Signs that Iran may accept a temporary suspension of uranium enrichment are mounting:

  • Foreign Relations Steering Council member Velayati, international affairs advisor to Iran’s Supreme Leader Ali Khamenei, left for Moscow on February 7 with a positive response to Russian President Vladimir Putin’s recommendation that Iran’s leaders accept the ElBaradei proposal under which Iran would freeze its uranium enrichment in exchange for a freeze on sanctions against it. In addition, on February 14, Velayati said, on the issue of a freeze on uranium enrichment, that “there is no idea that cannot from the outset be considered.”

  • Supreme National Security Council Secretary Larijani, who is in charge of Iran’s nuclear dossier, said “the proposals based on us activating centrifuges in such a way that uranium enrichment will be in minimal quantities can be an opening point.”

  • On February 12, Foreign Ministry Spokesman Husseini announced that “Iran is considering all the issues, even freezing [uranium enrichment], as worthy of examination in the framework of negotiations.” At the same time, Husseini announced on February 13 that Iran would never accept the demand to freeze uranium enrichment as a precondition for negotiations.

  • On February 9 Majlis [Parliament] National Security and Foreign Policy Committee Member Qanbari said that Iran was willing to partially freeze uranium enrichment, “as a goodwill [gesture]... A temporary freeze under the current conditions in order to gain the trust of the European side and the UNSC members is the best way to solve the nuclear crisis…”

  • On February 8, the Baztab website, which is affiliated with Expediency Council Secretary Rezai and considered to be in the camp of Supreme Leader Ali Khamenei, reported that there was a possibility that Iran would freeze uranium enrichment for two months: “[Towards the UNSC discussion on the continued handling of the nuclear crisis], commentators anticipate three possible scenarios. The first is an examination of the ElBaradei proposal… The second is… the continued implementation of Resolution 1737, where instead of issuing a resolution on additional sanctions… the negotiations between Iran and Europe will continue in order to arrive at a possible outcome. But the third scenario, that has a greater chance of acceptance by both sides, is a return to the previous 11-section agreement between [EU Foreign Policy chief Javier] Solana and [Supreme National Security Council Secretary Ali] Larijani, and the addition of a 12th section that stipulates that when the 11 sections mentioned by the 5+1 countries are signed, Iran will implement a two-month freeze on uranium enrichment…”

  • President Ahmadinejad’s further postponement of a long-promised speech revealing Iran’s nuclear achievements. News on this issue is now promised to be released occasionally until April 9.

  • In addition, senior Iranian officials made statements in favor of negotiating with the U.S. On February 11, Iranian Expediency Council Chairman Rafsanjani said, “It would be effective for us to negotiate [with the U.S.], but [at the same time preserving Iran’s] honor.”

Question: Why might this be happening? Answer: Iran’s command-style economy, already in serious disrepair, is reeling from the effects of coercive economic diplomacy.

An internal European Union document on Iran that circulated among the EU’s member countries last week and a copy of which was obtained by Britain’s Financial Times concludes that Iran’s economy is vulnerable because of economic mismanagement, with foreign investment almost nil and a 20 percent inflation rate. According to the report, UN Security Council Resolution 1737—and the fact that it was adopted unanimously—has had an impact on Iran:

The sanctions contained in the Resolution have limited direct effect but they come at a moment when the economy is performing poorly, partly because of Iranian mismanagement. Ahmadinejad is under criticism because of rising inflation – officially at 12 per cent, in reality closer to 20 per cent; economic growth around 5 per cent per annum is not keeping up with the need for job creation. Foreign investment has all but dried up, partly because of the nuclear issue and associated action (e.g. restriction on Iranian banks, greater caution of export credit agencies). Without new investment, Iran risks being unable to maintain medium-term oil production, currently 50 per cent of government income [emphasis added].

Over the weekend, the Europeans, “yielding to pressure from the United States,” agreed to widen a ban on financial transactions with Iran and the export of materials and technology that Iran could use to develop nuclear weapons.

An article in yesterday’s New York Times echoes the position taken in the EU document:

Western political and economic pressure on Iran over its nuclear program has chilled foreign investment to the extent that it is now squeezing the country’s long-fragile energy industry, adding strains to a government that is burdened by sanctions and wary of unrest at home [emphasis added].

Regarding Iran’s “fragile” energy industry, the Times article says that, according to some analysts, if the imbalance between stagnant production and rising domestic demand isn’t rectified, Iran will be unable to export any oil within a decade:

“They have a perfect storm of problems feeding into each other,” said Robert Murphy, an analyst at PFC Energy, a consulting firm in Washington. He estimated that Iran might have no more oil to export by around 2015 if it did not rein in runaway consumption and reverse the long-term decline in its oil production.

The information provided in the Financial Times and New York Times articles represents little more than the tip of Iran’s economic iceberg. Much more detailed information is provided in two recent essay-length articles:

Between them, these two articles paint a picture of the Iranian economy—in particular, of its energy sector—that is tittering on the edge of an abyss.

It would take far too long to cover everything in the PNAS and MERIA articles, so I’m confining the discussion here to what is the most visible—and, for the Iranian regime, the potentially most explosive—problem: gasoline.

  • Benefiting from a hefty government subsidy, Iranians are able to buy gasoline for $0.34 per gallon, well below the estimated production cost (in Iran) of $0.83. As a result, demand has been growing at an 11–12% annual rate. Because of its subsidized price, refining gasoline for domestic consumption is unprofitable and importing gasoline is favored over refining it. A National Iranian Oil Company (NIOC) official explains:

    “Given the fact that our refineries are outdated and that NIOC does not have the necessary funds to build new refineries and that the private sector does not engage in the business of construction of refineries due to the low profits involved, import of gasoline is more economically feasible than building refineries.”

  • The absurdity of this situation is crystal clear. Because the (subsidized) price of gasoline is so low, building new facilities to manufacture it would be a money-losing proposition. So, instead, gasoline is imported. But imported gasoline is priced at the market, and the market price (currently $1.63 per gallon) is almost twice the estimated cost of domestically-produced gasoline, which, in turn, is vastly greater than its subsidized price.

To summarize: retail price: $0.34, production cost: $0.83, import cost: $1.63. Is this any way to run an economy? Not if the experience of the Soviet Union is instructive.

Related Post: Iran Considers Gas Rationing