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Sanctions begin to compound Iran's severe economic problems

In a speech at the U.N. General Assembly session on poverty, Iranian President Mahmoud Ahmadinejad said that capitalism was on the verge of death.

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Washington Post Foreign Service
Tuesday, October 5, 2010; 11:01 PM

TEHRAN - President Mahmoud Ahmadinejad's government, already faced with growing opposition from competing political forces within Iran, is confronting new pressure brought on by severe economic problems, including some triggered by international sanctions.

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The sanctions, intended to push the country to abandon its nuclear program, are not yet crippling the Islamic Republic, economists and analysts say. But they are causing prices to rise and making it increasingly difficult for Iranian companies to work internationally.

U.S. officials have noted recently that the sanctions are having an impact, and also acknowledged the confluence of challenges. "This all comes at a time when Iran is especially vulnerable because of its government's economic mismanagement and narrowed political flexibility," Stuart Levey, a senior U.S. Treasury official, said in a Sept. 20 speech.

"We are already receiving reports that the regime is quite worried about the impact of these measures, especially on their banking system and on the prospects for economic growth," Levey said. "And, as pressure increases, so has internal criticism of Ahmadinejad and others for failing to prepare adequately for international sanctions and for underestimating their effect."

The sanctions are taking hold as Iran prepares to implement a major overhaul of how its state subsidies are distributed, giving direct payments to the poor while allowing prices of basic commodities such as bread, electricity and gasoline to rise by large percentages.

The confluence of the sanctions, concerns over the subsidy redistribution and possible budgetary problems have made the Iranian economy extremely fragile, as was apparent Sept. 25, when Iran's currency, the rial, took a deep dive.

Following fresh financial sanctions from the United Arab Emirates, the Islamic Republic's Central Bank did not intervene as the rial - stable for over a decade - plummeted by 15 percent, leaving traders and importers with evaporating bank accounts.

It's not clear whether the Iranian government was caught by surprise by the impact of the U.A.E. measures or deliberately hesitated. But it waited a full week before starting to sell its petrodollars, trading them at a considerably higher rate than it would have received a week before and making a profit on the sales.

The absence of well-defined policies to address these fundamental issues is making economists, businessmen and some officials increasingly nervous.

"It is a little bit difficult to see a clear economic strategy from the government," said Mohammad Nahavandian, the head of the Iran Chamber of Commerce, Industries and Mines. "Different ministries are coming up with different policies. It seems they react to the facts of the day," he said.

While international sanctions increasingly are hurting the government and the private sector, Iranians seem to have faith in their economy. Tehran's stock market has seen a huge increase in trade, and there is no clear sign of a significant capital flight.

But faced with dwindling buying power, many Iranians are reconsidering their faith in the currency, a shift that could prove to be more significant than the sanctions.

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