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• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00587R000200230003-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 21
• Document Creation Date: January 12, 2017
• Document Release Date: May 12, 2011
• Sequence Number: 3
• Publication Date: June 1, 1985
• Content Type: REPORT

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Intelligence _ 25X1
Iran's Economic Slide
An Intelligence Assessment
NESA 85-10110
June 1985
Copy 3 8 4
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Directorate of Secret
Iran's Economic Slide
the Chief, Persian Gulf Division, NESA, on
This paper was prepared by~ Office of
Near Eastern and South Asian Analysis. Comments
and queries are welcome and may be directed to
Secret
NESA 85-10110
June 1985
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Scope Note This Intelligence Assessment focuses on Iran's current economic problems
and highlights the political and economic implications of these problems.
iii Secret
NESA 85-10110
June 1985
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Iran's Economic Slidel 25X1
Key Judgments Iran's economy is sputtering as war-related disruptions, ideological rigidi-
Information available ty, massive corruption, and mismanagement stifle production. Iran's
as o,(1 May 1985 troubles worsened in 1984 as the soft world oil market and Iraqi air attacks
was used in this report.
depressed export earnings. Economic problems are adding to popular
unrest, and, in conjunction with recent battlefield defeats and power
struggles within the government, they pose the most serious threat to the
regime since it consolidated power in 1981.
Iran's exports slipped sharply in the second half of 1984 and helped
generate the largest current account deficit-$3.9 billion-since the
revolution. Oil revenues fell from $19.5 billion in 1983 to $16.5 billion last
year. Rather than trim imports, Iran drew down accessible foreign
exchange reserves to only about two months of imports, significantly
reducing Tehran's financial flexibility. This makes the economy vulnerable
to further disruption because Iran imports a significant portion of its food
as well as materials to support the war effort.
The domestic economy showed some improvement in 1982 and 1983
following the chaos of the revolution, but the war and lower oil revenues
have reversed the trend. Unemployment, shortages of consumer goods, and
inflation are undermining confidence in the regime and causing antigov-
ernment grumbling among a war-weary populace. In recent months there
has been an increasing number of strikes and antigovernment demonstra-
tions.
We expect Iran's foreign trade and financial situation to worsen this year.
Even with small increases in export volumes compared with the last half of
1984 and stable oil prices, oil revenues are likely to fall by another $1.8 bil-
lion. With foreign exchange reserves already low, imports almost certainly
will be cut by at least 15 percent, further depressing consumption and
domestic output. This will be a bitter pill to a regime that a year ago was
still building expectations of oil-financed development. Should oil prices
drop, Iran would have to institute even sharper import reductions.
Iran's economic difficulties present potential hazards as well as opportuni-
ties for the United States. Iran's desperate need for foreign exchange will
continue to push Tehran to lower its oil prices to spur exports and could
precipitate an oil price war. Although Iran's relations with the United
States will remain poor, moderate factions within the regime advocating
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stronger ties with Western Europe and Japan are likely to be strengthened
by Iran's dismal economic performance. On the other hand, financial
troubles are encouraging the regime to strengthen trade relations with
Eastern Europe, and this could push Tehran closer to Moscow. If the
regime believes its hold on power is threatened by economic and other
problems, it could initiate actions against US interests, such as increased
terrorism, to divert public attention and rally the populace.
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Skilled Labor Shortages
5
Effects of the Deteriorating Economy
7
Budget Austerity
7
Inflation and Shortages
8
Stifled Production and Delayed Development
8
Popular Reaction to Economic Decline: Growing Disenchantment
8
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Figure 1
Recent Workers' Strikes
ea
United Pte
Boundary representation is
not necessarily authoritative.
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Iran's Economic Slide
Oil remains the foundation of Iran's economy. Despite
extensive rhetoric about economic diversification, oil
accounts for about 98 percent of Iran's foreign ex-
change earnings and about 30 percent of gross domes-
tic product. Between 1981 and 1983, aggressive mar-
keting caused a near doubling of oil revenues to $19.5
billion. The increased earnings were used to boost
imports, shore up living standards for the war-weary
and increasingly cynical populace, and provide sub-
stance to regime promises of better days ahead. Over
the past year, however, oil revenues and foreign
exchange reserves have declined, and Tehran faces
25X1 rising economic discontent that is adding to other
pressures confronting the regime.
