Sanctions Lifted Iran's Slow, Frustrating Return to Normalcy

One year after some economic sanctions were lifted against Iran, there are still few signs of recovery as joblessness rises and the currency slides on concerns new U.S. President Donald Trump may revoke the pact.
Ali Akbar Nategh Nouri

When Iran reached what appeared to be a landmark nuclear deal with six world powers including the United States and Germany in July 2015, euphoria broke out on the streets of Tehran.

Celebrations went late into the night on hopes the agreement would end a decade of punishing sanctions and unleash a flood of international investment to kick start Iran’s economy, bringing about change and needed reforms.

But almost a year and half later, as Iranians still await signs of an economic recovery, frustrations are building as life gets tougher, not easier. Discontent is gaining as Iran’s currency, the rial, falls against the dollar on fears U.S. President-elect Donald Trump will revoke the nuclear deal, which he has called a “disaster.’’

In late December, the rial fell to 41,600 to the U.S. dollar, a record low. The currency, which recovered slightly to 32,300 versus the dollar this week, has plunged on fears Mr. Trump will roll back the clock. With unemployment edging up to nearly 12 percent in 2016 -- youth unemployment is more than double that level -- many Iranians are taking second jobs to make ends meet.

“These days I see more economic pressure on people in Iran than ever before,’’ said Saman Sayar, an architect who lives in Tehran, in an interview with Handelsblatt Global. “With the devaluation, prices are going even higher, and people have less and less buying power. The gap between rich and poor is widening.’’

Few people expected things to get worse a year ago when some economic sanctions were lifted after the International Atomic Energy Agency concluded Iran had lived up to its obligation to restrict uranium enrichment.

In late December, Iran's currency, the rial, fell to 41,600 to the U.S. dollar, a record low. With savings evaporating, many consumers are taking second jobs to make ends meet.

The deal cleared the way for Iran to sell more oil on the open market – it has tripled its production since then – and to recover an estimated $30 billion in assets frozen in the United States since 1979.

But the expected economic boom, spurred by greater international trade and business access to the international banking system, has failed so far to materialize, experts say.

As the economy stagnates, many educated Iranians have begun moonlighting as taxi drivers at Snap, an Iranian version of Uber. Snap said more than 20,000 Iranians have registered to become drivers in Tehran over the past few months. “I am amazed that so many highly educated people are working as drivers,’’ Mr. Sayar, the architect, said.

Kaveh Akhlagi, the 30-year-old chief executive of an online laundry service start-up called Washmash in the Iranian capital, said he felt the country’s currency pinch personally when he recently exchanged rials for dollars before an overseas trip.

“While I was signing the paperwork for the currency exchange, the dollar rose sharply again and I had to pay the equivalent of $50 more than when I first got to the counter 15 minutes earlier,’’ Mr. Akhlagi said.

Economic insecurity seems to be on the rise. Earlier this month, Iranians were shocked when Tehran newspaper ran photos of what appeared to be homeless people sleeping in open graves in a cemetery. While the circumstances behind the photos were unclear, the images set off a debate about rising poverty in the country.

Some observers say it was unrealistic for Iranians to expect such a quick economic boom after years of sanctions and economic neglect.

“I believe Iran is going in the right direction but the speed is too slow. The initial expectations were unrealistically high,” said Bijan Khajehpour, the managing partner in Vienna at Atieh International, a Tehran-based consulting group. “The idea that Iran would immediately morph into one of the most important emerging markets was wrong from the start.’’

A traffic jam in Tehran on Saturday, January 14, one year after many western economic sanctions were lifted against Iran as part of a nuclear containment deal.

Twenty percent of the Iranian economy is underdeveloped after years of sanctions, Mr. Khajehpour said. The rest is often hindered by corruption, mismanagement, inefficiencies and lack of modern legal structures and infrastructure, he added.

“Even if sanctions are lifted step by step, regulations and laws need to be changed and corruption needs to be tackled,’’ he said. “The pace of change has been too slow. Many issues must be resolved for Iran to turn into an emerging market.”

If and when that happens, analysts see huge potential.

