Iran buffeted by oil and currency falls

New sanctions likely to hit its investment plans and growth

Iran's economy is facing a double threat from lower oil prices and the sliding euro as western powers renew pressure on Tehran over its nuclear programme. If crude were to remain below US$70 a barrel for an extended period, additional economic sanctions on Iran could derail investment, trade and the country's economic recovery, the international consulting firm IHS Global Insight said.

"Although a temporary slide in the euro or drop in oil prices separately would not have a severe impact on Iran's economy, the two events occurring simultaneously will curtail the country's ability to ignore the impact of sanctions in the near term," Alyssa Rallis, an analyst with the firm, wrote in a research note on Tuesday. The note came as crude dropped below $68 per barrel and the euro fell to a four-year low against the dollar.

Spot prices for Dubai crude, which is similar in quality to the oil exported by Iran, have fallen to about $71 a barrel from a high of nearly $88 a barrel this month. Officially, oil revenue accounted for about a third of Iranian central government revenue and about 80 per cent of the country's foreign exchange reserves. But in practice, Iran's economy was almost entirely dependent on oil sales to maintain investment and growth, Ms Rallis said.

"Oil income has been used by Iran's ruling elite as a crutch for decades, with income from the lucrative export being used to finance regime supporters, buy public support through generous subsidy programmes, fund weapons development and support allies abroad with aid and investment," she added. "Due to numerous structural inefficiencies, Iran has come to rely on an extremely high oil price to maintain spending and investment and does not have the same flexibility as many countries in the Gulf to ride out a prolonged period of low oil prices."

Tehran would need to postpone "crucial" planned investments in its oil and gas sector and reduce infrastructure spending if crude remained at or below the current level, Ms Rallis predicted. Among the biggest setbacks to the country would be further delays in developing the giant South Pars gasfield. South Pars was expected to generate up to $130 billion (Dh477.49bn) in annual revenue once all its development phases were completed, an Iranian official said on Tuesday.

Foreign investment by Tehran, which the regime uses to bolster relations with its allies, is also on the line. A $4bn Syrian refinery project, for which Iran's state-owned Petropars, the Venezuelan national oil company Petroleos de Venezuela and Malaysia's Al Bukhari Group formed a joint venture in 2007, has stalled due to financing uncertainties, according to industry sources. The euro's fall is worsening Tehran's predicament. Last year, as tensions mounted with Washington, the Iranian president Mahmoud Ahmadinejad ordered the government to convert all US foreign exchange holdings into euros. The European currency's 16 per cent slide against the dollar this year will therefore have devalued Iran's currency reserves.