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Sanctions: How Will Sepaah Fare...And How Will The Iranian People Fare?
Interview with Dr. Mehrdad Emadi, Senior Economic Advisor to the European Union
Radio Hamseda - Ottawa (Shabnam Assadollahi)
August 22, 2010 (Link to the Farsi-language original can be found below)
Host, Shabnam Assadollahi – Welcome to our program Dr. Emadi.
Mehrdad Emadi – Thank you, I'm glad to have another opportunity to speak with you and your listeners.
Shabnam – Our listeners have called in from all over the globe with questions for you and they are tuned in right now for this important discussion. The first question is: Given the stifling sanctions and the expansion of doing business with the private sector, do you think it would be possible now to reduce people's financial dependence on the regime and maybe even abolish this slave-master relationship between the government and the people?
Mehrdad Emadi – Yes, anytime the main goal for the economic growth allows a space for the private sector to expand beyond the fields of government control, the short term effects of that would catapult the private sector into a gradual growth process that can help it move from constant dependency on the government, to a self reliant, productive and job-producing entity that can instead generate revenues for the government by paying taxes. Therefore, we can transform the system from the slave-master condition – as accurately described by your listener – into one where regulations are abided by and their costs willingly covered, as exemplified by the behavior of more developed countries.
Host – The next question. Rather than a gradual pressure, is it possible to apply an economic shock so as to eliminate the chance for the regime to cut a quick deal as well as to reduce the consequences on ordinary people, since the gradual pressures in the last 30 years have not been so effective?
Mehrdad Emadi – Well, yes, there is that hesitation about whether or not to enforce the sanctions through a sudden and physical move, bringing all trade and financial transactions to a halt, or to apply them in a step- by-step manner in order to show the regime that continuing its behavior can only increase the cost of the sanctions. Of course an economic shock would initially have a stronger effect and it will show the regime that the situation is serious-- besides, the administrators of the sanctions intend to impose maximum limitations on Iran.
However, since we are utilizing the best non-military and most effective tool we have, there is no reason to worry. This is to some degree against the diplomatic language the EU wishes to use. We do not wish to adopt a confrontational manner, but rather a methodology that can effect change in the behavior of the regime; and should we see that change in behavior, we are very much willing to normalize the relations. I also must point out that the strong and sudden move with the sanctions will, right from the beginning, make it easier for the regime to drop the sudden and huge cost on the people in one fell swoop, whereas the gradual application of pressures will also serve as a message to Iran's leaders that it is they who are forcing us to make such moves in order to protect our own economic and geographic security.
We can already see that the Iranians are assessing the source of the problem and recognizing it as being their own leaders, whose illogical behavior has put their country at odds with the rest of the world.
Host – The next question also presented by a listener from inside Iran asks: "Since much of Iran's current imports of products come from the neighboring region, particularly the United Arab Emirates, how close and precise is the EU's monitoring of these trade deals?"
Mehrdad Emadi – This is an excellent question. We do know that over the last six months, the rate of trade between Iran and UAE, as opposed to the EU, has doubled-- meaning that it has gone from direct to indirect and through middle men and brokers. As for having these trade transactions under a microscope, the sanctions are no longer administered solely by the EU and the US. There are now several nations involved in overseeing of proper management and application of the sanctions, through a collaborative effort. These tri-level sanctions are strongly affecting the country's foreign trade, as confirmed by the Bazaaris and the merchants we have spoken with.
First, we look at all the banking and financial transactions, more specifically at what bank accounts and what trade credits are being used which can reveal the type of activity and/or the intention behind it. The second level investigates all imported merchandise by others, a historical record of which - particularly in the case of the UAE – shows for example the average annual volume of imported industrial goods. And any excess to that trend would point at purchases made from Iran, as we would naturally conclude. The third level provides the easiest audit trail- and that is all the ships at sea, the point of origin of which is known to us. This quickly reveals the two sides of the deal which is now even easier to recognize due to the wide range of cooperating nations.
A review of the ships' records can tell us whether one side is merely a broker functioning on behalf of Iranian banks and the Sepaah, or the main part and parcel in the deal. This means that all cargo upon unloading at UAE or any port in the southern Persian Gulf would be subject to inspections, which can also lead to two other major issues. One is the substantial increase in the cost of shipments between Iran and the UAE, and the other is the increasing reluctance of the international insurance companies to provide coverage for such shipments.
Host – Which would also take their toll on social and economic lives of the people, should the sanctions continue this trend. Let me ask you this: How have the sanctions affected the regime so far and how will they in the future?
Mehrdad Emadi – A cursory review of all the statements made on the subject, by the office of the president and the Parliament alike, shows a relentless denial and dismissal of the impact or effectiveness of the sanctions. However, in reality regime officials in their discussions in private meetings with the members of the Parliament, or the merchants, or the recently formed special committee for resisting the impact of sanctions-- or even the various committees within the framework of the Parliament whose function is to control the impact of the sanctions in order to minimize the economic turmoil-- prove that these government officials are fully aware of the impact of the sanctions. Even the situation with the Iranian banks and merchants whose regime-related bank accounts were recently frozen by European authorities, as well as the two banks currently under a microscope for having violated the sanctions, has made the regime realize the seriousness of the issue facing the regime as a whole.
