ZNY CCCCC ZZH
P 021411Z NOV 06
FM IRAN RPO DUBAI
TO RUEHC/SECSTATE WASHDC
INFO RUCNIRA/IRAN COLLECTIVE
RUEHDIR/IRAN RPO DUBAI
RHEFDIA/DIA WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEHAAA/NSC WASHINGTON DC
RUEHDE/AMCONSUL DUBAI
RUEHAD/AMEMBASSY ABU DHABI
RUEHAD/USDAO ABU DHABI TC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

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 
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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 
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