by Karim Sharara
“People talk about smart sanctions and crippling sanctions. I’ve never seen smart sanctions, and crippling sanctions cripple everyone, including innocent civilians, and make the government more popular.” – Mohammad al-Baradei, former Director General of the IAEA.
All this talk of Iran thriving under sanctions seems a bit like politicians trying to save face, doesn’t it? Ask any political analyst with an understanding of Iranian policymaking, and they will tell you that throughout its history, Iran has not chosen to secure its interests over saving face. So, when you hear Iranian Foreign Minister Mohammad Javad Zarif saying that “Iran will thrive despite US sanctions”, you can’t help but doubt the authenticity of what he’s saying.
Well the thing is (and this may be surprising to many), imposing sanctions against a country does not necessarily signal impending doom. Yes, it does spell hardship for the people, especially in the short term, but nothing that would necessarily impede long-term growth or even development. Sanctioning Iran may in fact allow it an opportunity to implement economic reforms in order to better achieve self-sufficiency.
Allow me to explain.
Iran has been under sanctions since 1979. The sanctions against Iran were eased when the JCPOA was signed in 2015 until Trump decided to reinstate them in 2018 (they were also eased once in the late 90s under the Clinton administration after the election of President Mohammad Khatami). The sanctions affect Iranian oil sales and international trade, and they also impact, among other things, the sale of cars and car parts to Iran and the sale of commercial passenger aircraft to Iran. The outcome makes peoples’ lives all the more difficult, and even endangers them, all while the United States asserts that its sanctions are directed against the state, not the Iranian people.
Right after the revolution, Iran had to contend with an imposed war with Iraq that put a heavy toll on its economy, with close to 60-70% of its economy devoted to the war effort. This naturally resulted in an uneasy, unstable economy throughout the 8-year war, one that was heavily reliant on oil revenue and sensitive to global oil prices, in accordance with which Iran’s real GDP would fluctuate.
The war period doesn’t reveal anything special other than the fact that Iran’s economy is heavily reliant on oil exports. Shifting our attention to the post-war period, however, one can begin to see a trend.
Hashemi Rafsanjani was Iran’s first post-war president, serving from 1989 to 1997. His was the reconstruction period, wherein Iran shifted its focus from a war economy to internal production. The lowest growth rate registered by Iran during this period was in the year 1994, and that was due to mismanagement. The government directly interfered in setting the official Rial/Dollar exchange rate (an experiment it repeated in 2018), which resulted in market destabilization. The impacts of this approach were exacerbated by Rafsanjani’s policy of increased economic openness towards the West, which allowed more room for the private sector and for foreign economic investment in Iran.
Even though Presidents Khatami and Mahmoud Ahmadinejad had different policies towards the West, the private sector found even more room to operate during their administrations. The sanctions during that time actually stimulated Iran’s industrial development, insofar as they kept foreign competition at bay. Iran was in fact able to become something of an industrial powerhouse in the region.
Being sanctioned for so long has actually taught Iranians that reliance on the West will not yield economic prosperity. Only through the development of its internal capabilities will Iran be able to achieve self-sufficiency and stability. Indeed, the statistics show that since the revolution, the poor and lower middle class has actually decreased as a share of Iran’s population, while the middle class has grown larger. In 1972, the poor accounted for 40% of the population, whereas by 2015 they accounted for less than 10%, while the proportion of those reaching middle-class status grew to 60%. Moreover, not only have sanctions been historically ineffective in this regard, they have also had no effect on employment, as the Iranian unemployment rate did not fluctuate in accordance with sanctions imposition or removal from 2008-2018. Recent figures show that Iran’s unemployment rate decreased by 1.3% from March 21st to June 21st of this year, suggesting that sanctions are still not impacting employment.
Under Hassan Rouhani’s administration, things became a bit fickle. During that time, Iran became less reliant on oil sales, making sanctions targeting oil exports less relevant. Rouhani’s biggest achievement by far was the 2015 nuclear deal (Joint Comprehensive Plan of Action or JCPOA), and although it helped ease restrictions on Iranian exports, it also opened the doors towards easier imports, thereby damaging Iranian industries.
