IRPO: WESTERN BANK REP CLAIMS AHMADINEJAD DIRECTING

C O N F I D E N T I A L SECTION 01 OF 02 IRAN RPO DUBAI 000010 SIPDIS SIPDIS STATE FOR NEA/IR, LONDON FOR GAYLE, BAKU FOR HAUGEN, BERLIN FOR PAETZOLD, TREASURY FOR HECHT E.O. 12958: DECL: 11/2/2016 TAGS: PGOV PREL ECON EFIN EINV IR SUBJECT: IRPO: WESTERN BANK REP CLAIMS AHMADINEJAD DIRECTING ECONOMIC POLICY (C-NE6-00566) REF: CARACAS 3257 RPO DUBAI 00000010 001.3 OF 002 CLASSIFIED BY: JILLIAN BURNS, DIRECTOR, IRAN REGIONAL PRESENCE OFFICE - DUBAI, DEPARTMENT OF STATE. REASON: 1.4 (D) 1.(C) SUMMARY. IRPO AND CONGEN POL/ECONOFFS MET WITH A DUBAI-BASED REPRESENTATIVE OF A WESTERN BANK OCTOBER 30 TO DISCUSS IRANIAN ECONOMIC ISSUES. ACCORDING TO THE BANKING REP, THE SUPREME LEADER HAS ALLOWED PRESIDENT AHMADINEJAD TO TAKE THE FOREFRONT IN DIRECTING DOMESTIC ECONOMIC POLICY. HOWEVER, ECONOMIC MISMANAGEMENT AND A LACK OF A CLEAR MACRO-ECONOMIC POLICY HAVE RESULTED IN AN UNSUSTAINABLE STATE OF AFFAIRS, DESPITE CURRENT ROSY INDICATORS (DUE TO HIGH OIL PRICES). THE REP MAINTAINED THAT USG ACTION AGAINST IRANIAN BANK SADERAT HAS NOT HAD A NOTICEABLE IMPACT ON THE BANK ITSELF OR IRANIAN POLICY. NONETHELESS, THERE ARE RUMORS IN THE BANKING COMMUNITY THAT IRAN IS ACTIVELY SEEKING REGIONAL CENTRAL BANKS TO HOLD ITS RESERVES. END SUMMARY. ECONOMIC POWER IN IRAN -------------- 2.(C) IRPO AND CONGEN POL/ECONOFFS MET WITH A DUBAI-BASED REPRESENTATIVE OF A WESTERN BANK OCTOBER 30 TO DISCUSS IRANIAN AND REGIONAL ECONOMIC CONDITIONS. (NOTE: THE OFFICIAL, WHO CLOSELY FOLLOWS IRAN, ASKED TO SPEAK OFF THE RECORD. ENDNOTE) ACCORDING TO THE BANK OFFICIAL, THE SUPREME LEADER HAS ALLOWED PRESIDENT AHMADINEJAD TO TAKE THE FOREFRONT IN DIRECTING DOMESTIC ECONOMIC POLICY. WESTERNERS WHO INTERACT PRIMARILY WITH THE IRANIAN INTELLECTUAL ELITE AND REFORMISTS OFTEN LOSE SIGHT OF THE FACT THAT THE POOR, RURAL POPULATION ELECTED AHMADINEJAD BASED MOSTLY ON HIS PROMISES OF ECONOMIC REFORM. THE PRESIDENT HAS IN FACT MADE GOOD ON HIS CAMPAIGN PROMISES AND CONTINUES TO REACH OUT TO THE MOST RURAL AREAS (THROUGH POPULIST MEASURES SUCH AS THE GIFTING OF REFRIGERATORS, ETC). ECONOMIC MISMANAGEMENT -------------- 3.(C) DESPITE CURRENT ROSY INDICATORS IN IRAN (INCLUDING HIGH GDP GROWTH AND DECLINING UNEMPLOYMENT),ECONOMIC MISMANAGEMENT AND A LACK OF A CLEAR MACRO-ECONOMIC POLICY HAVE RESULTED IN AN UNSUSTAINABLE STATE OF AFFAIRS, ACCORDING TO THE BANKING REPRESENTATIVE. IRAN'S MACRO-ECONOMIC POLICY HAS SUFFERED UNDER AHMADINEJAD, THE URBAN POPULATION IS WORSE OFF, AND THE CENTRAL �A;BANK OF IRAN (CBI) HAS BEEN STRIPPED OF MANY OF ITS TOOLS TO INFLUENCE ECONOMIC CONDITIONS (E.G. SETTING OF INTEREST RATES). CURRENTLY, THE OFFICIAL NOTED, REAL INTEREST RATES ARE NEGATIVE, AND INCREASED OIL REVENUE AND GOVERNMENT EXPENDITURES HAVE RESULTED IN FIVE YEAR-HIGH LIQUIDITY RATES (ROUGHLY 36 PERCENT). ¶4. (C) THE OFFICIAL ADDED THAT OVERALL BANK SAVINGS ARE UP, WHICH SOME ATTRIBUTE TO A POSITIVE CHANGE IN THE "SAVINGS CULTURE." IN REALITY, THESE SAVINGS ARE NOT COMING FROM THE POPULATION BUT FROM THE CBI. THE INCREASED CASH FLOW IS UNSUSTAINABLE, AS THE GOVERNMENT IS DIPPING INTO ITS RESERVES AND THE OIL STABILIZATION FUND TO BANKROLL ITS POPULIST EXPENDITURES. IF SPENDING REMAINS UNCHECKED, ADDITIONAL PRESSURE WILL BE PUT ON THE INFLATION RATE. THE CBI IS INCREASING SAVINGS AS ONE OF ITS ONLY REMAINING TOOLS TO REIGN IN LIQUIDITY AND OFFSET INFLATION. IRAN'S FOREIGN RESERVES -------------- 5.