Pressure on Oil Revenues
A chronically weak world oil market and Iraq's
campaign against Persian Gulf shipping caused Iran's
oil revenues to decline 15 percent to an estimated
$16.5 billion in 1984. Lower revenues were mostly the
result of smaller export volumes in the last five
months of 1984-averaging 30 percent less than
during the previous 18 months. In August 1984, Iran's
Petroleum Minister Qarazi announced that Tehran
would reduce oil export volumes by 50 percent to
support OPEC price levels. Iran subsequently tough-
ened its pricing policy, and exports declined to about
1.2 million barrels per day (b/d) from August through
October after averaging 2 million b/d in the first
seven months of the year. Most of the drop in export
volume resulted from the refusal of Japanese firms to
pay Iran's asking price.F__1
Faced with sharply falling revenues, Tehran reversed
course in November and began to offer price dis-
counts of up to $1.70 a barrel on top of war-related
discounts of up to $3.00 per barrel. As a result,
exports rose to 1.6 million b/d in the last two months
of the year as Japan resumed lifting Iranian crude. In
January 1985, exports again fell as Iraq stepped up
tanker attacks and Iran held back discounts to sup-
port its hardline position on prices at the January
OPEC meeting. Exports increased again in February,
March, and April as Iran aggressively marketed its oil
at substantial discounts.
Figure 2
Iran Oil Revenues, 1979-84
I I I
0 1979 1980 1981 1982 1983 1984
Tehran's shifting oil policy is the result of its conflict-
ing goals of boosting foreign earnings and avoiding
measures that would destabilize the world oil market.
In an oil price war, Iran would probably end up a
loser. Ideological concerns play a role as well. Accord-
ing to public statements by senior officials, Tehran
believes that low oil prices help Western enemies of
the Iranian revolution and that the current soft oil
market is a Western plot to break OPEC.F____1
The war with Iraq has contributed to lower Iranian oil
earnings because Iraqi airstrikes on oil tankers have
forced Tehran to discount prices to offset the added
costs of transportation and insurance. Uncertainty
over delivery schedules has been another adverse
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Figure 3
Iran: Monthly Oil Exports,
January 1984-March 1985
0 J F M A M J J A S O N D J F M
1984 1985
factor as buyers became aware of the potential for
delays caused by Iraqi attacks or the refusal of crews
to enter the war zone. Delays can be especially costly
for Third World buyers, because the late arrival of
even a single tanker can cause fuel shortages. Accord-
ing to press reports, for example, Bangladesh's only oil
refinery shut down in January 1985 after a shipment
of Iranian oil did not arrive. So far, Iran's efforts to
neutralize the effects of Iraq's shipping attacks have
been unsuccessful
Oil assistance to compensate for Syria's support
against Iraq cost Iran about $700 million in lost
revenue last year. Tehran has provided Damascus
with about 120,000 b/d of oil since early 1982 in
exchange for the closure of Iraq's 1.2-million-b/d
pipeline through Syria. According to press reports, the
terms of the agreement call for the sale of oil to Syria
at what amounts to a 25-percent discount. Damascus
has made few payments, however, and almost all
outstanding debt has been forgiven or converted into
interest-free loans, which are unlikely to be repaid
soon, according to the US Embassy in Damascus.
Current Account in the Red
Low oil revenues and an unwillingness to slash im-
ports left Iran with a current account deficit of about
$3.9 billion in 1984-nearly five times the 1983
deficit and the largest since the revolution. Lacking
access to long-term credit, Tehran drew down foreign
exchange reserves to dangerously low levels. We
estimate Iran's foreign assets were only $5-6 billion
by the end of 1984. Only about $2.5 billion of these
reserves, however, were readily accessible.' This rep-
resents about two months of import coverage, only
one-third of the government's target. The regime,
wary of the serious currency crunch that occurred in
1981, has repeatedly stated in the Western and local
press a desire to maintain reserves sufficient to cover
at least six months' worth of imports.
Despite the drawdown of foreign reserves, Iran still
faces substantial foreign obligations, mostly in the
form of delayed letters of credit. According to press
reports, these outstanding letters of credit amount to
$6 billion. Iran's failure to make timely payments to
foreign firms has caused some to discontinue or
reduce business in Iran. For example, an Italian firm
refused to start the second phase of a planned port
expansion project at Bandar-e Abbas because of
problems obtaining payments for the first phase,
according to Western press reports
The shortage of foreign exchange has caused the
government to place severe restrictions on its expendi-
tures. In May 1984 and again in January 1985, Iran's
central bank temporarily stopped issuing letters of
credit because of difficulties meeting its obligations,
according to press reports. There have also been
reports of drastic cutbacks in foreign exchange alloca-
' About $1.1 billion is held in an escrow account to meet US claims
to be settled by the claims tribunal at The Hague; much of the rest
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Iran's Response to Iraqi Attacks
Price discounting and the Sirri shuttle operation have
been Iran's most effective responses to Iraqi tanker
attacks. Other measures have had little success. For
example, Iran offered to underwrite insurance at
below market prices, but the scheme failed when
Tehran subsequently refused to pay damage claims.
