared a chart showing the break-even prices for the world’s major oil producers and the price on Brent crude. Over the past six months, Brent crude fell far below the break-even price for eleven of the top oil producers in the world; Iran, Venezuela, Nigeria, and even Saudi Arabia can no longer finance their governments’ largess through oil revenues.

The combination of oil markets flying into a perfect storm and excessive government spending puts most of the world’s oil producers between a rock and a hard place, where they will stay for some time.

Iran, Stable but Miserable

Since Hassan Rouhani assumed the presidency of the Islamic Republic of Iran in August of last year, the economic outlook for Iran has improved. When Rouhani took office, he promised three things: to curb the inflation which had become rampant under Mahmoud Ahmadinejad, to stabilize Iran’s currency (the Rial), and to start talks to potentially end the sanctions which have battered Iran since 2010. Rouhani has delivered on each of these promises. From this, one might assume that the Iranian economy, and the Iranian people, are headed towards better times.

Unfortunately, the Misery Index paints a different picture. The Misery Index is the sum of the inflation, interest, and unemployment rates, minus the annual percentage change in per capita GDP. It provides a clear picture of the economic conditions facing Iranians.

Iran: From Hyperinflation to Stability?

With the announcement on Saturday night that Iran and the P5+1 group reached a tentative deal over the Iranian nuclear program, the Iranian rial appreciated 3.45% against the dollar on the black market. The rial jumped from 30000 IRR/USD on Saturday November 23rd to 29000 IRR/USD on Sunday November 24th. A daily appreciation of this magnitude is rare. In fact, it has occurred fewer than ten times since the beginning of 2013. Indeed, this indicates that the diplomatic breakthrough is having a positive effect on Iranian expectations.

Over a year ago, I uncovered the fact that Iran experienced a period of hyperinflation (in early October 2012), when its monthly inflation rate peaked at 62%. Since then, I have been actively monitoring and reporting on the IRR/USD black market exchange rates and calculating implied inflation rates for the country.

Since Hassan Rouhani took office, on August 3rd, Iranian expectations about the economy have turned less negative. Thus far, it appears Rouhani has been successful in ending the long period of economic volatility that has plagued Iran, since the US imposed sanctions in 2010. This has been reflected in the black-market IRR/USD exchange rate, which

There are three main factors at work here. The first is a concerted effort by the Rouhani administration and the central bank to curb Iran’s inflation. This stands in stark contrast to the previous regime, whose strategy was to simply deny that inflation was a problem.

The second is that that Iran’s economy has proved remarkably “elastic” – meaning that the country has ultimately adapted to the sanctions regime and has found ways to keep its economy afloat in spite of them.

The third factor in the rial’s recent stability is an improvement in Iranian economic expectations. This is where the P5+1 talks come into play. Iranians recognized that easing of the sanctions regime would be a bargaining chip in any nuclear negotiations. In consequence, their economic expectations improved as the talks progressed. Indeed, Saturday’s announcement gave these expectations a shot in the arm.

In light of the rial’s recent stability, I have delisted the rial from my list of “Troubled Currencies,” as tracked by the Troubled Currencies Project. For starters, the rial no longer appears to be in trouble. And, on a technical note, implied inflation calculations are less reliable during sustained periods of exchange rate stability.

That said, we must continue to pay the most careful and anxious attention to the black-market IRR/USD exchange rate in the coming months. Like the P5+1 agreement, Rouhani’s economic progress in Iran is tentative and likely quite fragile. Since the black-market IRR/USD is one of the only objective prices in the Iranian economy – and perhaps the most important one of all – it will continue to serve as an important weather vane, as the diplomatic process continues, and as Iran’s economy gradually moves into a post-sanctions era. 

A “Bad” Deal Was Always Better than No Deal, and We Should Be Thankful if We Get One

The foreign policy news of the day is the apparent deal being reached in Geneva between Iran and the permanent five members of the UN Security Council plus Germany (P5+1). What’s particularly striking is the pre-spin being offered by Israeli Prime Minister Binyamin Netanyahu and his ideological fellow-travelers in Washington.

To be clear: we do not know the precise terms of the deal being hammered out. The sketchy details that have been leaked make clear that both sides are taking small steps, as would be expected. Iran is not shuttering its nuclear enrichment program, or even freezing enrichment entirely, as the UN Security Council demanded it do in several resolutions. Similarly, the P5+1 is not normalizing economic relations with Iran, rescinding the spider web of sanctions that is strangling Iran.


None of this has stopped Iran hawks from asserting, without evidence, that the deal is a disaster for the world and a coup for Iran. Netanyahu was most succinct, labeling the deal—again, not having seen its terms—to be “the deal of the century” for Iran and a bad deal for the rest of the world.

Similarly, Danielle Pletka at AEI asks some pertinent questions about the exact terms of what was agreed to then declares, without answering them, that the deal is “lousy.” By her own one-sided accounting, what the Iranians will receive is “not clear” but she asserts, in spite of her admissions, that they will give “nothing.”

What’s happened here is that any gettable deal has been framed as “bad,” and the administration, while disagreeing with that framing, has agreed that “a bad deal is worse than no deal.” Netanyahu actually had a pretty solid debating point when he tried to scuttle the early feelers of this diplomatic opening by comparing a prospective deal to the deal brokered with North Korea. The parallels there are not ones that pro-diplomacy doves like very much, for good reason.

So let’s concede: this interim deal is not reliving old glories on the decks of the Missouri. It’s not a complete, irreversible end of the problem posed by Iran’s nuclear program. What hawkish observers fail to understand is that there is no such solution, through diplomacy, military strikes, or otherwise.

Thus the question was never whether this deal could provide Netanyahu’s desiderata: the shipping out of all enriched uranium, the destruction of Fordow and Arak, and an end to Iran’s pursuit of enrichment altogether. Nobody, perhaps even including Netanyahu thought that was possible. Given his various public statements, Netanyahu seemed to think any deal was a bad deal.

So yes, it’s not time to pop champagne corks and forget the world, nor time to throw a tantrum. A prospective interim deal would be a small, but very important, step in the right direction. Given the disaster that would be a war in Iran, we should take this small step and see if it can be built on. As Amos Yadlin, head of the Israel Institute for National Security Studies remarked, “There needs to be a scrutiny of the details before determining whether the ‘holy of holies’ was destroyed today.” One hopes Netanyahu, and hawks in Washington, will come to agree.