INFLATION

Ayatollah Ali Khamenei, the supreme leader of the Islamic Republic of Iran has a lot on his mind these days. Especially chicken.

The rising price of this food staple is the cause of such anxiety among Iranian officials that last month, Iran’s police chief, Esmail Ahmadi-Moghaddam, urged the country’s TV stations not to broadcast images of people eating the birds. He was worried it could lead to social unrest.

Khamenei is Iran’s most powerful man, but he knows the chicken crisis is one he must address. He needs to find a solution to it and, like any politician, someone to blame.

None of the options available to Khamenei is attractive, a situation that’s increasingly the case in other areas, too. His country is being pushed ever further into international isolation and economic hardship by its insistence on pursuing a nuclear-fuel program that the rest of the world believes is designed to produce weapons, despite Iran’s protestations to the contrary.

The supreme leader could, for example, blame the price of chicken -- which has tripled since last year -- on sanctions that the U.S. and the European Union imposed to deter Iran from continuing its nuclear-fuel plan. Yet that would mean admitting to both the West and ordinary Iranians that sanctions are having a big impact, something the regime is desperately trying to avoid. Iranian officials have instructed the news media not to discuss the effect that sanctions are having on the economy.
Blame Game

Another option would be to blame President Mahmoud Ahmadinejad, but that could backfire, too. Khamenei was once the president’s main backer. It was the supreme leader who allowed Ahmadinejad to go ahead with the subsidy-reform plan that has been a core driver of inflation.

Escaping from international isolation doesn’t look any easier for Khamenei, either with regard to the nuclear issue or the turmoil in Syria, Iran’s most important ally in the region.

One avenue Khamenei could take would be to stop supporting Syrian President Bashar al-Assad now, before it’s too late. That would mean ditching an ally in his hour of need and at a time when Assad has a fighting chance of holding on to power. An unfriendly Sunni regime could still take over in Damascus, and abandoning Assad would meanwhile damage Iran’s credibility among other friends in the region. If Assad can’t rely on Khamenei when the chips are down, for example, would Hezbollah leader Hassan Nasrallah be able to?

Khamenei could also compromise on the nuclear program to avoid subjecting his regime’s economy to further pain of sanctions. But so far, that would require Iran to give up its insistence that it has the right to enrich uranium, a public defeat for the government. Judging by a speech he made late last month, Khamenei appears to think he can tough it out. “Long-term continuation of sanctions is not in the West’s interests,” he said.

The logic of digging in is based on the belief that once Iran is a regional nuclear power, rivals such as Saudi Arabia, the U.S. and Europe might find they have no choice but to deal with Iran on its terms. Yet this carries risks, too: A nuclear bomb might make the regime even more isolated and subject to hostile policies from regional and Western countries than before.
Sanctions’ Cost

The supreme leader doubtless knows that there’s a substantial risk he’s wrong and that time is not on his side, but on that of the U.S. and its allies. Sanctions haven’t caused the feared increase in global oil prices, a result of Saudi intervention and a global economic slowdown. The current cost of sanctions to Iran, by contrast, is $133 million a day in lost revenue -- annualized, that would be about 10 percent of the country’s annual gross domestic product. Iran’s oil exports are down by 1.2 million barrels a day, or 52 percent.

One way for Khamenei to improve the government’s standing at home against both internal and external pressure would be to try to address its perceived corruption and mismanagement of the economy. Here, too, Khamenei’s options are constrained. Should he begin a real campaign to fight corruption, he could turn vital supporters into enemies. The loyalty of many regime insiders is based on being allowed to profit. Nor can Khamenei easily provide an escape valve for popular anger by introducing political reforms -- he believes his opponents would interpret any move to open up the system as a sign of weakness.

Ahmadinejad was already ruining the economy before the U.S. and Europe introduced the latest rounds of much tougher sanctions. This is why two heads of Iran’s central bank have resigned since the president was first elected to office in 2005. His populist spending policies have pushed up inflation and unemployment levels.

The subsidy-reform policy is a good example. Under the program, Ahmadinejad cut government support for certain goods and industries, but then distributed cash handouts to compensate. That increased the money supply and inflation rate. At the same time, his government failed to invest the money saved from the reduced subsidies, damaging productivity. The poultry industry was a case in point. Parliament speaker Ali Larijani has said Iran’s poultry farmers warned eight months ago about lack of feed for their chickens, yet the government did nothing to fix the problem.

With the added impact of sanctions, Iran’s economy now faces one of its most serious economic crises since the 1979 revolution and there’s little sign of relief. Last week, the U.S. administration introduced more sanctions, including on Chinese and Iraqi banks doing business in Iran, to further tighten the noose. Two days later, the U.S. Congress followed up by voting in favor of further measures against Iran.

Unless a solution is found, the price that Iran’s economy is paying for intransigence may turn its nuclear-fuel program into a bigger danger to the existence of the regime in Tehran than to the state of Israel. Khamenei’s challenge is to find an answer to this dilemma, without making feathers fly.

(Meir Javedanfar is an Iranian-Israeli Middle East analyst and teaches a contemporary Iranian politics course at the Interdisciplinary Center in Herzliya, Israel. The opinions expressed are his own.)

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First published in Bloomberg.