Financial Times Europe - 23.03.2020

Monday 23 March 2020 ★ F I N A N C I A L T I M E S 15

F T B I G R E A D. IRAN

Severe US sanctions threatened to bring the Iranian economy to its knees, but efforts to develop its own

industries and new trade deals with neighbours sparked confidence in Tehran. Then coronavirus struck.

By Andrew England and Najmeh Bozorgmehr

Virus could hit harder than US sanctions

China remains Iran’s main export des-

tination, but neighbours Iraq, Turkey

and Afghanistan have overtaken the

likes of South Korea, India and Japan —

all big buyers of the country’s crude oil

before the latest sanctions — as import-

ers of Iranian goods.

A salesman at an electrical appliance

shop explains that his company brings

in goods from Asia via an Iraqi middle-

man, with $500,000 moved in suitcases

from Tehran to Baghdad. Prices have

increased four times under sanctions,

but Iranians “will go without food to buy

their phones”, the salesman says.

Turkey, which imports Iranian gas,

has become a favoured destination for

Iranian businessmen to set up offices or

locate representatives to continue trad-

ing. Iranians established more than

2,000 companies in Turkey in just two

years up to 2019. Some are buying

$250,000 properties to secure Turkish

passports, which can make it easier

to do business.

“I know lots of people doing that, I

want to do it,” says a food trader. “Food,

livestock, pharmaceuticals are not sanc-

tioned, but when you cannot use bank

transfers, it’s like sanctions.”

He, like others, uses a third person to

help with financial transfers, but it can

come with risks — the trader says he lost

$200,000 when a middleman simply

disappeared with his money.

Even if Iranian businessmen find a

reliable partner, they face the challenge

of financing deals. US sanctions have

severed the republic’s links to the global

financial system and a shortage of for-

eign currency at home has exacerbated

the situation. Before the outbreak,

Tehran had already restricted the allo-

cation of dollars to priority sectors, such

as pharmaceuticals and food, and put

curbs on the imports of 1,400 goods.

A businessman who used to import

$20m-worth of Chinese water pumps

annually is working on a joint venture to

start producing them at home as a result

of the dollar restrictions.

“We provide the land and infrastruc-

ture, they provide the parts. We will

open the factory in six months,” the

businessman says. “A Chinese guy living

in Dubai signs for this [ JV]. Who he is

working with, I don’t know.”

The non-oil economy

Brian Hook, the US special representa-

tive for Iran, said in a speech in Decem-

ber that the country had about $100bn

in foreign reserves, but added that only

about 10 per cent of that was “immedi-

ately accessible” because of sanctions.

He calculated that Iran had lost about

$50bn since May 2018 in oil revenue.

Iranian analysts and officials say the

government has offset some of the

losses by increasing other exports,

Source: Iran's customs administration

Selected countries (bn)

The leading destinations

for Iran's non-oil exports

China provides a quarter

of Iran's imports

Selected countries (bn)

 of all

exports

    

China

Iraq

UAE

Afghanistan







    

China

UAE

Turkey

India

Germany

 of all

imports











Data cover first  months of Iranian year 

(March -March )

“They say, sanctions are like a knife.

The more you use it, the blunter it

becomes,” Mohammad Nahavandian,

vice-president for economic affairs, told

the Financial Times before the extent of

Iran’s coronavirus crisis was clear.

“There was a time that just one sentence

in a statement made by an American

official, president or otherwise, could

send waves of worry in the Iranian econ-

omy. Not any more.”

From its shrunken base, growth was

expected to be flat this year, the IMF

predicted. And in the absence of foreign

competition, some Iranian businesses

were in expansion mode.

The central bank said that non-oil

growth expanded by 1.3 per cent in the

first nine months of the financial year

that ended on March 19. Adding that the

agriculture, industrial and mining sec-

tors and services grew by 7.8 per cent, 7

per cent and 1.2 per cent respectively

between September and December.

“This exodus [of foreign companies]

has helped Iran to stand on its feet more

and produce most of the spare parts that

used to be supplied by these partners,”

says Farshad Moghimi, chief executive

of Iran Khodro, which claims to be the

Middle East’s largest carmaker.

Seven months ago, the quasi state-run

company was a stark example of the

damage US sanctions had wrought on

the country’s manufacturing sector as

foreign partners, including Peugeot

and Renault, suspended their opera-

tions in Iran.

