x Abu Dhabi, UAETuesday 25 July 2017

Sanctions squeeze Iran, but the street isn't suffering yet

The goal of US and EU sanctions against Iran's central bank may be to economically cripple the country, but life on the ground suggests that still seems like wishful thinking.

In March, during his annual television address for the Iranian New Year, Supreme Leader Ayatollah Ali Khamenei dubbed the next 12 months as the year of "economic jihad". "These sanctions that the enemies of the Iranian nation have planned or implemented are intended to strike a blow to the progress of our country," Ayatollah Khamenei said. It was a prescient statement about what would be the rockiest economic year in the 32-year history of the Islamic Republic.

New legislation on sanctions signed into law by President Barack Obama on January 1, which might make it almost impossible for Iran to sell oil on the international market, has sent Iran's currency into a tailspin, seeing it lose 40 per cent of its value against the dollar and euro in the first three weeks of 2012. EU diplomats yesterday piled on further pressure by announcing an oil embargo to take effect in July.

In response, Tehran has implemented emergency regulations and limits on the amount of foreign currency Iranians can buy. The unregulated trade of the rial has been criminalised, with the black market exchange rate hitting 21,000 Iranian rials to the dollar yesterday. "Don't be surprised if it reaches 22,000 rials this week," one trader said.

In most countries, that succession of bad news would spell disaster. But, as we've learnt time and again, Iran is not "most countries".

The US understanding of contemporary Iranian life is far off the mark. The goal of sanctions against the central bank, as stated by US Senator Mark Kirk, was to "economically cripple" Iran: "Their currency would become like North Korea's." That still seems like wishful thinking.

There have been unexpected bright spots in the economy. After two years of declining property prices, property development is beginning to pick up, says Kevan Harris, an Iran researcher at Johns Hopkins University in Baltimore, Maryland. "The main policy of the government after 2008's recession has been to keep interest rates low - lower than the rate of inflation in many cases - and also to engage in a huge housing construction effort. This has flooded the country with cash again." Given the low confidence in the rial, many Iranians have put their savings in property, which is seen as a safe haven.

The lifting of fuel and food subsidies also has not been the disaster many expected. In place of blanket subsidies, since 2010 the government has been making direct cash deposits into the bank accounts of Iranians who have signed up for the programme. These monthly deposits are a significant cash flow in the economy.

This, in turn, has led to the well-known tendency towards conspicuous consumption to reach new levels. The proliferation of retail outlets and, in particular, restaurants has been a noted change. For a country supposedly on the verge of bankruptcy, the queues in front of restaurants - where a meal can cost much more than in the UAE, Europe or America - paint a very different picture than the one being described in the West.

Restaurants serving everything from sushi to burritos are cropping up across the capital. The equivalent of a $7 (Dh25) cappuccino is commonplace and cafes are doing a brisker business than ever. At Tehran's Hyperstar market, thousands of middle-class Iranians jam the aisles with overflowing carts. In everyday society, there is absolutely no sign of belt-tightening.

One major issue, however, is that most goods that are fuelling this economic activity are imported. Locally produced meat, for example, costs nearly $20 per kilo, while frozen meat imported from South America is closer to $6.

One industry where Iran has had some success is car manufacturing (the country is the top producer and exporter of cars in the region). Two carmakers, Iran Khodro and Saipa, account for the majority of domestic production and just a few years ago it would have been rare to see a foreign model. Now Maseratis, Porsches, BMWs and Mercedes are common sights in Tehran despite import taxes that can exceed 100 per cent and petrol prices that have nearly quadrupled since subsidies were lifted.

Having long withstood intense economic pressure, Iran has developed its defences. From using third parties to purchase goods it cannot import directly, to paying for jet fuel with suitcases full of cash, the regime has mirrored the Byzantine style of doing business found in Iran's markets to diminish - or at least delay - the effects of sanctions.

While inflation numbers and unemployment rates are well into double digits, and salaries have been stagnant for two years, signs of abject poverty are, as yet, not evident - at least not in the ethnically Persian and Azeri Turk regions of the country.

The picture is bleak, but even the harsher measures being discussed are unlikely to cripple the economy enough to force Tehran's capitulation. "Sanctions on the central bank won't work and won't change Iran's course," says Reza Marashi, director of research at the National Iranian American Council. "The Iranian government has taken multiple steps to insulate itself from such pressure breaking its economy. The government will go back to the drawing board and find new ways to move money."

 

Jason Rezaian is a freelance journalist based in Tehran