Similarly, Iranian offers to absorb the financial
losses resulting from Iraqi attacks have not reduced
pressure for war discounts on oil lifted at Khark.
In February 1985 Iran started shuttling oil from
Jazireh-ye Khark (Khark Island) in chartered tankers
to two large storage tankers anchored near Jazireh-ye
Sirri (Sirri Island) in the southern Persian Gulf.
Technical problems plagued the startup of the opera-
tion, and we believe export volumes through March
were only half the 1-million-b/d target.
in April Tehran had expanded
pipeline to the Gulf of Oman. The line could take as 25X1
long as five years to build and cost an estimated
$5 billion,
According to press reports, Iran is also
discussing plans with Turkey for a pipeline through
that country. We believe both lines, especially the
Turkish line, would be prohibitively expensive, given
Iran's shortage of foreign exchange and lack of access
to foreign credit. We suspect Iran's pipeline overtures
to Turkey were made to further political relations
and will not advance beyond the planning stage.
Tehran has beefed up defensive measures around
Khark Island. Loading procedures have been changed
to afford more protection to tankers berthing at
There are indications that defensive preparations,
probably connected with the shuttle, are also under
the shuttle and was successfully exporting at least
I million b/d through Sirri. Iran hopes to avoid
paying war discounts associated with lifting at
Khark, but the costs of the shuttle operation will
offset part of the higher prices obtained for crude
from the operation. Iran is still vulnerable to attacks
on the shuttle tankers or Khark itself
the shuttle was temporarily disrupt-
ed in March when two shuttle tankers were hit by
Iraqi missiles.
To reduce its dependence on Khark Island terminal,
Iran is considering pipeline alternatives. Currently,
about 90 percent of Iran's oil production is onshore
and is exported through Khark. Press reports indi-
cate Iran is seriously considering building an oil
Despite drastic cutbacks in nonessential imports and
efforts to raise domestic production, Iran still has
significant import requirements. We estimate Iran
imported about $2.5 billion worth of food and $1.4
billion in military equipment last year. Iran also relies
on imports of capital goods, raw materials, and tech-
nical expertise to keep its major industries operating.
Iran imported $2.4 billion in raw materials last year,
according to press reports.
way at Sirri.
Iran has responded to Iraqi attacks on tankers with
its own strikes against ships in the Gulf. Although far
fewer in number than Iraqi attacks, Iran hopes they
can put pressure on the Gulf states or the West to
intercede and stop the Iraqi strikes. Tehran has
limited its attacks to the southern Gulf after the
Saudi Air Force shot down at least one Iranian F-4
fighter over its territorial waters last June. Moreover,
by raising the general level of danger to Gulf ship-
ping-and occasionally hitting, by accident, tankers
going to Khark-has probably raised insurance rates
for ships calling on its own ports as well as those for
other Gulf states.F_-]
Rising service payments, especially transportation and
insurance charges, have also contributed to the large
current account deficit. The war has closed or ren-
dered less useful a large portion of Iran's port capaci-
ty. This has forced Iran to rely more heavily on
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Figure 4
Iran: Official Foreign Exchange Assets,
Yearend, 1974-84
Military Procurement: A Special Case a
The embargo on arms shipments to Iran by many
Billion Us S Western suppliers and Soviet backing of Iraq have
expensive overland alternatives and has resulted in
large demurrage charges at clogged entry points. Iran
has lost many merchant vessels during the war,
forcing it to use scarce hard currency to charter ships.
25X1 War risks have raised insurance for cargo and ships
calling at Iranian ports.
Iran's diplomatic isolation has left it without benefac-
tors willing to finance its current account deficits.
Tehran's only allies, Syria and Libya, have their own
cash-flow problems. Tehran has been unable to obtain
medium- and long-term loans from international mon-
ey markets, for potential lenders are reluctant to offer
unsecured credit because of the war and revolutionary
turmoil inside the country.F_~
Tehran has responded to its financial squeeze by
expanding barter and other forms of countertrade.
