This has been an interesting week among the authoritarian set. First, Russian Prime Minister Putin amused the world by complaining that the effect of foreign markets on the share prices of Russian companies was unfair; This coming from the destroyer of Yukos. Second, Venezuelan President Hugo Chavez is having another go at trying to get indefinite re-elections. He is one man who can’t take no for an answer. Lastly, Iranian President Mahmoud Ahmadinejad has finally admitted that the Iranian economy is suffering from the sharp fall in oil prices. I don’t know exactly what it was that changed his mind. Maybe it was the 10% unemployment rate or the 30% inflation. Whatever it was, it brought him back from Disney Land.
The Iranian budget is based on the assumption that oil will sell for at least $90 a barrel. Everything was fine while prices were in the stratosphere, but earlier this week oil fell as low as $47, sparking convulsions throughout the oil-exporting crowd. (See Iran Urges OPEC to Take Action) Earlier, Ahmadinejad had put a brave face on it and declared that Iran was immune to the world financial crisis and kept spending away like an out-of-control shopaholic. Then the Iranian economy began to falter. Finally, last month, 60 economists wrote Ahmadinejad a third letter blaming him for the countries sky-high inflation.
Now the Iranian government has sobered up and they are trying to work out next year’s budget. Approximately a month ago, it stated that is was planning to base it on a $50-$60 a barrel oil price. OPEC met last Saturday and thanks to Saudi Arabia, it decided not to make another round of production cuts. They will meet again in a few weeks, but the deepening world recession seems likely to keep oil prices suppressed for some time to come no matter what cuts are made. That may be why Tehran has now adjusted its budgetary base to $30-$35 ‘because we do not decide the price of oil on the global market,’ said the President.
What will be the result of this new budget? The Iranian President’s Office has already stated that spending programs will have to be slashed and taxes raised. Some possible casualties may be public utility projects, some new oil and gas exploration projects, and a potential cut in gasoline subsidies for cars. This last point can be a sticky one because Iranians love their cars and cheap gas. Previous attempts to cut gas subsidies resulted in strong enough backlashes to force the government to reverse course. Tehran is behind the eight ball here since it has to spend $350 million in hard currency per month to maintain this fuel addiction.
The next presidential election in Iran takes place in June. Ahmadinejad is literally banking his hopes on the poor because he plans to keep making direct payments to them no matter how badly the budget gets. However, that may not be enough as the economy continues to tank. Ahmadinejad needs to do something else quickly because his overall popularity is dropping as fast as the price of his precious oil is. If it falls much lower and stays that way for any length of time, he will end up like his country’s economy, down and out and broke.
