Iran has become an exporter’s nightmare

Press, 22 December 1978, Page 12

Iran has become an exporter’s nightmare

By

the Foreign Staff

of the “Financial Times,”

London.

The Iranian crisis is the most important political and economic event in the Middle East since the 1973 Arab-Israeli war and the consequent rise of the price of oil. Every effort by the Shah to stabilise his position by repression or conciliation has so far failed. At the beginning of November he installed a military Government to restore order in the street and end the crippling strikes in the oilfields and elsewhere. In this it has signally failed. Riots have continued, culminating in huge but peaceful demonstrations by much of Teheran’s population of 4M. Along with the C.1.A., recently criticised by President Carter for its failure to foresee events in Iran, governments, banks, companies and most newspapers had all clearly under-estimated the depth of the unpopularity of the Shah’s Government for many the business eldorado of three years ago is turning into a nightmare. Attempts by the Shah to bring the more moderate opposition leader into a coalition Government have collapsed. But the moment when the departure of the Shah would have resolved the crisis may well have passed. The attack appears have broadened into a general assault on the Iranian political elite as a whole, rather than the Pahlavi dynasty alone. No rapid political surgery is likely to produce a stable government in Iran capable of formulating long-term economic policies. The numerically massive but inchoate opposition is united primarily by its dislike of the status quo. Western interests involved in Iran are therefore faced with a

crisis not only far bigger than they had foreseen as recently as six months ago, but one to which there is no end in sight. Together with Saudi Arabia, Iran has provided the largest developing market in the Middle East. The Shah spoke of his country becoming the fifth industrial power in the world by the end of the century. Big civil and military projects, including such items as 20 nuclear power stations, were planned for an economy lacking the necessary infrastructure and skilled manpower. The current crisis clearly required a totally new list of economic priorities. Even taking into account underspending in some sectors, this year’s budget target of $59.2bn required heavy borrowing at home and abroad. Since then there has been a pay increase for 900,000 civil servants costing some s2bn. Some 61,000 oil workers have received a rise of at least 22.5 per cent, though strikes in the oilfields may well bring oil revenue down to sl7bn this year. The Government may well have to let foreign exchange reserves fal] below the slobn mark. In the light of the shortfall in revenue, the Government will inevitably cut back on the more ambitious projects. But the chaos in Teheran, the rapid changes among senior government officials, strikes in the banks and ministries, and the concentration on day-to-day survival by the Shah and his Government, mean that there is little by way of long-term economic planning going on.

Progress payments from Iran have always been sub-

ject to long delays, so that it will be some time before it becomes clear how seriously companies will be hit. Bell Helicopter Textron has for the moment stopped work on its helicopter coproduction deal, costing a total of $575M, because advance funding requirements have not been met. The Italian State-controlled engineering group Condotte d’Acqua, involved in the construction of a Sl.sbn harbour project at Bandar Abbas, is reported to be owed some SI9OM.

Companies facing delayed payments are for the moment intent on avoiding making too vociferous complaints. They are aware that the delays are frequently the consequence of the chaos in the Iranian banking system. With many banks closed and others destroyed or damaged in the riots, contractors on the spot are also the victims of short-term cash difficulties.

What is equally worrying for such companies during the next few months is the growing hostility towards the 100,000 Americans, Eur-

peans, and Japanese in Iran. The common Iranian belief that the Shah’s future is more closely linked to the support of America and Britain than in fact it is means that they face a rising tide of xenophobia. Their high salaries have long created ill-feeling. The 45,000 United States expatriates are the most vulnerable. Besides them, there are some 13.000 West Germans, 10,000 British. 7500 French and 7000 Japanese in the country. Physical attacks on foreigners have been few, but the removal of foreign experts has frequently been a part of strikers’ demands.

The American arms contracts, on which many of the expatriates are working, could well fall victim to any major cutbacks. Since President Nixon promised the Shah any arms he could buy in 1972, Iranian orders for highly sophisticated equipment have accumulated. There are some sl2bn. worth of arms in the pipeline. With a military Government in power, the planning and budget officials may feel constrained to avoid cutting too deeply into defence spending. The loyalty of the army is clearly crucial to the Shah’s survival. This could put the onus ,of cuts on the Navy which was due for a four-fold expansion. A reduction of naval expenditure will hit West Germany. In the first half of this year most of the DM 3.1 billion (about $1.5 billion) West German exports to Iran consisted of machinery, machine tools, process plant and vehicles. But last year, Mr Hans-Dietrich Genscher, the German Foreign Minister, ended Bonn’s self-im-posed limitations on selling arms to Iran by declaring that the country was no longer “an area of tension.” Howaldts - werke - Deutsche

Werft of Kiel subsequently won a DM I.2bn contract for six diesel electric submarines, considered crucial for maintaining 1500 jobs at the Kiel naval yard. A further bit order for the supply of other warships, including frigates, minesweepers, and fast patrol boats on which there had been negotiations is now unlikely to be signed bv Iran.

Despite Iran being West Germany’s single largest oil supplier in 1978, the Germans had a trade surplus of DM 500 M with Iran in. the first half of this year. Kraftwerk Union has 3000 expatriate staff building two nuclear power stations and had hopes of a further order.

It was to have been for four such power stations, worth DM 12bn to DM 13bn. The company’s chairman, while saying he still expects the deal to go ahead, has warned of serious consequences for Kraftwerk Union if it did not. Given that the power station programme is regarded in Iran as the most expensive white elephant ordered in the

years since 1973, a cancellation is very much on the cards.

Britain is less immediately vulnerable than the United States to the cancellation of military projects, if only because at least 800 of the 2200 Chieftain tanks have already been sent to Iran. So far the 1000 special Shir Iran version of the Chieftains are being delivered without problems. Neither France nor Japan have benefited very much from Iranian military expenditure. But, like the West Germans, French contractors will probably have to be satisfied with only two nuclear power stations. The Teheran underground in which French engineers were slso involved is likely to be de* layed.

The Japanese have expressed worry about the future of the’ petrochemical plant which Mitsui is bui.ding at Bandar Shapur for which the company is looking for backing from the Japanese Government. The prospects for the southern oil refinery on which 3500 Japanese are working look distinctly better.

All the companies which have contracts in Iran have every reason to be worried. Even without cancellations nobody looks forward to prolonged negotiations on escalation clauses with an unsympathetic Government The economic policy of the opposition is unclear but ominous. The effectiveness of Ayatollah Khomeini’s call for a strike in the oilfields shows his influence among the Iranian workers. He has already attacked the United States military contracts as being without benefit and at the beginning of this month simply stated that "all these contracts which are against the national interest will not be acknowledged.”