Battered by US sanctions, Iran finds a lifeline in the domestic economy

Iran’s central bank governor said in December that the country’s economy grew 1.3% between March and mid-September, driven largely by domestic production.

“Even if sanctions cut off all of Iran’s oil exports, the country’s economy could survive,” said Mohsen Tavakol, a sanctions expert at the Atlantic Council.

A strengthened domestic economy gives Iran some leeway ahead of the arrival of the Biden administration, which has said it would lift some sanctions if the US returns to a 2015 deal limiting Iran’s nuclear program and if Iran’s violations of the agreement. The country has stepped up nuclear enrichment and earlier this month passed a law restricting access to nuclear inspectors. Iranian Secretary of State Javad Zarif has urged the US to live up to its previous commitments under the nuclear deal before negotiations can begin on the country’s return to the deal.

The US has long used the dollar’s power and access to the global bank transfer system, which it effectively controls, as a tool to achieve foreign policy goals in countries like North Korea. In Iran, the Trump administration has imposed a so-called maximum pressure campaign to stifle the economy and force Tehran to renegotiate the 2015 nuclear deal. In some quarters, however, the Iranian economy is adapting to be cut off from much of it. of international trade.

For example, after US sanctions prompted French cosmetics company L’Oréal to end takeover talks with Zarsima Nami Rasa in 2018, the Iranian company launched its own product line that has since replaced the brand of its former suitor in many of Tehran’s hair salons.

“Sanctions were the right push for us,” said Hassan Oskoui, president of Zarsima Nami Rasa, an Iranian beauty care company. The company said it was able to retain approximately 450 employees thanks to its domestic focus.

Iranian home appliance manufacturer Pakshoma Co. also benefited from the departure of much larger South Korean competitors, LG Electronics and Samsung.

It developed the first domestically produced dishwasher, called the Josephine, after the American inventor of the machine Josephine Cochrane.

Sales of dishwashers and washing machines are up 40% and 55% in the last two years, allowing the company to hire 600 employees, said Mehrdad Nikzad, the Iranian manufacturer’s marketing manager.

In Tehran’s Iran Mall, which opened in 2018, foreign brands such as Adidas, Benetton and Mango have been replaced with local brands, many knock-offs from foreign counterparts.

Agile small and medium-sized companies are driving the growth of Iranian production. About 1,000 such companies have created or restored 17,000 jobs, the deputy head of Iran’s organization for small industries and industrial parks told state news agency IRNA last week. According to the organization, they account for 92% of manufacturing companies in Iran and 45% of industrial jobs. According to government statistics, the unemployment rate in Iran has fallen from 12.3% to 9.5% over the past decade.

The Trump administration has used sanctions as a weapon to bring about change in Iran, Venezuela and Russia. However, because those governments refuse to give in to Washington’s demands, the Biden administration must decide whether to renew them.

In recent months, Iran has gotten better at dodging US sanctions on its crude oil exports. Most shipping companies and oil buyers stopped doing business with Iran after Washington imposed an embargo on Iran’s crude oil shipments following the Trump administration’s 2018 decision to withdraw from an Obama-era nuclear pact with Tehran. But Iran is offering steep discounts to lure buyers who are comfortable walking by, traders say. New customers have also emerged for Iranian crude oil, especially as Asian economies, including China, are recovering.

US Secretary of State Mike Pompeo said last month that the sanctions are effective, adding that Iran has withheld $ 70 billion in oil revenues since the spring of 2018. The Treasury Department declined to comment.

US officials have said they believe Tehran is barely surviving, pointing to scarce foreign exchange reserves and a plummeting exchange rate. They also say they view Tehran’s statistics as unreliable and that the government is hiding the true extent of the economic damage it is suffering from the pressure campaign. However, foreign economists and institutions such as the World Bank and the International Monetary Fund use Iranian statistics as the basis for analyzing the country’s economy.

Iran’s currency has fallen 85% since early 2018, while inflation of more than 30% has made daily necessities for Iranians more expensive. Last year, demonstrations broke out against austerity measures, killing hundreds of people.

The proportion of the Iranian population now living below $ 5.50 a day, the World Bank’s poverty line for upper-middle-income economies, has increased from 8% in 2011 to 13% in 2019, according to the World Bank.

“Rising employment does not translate into higher income,” said Djavad Salehi-Isfahani, an economics professor at Virginia Tech. “Poverty is on the rise, and I am sure the government is aware of this and is concerned.”

The Covid-19 pandemic has sealed Iran’s borders with neighboring Iraq and disrupted trade with China, Iran’s two main export destinations. That has resulted in a 25% decline in non-oil exports from the previous fiscal year, according to figures from Iranian customs.

Some of Iran’s larger manufacturers, who rely on imported raw materials and don’t export, have made it more difficult. Iran’s major auto industry, for example, has scaled production from 1.4 million cars in 2017 to 770,000 in 2019, according to the International Organization of Motor Vehicle Manufacturers.

But while families are unlikely to spend on cars in times of crisis, consumption of everyday products has remained constant, said Omid Gholamifar, founder of Sweden-based Serkland Invest, which specializes in investing in Iran. “The overall question is healthy and needs to be filled in by someone,” he said.

Mr. Gholamifar has invested in four Iranian consumer goods companies – a pharmaceutical company, a food retailer, an industrial packaging company and a home care company. All have increased their sales volume by 25% to 30% per year since 2018, he said.

While parts of the Iranian economy are weathering the country’s stormy relationship with the US so far, many face problems. As long as foreign investors shun Iran, the country’s capital and technology limited manufacturing sector will struggle to grow, economists say.

“In the last three to four years, infrastructure and technology have not been updated or modernized as it should have been,” said Mohammad Taheri, editor-in-chief of Iranian economic weekly Tejarat Farda. “If the supply of cheap fuel to factories is stopped, and if they cannot restore the low efficiency that now controls the industry, this situation cannot last.”

According to Adnan Mazaeri, a non-resident of the Peterson Institute for International Economics in Washington, any attempt to address the cash shortage by printing money will fuel inflation and exacerbate the pain of Iranian families.

“Iran can handle this for maybe another year,” he said. “Human pain absorption also has limits.”

Write to Sune Engel Rasmussen at [email protected]