Battered by U.S. Sanctions, Iran Finds a Lifeline in Domestic Economy

Sunday, December 27, 2020

Aresu Eqbali and Sune Engel Rasmussen

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 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 said the economy grew 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. Iran has ramped up nuclear enrichment and 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 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.

After U.S. sanctions prompted French cosmetics company L'Oreal in 2018 to abandon acquisition talks with Zarsima Nami Rasa, the Iranian firm launched its own products that have since replaced its former suitor's brand in many Tehran hair salons.

"Sanctions were the right nudge for us," said Hassan Oskoui, managing director at Zarsima Nami Rasa. The Iranian beauty-care company said its domestic focus allowed it to retain about 450 workers.

At the Iran Mall in Tehran, which opened in 2018, foreign brands like Adidas, Benetton and Mango have been replaced by local brands, many knockoffs of foreign counterparts.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 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, especially as Asian economies, including China, bounce back.

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 say that they regard Tehran's statistics as unreliable and that the government is hiding the true extent of damage it is suffering under the pressure campaign.

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.



Source: Wall Street Journal