Matters were made difficult by Rouhani’s mismanagement of the exchange rates in March 2018, which devalued the Rial and cut back on Iranian industries’ ability to purchase raw materials. The problem with the Rouhani government’s economic policies is that they favored consumption over production in a time of crisis. The administration allocated scarce foreign reserves at less than half the market price to continue the import of essential goods, instead of implementing other policies that would preserve foreign reserves and drive domestic production. Rouhani appears to have since changed his approach.
The importance of the industrial sector lies in the fact that it is Iran’s way out of the recession. Iran’s technology sector in particular has made great strides in the absence of competition, with startups thriving under sanctions. In fact, the Supreme Leader of Iran, Ayaltollah Ali Khamenei, has, over the last 8 years, stressed resolving economic matters through what he calls a “Resistance Economy”, and has for the last three years placed special emphasis on supporting local industries, production and goods.
Through the “Resistance Economy,” Iran has learned to transform threats (such as sanctions and economic isolation) into opportunities. One such example can be seen in the recent strengthening of Iran’s Rial despite further restrictions placed on it by the U.S. following the downing of a U.S. drone in the Persian Gulf. This was made possible because of sound economic policies recently adopted by the Central Bank of Iran.
The products of this growing “Resistance Economy” are many. For one, the Global Hawk was downed by a domestically produced Raad SAM, a system loosely based on the Russian SA-11 Buk. The Iranian Ministry of Defense also introduced an Iranian fighter jet, Kosar, last year, which is based on the F-5 and is completely domestically manufactured.
Additional examples of the development of domestic production despite hardships and sanctions are many. In order to help victims still suffering from the floods that had struck Iran in March 2019, the Executive Headquarters of the Imam’s Directive placed an order for 10,000 refrigerators of a then-defunct Iranian brand, effectively reviving that brand, its factory, and its production lines, providing employment for hundreds of people and material aid for the flood victims. It also insured 14,000 rural homes in Khuzestan province before the floods hit, providing distraught families with new equipment for their houses, and replacing almost half of the province’s cattle so that people would not end up jobless. This is an example of how Iranians are reviving their own industries and securing their own interests in times of hardship.
A few months ago, students from Amir Kabir University announced that, due to sanctions that made it impossible to import TBM tunnelers, they were in the process of reverse engineering the tunnelers they already had in order to manufacture them domestically.
Yet another example concerns medicines, which—although not officially under sanction—have become increasingly difficult to import. This has prompted Iranian companies to begin producing hard-to-obtain or imported drugs domestically. One such case is that of Penicillin G, of which Iran is the only manufacturer in the Middle East. In the same field, the Barakat Pharmaceutical Industrial Town was opened a year ago, providing direct employment to close to 7,000 individuals and indirect employment to roughly 30,000 more, all in an effort to manufacture hard-to-obtain drugs for the Iranian populace.
Of course, this is not to say that nothing in Iran has changed since the sanctions were renewed. Iran is at present not self-sufficient in all fields, and its economy is still reliant on oil sales (though not to the extent it was under previous administrations). The impact of the sanctions can be seen in the dip in Iran’s GDP post-renewal. The sanctions have presented Iran with many difficulties in terms of importing needed technology as well as other essential products. Rouhani has compared the impact of the sanctions to the hardships created by the eight-year Iran-Iraq war of the 1980s. At the same time, however, it’s important to note that Iran is managing to side-step some of the sanctions affecting its exports (although to what degree is up for debate, since these sales are secret).
Iran definitely has no way to go from here except to strengthen its local industries and domestic talents in an effort to undermine the sanctions. This seems to be the course it has chosen to tread, as evidenced in statements by a number of figures. With less reliance on oil sales (with Iran planning to completely end its dependence on oil) and increased reliance on domestic production (thus creating employment), Iran should fare much better in the coming years. If Khamenei’s statements and the achievements of local industry show anything, it’s that Iran has gradually become more self-reliant over years of sanctions. Despite the current hardships, the renewed sanctions regime offers a renewed opportunity for Iran to accelerate that trend.
Of course, with tensions rising in the Gulf, and Trump having exhausted all his options short of war without achieving his intended result, we will have to wait and see how things come to pass.
Karim Sharara is a Lebanese PhD student who has been living in Iran since 2013, majoring in Iranian Affairs at Tehran University.