Iran has used countertrade since the revolution, but in
January 1985 it began pushing to conduct all trade on
a barter basis. Barter has spurred Iran's oil sales, but
only through implicit oil price discounts built into the
denied Tehran access to most weapons from major
world suppliers and practically eliminated its ability
to obtain technologically advanced weapons. Interna-
tional pressure has also tended to restrict Iran's
purchases from smaller European and Third World
suppliers. Arms deliveries since the start of the war
have favored Iraq by 4 to 1. In 1984 arms sales to
Iran totaled about $1.4 billion compared with $3.2
billion for Iraq.
Nevertheless, Tehran's willingness to pay high prices
in both the legal and gray arms markets has undercut
efforts to prevent Iranian purchases. For example,
Iraqi and Egyptian attempts to dissuade North Ko-
rea-Iran's biggest arms supplier from selling
weapons failed when Pyongyang refused to suspend a
$250 million sale. Similarly, non-Communist suppli-
ers have been lured by Iran's willingness to pay high
prices. Often these weapons are shipped to Iran
through third countries.
Iran's principal arms suppliers in 1984 were North
Korea, Greece, Portugal, and Eastern Europe. Syria
and Libya have provided limited supplies of weapons,
primarily of Soviet origin. China currently supplies
limited quantities of small arms and ammunition
and, according to press reports, is negotiating to sell
large weapon systems worth $1.5 billion.
Tehran has been able to purchase or manufacture
small arms and munitions for its combat forces,
which are mostly composed of light infantry. Al-
though we believe Iran will continue to make or buy
sufficient small arms to carry on the war, Tehran will
probably not be able to alter appreciably the numeri-
cal and technological superiority Iraq enjoys in air-
planes, armored vehicles, and artillery.
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Figure 5
Arms Sales to Iran and Iraq, 1980-84
agreements. These discounts range between 8 and
20 percent, or $2 to $6 per barrel. For example,
firms involved in barter
have raised the price of their goods to make up for
high "official" oil prices and that traders who arrange
the deals have assessed large commissions.
Domestic Economic Problems
Tehran's inability to handle its financial problems is
increasing economic misery and popular dissatisfac-
tion with the regime. Aggravating these problems are
ideological conflicts over economic policy, corruption,
rapid urbanization, and a shortage of skilled labor.
Ideological Conflicts. Economic policy differences
between radicals and conservatives have even ap-
peared in the Iranian press and have almost paralyzed
policymaking. The radicals advocate strong govern-
ment direction of the economy including land reform,
nationalization of industry, and government control of
investment and foreign trade. The conservative fac-
tion draws its support from clerics and merchants who
favor a limited government role in the economy and
oppose the rapid development plans advocated by
radicals.
Neither faction is powerful enough to push through its
programs, and this has produced divergent policies or
stalemate. Inaction on land reform has created uncer-
tainty over land ownership, stifled private agricultural
investment, and encouraged migration of rural labor-
ers to the cities. Uncertainty over nationalization and
import policies has depressed private business invest-
ment and caused hoarding.F__1
Efforts to construct an economy based on Islamic
doctrines are taking a toll. According to press reports,
even Prime Minister Musavi has complained of diffi-
culties organizing an Islamic economy because a
specific model does not exist. For example, fixed
interest payments have been replaced under Islamic
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The war has gnarled Iran's transportation network,
worsening shortages and impairing industrial output.
The conflict has cost Iran approximately 60 percent
of its prewar port capacity. Closure of the Shatt al
Arab has shut off the ports at Khorramshahr and
Abadan, and Iraqi bombing has reduced the use of
Iran's largest prewar port at Bandar-e Khomeini by
about 30 percent. F__1
Iran now depends on its southern ports, primarily
Bandar-e Abbas, for the bulk of its seaborne imports.
Bandar-e Abbas, however, has been strained by the
increased use. Despite efforts to speed offloading,
ships are experiencing delays of up to two months,
Using average delays
and charges, we estimate demurrage costs and spoil-
age probably totaled several hundred million dollars
last year.
More costly overland routes through Turkey, Paki-
stan, and the Soviet Union have become more impor-
tant since the war began. We estimate these routes
handled about 7 million tons of goods last year
compared with less than 2 million tons in the peak
import year of 1977. In 1984 we estimate the Soviet
Union transshipped about 20 percent of Iran's im-
ports; Turkey transshipped about 15 percent; and
Pakistan, slightly less than 5 percent.
substantial delays
exist at border crossings with Turkey and the Soviet
Union.
