CRS Report for Congress: Iran’s Economy

30 06 2008

URL: http://www.fas.org/sgp/crs/mideast/RL34525.pdf. Source: Congressional Research Service (via Federation of American Scientists).

The Islamic Republic of Iran, a resource-rich and labor-rich country in the Middle East, is a central focus of the U.S. national security policy. The United States asserts that Iran is a state sponsor of terrorism and that Iran’s uranium enrichment activities are for the development of nuclear weapons. To the extent that U.S. sanctions and other efforts to change Iranian state policy target aspects of Iran’s economy as a means of influence, it is important to evaluate Iran’s economic structure, strengths, and vulnerabilities.

In terms of external challenge, Iran has long been subject to U.S. economic sanctions and, more recently, to United Nations sanctions. Partly due to the sanctions, some foreign countries and companies, particularly in Europe, have curbed trade and business with Iran. Iran also has faced challenges in obtaining foreign investment for development of its energy sector. Iran has turned to new trading partners, such as China and Russia, and has focused more heavily on regional trade opportunities. A significant internal challenge is domestic economic mismanagement. With the election of President Mahmoud Ahmadinejad in 2005, Iran’s economic policies have worked to reduce regional and class disparities through oil wealth redistribution.

Mr. Ahmadinejad has tried to reduce unemployment and poverty through expansionary monetary and fiscal policies, including large energy subsidies and subsidized lending. However, some criticize these policies for contributing to unemployment and inflation and not reducing poverty. Another domestic vulnerability is Iran’s dependence on its oil sector; the government’s chief source of revenue is from oil exports. Iran has experienced strong economic growth in recent years due to the rise in international oil prices, but remains susceptible to oil price volatility. Iran has taken steps to diversify its economy, such as through building up its non-oil industry sectors.

Because Iran does not have sufficient refining capacity, the country is highly dependent on gasoline imports to meet domestic consumption needs. To reduce this dependency, the country is seeking foreign investment to develop its petroleum sector. While some deals have been finalized, reputational and financial risks may have limited other foreign companies’ willingness to finalize deals.

While some analysts maintain that Iran’s economy is performing robustly, others suggest that the economy is underperforming, given the country’s vast resources. Despite the challenges faced by Iran, most analysts believe that the economy is not in immediate crisis, given the continued highs in oil prices.

Members of Congress are divided about the proper course of action respect to Iran. Some advocate a hard line, while others contend that sanctions are ineffective at promoting policy change in Iran and hurt the U.S. economy. In the 110th Congress, several bills have been introduced that reflect both perspectives. This report will be updated as warranted by events.

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