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
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 --