Iran's domestic transportation system was not de-
signed to handle the large flow of goods through
Bandar-e Abbas and across the Soviet and Turkish
borders. None of Iran's southern ports is linked by
rail to the major population centers, although a line
is being built to Bandar-e Abbas. Inadequate mainte-
nance of roads and railroads also hampers internal
transportation. Moreover,
shortages of tires and spare parts plague an already
overworked truck fleet. Delays in shipping raw mate-
rials and spare parts to factories have caused lower
capacity utilization and in some cases even shut-
downs.
banking statutes by a form of uncertain dividend, and
this has caused bank deposits and loanable funds to
drop, Ques-
tions over the government's right to tax have touched
off a raging religious dispute. Two grand ayatollahs
support the bazaaris or merchants who contend that
only religious taxes paid to the mosques are legitimate
in an Islamic republic. Most regime officials, on the
other hand, claim that payments to the government as
well as to the mosques are proper under Islamic law
because Iran is a religious state.
Corruption. Abuse of office, a time-honored practice
in Iran, has not been eliminated by the revolution.
Government rationing and foreign exchange controls
have opened more extensive opportunities for illicit
activities. Moreover, erosion in government pay by
rapid inflation has fostered more corruption. For
example, the Iranian press reports that textileworkers
in Qazvin went on strike last fall to protest the
embezzlement of $2 million in wages and bonuses by
government managers. Businessmen complain they
must resort to bribery just to sustain operations
according to press reports.
most Iranians believe cor-
ruption is responsible for shortages and rising prices,
and this has undermined support for the regime.
Concern over this public perception has prompted the
regime to launch an anticorruption campaign, includ-
ing the prosecution of corrupt officials. The campaign,
however, has been limited to low-level officials and
has not reduced the level of public complaints.F_
Rapid Urbanization. Government policies such as
food distributions to the urban poor have encouraged
migration to the cities by peasants from the country-
side. This migration and refugees from Afghanistan
and border areas affected by the war have contributed
to rapid urbanization. The populations of many Irani-
an cities have doubled since 1979. For example, press
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reports indicate that Tehran has doubled in size to 7-8
million residents, and the population of Karaj, west of
Tehran, has shot up from 100,000 to well over
1 million. We estimate Iran has received 1.2 million
Afghan refugees since the Soviet invasion. Most have
settled in cities.)
Rapid urbanization has strained public services and
worsened social problems. For example, Tehran expe-
rienced daily power cuts lasting several hours at a
time last summer, and the deteriorating water system
threatens the city with a water shortage, according to
press reports. there is an
acute housing shortage in Tehran and other cities.
There has also been an upsurge in crime, which many
Iranians blame on Afghan refugees,
Skilled Labor Shortages. The regime is especially
short of trained technical and managerial talent to
run industries and provide government services. Emi-
gration of members of the middle class seeking eco-
nomic opportunities and political freedom and to
avoid military duty has aggravated a shortage of
skilled manpower. War-related demands also strain
the limited pool of skilled labor.
a lack of trained personnel pre-
vents Iran from constructing multistoried buildings
and other complex projects. The departure of skilled
foreigners from the aircraft industry has reduced
Iran's ability to maintain its aircraft,
A shortage of physicians has
prompted Tehran to restrict foreign travel by doctors
and to have them leave behind family members to
ensure their return.
Effects of the Deteriorating Economy
The cost of the war, lower oil revenues, and depleted
foreign exchange reserves have caused inflation,
shortages, cuts in development programs, and unem-
ployment. Sorely needed industrial development is
being reduced at a time of high unemployment and
stagnant production. With minimal foreign exchange
reserves and no source of long-term credit, the regime
is being forced to make additional import reductions
that are worsening shortages and inflation.
Budget Austerity. The government depends on oil
receipts for a little more than half of its revenues, and
depressed oil earnings have led to cuts in government
spending. This has a widespread influence on the
economy because government spending accounts for
about 40 percent of the gross domestic product, and
the state directly or indirectly controls basic industries
and accounts for most investment. The state also runs
large make-work projects to reduce unemployment.
The government scaled back original budget alloca-
tions for the 1985 fiscal year that ended in March by
about $2 billion-to $44.5 billion-to close the reve-
nue shortfall.' Oil receipts, however, fell short of
budget targets by at least $5 billion, according to
press reports, and left an even larger-than-expected
deficit of at least $5.7 billion. Almost all of the
spending cuts came from the development budget,
which was reduced by 13 percent.