The continuity of Iran's foreign trade and the very strength of the regime itself ride on this issue, especially given an economy so heavily dependent on Imports, particularly in the area of industrial goods. Almost 88% of Iran's industrial production depends on imported unfinished goods. They are fully aware of this fact. Weekly reports from the factories reflect a continuous drop in production as a direct result of reduction in imports. Therefore, the government's denial of the sanctions' impact is completely disingenuous.
As I've always said, even though the regime's analytical views, its values, and its beliefs are vastly different from ours it is nevertheless not stupid- and its conclusive analysis of the outcome of economic market performance is the same as ours. They are aware of the deep and far-reaching impact of the sanctions. The production of oil/gas alone in the next 6 months will be almost crippled as all the necessary tools (such as power compressors, pumps, etc. ) are becoming increasingly difficult to obtain. And these two are the main sources of revenue, making up over 85% of Iran's income. And thus we conclude that the effects of the sanctions have been enormous, both on the people and on the regime.
Host – Of course, they must have affected the Sepaah's foreign policy the most.
Mehrdad Emadi - Yes, in fact prior to aiming at the banking system and the Oil/Gas industry, the sanctions' main target was the Sepaah; so the impact on them is most noticeable. Those bank accounts recently seized in Germany and those in Austria belonged to certain private citizens who had taken over the management of these accounts from the Sepaah and these individuals and entities are totally crippled now. In my recent talks with several Iranian merchants in Belgium, Hamburg and Munich, they confided in me that their business activities have reached a near total halt and if this trend continues, they will soon have no choice but to lay off their staff, and shut down the business and maybe even sell the buildings they own. They said they are unable to just continue absorbing the cost of doing business when such gloomy news about the imminent darkening of foreign trade is looming over head. This is why I think the businesses owned by the Sepaah, or those infiltrated by them,, are facing harsher impacts of the sanctions than those authentically owned by the private sector.
Host – Let's return to the question about Iranian merchants doing business outside Iran and their future. This was also a question posed by a listener in Iran.
Mehrdad Emadi - Yes, this is a legitimate concern, as there are those innocent ordinary people paying a price here, even though they have had no involvement in the creation of this problem and the decisions that have brought us to this point. There are also others who are paying a price here. There are merchants who had been working for years in various capacities of facilitating Iran's foreign trade, either directly operating as a merchant, or simply managing certain affairs such as handling government contracts or translating documents. Then there were those who strictly had side businesses such as contacting the merchants inside and facilitating the sales or purchases of certain products for which they felt there was a market in Iran.
Something that is troubling me personally as an Iranian is that many of these merchants have spent 20-30 years establishing their businesses; now, they have been left totally paralyzed over the course of a few short months. For example, a prominent merchant of industrial goods, currently living in Germany, with whom I had recently spoken, told me that his business has suffered a 75% drop. Another one in London told me just last week that over 90% of his business activity has come to a halt and when he requested a line of credit in order to open a new line of business with the UAE, the bank refused to extend credit to him, solely based on his Iranian background. People like these merchants, who have conducted their business free of any political ties to the regime, essentially belong outside the parameters of the sanctions. However, since the Sepaah has infiltrated every sector of Iran's economy, the sanctions by default apply to all Iran related trade, until every business is investigated and proven to be either connected to the Sepaah or to be functioning independently. This is why so many private businesses are also sufferin-- because all banking operations involving trade with Iran are currently closed in an effort to prevent potential new fictitious businesses and any other attempts by the regime to circumvent the sanctions.
At this point in time, all efforts of merchants and other business entities to continue their economic lives are under heavy scrutiny and should these sanctions last for two more years, we might witness total closure- or even bankruptcy -of over 50% of all Iranian merchants outside the country.
Host – We ask our last question which you pretty much answered in your last remarks. It also comes from the inside. How do you see the future of the private sector inside Iran, within the framework of the militarization of the economy?
Mehrdad Emadi – See, all these issues are interconnected. If we look at the combination of factors-- the price paid by the merchants in Diaspora; the significant reduction in business of the merchants inside the country; the ever increasing share of the Sepaah in all sectors of the economy ( from construction, to oil and gas production, to energy, industrial productions, transportation, communication, etc., etc....)--the more careful the implementation of the sanctions is,the more it will cover every corner of the private sector.
Unfortunately the truly independent private businesses lack access to vast financial resources, whereas the regime and its interests are in a powerful positiion so that that they can and will circumvent the sanctions and avoid paying taxes. Therefore, the private business will suffer the cost.
Based on our analyses of 2-3 months ago, we believe that over the next 12 months the private sector will see a 35-55% drop in its activities. In comparison, during a full blown war in any country, the private sector would typically lose about 40-50% of its income in the first year of war. This proves the degree of the adverse effects of Sepaah's influence in the economy-- and its dire consequence on the authentically private sector that is totally independent of the government. We may be reaching a point where in the next 3-4 years we could be witnessing the demise of an economic force with 300-400 years of active and productive history in Iran.
Host – And again the heaviest blow is felt by the people. These are extremely painful days, politically, economically, and socially; we are going through very difficult times. In conclusion, do you wish to add anything?
Mehrdad Emadi – The only thing I would like to add, whenever stress, whenever given a chance, is that the sanctions are not desired by the European Union- nor are they desired by Japan, Korea, Australia or Canada. The sanctions are the direct result of the wrong policies adopted by the leadership in Iran, which are only increasing the daily cost paid by the people of Iran. Iranians should analyze this for themselves and determine if this cost is justified in anyway, and if not, maybe the time has come to make a wise examination of their lives and to dramactically amend the way in which the country relates to the rest of the world...
Link to Orig.