IRAN TAKES THE HEAT FOR RAISING GAS PRICES

S E C R E T SECTION 01 OF 02 IRAN RPO DUBAI 000037

SIPDIS

SIPDIS

E.O. 12958: DECL: 5/23/2017
TAGS: PGOV ECON EPET IR
SUBJECT: IRAN TAKES THE HEAT FOR RAISING GAS PRICES

REF: A. RPO DUBAI 0015, B. RPO DUBAI 0033

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CLASSIFIED BY: Jillian Burns, Director, Iran Regional Presence
Office - Dubai, Department of State.
REASON: 1.4 (d)

1.(S) Summary: As of May 22, the price of gasoline in Iran was
increased 25% to roughly 10 cents per liter, and gasoline
purchases will only be allowed with "smart cards." Iran's
Interior Minister Pour Mohammadi said that gasoline rationing
would begin "early June," based on a quota system that will be
announced by the cabinet "within days." However, one contact
who claimed to have worked on the smart card project said
recently that the country lacks the communication structure to
fully implement a fuel-card system. The government has been
threatening to decrease gasoline subsidies for years, which
constitutes a huge drain on the annual budget, but until now
failed to take this unpopular step. Some contacts opine that
President Ahmadi-Nejad made the tough decision in the face of a
feared embargo against refined gasoline imports. In the view of
one Iranian expat economist, cutting off Iran's gasoline supply
would be the only way to "get to the government," but at the
same time, he was concerned over repercussions for the Iranian
people. He claimed that the government is actually "benefiting"
from the current atmosphere of sanctions and international
pressure and that it thrives under "crisis conditions." The
people are already bearing the brunt of the burden, he said.
While we agree a cut-off of gasoline would have an immediate
impact on the Iranian government, we would argue that it is
better for the increasingly unpopular Ahmadi-Nejad government to
be seen as the cause of increasing prices and decreasing
supplies. End Summary

Gasoline prices rise and rationing on tap
--------------

2.(S) In a joint statement May 22, the Minister of Oil and the
Minister Interior announced that gasoline prices rose 2 cents
per liter, or roughly 25% to 10 cents per liter. In addition,
Iranian must now use a "smart card" to purchase gasoline. They
said that "all filling stations have been equipped with smart
card systems and more than 90 percent of stations have become
operational." Pour Mohammadi told reporters that once all smart
cards were distributed - within 10-15 days - "rationing would
take affect." While the cabinet has yet to announce the
rationing system, the Interior Minister said "for the current
year, two quotas have been determined for every five months."
Presumably, the rationing would be controlled by the smart card,
but according to an IRPO contact - who claimed to have been the
consultant for the project - the country still lacks the
communication infrastructure to take full advantage of a
fuel-card system.

Why ration now?
--------------

3.(S) In a discussion with IRPoff, one Iranian expat economist
said that the Iranian government has been "threatening to
implement some sort of gasoline rationing system for years."
This had presumably not been done, he said, because domestically
it is very unpopular, particularly for a president like
Ahmadi-Nejad who sells himself as a populist. The Iranian
government's current efforts to reduce gasoline consumption are
probably in part to protect itself from a possible boycott and
in part to decrease the money spent on subsidies (ref A).
Depending on the rationing scheme set to be announced in the
next 1-2 weeks, lowering fuel consumption could lessen the
impact that any future gasoline boycott would have on the
Iranian economy. Current estimates suggest that Iran imports
roughly 40% of its gasoline needs. (Note: Further complicating
the situation is the reportedly high levels of gasoline then
smuggled out of the country. The consultant for the smart card
project claimed to IRPO Director that his research indicated
that two thirds of gasoline purchased by the gasoline stations
he tracked ended up somewhere else other than the gas pump. He
said that when he presented his research to the Ministry of Oil,
they asked him not to publicize these findings. He claimed that
the IRGC and others are likely involved in smuggling. End note)

An advocate for gasoline embargo
--------------

4.(S) The Iranian economist told IRPoff that President
Ahmadi-Nejad only thinks about the economy when he is "forced
to" under pressure, and that economic liberalization and growth
are not a goal of the current administration. He repeated the
complaints of other contacts that after the new administration

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sidelined experts in the ministries, it lost the "capacity" to
shape long-term economic policies. Instead, he said,
decision-making is reactionary. The government tends to operate
in crisis mode, and it applies short-term band-aids to long-term
problems. He predicted the government would continue to use oil
dollars to bankroll short-sighted economic policies that are
appealing to the public but not good for the long-term economic
health of the country -- as long as it is "allowed to do so."
The economist opined that oil dollars "cushion" the impact of
the international sanctions for the government and that the
consumers pay the increased costs associated with doing business
with Iran (ref B).

5.(S) The economist asserted - though with great hesitancy -
that the only way to "hurt" the government would be to impose a
gasoline embargo on Iran. At the same time, he recognized that
such an act would be very detrimental to the Iranian people. He
also predicted that critics of the West inside Iran would use
such a move as "proof" that the West was lying when it claimed
that its sanctions were designed not to hurt the Iranian people.
Nonetheless, the economist argued for an embargo because he
believed that the financial pressure against Iran to date
actually benefited the current government and its policy of
isolationism. He said the only way to "force" the reactionary,
crisis-driven Ahmadi-Nejad government to change its behavior
would be to put it in a position where it has no choice.

6.(S) Comment: It is clear that a sudden cut-off of gasoline
imports to Iran - if enforceable - would cause an immediate
effect in a country that is importing almost half of its
gasoline needs. However, it may not yield the desired effects.
We have noted that contacts of all ages are increasingly blaming
their country's political and economic difficulties more on
their own government and less on external pressures. If true, a
gasoline boycott that caused immediate pain among ordinary
people could reverse this trend. It is preferable that the
apparently increasingly unpopular Ahmadi-Nejad government
directly takes the hit for higher prices and reduced supply of
gasoline in Iran, not the international community.
BURNS