Fear and chaos swept across the

industry, Iran’s biggest private sector

employer. Thousands of jobs were lost

and nearly 200,000 new cars sat unfin-

ished as supply lines for imported parts

from Europe dried up.

The local industry appeared close to

collapse. Yet, before the virus outbreak,

Iran Khodro was being touted as a

model of the republic’s “resistance” as it

ramped up production. Mr Moghimi,

previously deputy industries minis-

ter, took over the running of the com-

pany in August after his predecessor

was sacked. At the time, Iran Khodro’s

output had fallen to 600 vehicles a day.

This year, the company’s factories,

backed by government funding, have

been operating 24 hours a day, six days a

week, with 2,000 cars rolling out of its

plants each day, says Mr Moghimi. The

plan was to increase that to 2,500 a day.

In February, Iran’s defence minister,

Brigadier General Amir Hatami, visited

the factory, and described how the mili-

tary is using its technology to develop

components that the private sector

cannot, such as electronic control units.

Asked how the company manages to

procure imports, Mr Moghimi says:

“There are many individuals and coun-

tries in the world who are opportunists.”

F

or almost two years, Iranian

leaders have vowed to resist

the “economic war” the US is

waging against their country

as American sanctions have

strangled the Islamic republic’s econ-

omy ever tighter. President Hassan Rou-

hani even suggested that the mission

had been accomplished when he

addressed the nation in February.

“Never in our history have we experi-

enced an economy without oil,” Mr Rou-

hani said with an undisguised hint of

pride. “We have come to realise we can

govern without oil.”

His message was clear: a nation with

some of the planet’s largest crude and

gas reserves had been forced to break its

addiction to oil. And it had survived.

But, three days later Iran reported

its first cases of coronavirus. The out-

break not only triggered a health crisis,

but also exposed the fragility of Iran’s

survival mechanisms. Some argue the

outbreak is succeeding where US presi-

dent Donald Trump’s sanctions failed:

throttling many of the regional trading

routes the republic has become more

dependent on over the past two years.

In the weeks since, the number of

infections has soared to 21,628 as of yes-

terday and the official number of those

who have died has reached 1,685.

As a result, the republic is more iso-

lated than ever and appealing for inter-

national aid, including a $5bn loan from

the IMF, while complaining that sanc-

tions are crippling its ability to respond

to the crisis.

Many of its neighbours — including

Iraq, Turkey, Pakistan, Afghanistan and

Armenia — have closed their borders or

imposed restrictions on crossings and

trade. Only one foreign airline, Qatar

Airways, still flies to Iran.

“Coronavirus has struck a more

severe blow to Iran’s economy than US

sanctions over a very short period,” says

Saeed Laylaz, an Iranian economist.

Survival strategy put to the test

Iran’s survival strategy has been three-

fold since Mr Trump unilaterally with-

drew the US from the 2015 nuclear deal

Tehran had signed with western powers

and then imposed the “toughest ever”

sanctions. It has sought to bolster

domestic production, particularly in

key sectors such as petrochemicals,

steel, cement, agriculture and manufac-

turing, while attempting to boost non-

oil exports, including face masks to

China. It also shifted its focus to regional

markets, both as a destination for Ira-

nian goods and as transshipment hubs.

Iranian businessmen tell apocryphal

tales of middlemen traversing the

region with suitcases packed with hun-

dreds of thousands of dollars; of devel-

oping a complex web of trading routes;

and setting up offshore offices and front

companies to keep goods and finances

flowing, albeit at a higher cost and with

longer delivery times.

The republic produces enough food

for its 80m population and exports to

neighbours. Iranian companies account

for about 70 per cent of the country’s

pharmaceutical needs, with the remain-

der — either finished medicines or

inputs — imported. Neither sector is

under sanctions, but the difficulty

of conducting financial transactions,

with few banks willing to touch any-

thing connected with Iran, has led to a

shortage of some specialist medicines,

such as cancer drugs — and now equip-

ment to fight coronavirus.

Even before the outbreak, Iranian

officials knew they could not disguise

the damage the US sanctions have

wrought, particularly on poorer Irani-

ans, as oil exports have plunged from

2.8m barrels a day two years ago to a few

hundred thousand. The IMF estimates

that the economy contracted by 9.5 per

cent last year; the rial lost more than 50

per cent of its value in the months after

Mr Trump withdrew from the nuclear

deal, inflation soared above 40 per cent

and foreign companies fled the country.