The downward trend will continue in the 1986 budget,
which calls for a 13-percent decline in spending. Most
cuts again come from the development budget, but the
budget also projects a 4-percent drop in direct mili-
tary expenditures, which dominate the budget. Prime
Minister Musavi highlighted the impact of the war by
publicly acknowledging that almost one-third of the
government's $38.7 billion FY 1986 spending will be
directly or indirectly related to the war. Lower pro-
jected oil revenues prompted the government to in-
crease taxes by 30 percent. Proposals to double the
price of heating fuel and gasoline are also under
consideration.
The government expects a deficit of $2 billion in
FY 1986, but we believe it will be closer to $7 billion
because Tehran is likely to fall far short of its oil and
tax revenue forecasts. The regime claims it will
finance the deficit with domestic borrowing, but we
believe the government is unlikely to attract the
necessary savings and will resort to money creation,
adding to inflationary pressures.
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Inflation and Shortages. The official inflation rate of
13.5 percent is misleading because it measures only
the rise in government-regulated prices. Many goods
are available only on the black market for four to
eight times official prices, and press reports indicate
the actual inflation rate may be as high as 40 percent.
In addition to shortages and high prices, the quality of
most goods, especially those sold at government
prices, has declined dramatically. For example, a loaf
of rationed bread has shrunk in size by about 30 per-
cent since 1979,
The rationing system and shortages have hurt produc-
tivity.
government employees and military officers often
spend working hours standin in line for rationed
goods. three- to four-
hour waits for meat were common last summer. E
inflation has
eroded military wages and contributed to morale
problems.
Stifled Production and Delayed Development. Lack
of hard currency and transportation problems have
made it difficult to obtain spare parts and raw
materials. As a result, many factories operate at far
below capacity, and industrial and infrastructure pro-
jects are being delayed. According to press reports,
Iran has had to cut raw material imports to only
40 percent of the amount Iranian officials have
deemed necessary to keep domestic industry running
at capacity. For example, a shortage of raw materials
caused output in Iran's auto industry to fall in 1984,
and a shortage of bitumen has held up road construc-
An ambitious $169 billion five-year development plan
adopted in August 1983 is being revamped in accor-
dance with more realistic assessments of financial and
skilled manpower resources and because of war risks,
according to Iranian press reports. For example,
construction of a $4 billion petrochemical project at
Bandar-e Khomeini-the largest industrial project
under way in Iran-has been suspended because of
Iraqi bombing. Many other projects still under way
are experiencing long delays because of resource
shortages.
Unemployment. With industry operating at low rates
and development programs cut, unemployment has
worsened.
with the jobless rate as high as 35 percent
Popular Reaction to Economic Decline:
Growing Disenchantment
growing war-weariness and disenchantment with the
government's handling of the economy.
labor unrest and protests over
prices, shortages, and working conditions. Lack of
progress in the war-a main cause of economic
hardships-has led to frustration. Recently, persistent
Iraqi air attacks on cities have lowered morale,
sparked antiwar demonstrations, and further disrupt-
ed the economy. The middle class, which has never
had much affinity for the revolution, is especially
vocal in its grumbling,
More important, there have been increasing numbers
of demonstrations among the working class-the
backbone of the revolution.
over the
steel mill in Esfahan during November 1984.
18,000 workers went on strike at Iran's largest
throughout Iran.
despite efforts
by the regime to contain the story, sympathy strikes
were held in many cities. The government eventually
gave in to most worker demands,
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refinery
workers in Shiraz, Tabriz, and Esfahan held strikes
this winter in the midst of fuel shortages. The workers
were disgruntled over the lack of pay increases despite
rising prices and shortages. They may also have been
protesting government efforts to increase domestic
production and thus offset cuts in imported fuels
made to conserve hard currency. In addition, there
have been strikes in Arak, Karaj, Mashhad,
Kermanshah, Mobarakeh, Kerman, and at the Khark
Island oil terminal. Some of the strikes appear to have
been coordinated, and the Iranian exile press reports
the existence of a secret national labor organization.
