Battered by U.S. Sanctions, Iran Finds a Lifeline in Domestic Economy – Swaths of the Iranian economy are retooling in response to more than two years of U.S. sanctions, finding pockets of resilience in the country’s large domestic economy.
Iranian companies are increasingly producing the sorts of goods that Iran had long imported from abroad, while smaller, growing companies have picked up hiring. According to Iranian government statistics, Iran’s non-oil industry’s gross revenues have grown 83% in the past couple of years, overtaking the sanctions-battered energy sector’s.
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 manufacturing.
“Even if sanctions severed Iran’s entire oil exports, the country’s economy could continue to survive,” said Mohsen Tavakol, a sanctions expert at the Atlantic Council.
A bolstered domestic economy gives Iran some leeway ahead of the arrival of the Biden administration, which has said it would lift some sanctions if the U.S. returns to a 2015 deal limiting Iran’s nuclear program and if Iran reverses its breaches of the accord. The country has ramped up nuclear enrichment and earlier this month passed a law limiting access to nuclear inspectors. Iranian Foreign Minister Javad Zarif has urged the U.S. to abide by its previous commitments under the nuclear deal before any negotiations on the country’s return to the accord can take place.
The U.S. 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 goals in countries such as North Korea. In Iran, the Trump administration has imposed what is called a maximum-pressure campaign to choke off its economy and force Tehran to renegotiate the 2015 nuclear deal. However, in some quarters, the Iranian economy is adjusting to being cut off from much of international commerce.
For instance, after U.S. sanctions prompted French cosmetics company L’Oréal in 2018 to abandon acquisition talks with Zarsima Nami Rasa, the Iranian firm launched its own line of products that have since replaced its former suitor’s brand in many of Tehran’s hair salons.
“Sanctions were the right nudge for us,” said Hassan Oskoui, managing director at Zarsima Nami Rasa, an Iranian beauty-care company. The company said its domestic focus allowed it to retain about 450 workers.
Iranian home-appliance manufacturer Pakshoma Co. also took advantage of 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.
Its sales of dishwashers and washing machines have surged 40% and 55% over the past 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 like Adidas, Benetton and Mango have been replaced by local brands, many knockoffs of foreign counterparts.
Nimble small and medium-size companies are driving the growth of Iranian manufacturing. About 1,000 such enterprises have created or reinstated 17,000 jobs, the deputy head of Iran’s Small Industries and Industrial Parks Organization told the IRNA state news agency last week. They account for 92% of Iran’s manufacturing enterprises and 45% of its industrial jobs, according to the organization. Iran’s unemployment over the past decade has decreased to 9.5% from 12.3%, according to government statistics.
The Trump administration has used sanctions as a weapon to effect change in Iran, Venezuela and Russia. However, with those governments refusing to bend to Washington’s demands, the Biden administration must decide whether to extend them.
In recent months, Iran has gotten better at evading U.S. sanctions on its crude-oil exports. Most shipping companies and buyers of oil ceased doing business with Iran after Washington imposed an embargo on Iran’s crude shipments, following the 2018 decision by the Trump administration to withdraw from an Obama-era nuclear pact with Tehran. But Iran has been offering steep discounts to lure buyers who are comfortable skirting them, say traders. New customers have emerged for Iranian crude, too, especially as Asian economies, including China, bounce back.
U.S. Secretary of State Mike Pompeo last month said 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.
U.S. officials have said they believe Tehran is only just surviving, pointing to scarce foreign-currency reserves and a plummeting rial exchange rate. They also say that they regard Tehran’s statistics as unreliable and that the government is hiding the true extent of economic damage it is suffering under 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 early 2018, while inflation of over 30% has made everyday necessities more expensive for Iranians. Demonstrations broke out last year protesting austerity measures, in which hundreds were killed.
The share of Iranian people now living under $5.50 a day, the World Bank’s poverty line for upper-middle-income economies, rose to 13% in 2019, from 8% in 2011, according to the World Bank.
“Rising employment doesn’t translate into higher income,” Djavad Salehi-Isfahani, professor of economics at Virginia Tech, said. “Poverty is rising, and I’m sure the government is aware of this and concerned.”
The Covid-19 pandemic has sealed Iran’s borders with neighboring Iraq and slashed trade with China, Iran’s two main export destinations. That has resulted in a 25% drop in non-oil exports from the previous fiscal year, according to numbers from Iran’s Customs Administration.
Some of Iran’s larger manufacturers, which rely on imported raw materials and don’t export, have hit harder times. Iran’s large automotive industry, for example, has slashed output from 1.4 million cars in 2017 to 770,000 in 2019, according to the International Organization of Motor Vehicle Manufacturers.
But while families in times of crisis are unlikely to splurge on cars, consumption of everyday products has remained constant, said Omid Gholamifar, founder of the Sweden-based Serkland Invest, which specializes in investments in Iran. “Overall demand is healthy and it needs to be filled by someone,” he said.
Mr. Gholamifar has invested in four Iranian companies producing consumer goods—a pharmaceuticals 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% annually since 2018, he said.
While parts of the Iranian economy are weathering the country’s stormy relationship with the U.S. so far, many face trouble ahead. As long as foreign investors avoid Iran, the country’s capital-constrained and technology-restricted manufacturing sector will struggle to grow, say economists.
“In the past three to four years, the infrastructure and technology haven’t been updated or modernized the way 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 mend the low-efficiency that is ruling the industry now, this situation cannot continue.”
Any efforts to address cash shortages by printing money will fuel inflation, further compounding the pain of Iranian families, according to Adnan Mazaeri, a nonresident fellow with the Peterson Institute for International Economics in Washington.
“Iran can withstand maybe a year more of this,” he said. “People’s absorption of pain has limits too.”