But there was a growing belief, at least

among officials, that Iran was proving it

could absorb the shocks. Supermarket

shelves have remained full during the

coronavirus outbreak, partly because in

its preparations for sanctions-related

shocks the republic has built up food

reserves, Iranian analysts say.

‘[Once] a sentence

[from] an American

official could send waves

of worry in the Iranian

economy. Not any more’

notably petrochemicals, steel and

cement. Iran’s Revolutionary Guards,

which oversees a sprawling, opaque

business empire, has stepped up activi-

ties in some of these areas.

Oil and gas exports accounted for 31

per cent of government revenue and 61

per cent of foreign currency earnings in

2017, but that dipped to 23.5 per cent

and 30 per cent respectively last year,

Mr Nahavandian says.

An industry executive says Iran

exported petrochemicals worth $15bn,

including polymers, urea and methanol,

and steels products worth between $6bn

and $8bn in the first 10 months of the

financial year. Often the goods are sold

at a discount, the executive says, with

liquefied petroleum gas more than 10

per cent below the market benchmark.

He adds that Iran’s crude exports are

easy for the US to track. But with petro-

chemicals, which can be stacked into

shipping containers, it is much harder.

“America cannot control all the sea.

[Some] 10m containers leave [Iran’s]

Bandar Abbas [port] every year, how

can they check what’s inside every con-

tainer?” the executive asks.

He adds that the country’s annual pet-

rochemicals production has risen from

55m tonnes five years ago to 66m. Out-

put continues to expand as the short-

lived easing of some western sanctions

after the nuclear deal was signed pro-

vided a window for the republic to buy

specialist parts required to complete

refineries and chemical plants. That has

also helped it produce enough petrol to

prevent domestic shortages and export

other oil products in the region.

But the US placed sanctions on Chi-

nese companies, a South African group

and five entities based in the United

Arab Emirates last week as it sought to

thwart trade in Iranian petrochemicals.

It is a precarious existence for the gov-

ernment as Tehran manages diminish-

ing resources amid simmering social

pressures. At least 300 people were

killed in a brutal crackdown after a mas-

sive rise in fuel prices triggered mass

protests in November.

“Nobody is predicting what will hap-

pen, it’s very difficult,” the petrochemi-

cals executive says. “Maybe we will be

able to survive but what is the cost for

the people? For the country?”

Additional reporting by Laura Pitel in

Ankara

‘This exodus [of foreign

companies] has helped

Iran to stand on its feet

and produce most of the

spare parts [itself ]’

Since the virus outbreak, Iran Khodro

says 2,000 of its of 57,000 workers

with underlying health issues have been

sent home on paid leave, but it insists

the outbreak has had “no impact on the

trend of production”.

Mehdi Arjomandi’s home appliances

factory is also among those that have

continued operating through the health

crisis. But the firm has cancelled over-

time and it takes longer to receive parts

from China, he says.

He founded Vidas, whose products

include irons, vacuum cleaners and cof-

fee machines, the last time Iran was

under strict sanctions in 2014. But as he

sought to grow, the nuclear deal was

implemented and foreign goods flooded

back in. Since Mr Trump withdrew the

US from the agreement, he has been in

expansion mode again, doubling pro-

duction. About 80 per cent of the parts

for the 25,000 items his factory churns

out are now produced domestically.

“If it was not for Mr Trump... Ira-

nian industry would not have had the

growth it has,” Mr Arjomandi says.

Yet, he does not sugarcoat the situa-

tion. “While many businesses grow,

people’s living standards have been

shrinking,” he says. “Even my workers,

who are benefiting, have concerns

about health, security and rents. Will

landlords increase rents? If their chil-

dren are sick, will they have access to

medicine?”

‘Disappearing’ middlemen

Iranians have more than four decades of

experience of living under varying

degrees of sanctions. But the Trump

administration has been relentless in

its targeting of entities and individuals.

600

Number of vehicles produced daily at

Iran Khodro (above) at the low point

after sanctions. It is now 2,000 a day

$50bn

Estimated losses in oil revenue since

sanctions were imposed on Iran

9.5%

Estimated contraction in Iranian gross

domestic product last year, according to

the IMF

A firefighter disinfects an

overpass in Tehran: Iran has

suffered one of the highest

casualty rates from

coronavirus, stalling efforts

to revive its sanctions-hit

economy — Ali Mohammadi/Bloomberg

MARCH 23 2020 Section:Features Time: 22/3/2020 - 17:34 User: neil.way Page Name: BIGPAGE, Part,Page,Edition: USA, 15, 1