Ahmadinejad's economic savvy

From the White House to London's House of Commons and beyond...few Westerners have anything nice to say about Mahmoud Ahmadinejad.

But there's one group that has glowing words of praise for Iran's President - and it's based not in Tehran, but in Washington.

The International Monetary Fund's latest report paints a pretty picture of Iran's economy.

It says growth has hit 3.2%, and will accelerate still further. Inflation has dropped from 25% to 12% in just two years.

And Tehran has managed to do what every major oil exporter can only dream of accomplishing: It's slashed subsidies on gas to recoup 60 billion dollars in annual revenue. That one-sixth of Iran's entire GDP.

Why is this happening? And how can it be despite years of economic sanctions?

What in the world is going on?

Some say the IMF's numbers can't be right.

But we have no reason to doubt their work. The fund reasserted this week that its projections were independent of the government.

The real story here is that Iran has actually begun implementing some economic reforms. For decades now, Iranian leaders have tried to wean its people off cheap oil - oil that is subsidized by the government.

Cheap oil that has no connection to real market prices is not sustainable. Iran knows it, and so does every country from Saudi Arabia to Venezuela. But in the same way that any talk of tax increases here in America is considered heresy, people in oil-rich countries believe as an article of faith that they deserve cheap oil.

So how did Iran finally cut out the freebies?

The backstory is a complex game of chess between Ahmadinejad and someone much more powerful - the Supreme Leader Ayatollah Khamenei.

One theory goes like this: The Ayatollah thought cutting subsidies would make Ahmadinejad deeply unpopular. An ensuing revolt would then remove the one man who's come to challenge the Supreme Leader's power.

Another theory is that Ahmadinejad felt confident enough to go ahead with the reforms because he's crushed the opposition Green Movement.

Either way, he's played a smart hand. He's giving back half of the 60 billion dollars in savings directly to the people in monthly deposits. So every Iranian, man woman and child, is eligible to receive the equivalent of 40 dollars a month.

That kind of money won't make any difference to Tehran's upper classes. But that's not Ahmadinejad's constituency.

On the other hand if you're poor, if you have many children, and if you make sure the whole family signs up for the deposits, you'll probably be saying "Thanks, Mr. President".

The key thing to note here is that President Ahmadinejad had no choice, and neither did the Ayatollah.

Iran could not afford the subsidies anymore. Its economy is highly dysfunctional with many massive distortions and subsidies. And Washington's recent targeted sanctions are beginning to bite.

It is now harder than ever before for Iran to do business with the world. Most of the major international traders of refined petroleum have stopped dealing with Iran. Tehran now has to rely on much costlier overland shipments for its exports.

And it is now almost impossible to conduct dollar-denominated transactions with Iran. So we were left with the bizarre case last month of China resorting to the barter system to pay Iran for 20 billion dollars worth of oil.

The IMF has a point. Iran is implementing some needed reforms and as a result its economy is doing better. The irony is that it's happening - in some part - because of our sanctions. Talk about unintended consequences.