Iran’s workforce is educated, wages are low compared to the West, and the culture is increasingly pro-western, with women making up 60 percent of college graduates. The market of 80 million consumers in a country with the world’s fourth-largest crude oil reserves has been relatively untapped by foreign investors.

And perhaps fortuitously, Iran is young as a nation and digitally savvy – nearly a third of the population is less than 30 years old. Despite the economic obstacles, a nascent high-tech scene is blooming, long on initiative and short on investment.

With the election of Mr. Trump, and the possibility he may revoke the nuclear deal and reimpose sanctions on Iran, many businesses have taken a wait-and-see approach.

The nuclear deal lifted some sanctions, but not all. Investors can still face prosecution for selling technology to Iran that could be used for nuclear proliferation. U.S. and U.N. curbs on technology and arms sales to Iran are also still in place for about a decade.

In December, the U.S. Senate passed by 99-0 a 10-year extension of its Iran Sanctions Act, which was first adopted in 1996, which proponents argued was not in conflict with the nuclear treaty.

The Senate Foreign Relations Committee chairman, Bob Corker, at the time said the renewal of the act ensured Mr. Trump could reimpose sanctions.

One major issue has been financing and cash in Iran. Banks do not give out loans because of these sanctions; they fear being penalized by the U.S. Kaveh Akhlagi, Chief executive of online laundry service start-up Washmash in Tehran

"Extending the Iran Sanctions Act ... ensures President-elect Trump and his administration have the tools necessary to push back against the regime’s hostile actions," Mr. Corker told Reuters at the time.

Amid the uncertainty, Iranians are worried their economy could get worse, not better.

“One major issue has been financing and cash in Iran,” said Mr. Akhlaghi, the laundry startup CEO. “Banks do not give loans because of these sanctions, they fear being penalized by the U.S.,” Mr. Akhlaghi said.

Damon Afkari, an Iranian engineer at Principia, a consultancy in Madrid, said he thought international banks would eventually free up financing for more trade with Iran.

“The banks have not been able to establish the necessary connections yet,’’ Mr. Afkari said at a conference in Barcelona in December. “It takes time, no one knows how long, but Iranian banks are eager to cooperate to be reintegrated into the global banking system.”

Iran’s banking sector also needs “substantial reform to standardize their regulations and infrastructure to operate within international financial system with more transparency. I am optimistic that they are capable of resolving these issues,” he said.

There have been small signs of progress.

A Spanish pizza chain, Telepizza, recently entered the Iranian market and plans to open its first store in March.

Some Iranian businesses are also wary of opening their market to foreign competitors, and there is resistance to admitting new rivals that will threaten long-established relationships. Iranian law still requires foreign companies operating in Iran to create partnerships or joint ventures with local firms, which retain ownership control.

An Iranian money changer in early January at a square in Tehran. The Iranian rial currency fell last month to a record low of 41,600 to the U.S. dollar, raising pressure on the country's struggling consumers.

“Some companies have gained an exclusive status because of sanctions with no competitors around and they are not willing to lose this exclusivity,” said Hassan Askari, an Iranian business consultant living in Cologne, Germany. “There are non-E.U. companies from countries not directly affected by sanctions that have already established businesses. They are not interested in the arrival of competitors with higher E.U. standards and quality.”

Foreign investment in Iran so far has focused on its energy reserves.

A key test case will be a pending deal between U.S. aircraft maker Boeing and state-owned Iran Air for the sale of 80 passenger jets and the leasing of 29 others over a decade.

The U.S. Treasury Department’s Office of Foreign Assets Control must give Boeing a license for the transaction to proceed. Many in Iran are hoping the permit will be issued.

If approved, the deal, which is worth almost $17 billion, would be the largest ever between a U.S. company and Iran since its 1979 revolution. One argument for not blocking the deal in Washington could be an economic one: Last week, Boeing’s European rival Airbus delivered the first of 100 passenger jets it sold to Iran, in an $18 billion transaction.

 

Fereshteh Modarresi is a postdoctoral fellow at the Leibniz Institute for Language Science in Berlin. She previously worked in Iran as a journalist for the Frankfurter Allgemeine Zeitung newspaper and French news service AFP. To reach her: [email protected]