We believe the regime will attempt to prevent a
unified labor threat by giving in to workers in essen-
tial industries, while suppressing those in other fields.
the opposition press abroad
report several cases in which strikes have resulted in
the use of force by the government. For example,
last December Revolutionary
Guards killed 10 demonstrators and wounded many
others at a rally in support of striking cement workers
in Shiraz. Four strikers were killed and 15 to 18
others wounded in a tobacco workers' strike in 1984,
Popular dissatisfaction has not coalesced into a cohe-
sive opposition movement. Indeed, some demonstra-
tions have had the tacit approval of senior clerics
representing different sides in the continuing debate
over economic policy, according to Western press
reports. To head off a coordinated opposition, the
government has attempted to buy the support of the
middle class and bazaaris by allowing them greater
economic freedom and wealth without giving them
significant political power. This is likely to prove
increasingly difficult, however, because of the shrink-
ing economic pie. F--]
Outlook and Vulnerabilities
Iran's economy will continue to worsen. The soft oil
market and continued Iraqi attacks will drive oil
revenues down this year. We estimate oil revenues will
be $14.7 billion in 1985, assuming exports average
1.55 million b/d. To maintain this level, Iran will
Ayatollah Khomeini on economic hardships, March
1985:
"At times calamity becomes a blessing. At other
times what we consider blessing is in fact a calamity.
The great God wants to groom the people. It is under
pressure that the spirits soar to the higher world.
Therefore, we can say that, by the grace of God, our
nation is also like this. They are not afraid of
hardships. If we Muslims, in fact all Muslims, were
like other nations and had been running after wealth,
status, and such things, or they were running for
bread or sex, many would have been disappointed.
But the nation who goes to war for martyrdom, a
nation whose men are lovers of martyrdom and wish
for martyrdom, such a nation can hardly think of
anything else. As for its economy, it does not matter.
These matters are for those who are tied to econo-
mies. The people who work for anything, that the
prices be less or more, are very different from the
nation that wishes for martyrdom. When one is
determined to attain martyrdom, he is not supposed
to worry about price. He does not go to collect booty,
because through martyrdom he gains a booty that
never dwindles. I hope all are of such mind. "I
Ayatollah Montazeri, Khomeini's heir apparent, on
lower public consumption, January 1985:
"In my view, as we eliminate excessive expenditures
and formalities in the ministries and organizations,
we must spread and promote a policy of thrift and
contentment in all matters and an anticonsumption
ethic among the people. Our nation is definitely not
satisfied to see the government spending more than is
necessary to subsidize unnecessary items and formal-
ities. If we impress upon the people the consequences
of consumerism and waste in certain affairs, the
people themselves will certainly take the initiative in
the fight against consumerism and waste in the effort
to be content with establishing Islamic ethics. "I
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Exports (f.o.b.)
21.9
20.6
13.6
11.7
18.9
19.8
16.9
15.1
Oil
21.2
20.2
12.8
10.9
18.6
19.5
16.5
14.7
Nonoil
0.7
0.4
0.8
0.8
0.4
0.3
0.4
0.4
Imports (f.o.b.)
17.8
7.8
10.7
10.8
9.7
15.3
15.0
12.5
Services (net)
-3.4
-1.0
-2.4
-3.3
-3.0
-5.3
-5.8
-5.1
Balance
0.7
11.8
0.5
-2.4
6.2
-0.8
-3.9
-2.5
1985 projection assumes oil exports for the year average about
1.55 million b/d. This projection also assumes oil prices remain at
current levels and Iraq continues attacks on shipping at the same
level as the first two months of 1985.
have to price its oil competitively and yet not precipi-
tate a sharp decline in oil prices. Imports will have to
be cut at least 15 percent, but the cuts could go even
deeper if Tehran is unwilling to further reduce foreign
exchange holdings or unable to arrange some credits
to fund a current account deficit on the order of $2.5
billion. Lower imports will cause further declines in
industrial production and more delays in development.
Iran's economic problems would go from bad to worse
if there were a major fall in oil prices. If prices fell to
$20 per barrel and Iran maintained its current export
levels, oil revenues would drop to about $10 billion.
This fall in earnings would force cutbacks in war-
related imports and popular government programs.
Iran could soften the impact of a severe crisis by using
the estimated $2-3 billion in gold and jewels the
regime has kept as a last resort.F__1
In the unlikely event that the oil market firms and
Iran can raise oil export volumes to 1983 levels, 1985
revenues would only reach the 1984 level. By match-
ing last year's earnings, however, Tehran would still
face import cuts because it lacks the reserves to
finance a current account deficit as large as in 1984.