(C) THE DUBAI BANK CONTACT SAID THAT ACCORDING TO THE BANKING COMMUNITY RUMOR MILL, THE CBI RECENTLY BEGAN APPROACHING OTHER CENTRAL BANKS IN THE REGION ABOUT HOLDING SOME OF ITS RESERVES. HOWEVER, IT WAS NOT KNOWN IF IT FOUND ANY TAKERS. IMPACT OF US ACTION AGAINST SADERAT -------------- 6.(C) THE DUBAI-BASED BANKING REPRESENTATIVE OPINED THAT USG ACTION TAKEN AGAINST IRAN'S BANK SADERAT HAS NOT HAD A NOTICEABLE IMPACT. THE BANK REP SAID THAT ADDITIONAL MEASURES AGAINST IRANIAN BANKS WOULD MOST LIKELY SOLIDIFY DUBAI'S RELATIONSHIP WITH IRAN AND INCREASE EUROPEAN, PARTICULARLY GERMAN (ALREADY VERY ACTIVE),PARTICIPATION IN THE IRANIAN ECONOMY. POL/ECONOFFS AND THE BANKING REP DISCUSSED THE FACT THAT SINCE GULF COUNTRIES PEG THEIR CURRENCIES TO THE DOLLAR, MUCH OF THE REGIONAL TRADE AND INVESTMENT IS DOLLARIZED. THE OFFICIAL CLAIMED THAT FURTHER ACTION TO LIMIT U-TURN TRANSACTIONS WOULD FORCE IRAN TO LOOK OUTSIDE THE REGION AND TRADE MORE EXCLUSIVELY WITH EUROPEAN FIRMS. WITH ITS EXTENSIVE B T #0010 N -- END OF ERRORED MESSAGE -- RPO DUBAI 00000010 002.3 OF 002 EUROPEAN BANKING NETWORK, DUBAI WOULD BE A NATURAL MIDDLE GROUND TO FACILITATE SUCH TRADE. THE REPRESENTATIVE PREDICTED THAT EVENTUALLY, IRAN (AND TO SOME EXTENT DUBAI) WOULD SWITCH ITS HOLDING RESERVES INTO EUROS, WHICH COULD IN TURN WEAKEN THE DOLLAR. (NOTE: THE CENTRAL BANK OF THE UAE HAS BEEN DISCUSSING MOVING SOME PERCENTAGE OF ITS RESERVES INTO EUROS FOR MONTHS NOW, BUT HAS SHOWN LITTLE INCLINATION TO MOVE QUICKLY. ENDNOTE) IRAN REACHING OUT -------------- 7.(C) WHEN THE BANKING REPRESENTATIVE WAS ASKED IF IRAN WAS NOTICEABLE INCREASING ITS EFFORTS TO SOLIDIFY EXTERNAL RELATIONS, THE REP NOTED THAT YES, IRAN IS INDEED ATTEMPTING TO CULTIVATE GREATER EXTERNAL LINKS BOTH WITH ITS IMMEDIATE NEIGHBORS AND THROUGHOUT THE WORLD COMMUNITY. ACCORDING TO THE BANK REP, VENEZUELA HAS REPORTEDLY DIVERTED SOME OF ITS OIL EXPORTS FROM THE US TO IRAN IN TRADE FOR REFRIGERATORS. (NOTE: IRPOOFF COULD NOT FIND ADDITIONAL INFORMATION TO CORROBORATE THIS CLAIM OF TRADED REFRIGERATORS, HOWEVER IRAN HAS 61 KNOWN DEALS WITH VENEZUELA VALUED AT USD 1.8 BILLION (REFTEL). ENDNOTE) 8.(C) COMMENT: SOME CONTACTS HAVE SAID THAT INITIALLY AHMADINEJAD WAS NOT ALLOWED TO INSTALL HIS OWN PEOPLE INTO KEY ECONOMIC POSITIONS, TO MINIMIZE HIS INFLUENCE ON MACROECONOMIC POLICY. WHETHER OR NOT AHMADINEJAD IS ASSUMING GREATER CONTROL OF MACROECONOMIC POLICY IS OPEN TO DEBATE. ONE INTERESTING INDICATOR IS THAT DESPITE LONGSTANDING RUMORS THAT CENTRAL BANK GOVERNOR EBRAHIM SHEIBANI - A CARRYOVER FROM THE KHATAMI ADMINISTRATION - WOULD BE REPLACED, TO DATE HE HAS HELD ON TO HIS POSITION. END COMMENT. BURNS B T #0010 N -- END OF ERRORED MESSAGE --