Drop in Oil Prices Spurs Iran to Diversify Alternative Trade

By Andrea W. Lorenz

Exporting the Islamic revolution no longer appears to be the Iranian government's top priority. The recent precipitous drop in oil prices has dealt such a serious blow to the country's oil-dependent income that President Ali Akbar Hashemi Rafsanjani and the more pragmatic-minded in his government have recognized that their first priority must be to revive Iran's ailing economy.

The country's short-term debt now totals about $20 billion, and Iran has had to reschedule more than $4 billion in debts owed to Japanese, German and French firms and banks. To make things worse, since the government drew up its second five-year plan at the end of 1993, the price of oil has plummeted further.

Iran's fragile economy has the potential of gaining strength, however, if the Iranian majlis (parliament) allows Rafsanjani to implement the reforms he has been proposing. One reform which already has been instituted is to devalue the rial. But one Iranian economist who asked that his name be withheld told the Washington Report that other measures Rafsanjani proposes will not be easy to implement. They include lowering tariffs, reducing subsidies, and relaxing labor laws to allow industries to lay off workers.

An important reform that has been instituted is to establish a single foreign exchange rate. The system is called "managed float, " and Amuzegar explained that the government, not the market, decides the daily rate. During the Iran-Iraq war, Iran had up to 12 different exchange rates simultaneously in order to facilitate the import of essential goods such as food, medicine, and war materiel. However, multiple exchange rates resulted in corruption and inefficiency.

Despite promised long-term benefits, in the short run Iran's reforms have produced inflation and unemployment. Although the size of the Iranian economy is little changed from the latter part of the shah's rule, per capita income is only 55 or 60 percent of what it was then. One reason is Iran's high birth rate. If it continues to grow at the current 3.5 percent rate, the population in 20 years will reach 120 million people, half of whom will be under age 15. Recognizing this, the government is trying to implement a family planning policy.

A country one-fifth the size of the United States, Iran's population of 60 million is roughly twice the total of all the Arab states of the Gulf, including Iraq. Iran shares a 1200-mile border with mostly Muslim republics of the former Soviet Union.

Iran's southern frontier is the Persian Gulf, through which more than 40 percent of the West's oil passes daily. With 92.25 billion barrels of oil (roughly 10 percent of the world's known reserves) and the second largest natural gas reserves in the world after Russia, Iran's value as a trading partner simply can't be ignored.

Iran's value as a trading partner simply can't be ignored.

Yet, if Iran's economy is to grow, it must diversify its exports. At present, the country relies on oil sales for about 85 to 90 percent of its income. In January, however, the Iranian news agency (IRNA) reported that Iran had exported 190 billion rials worth of non-petroleum goods in the previous nine months. These included hand-woven carpets, nuts, iron and steel, chemicals, aluminum, copper, tanned hides, and grains. According to IRNA, the figures indicated a rise of 69 percent in terms of weight and 32 percent in terms of value compared to the corresponding period the previous year.

In addition to diversifying its trade potential, Iran is pursuing new customers eagerly. One of the Islamic Republic's biggest trading partners is Germany. Ignoring American disapproval, Germany provided more than $5 billion in goods and services to Iran in 1993.

Eyeing another lucrative new market, South Africa, Tehran formally lifted its oil embargo against Pretoria in January. At about the same time, Foreign Minister Velayati flew to Dublin for trade talks with the Irish government. Trade with both North and South Korea also is brisk.

According to the Jerusalem Post, North Korea buys 40 percent of its oil from Iran. In October, Iran reportedly tested the North Korean medium-range missile, No-dong 2, which it is interested in purchasing. In addition, in late February Iran ordered five oil tankers valued at $635 million from the South Korean company Daewoo.

In a further effort to attract customers, in January the government formed a new company, Iranian Offshore Engineering and Construction Co., headed by one of President Rafsanjani's sons, Mehdi Hashemi-Rafsanjani. Its goal is to seek out joint ventures with top international engineering companies, which would take the lead in arranging financing for the projects.

American Wade With Iran

Even some American companies are beginning to do business quietly with Iran. With purchases of 200,000 barrels a day, Exxon topped the January Petroleum Intelligence Weekly list of regular buyers of Iranian crude oil.

In addition, despite an official 13-year trade ban, the State Department recently acknowledged that Iranian purchases of U.S. goods have increased even while America has been criticizing its allies for trading with Iran. In 1992, U.S. exports to Iran reached almost $750 million, officials said. They emphasized, however, that the U.S. continues to distinguish between "peaceful goods" and potentially dangerous technology. Peaceful goods include oil drilling and engineering equipment, chemicals, gas turbines, medical equipment and spare parts, all of which Iran desperately needs.

For its part, the Rafsanjani government discreetly cultivates American companies that show a willingness to trade with Iran. To make the potential for investment more attractive, the Iranian government has opened a company in New York called the Center for Iranian Trade and Development. It facilitates contacts between potential American investors and the appropriate Iranian ministries. Explaining that foreign executives waste a lot of time trying to navigate the complex Iranian bureaucracy, the center's vice president for marketing, Alexander Zar, told the Washington Report that for a fee his company will introduce investors to "the right people."

Closer to home, Iran is mending fences and building bridges with its potentially rich neighbors, Turkmenistan and Kazakhstan. Iran has offered to help Kazakhstan, which currently exports only through the Russian pipeline system, to develop alternative transport routes for its oil. In a September conference in Tehran on Energy Cooperation in Central Asia and the Caucasus, a proposal was made to export Kazakhstan crude via a pipeline laid in Iran.

As for Turkmenistan, it recently held tripartite talks with Iran and Turkey to discuss transporting Turkmenistan gas to Western markets via a new pipeline. The 5,300-kin gas pipeline would run through northern Iran and connect with the existing European gas grid. Iran-Turkmenistani economic cooperation has extended to other areas as well. The two countries have decided to cooperate in building small dams near their borders and have agreed to coordinate their fight against narcotic smuggling. Tehran also has established a regular bus service to Turkmenistan and eased travel restrictions between the two countries.

Iran's relations with its Arab Gulf neighbors are more delicate, due in part to their fears that Iran will radicalize their own Shi'i populations. Nevertheless, Kuwait felt confident enough this winter to allow Iran to establish a new fast maritime service between Kuwait and Iran's southern port of Khoramshahr. Iran initiated the project by purchasing for $4.5 million a swift, ultramodern, Australian-made vessel, the Negeen, that can carry 200 passengers.

Iran-watchers fear that the country is spending the money it makes from foreign trade to re-arm. Iran has purchased sub, marines from Russia, medium-range missiles from North Korea, strategic bombers from Ukraine, and other military equipment from China and Czechoslovakia. The first Iranian-manufactured military helicopter went into operation in March.

New York Times columnist William Safire recently accused Israel of helping Tehran acquire German nuclear information. Safire wrote that in exchange for progress in talks aimed at the return of Israeli hostages held in Lebanon, Israel worked with Czech, intermediaries to smoothe the way for Iranian purchase of Siemens nuclear technology.

A natural consequence of Iran's new foreign policy tack might be a toning down of its inflammatory rhetoric. So far there's little indication that this is occurring. Therefore, with the blood of tens of thousands of executed political opponents on its hands, and charges pending that the Iranian government has assassinated 59 Iranian dissidents abroad, the U.S. government has become accustomed to viewing alleged turns by the Rafsanjani regime toward pragmatism with a large degree of skepticism.