We believe that, after years of hardship, further
declines in living standards will lead to greater domes-
tic unrest. Higher taxes and fuel prices in the new
budget are potential rallying points for opposition
groups. The poor health of Ayatollah Khomeini and
the struggle for political power in Iran will continue to
prevent decisive action on domestic economic prob-
lems. The regime is warning the populace that it must
become self-reliant and lower its expectations in
contrast with earlier advice that the public should
endure sacrifices in expectation of better times.F_
Iraqi attacks against oil shipping will not significantly
change Iran's economic outlook unless Iraq either
becomes far more effective or stops its attacks. Bagh-
dad sees the present level of attacks as part of a
strategy to bring Iran to accept a comprehensive
peace settlement. Iraq, however, appears unwilling to
risk the losses or possible Iranian retaliation that
could result from more widespread attacks against
Iranian production facilities or tankers.F__1
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Iran's Oil Policy and Potential To Break Global
Prices
Iran's increasingly desperate financial condition is
moving Tehran toward a strategy of price cutting to
spur sales that could precipitate a fall in global oil
prices. The Petroleum Ministry has been criticized
for past pricing policies and its inability to maintain
revenues. Moreover, Tehran is unlikely to sit by idly
as new oil pipelines give Iraq additional export
capacity early next year.
Rising postwar expectations and the return of soldiers
from the front could make the government's inability
to deal with economic problems an even more serious
threat to stability.F__1
Implications for the United States
Tehran's economic misfortunes provide both opportu-
nities and hazards for US interests:
? We believe Tehran's continued efforts to price its oil
competitively will help maintain downward pressure
on world oil prices. Aggressive price cutting by Iran
to climb out of its economic morass could start an
oil price war and contribute to a sharp fall in prices.
There are indications from public statements that
Tehran regards its OPEC quota of 2.3 million b/d as
a limit on exports rather than a production quota-a
calculation that would permit exports 600,000 to
700,000 b/d greater than OPEC intended. These
statements may be intended to warn other OPEC
producers that Iran will match, or anticipate, future
Iraqi production increases. We estimate Iran can
bring production up to 3.2 million b/d in a matter of
months, whereas recent production has been some 2.2
million b/d.
rate seriously over the past year and that consider-
25X1 able work may be required before higher production
levels can be achieved.
Iran's weak economy and low foreign exchange re-
serves will continue to make it vulnerable to Iraqi
attacks on other economic targets. Tehran is ill
prepared to offset lost output or repair damage to
factories, power generators, and other economic facili-
ties.
An end to the war would reduce some of Iran's
economic problems, but it would not provide a dra-
matic turnaround. Oil revenues would rise as the war
risks of lifting Iranian crude were eliminated, and
substantial financial and manpower resources would
be freed for development. The regime, however, would
still face a host of problems, including a weak oil
market and ideological conflict over domestic policies.
? The depth of Iranian opposition to the United States
is so great that it is highly unlikely there will be a
significant improvement in relations any time soon.
Relations with other Western countries, however,
may improve if moderates in the regime who favor
stronger ties with the West succeed in using eco-
nomic issues to discredit radicals. Moderates also
oppose strong ties with the Soviet Union.
? Economic difficulties increase the likelihood that
Iran will improve relations with the Communist
nations. A weakened financial position makes Teh-
ran more wary of renewed economic sanctions by
the West and encourages it to seek stronger trade 25X1
links with nonaligned and Communist countries.
Tehran's push for countertrade agreements to bal-
ance trade on a country-by-country basis can be
more easily handled by centrally planned econo-
mies. The Soviet Union probably will benefit unless
opposition within the Iranian regime to warming
ties with Moscow intensifies.
? Tehran has publicly threatened to blockade Persian
Gulf oil exports if Iraq cripples Iran's ability to
export oil or if there is a collapse of the oil market.
The latter threat is a relatively recent occurrence
highlighted by Majles Speaker Rafsanjani's warn-
ing that Iran would "stop the flow of oil to the
plundering countries" in the event of a large price
fall, according to press reports. We believe Tehran
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would attempt to close the Strait of Hormuz only as
a last resort, and the closure would last no more
than a few days if Western countries react. Attacks
against oil facilities in Iraq, Saudi Arabia, or Ku-
wait are slightly more likely options should Iran
conclude that it was in dire circumstances, although
this would still risk military and diplomatic
retaliation.
? If the regime believes that its power is threatened by
economic as well as other difficulties, it may support
increased acts of terrorism against US and other
Western interests in the region and in Western
Europe. Such action would be used to rally the
populace and divert attention from domestic prob-
lems. F__1
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