This Iran-in-depth piece aims to explore the following questions: to what extent is it true that Iran’s budget dependency on petrodollars has been lowered to approximately zero? How has the government compensated for a decline in its oil revenues? What costs has it reduced? Has it lowered its domestic costs or expenditure on its foreign proxies? Have sanctions been a blessing for Iran’s economy?
For 40 years, the Islamic Republic of Iran’s officials have promised to end or at least lessen the country’s dependence on oil revenues. They have reiterated this promise after every round of economic hardship that Iran has experienced such as the tanker wars during the Iran-Iraq war and the present US-led economic sanctions that began in 2018.
Hamid Pourmohammadi, Deputy Head of the Plan and Budget Organization (a government body under the president’s office) said that by adopting a number of budget reforms, the government has paved the way for lowering its dependence on oil revenues. “The Islamic Republic rose to the occasion against US sanctions and reduced national costs and boosted revenues. By introducing structural reforms, budget dependency on petrodollars has nearly lowered to zero,” he said.
Rouhani’s campaign of hope and change in 2013 was based on the idea that by ending sanctions Iran’s economy will flourish. When US sanctions were reimposed in 2018, the Iranian government had no way other than going back to its revolutionary discourse of self-sufficiency.
Iran mainly depends on oil revenues, which constitute around 40 percent of the government’s current budget. Based on the Iranian government’s yearly budget (March 2019 to March 2020), Iran has planned to earn about $30 billion from oil and gas condensate exports. Despite Iran’s claims of finding new sources of national income, it has not been able to substitute its oil revenues with these new alternative sources.
Iran has explored three ways to compensate for its declining oil exports: secret oil exports, spending past oil revenues, and exchanging oil for commodities:
1. Secret deals: According to tanker tracking companies, Iran secretly exports oil to ease its cash flow difficulties. Iran exports 0.1 to 0.3 mb/d oil secretly, using various indirect methods. When Iran’s Minister of Oil, Bijan Zangeneh says that “we are unable to sell oil under our name” and “the American dream for making our oil exports zero will not be realized”, he is implying that Iran is doing secret deals under the name of other countries. Iran has also been striking petrochemical deals using front companies in neighboring countries.
2. Spending past oil revenues: Mehrdad Emadi at UK-based Betamatrix told Radio Farda that according to documents, Iran’s total foreign currency reserves in January 2017 were equivalent to about $124 billion, but decreased to about $70 billion in July 2018. “Its foreign currency assets stood at $58 billion at the end of 2018, of which $47 billion was outside of Iran, mostly in China, India, and Russia and $11 billion in Iran,” he said. These reserves were mostly accumulated through oil and gas sales.
3. Oil for food and drugs: while selling oil for cash is not viable, Iran can exchange it for commodities. There are ongoing negotiations to let Iran sell her oil to purchase specific goods. This is not yet final because details regarding the amount of oil to be sold, the main buyer, and the kind of goods to be imported are still under discussion. According to confirmed news reports, Iraq is the transit area for the exchange transactions. This will allow the United States to closely monitor Iranian commitment to this oil-for-food exchange program. The possible agreement will be based on the UN oil-for-food program implemented in Iraq in 1995.
The aforementioned indicates that Iran is not going to give up its dependence on oil exports and it is not in a position to do this. When other energy-related exports are also in decline, any possible alternative to Iran’s oil revenues is ruled out. Iran’s gas condensate exports from March 2018 to March 2019 also indicate a 45 percent decline in volume and a 30 percent decline in value year-on-year. Iran has neither the capacity nor infrastructure to increase taxes or to increase its non-oil exports to compensate for its financial losses due to US-led oil sanctions. Therefore, it would be accurate to say that Iranian claims of ending or lowering Iran’s dependency on oil is just state propaganda for domestic purposes.
