In Iran's Factories and Shops, Tighter Sanctions Exact Toll .
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By FARNAZ FASSIHI and JAY SOLOMON
Associated Press
Iranian workers protested in August in front of a Tehran government building because they hadn't been paid.
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A manager of Bam Shargh Isogam, an Iranian manufacturer of insulation sheets for rooftops, saw trouble ahead when a government official offered advice for surviving the crippling international sanctions: Reduce quality and cut back production.
The manufacturer in Delijan, three hours south of Tehran, replaced the high-quality material imported from Europe with domestic material, dismissed more than half its 350 employees, and didn't pay the remaining workers for four months, managers said.
"From the owner to the line worker, no one is safe," said Bijan, a manager, who asked that his last name not be used. "Our country is facing an economic disaster." Company officials didn't return calls asking for comment.
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Western sanctions against Iran, combined with years of economic mismanagement by the country's government, have hammered Iran's currency and its economy. The economy was predicted to contract by nearly 1% in 2012, according to the International Monetary Fund, after registering annual growth above 6% for much of the past decade. The IMF said Iran's economy could grow again in 2013, but stressed that the collapse of the currency, inflation and reduced oil sales were working against a rebound.
Washington has sanctioned Iranian institutions going back to the months following the 1979 Islamic Revolution. But it was 2010 legislation that markedly changed the financial war against the regime, according to U.S. and European officials.
Previously, U.S. sanctions only targeted American companies doing business with blacklisted Iranian entities. The 2010 law required the White House and U.S. Treasury to sanction any company, American or foreign, conducting proscribed Iranian trade, placing at risk their access to the U.S. financial system. The West intensified the sanctions campaign because of the belief that Iran is secretly developing atomic weapons, a charge Tehran denies.
Congress passed new sanctions this week, signed by President Barack Obama, that lawmakers said move closer to a nearly complete trade embargo on Iran. The law seeks to block Tehran's ability to barter its oil for gold and precious metals, and significantly widens the number of Iranian energy, shipping and financial entities on the U.S. blacklist, and bars foreign firms from doing business with them.
"The sanctions so far have inflicted far greater damage on Iran's economy than anyone expected, but the economic pressure is still moving too slowly given the pace of Iran's nuclear development," said Mark Dubowitz of the Foundation for Defense of Democracies, a conservative Washington think tank that advised Congress on implementing the latest sanctions.
White House officials on Thursday declined to comment on how they are specifically going to implement the new sanctions, but said that the Obama administration has dramatically increased financial pressure on Tehran over the past four years.
The squeeze on Iran has been tightening for months. In July, the European Union placed a ban on purchases of Iranian oil. This deprived Tehran of one of its main energy markets. In September, Iran's currency dropped nearly 30% in one week. In response, Iran stopped subsidizing currency rates for travelers and students; it also halted subsidies for merchants importing anything but essential food and medical items.
Iran analysts are skeptical that the sanctions will bankrupt Iran's government in the short-term. Tehran was believed to have more than $100 billion in foreign exchange reserves at the beginning of last year, thanks to windfall oil revenues in recent years. Until September, it had used these reserves successfully to support the Iranian currency, the rial. These analysts believe the sharp decline in Iran's energy exports has cut into reserves, but probably not enough to drain Tehran of its hard currency.
The situation already is a crisis for many Iranians. For middle-class families even buying books and magazines has become a luxury. Poor families now go months without eating meat or poultry, which have seen some of the biggest price hikes.
"We've slowly scratched off milk, yogurt cheese and butter from our table. Prices are going up almost daily, and we can't afford them," said Ameneh, 45-year-old mother of two young children in Tehran, who asked her last name not be used.
Sanctions are reverberating beyond Iran's borders. Iranian business investments in Dubai have decreased as many merchants close shop. The Turkish tourism ministry said that visitors from Iran dropped 35% in the first nine months of the year.
Iranian officials, usually defiant in the face of Western pressure, now openly acknowledge that sanctions are taking a toll. Gholamreza Mesbahi Moghadam, head of the parliament's planning and budget committee, said recently that Iran's oil sales have fallen to little more than a million barrels per day, compared with the 2.5 million barrels per day last year. Mr. Moghadam said the government faced a $60 billion deficit in 2012.
Iran's nuclear program remains a top foreign policy issue for President Obama in his second term, according to senior U.S. officials. Washington's strategy includes the threat of even more economic sanctions in hopes of pressuring Iran into a compromise. But administration officials also are banking on the Iranian government's own failures to create pressure on the regime. They say that President Mahmoud Ahmadinejad's heavy spending and price hikes have led to surging inflation in the country.
"We are seeing tremendous impact on the economy, not just because of sanctions, but because of horrific mismanagement," said a senior U.S. official.
U.S. officials hope nuclear negotiations, which have been stalled for months, will resume soon. The Iranian regime is divided. Some pragmatic officials hope to end the standoff with the West to help revive the economy. But Supreme Leader Ayatollah Ali Khamenei holds the final decision, and some key supporters close to him have said the Islamic Republic must stand firm and compromise only if an agreement can be reached with the West that ensures the regime's stability.
One result of the economic blockade around Iran: Its modern economy is increasingly dependent on old-fashioned barter. In exchange for oil, Iran receives not dollars as before, but wheat and tea from India, rice from Uruguay, meat and fruit from Pakistan and everything from zippers to bricks from China.
