LONDON // Iran's state finances have come under unprecedented pressure and the resilience of ordinary people is being tested by soaring inflation as oil income plummets because of tightening western sanctions and sharply falling oil prices.
Tough financial measures imposed by Washington and Brussels have made it ever more difficult to pay for and ship oil from Iran. Its oil output has sunk to the lowest in 20 years, cutting revenue that is vital to fund a sprawling state apparatus.
Already down by more than a quarter, or about 600,000 barrels per day (bpd), from rates of 2.2 million bpd last year, shipments of crude oil from Iran are expected to drop further when a European Union oil embargo takes effect on July 1.
Tehran is already estimated to have lost more than US$10 billion (Dh36.7bn) in oil revenues this year.
Causing even more pain, oil prices fell below $100 a barrel last week to a 16-month low amid a darkening outlook for economies in Europe, the United States and China.
"This is an act of economic warfare. The sanctions are having a big effect in cumulative terms: Iran is being locked out of the global financial system," said Mehdi Varzi, a former official at the National Iranian Oil Co.
"It does appear that Iran is more amenable to negotiations now than it was a year ago. The West should take advantage of this momentary situation to offer more meaningful concessions - a road map to where this will all end," said Mr Varzi, who runs Varzi Energy, an energy consultancy in Britain.
Diplomats and analysts said Iran might offer the International Atomic Energy Agency (IAEA), increased cooperation as a bargaining chip in its negotiations with world powers, which resumed in April after a 15-month hiatus and are to continue in Moscow on June 18 and 19.
Basic mathematics dictate that the lower Iran's oil exports, the higher the oil price it will need to stay in the black.
According to the International Monetary Fund, Iran needs oil at $117 a barrel to balance its budget, set at $462 billion. President Mahmoud Ahmadinejad has said the budget was designed to decrease Iran's dependence on oil revenues.
Iranian oil officials have acknowledged that sanctions have reduced exports but said the country had long experience of finding ways around declining exports, and a drop in oil revenue is not the end of the world.
"Personally, I will be very happy if the dependence of the economy on oil revenue is decreased," said an Iranian oil official, who requested anonymity. "We can use the sanctions as an opportunity."
International sanctions have been a fact of life in Iran for decades and Tehran is adept at working round them. But there are growing signs that ordinary people are feeling much more pain from them than in the past as inflation has soared in the past six months.
"I was struck by the high prices when I went to the grocery store yesterday," said Ahmad, 54, who owns a small fabric shop in Tehran's bazaar.
He said the price of apples had more than doubled in the past month and strawberries had almost tripled to 110,000 rials per kilo, or more than Dh32 at market rates.
"Little by little, even fruit is becoming a luxury."
Inflation is officially running at about 20 per cent, although economists said prices of the goods most Iranians worry about are rising much faster.
The country is undergoing what the government has called major economic surgery, in the form of cuts to the multibillion dollar subsidies which for years have held down the price of essential goods such as fuel and food.
On the export front, several big European companies have halted purchases of Iranian oil and others are winding down business with the country.
Iran had hoped that energy-hungry China and India, both major customers, would mop up much of the surplus oil left by European clients. That might not be the case.
"Our impression is that China and India have not been as helpful as the Iranians expected," said a western oil executive, who declined to be identified.
"But it's very difficult to get a clear picture of how much oil is moving because they are deliberately cutting off communication."
Since early April, Tehran has been hiding the destination of its oil sales by switching off tracking systems on its tankers.
But barrels counted upon arrival in Iran's top four customers - China, India, Japan and South Korea - show a 20 per cent decrease this year, according to government data and industry sources.
That translates into a loss in revenue of roughly $35.7 million a day, or $4.3 billion in the first four months of this year, based on current Brent crude prices.
Iranian crude is sold at a discount of several dollars per barrel to benchmark dated Brent, so the actual losses are likely to be even higher.
Some relief has come from soaring prices earlier this year as Brent so far in 2012 is averaging $116 a barrel, up from last year's $110, which was a record high. But reduced output and falling prices are making things worse very quickly.
From July 1, Morgan Stanley expects Iranian exports to fall by a further 150,000 bpd while the International Energy Agency has said they could almost halve by 1 million bpd.
That is putting Iran on course for a massive drop in oil revenues, while those of its rivals from the Organisation of the Petroleum Exporting Countries (Opec) will hit a record high.
According to the London-based Centre for Global Energy Studies, the strong oil price has put Opec on a path to earn $911 billion from oil exports this year.
Iran - Opec's second biggest producer - could see a 39 per cent decrease this year to $44 billion, while Saudi Arabia is expected to see a $3 billion increase to $294 billion.
Belt tightening may be needed for Iran to withstand lower oil prices and exports after the EU sanctions take full effect.
"The only way around it will be for Iran to cut the budget, which has a lot of fat," said Mr Varzi.
Anxiety and work stress major factors
Anxiety, work stress and social isolation are all factors in the recogised rise in mental health problems.
A study UAE Ministry of Health researchers published in the summer also cited struggles with weight and illnesses as major contributors.
Its authors analysed a dozen separate UAE studies between 2007 and 2017. Prevalence was often higher in university students, women and in people on low incomes.
One showed 28 per cent of female students at a Dubai university reported symptoms linked to depression. Another in Al Ain found 22.2 per cent of students had depressive symptoms - five times the global average.
It said the country has made strides to address mental health problems but said: “Our review highlights the overall prevalence of depressive symptoms and depression, which may long have been overlooked."
Prof Samir Al Adawi, of the department of behavioural medicine at Sultan Qaboos University in Oman, who was not involved in the study but is a recognised expert in the Gulf, said how mental health is discussed varies significantly between cultures and nationalities.
“The problem we have in the Gulf is the cross-cultural differences and how people articulate emotional distress," said Prof Al Adawi.
“Someone will say that I have physical complaints rather than emotional complaints. This is the major problem with any discussion around depression."
Daniel Bardsley
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
