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Iran's Nuclear Drive: The Economic Cost

Prepared by: Lionel Beehner
May 5, 2006

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Ask Iranians what's more important—a nuclear program or economic progress—and centuries worth of evidence suggests they'll answer the latter. Iran's economy has stagnated in recent years despite oil prices eclipsing the $70-per-barrel mark. Voters elected President Mahmoud Ahmadinejad to power last year on his populist promises to reform Iran's economy and redistribute more of its petrodollars to the poor. Instead, as this International Monetary Fund report finds, unemployment and high inflation continue to cripple Tehran's economy, while most of the country's $45 billion in oil revenues remain in the hands of the ruling elite. Economists say Ahmadinejad's recent budget only panders to populist sentiment with short-term, quick-fix solutions that do not address the economy's structural problems. A more serious approach, they say, would be privatizing its inefficient state-run industries or reforming bloated subsidies programs (NYT).

Iran therefore feels economic disruptions acutely, as this CFR Background Q&A explains. Experts suggest policymakers continue to view this as an opening as they debate the merits of sticks versus carrots. Kenneth Pollack of the Brookings Institution credits the threat of sanctions, not military force, for bringing the Iranians to the negotiating table with the so-called EU-3. Pollack told a recent CFR symposium on Iran: "It is the economy that is causing the greatest concern in terms of popular unhappiness with the regime."

Yet Iranians walked away from an incentives package offered last year by the EU-3 that included a trade agreement, assistance procuring nuclear fuel, and support for Iran's bid to join the World Trade Organization, as explained in this CFR Background Q&A. Most experts say winning the Iranians over, given the current political climate, would have to involve a much more generous package of economic incentives, including security guarantees. Iran knows sanctions against its oil and gas industry are unlikely because China and Russia, both veto-wielding members of the UN Security Council with strong trade and energy ties to Tehran, would block such a move. Hence, Iran's defiance in the face of growing international isolation, says the Economist.

That has not stopped Iran from looking elsewhere in the region for economic support and stronger trade ties. Ahmadinejad is currently in Baku, Azerbaijan, attending the annual summit of the Economic Cooperation Organization to boost business with countries along Iran's northern and eastern flanks (RFE/RL).

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