Sanctions on Iran force interest rates higher

Western world's sanctions are having an effect – although Ahmadinejad denies the squeeze.

Iranian rial 390 (photo credit: Reuters)
Iranian rial 390
(photo credit: Reuters)
President Mahmoud Ahmadinejad has apparently agreed to increase Iran’s interest rate on bank deposits, causing the populace of his country to become increasingly worried about the economy and the toll on future income. It appears that the sanctions imposed by world leaders are having an effect – although Ahmadinejad denies the squeeze.
According to various sources, the sanctions are supposed to bring Iran’s oil industry to its knees. Not so – countries such as Sri Lanka, China, Japan, Italy, South Korea, Spain, Greece, Turkey and South Africa have remained aloof and refused to join the United States and European Union in banning the import of Iranian crude. These countries represent a petroleum import ratio of anywhere from 10% to 100%.
The pinch, however, is being felt in the area of foreign currency sales. According to the IRNA news agency in Tehran, Ahmadinejad has upped interest rates on bank deposits to “up to 21%.” Iranians have been instructed to buy dollars only when traveling.
Hoarding of US currency had become de rigueur in aristocratic circles in the country. It was the currency to covet, but no longer. Now it will be at a premium, and will require government permission to purchase. Ahmadinejad has acknowledged – albeit subtly – that the sanctions have seriously degraded the value of the Iranian rial. One anonymous Iranian politician depicted the current economy as the worst since the Iran/Iraq war.
Iran’s raising the interest rate resembles the tactics employed by the Jimmy Carter administration to curb runaway inflation. Under his governance, the Federal Reserve continued to raise interest rates to double digits. It was great for job creation, but prices were so high the newly-hired could not afford to purchase goods and services. The result was what came to be known as “stagflation.”
The countries that joined forces to impose sanctions on Iran did so in hopes of restricting the amount of currency available to purchase the materials and expertise needed to continue its nuclear pursuits. The weaker rial triggered a run on gold and foreign currency and further exacerbated the problem as Iranians withdrew savings in order to make their purchases. Iran’s economy has been further destabilized. People such as students, medical patients and business owners seeking to purchase dollars or other foreign currencies will be forced to prove need before a supply is made available.
Raising the interest rate is a risky move on Ahmadinejad’s part as inflation continues to rise despite the increase. It puts his leadership position in the upcoming March elections at risk in a parliament already critical of the despotic president.
The sanctions, far from causing the Iranians to rethink their resolute rush to gain nuclear weapons, have resulted only in a more defiant attitude, and have been labeled “ineffective.” They would, of course, be more effective were China and India to join the list of countries imposing restrictions on Iran.
If the Iranian people grow tired of Ahmadinejad’s machinations, could we see a repeat of the tactics used to overthrow the Shah of Iran? A weapon used by Ayatollah Ruhollah Khomeini when he engineered the overthrow of the Shah was oil-related strikes. He took full advantage of the freedom to use the media for his purposes.
Khomeini began to urge the workers in Iran – from oil workers to garbage haulers – to go on strike. Students were encouraged to riot in support of the working class. The strikes proved to be very efficient at creating dissent. The strikes spread from the Tehran oil refinery to the oil refineries at Isfahan, Abadan, Tabriz and Sharaz. In one week, oil production fell by three million barrels.
Should the Iranian people again employ that strategy against their government, blood will flow in the streets. When the people revolted following Ahmadinejad’s re-election in 2009, President Barack Obama did nothing to help them defend themselves against reprisals. They would, I imagine, be very reluctant to try a second time unless the US rallies behind them and the Western press is supportive. If that does not happen, then there is little chance of revolution in Iran.
Following the taking of the US embassy in Tehran, President Carter tried to use sanctions to gain an advantage, all to no avail. Khomeini was as strong-minded in his determination not to give up the hostages as Ahmadinejad is in his unwavering resolve to secure a nuclear advantage. The fact that oil prices are rising in the West only serves to strengthen his decision to thumb his nose at the sanctioning countries.
The writer is a No. 1 New York Times bestselling author. His newest book, The Protocols, addresses the role of anti-Semitism in the peace process. It was officially launched at the Menachem Begin Heritage Center.