Beaten by US sanctions, Iran finds a lifeline in its domestic economy

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

“Even if sanctions destroyed Iran’s entire oil exports, the country’s economy could continue to survive,” said Mohsen Tavakol, a sanctions expert at the Atlantic Council.

A strengthened domestic economy gives Iran some leeway before the arrival of the Biden administration, which has said it will lift some sanctions if the US reverts to a 2015 agreement limiting Iran’s nuclear program and if Iran revokes its violations. The country has stepped up nuclear enrichment and earlier this month passed a law restricting access to nuclear inspectors. Iranian Foreign Minister Javad Zarif has called on the United States to honor its previous commitments under the nuclear deal before any negotiations on the country’s return to the agreement take place.

The United States has long used the power of the dollar and access to the global banking transfer system, which it effectively controls, as a tool to achieve foreign policy goals in countries such as North Korea. In Iran, the Trump administration has imposed what is called a campaign of maximum pressure to stifle its economy and force Tehran to renegotiate the 2015 nuclear deal. However, in some areas, the Iranian economy is adapting to be disrupted. part of international trade.

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

“The sanctions were a good boost for us,” said Hassan Oskoui, general manager of Zarsima Nami Rasa, an Iranian beauty care company. The company said its internal concentration allowed it to retain about 450 workers.

Also Iranian home appliance manufacturer Pakshoma Co. took advantage of the departure of much larger South Korean competitors, LG Electronics and Samsung.

He developed the first domestically produced dishwasher, named Josephine, after the American inventor of the Josephine Cochrane machine.

Its sales of dishwashers and washing machines have increased by 40% and 55% in the last two years, allowing the company to hire 600 workers, according to Mehrdad Nikzad, the Iranian manufacturer’s marketing manager.

At the Iran Mall in Tehran, which opened in 2018, foreign brands such as Adidas, Benetton and Mango have been replaced by local brands, many knockoffs of foreign counterparts.

Nimble small and medium-sized companies are the ones leading the growth of Iranian production. About 1,000 such businesses have created or restored 17,000 jobs, the deputy head of the Iranian Organization for Small Industries and Industrial Parks said last week. According to the organization, they represent 92% of Iran’s manufacturing enterprises and 45% of industrial jobs. Iran’s unemployment rate has fallen to 9.5 percent from 12.3 percent in the past decade, according to government statistics.

The Trump administration has used sanctions as a weapon to make changes in Iran, Venezuela and Russia. However, given that these governments refuse to comply with Washington’s demands, the Biden administration must decide whether to extend them.

In recent months, Iran has improved on circumventing US sanctions on its crude oil exports. Most shipping companies and oil buyers have 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 a nuclear pact from the Obama era with Tehran. But Iran has offered strong discounts to attract buyers who feel comfortable around them, traders say. New customers have also appeared for Iranian crude oil, especially as Asian economies, including China, are returning.

US Secretary of State Mike Pompeo said last month that the sanctions were effective, adding that Iran had been deprived of $ 70 billion in oil revenues in the spring of 2018. The Treasury Department declined to comment.

US officials say they believe Tehran is only surviving, stressing limited foreign exchange reserves and a declining exchange rate. They also say they believe Tehran’s statistics are unreliable and that the government is hiding the true extent of the economic damage it is suffering as part of the pressure campaign. However, foreign economists and institutions such as the World Bank and the International Monetary Fund use Iranian statistics as a basis for analyzing the country’s economy.

The Iranian currency has fallen by 85% since the beginning of 2018, while inflation of over 30% has made daily necessities more expensive for Iranians. Demonstrations erupted last year to protest austerity measures, in which hundreds were killed.

The share of Iranians now living below $ 5.50 a day, the World Bank’s poverty line for higher-middle-income economies, has risen to 13 percent in 2019 from 8 percent in 2011, according to the World Bank.

“Increasing employment does not translate into higher incomes,” said Djavad Salehi-Isfahani, a professor of economics at Virginia Tech. “Poverty is rising and I am sure the government is aware of this and is concerned.”

The Covid-19 pandemic sealed Iran’s borders with neighboring Iraq and reduced trade with China, Iran’s two main export destinations. This led to a 25% drop in non-oil exports in the previous fiscal year, according to figures from Iran’s Customs Administration.

Some of Iran’s largest producers, which rely on imported raw materials and do not export, have suffered more difficult times. Iran’s large auto industry, for example, has reduced production from 1.4 million cars in 2017 to 770,000 in 2019, according to the International Motor Vehicle Manufacturers Organization.

But while families in times of crisis are unlikely to break into cars, daily consumption of products has remained constant, said Omid Gholamifar, founder of Sweden-based Serkland Invest, which specializes in investing in Iran. “The general demand is healthy and needs to be covered by someone,” he said.

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

While parts of the Iranian economy have so far withstood the country’s stormy relationship with the United States, many are facing problems ahead. As long as foreign investors avoid Iran, the country’s limited capital and technology-restricted production sector will struggle to grow, economists say.

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

Any efforts to address the cash deficit by printing money will fuel inflation, further exacerbating the pain of Iranian families, according to Adnan Mazaeri, a non-resident colleague at the Peterson Institute for International Economics in Washington.

“Iran can withstand this for perhaps a year longer,” he said. “Pain absorption has limits.”

Write to Sune Engel Rasmussen at [email protected]