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

The president of Iran’s central bank said in December that the country’s economy grew 1.3% from March to mid-September, largely driven by domestic industry.

“Even if sanctions cut all Iranian oil exports, the country’s economy can continue to survive,” said Mohsen Tavakol, sanctions expert at the Atlantic Council.

A strengthened domestic economy gives Iran some leeway before the arrival of the Biden government, which said it would lift some sanctions if the U.S. returns to a 2015 agreement that limits Iran’s nuclear program and if Iran reverses its violations of the agreement. The country increased nuclear enrichment and earlier this month passed a law that limits access to nuclear inspectors. Iranian Foreign Minister Javad Zarif has asked the United States to fulfill its previous commitments under the nuclear deal before any negotiations on the country’s return to the deal can take place.

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

For example, after U.S. sanctions prompted French cosmetic company L’Oréal in 2018 to abandon acquisition negotiations with Zarsima Nami Rasa, the Iranian company launched its own product line that replaced its former suitor’s brand in many of Tehran’s beauty salons.

“The sanctions were the right push for us,” said Hassan Oskoui, managing director of Zarsima Nami Rasa, an Iranian beauty care company. The company said its domestic focus allowed it to retain about 450 workers.

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

She developed the first domestically produced dishwasher, named Josephine, in honor of the American inventor of the machine Josephine Cochrane.

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

At Iran Mall in Tehran, opened in 2018, foreign brands like Adidas, Benetton and Mango have been replaced by local brands, many copies of their foreign counterparts.

Agile small and medium-sized businesses are driving the growth of Iranian manufacturing. About 1,000 of these companies have created or restored 17,000 jobs, the deputy head of Iran’s Small Industries and Industrial Parks Organization told the state news agency IRNA last week. They represent 92% of Iran’s manufacturing companies and 45% of their industrial jobs, according to the organization. Iran’s unemployment in the last decade has decreased from 12.3% to 9.5%, according to government statistics.

The Trump administration used sanctions as a weapon to effect changes in Iran, Venezuela and Russia. However, with those governments refusing to yield to Washington’s demands, the Biden government must decide whether to extend them.

In recent months, Iran has improved in escaping US sanctions on its crude oil exports. Most shipping companies and oil buyers ceased their business with Iran after Washington imposed an embargo on Iran’s oil shipments, following the 2018 Trump administration decision to withdraw from an Obama-era nuclear pact with Tehran. But Iran has offered huge discounts to attract buyers who are comfortable avoiding them, traders say. New customers have emerged for Iranian oil as well, especially with Asian economies, including China, recovering.

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

American officials said they believed Tehran was just surviving, pointing to scarce foreign currency reserves and a drop in the rial’s exchange rate. They also say that they consider Tehran’s statistics to be 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 like 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 85% since the beginning of 2018, while inflation of more than 30% has made daily necessities more expensive for Iranians. The demonstrations broke out last year protesting austerity measures, in which hundreds were killed.

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

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

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

Some of Iran’s largest manufacturers, which depend on imported raw materials and do not export, have gone through more difficult times. Iran’s large automotive industry, for example, reduced production from 1.4 million cars in 2017 to 770,000 in 2019, according to the International Organization of Automotive Vehicle Manufacturers.

But while families in times of crisis are unlikely to flaunt cars, consumption of everyday products has remained constant, said Omid Gholamifar, founder of Sweden-based Serkland Invest, which specializes in investments in Iran. “Demand overall it is healthy and needs to be attended to 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 of them have increased their sales volume by 25% to 30% per year since 2018, he said.

While parts of the Iranian economy are resisting the country’s turbulent relationship with the United States so far, many face problems ahead. As long as foreign investors avoid Iran, the country’s manufacturing sector, with restrictions on capital and technology, will struggle to grow, economists say.

“In the past 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 the Iranian economic weekly Tejarat Farda. “If the supply of cheap fuel to factories is interrupted, and if they cannot fix the low efficiency that is now governing the sector, this situation cannot continue.”

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

“Iran can withstand perhaps another year of this,” he said. “People’s absorption of pain also has limits.”

Write to Sune Engel Rasmussen at [email protected]