"It's definitely one way of circumventing sanctions, but in the long while the economy will deteriorate," said Dariush Zahedi, a professor of political science at the University of California, Berkeley, who has researched the impact of sanctions on Iranian society.
Tehran's bazaar merchants, a major force in the economy, staged a strike in September. Protests erupted, ending only after security and intelligence forces pressured merchant unions by threatening to arrest leaders and revoke members' licenses.
Factory workers and families of students who have lost their access to special subsidized dollar exchange rates for tuition have staged sit-ins outside the parliament to protest the Central Bank's new currency policies. In October, unions of truckers that transport fuel and gasoline in the city of Isfahan went on a two-day strike, cutting off fuel delivery to one of Iran's largest cities. Their costs of living and of maintaining their trucks have skyrocketed while their salaries remain the same.
Bam Shargh Isogam, the insulation manufacturer, is among 160 factories located in the industrial city of Delijan. The city, home to 50,000 Iranians, was once a model of economic growth. Located on a remote plain formerly devoid of industry, Delijan saw the construction of hundreds of factories ranging from construction material to paint and industrial textile during the past decade.
There were jobs for most of the city's residents and then some. Housing and construction boomed. A university outpost opened, offering courses and advanced vocational training workshops for workers and ambitious youth. Dozens of service businesses, such as catering and cargo transportation, flourished alongside the factories. Local industry even exported goods to neighboring countries like Iraq, Afghanistan and Turkmenistan.
Signs of serious problems for industrial areas such as Delijan started emerging in 2011.
At first, they had nothing to do with sanctions. The regime implemented an ambitious scheme to cut energy subsidies, which cost the government billions each year. The plan was lauded by international monetary officials. But economists inside and outside Iran say the implementation was botched, especially when it came to industry and businesses.
Prices for gasoline, electricity and water spiked. The government had promised that it would reallocate 30% of the money it saved on subsidies—about $100 billion a year—to private sector industries to compensate for these rising costs. Those allocations never arrived.
Meanwhile, the government gave billions of dollars to consumers to compensate them for the higher prices. And the Central Bank kept the currency rate artificially low. Tens of billions of dollars in foreign exchange were frittered away importing cheap consumer goods.
When sanctions hit in 2012, factory owners in Delijan couldn't take the additional blow. Simple maintenance routines, such as purchasing new parts for aging machinery, became an unaffordable, time-consuming ordeal.
Many smaller factories have shut down. Dozens of the bigger ones are battling to avoid bankruptcy, according to interviews with owners, managers and workers. The economic downturn is spreading to other sectors in the city as businesses downsize to meet shrinking demand.
The owner of Nader Ghazapazi, a local restaurant that serves factory workers, said orders have decreased to 320 meals each day from 1,250 five months ago. A representative of a local trucking company said it now has 15 trucks driving cargo to Tehran daily, compared with 40 before. All of the company's export business has stopped.
Across Iran, industries are facing similar problems. At the Alborz industrial complex near the city of Qazvin, many factories are searching for cost-saving measures. Some are closing an extra day each week, cutting paid holidays and reducing the number of free meals and snacks provided to workers.
The five major factories that produce the bulk of Iran's dairy products wrote a joint letter to Mr. Khamenei, the country's supreme leader, in October complaining that if the economy doesn't turn around they would be out of business in months.
Iran's car industry, the region's largest with manufacturing plants from Africa to Ukraine, posted 60% to 80% production declines last year, leading to hundreds of thousands losing their jobs, according to Iranian media reports. Many manufacturers of automobile spare parts are working at 40% capacity because of a shortage of cash and a lack of raw materials, according to a statement by one of the industry's union leaders.
The financial crunch has also imperiled one of Iran's biggest exports: its students. Some 90,000 Iranian college students abroad are in limbo after the government cut the subsidized exchange rate it allowed for students' tuition abroad. Many say they are abandoning their studies and returning to Iran because their expenses have quadrupled in the face of the rial devaluation. Yet they have few prospects back home.
"It's demoralizing. I've invested two years to get a graduate degree, and I can't afford to graduate now," said Ali, a student in Asia in his last semester of M.B.A. studies.
The effectiveness of the sanction campaign has surprised some of Washington's biggest skeptics. Just two years ago, Tehran's finances were bolstered by high international energy prices and a flourishing trade with Europe and East Asia. U.S. and European officials said a big reason for the success in recent months of the sanctions campaign has been the sharp increase over the past year in oil production by Iraq, Libya and the U.S., as well as Saudi Arabia's willingness to make up for any shortages in oil supply on international markets.
Iranian officials could respond with wartime measures such as rationing gasoline and basic goods and heavily controlling exports and imports. Iran's ministry of trade recently issued an import ban on a list of 75 luxury goods, ranging from cars to chocolate, plus a ban on exports of basic food items such as wheat.
The Central Bank also issued a new mandate to generate foreign currency cash flow, demanding that all exporters return revenues from sales abroad to Iran. "The merchants and business people are caught between the clerics fight with the West, said one prominent merchant with offices in Iran and Dubai. "We won't be able to survive."
Write to Farnaz Fassihi at
farnaz.fassihi@wsj.com and Jay Solomon at
jay.solomon@wsj.com
