The car market in Iran is expected to enjoy a New Year's “gift” from the government in Tehran: About 700 KIA cars manufactured in South Korea are scheduled to arrive in port this month. This will be the first shipment of foreign-made cars to arrive in the country since the government decided in August to revoke the ban on importing such vehicles.
Back in 2018, President Hassan Rouhani had imposed the prohibition in an attempt to deal with the sanctions the United States slapped on Iran when it withdrew from the nuclear accord.
However, the new decision, which could promote competition in the automotive market, comes with a number of restrictions, the most serious of which caps the price of all imported vehicles at $25,000.
In other words, the wealthy classes – those who can help move the market but tend to opt for pricey luxury vehicles – have nothing to wait for. Importers have also noticed that the government budget does not call for allocation of dollars for imports at the official exchange rate, which is much lower than the market rate; the latter currently stands at 42,000 toman (a superunit of the official rial) to the dollar. In addition, there are no guidelines as to the level of customs duty imposed on the imported vehicles or the “handling fees” the government will collect.
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All in all, this means the final price of these cars is still unclear – and the result is that in spite of the ostensibly happy news, many Iranian car importers have chosen to stay out of the competition for receiving import quotas.
Iran's automotive market is controlled by two manufacturing monopolies, Iran Khodro and Saipa, which together produce about 1.5 million vehicles a year. The basis for building these cars is old infrastructure designed for Citroen and Peugeot models and so-called cannibalized vehicles made in first decade of the 2000s.
These cars do not meet any safety standards and their computerized components are minimal, if they exist at all. They belch harmful emissions and are responsible for the high numbers of traffic accidents in the country, constituting over 5 percent of all deaths in Iran. Indeed, Saipa’s Pride model has earned the name "Death Trap" because of the large number of accidents it is involved in.
According to online Iranian car buying guides, the average price of a locally manufactured vehicle is in the $6,000 to $11,000 range, according to the type and size. This would seem to be reasonable for a mid-level official who earns between $450 to $900 a month, and gets a few hundred dollars more each month from moonlighting on the side – after taking out a loan to be paid off over a number of years. For a similar price, it is possible to buy “brand new” foreign-made cars with zero mileage, which have sat in warehouses or auto showrooms for a few years.
But it seems that local production of cars may no longer be possible “thanks” to the war in Ukraine. In November, Tehran and Moscow signed a memorandum of understanding according to which Russia will buy $300 million worth of cars from Iran. After also selling Russia drones, it seems that Iran has now become Moscow's guide when it comes to surviving under sanctions.
The number of cars Russia will buy from Iran for the above-mentioned sum – about 30,000 vehicles – will not satisfy the demand in the Russian market, where about 100,000 cars were sold per month before the war, but it is yet another means to help Tehran cover its budget deficit. The two large Iranian auto manufacturers employ a total of about 100,000 workers directly; another 700,000 are employed in associated industries. This makes up a very significant share of the labor market, second only to the country’s energy sector.
Impact on the job market
This means that any fluctuation in the car market directly affects the job market and the government’s ability to deal with the economic crisis and the national unemployment rate, which is officially 9.2 percent and but is actually more than double that, as felt mainly among young people.
In addition to the news coming from Russia in this realm, Iran is also committed to its strategic ally China, which is planning to built a new plant in Iran for making Chery model cars, at a cost of about $370 million. While the plant will provide several hundred additional jobs for Iranians, it is expected at the same time to compete with the local automotive industry and even to cut into the Russian market, Iran’s new customer.
Here is where the country’s lack of proper economic and commercial planning comes to the fore – a situation that has been lamented and is increasingly being criticized by members of parliament and the media in Iran.
One of these is Saeed Mohammad, former manager of the free-trade zone on Kish Island, and prior to that adviser to President Ebrahim Raisi and a senior commander in the Revolutionary Guards. Mohammad’s tweets are quoted in an article published on the Iranian Roidad 24 news website, in which he states that “inconsistency, an absence of planning and a lack of experience are the ills plaguing the government’s economic team.”
In another tweet he asks where the government and the parliament are in the face of these failures. “The satisfaction of the public is more important than that of the factories’ shareholders, but everyone seems to be satisfied with the government’s economic team except for Iran's citizens.”
The article accuses the government not only of approving the sale of polluting vehicles but also claims that “neither the police nor the environmental protection ministry, which is supposed to handle this issue, has come with complaints.” Mohammad also aims barbs at the government that promised housing “and hasn’t taken a single step as yet. The previous housing minister traveled to China for [medical] treatment and died. Now they’re saying that this whole matter is being delayed due to the minister’s death.”
Such declarations could perhaps be considered slanderous, but even the most loyal supporters of the regime in Tehran are not pleased with the present situation, according to the website article. Even Parliament Speaker Mohammad Bagher Ghalibaf has accused the government of failing to attain its targets regarding compensation for the high cost of living and increasing citizens’ purchasing power.”
Raisi is not ignoring the criticism and is reportedly planning to replace several ministers dealing with the economy, but these changes will not be of much significance without a comprehensive plan that includes economic reforms, allocation of resources for development and decisions on a rational order of priorities. But the officials that were supposed to present the budgetary plan to parliament by December 15 – thus enabling the start of the series of discussions required to approve it – have yet to finish drafting their proposals. Even the plan to provide smart cards to needy citizens, with which they would be able to purchase staples at a discount, has yet to be finalized.
The government bases its revenues on an estimated price of a barrel of oil, from which its expenditure clauses will also be derived. The price of a barrel of oil topped $80 dollars this past week on the world market, but Iran sells its oil at a discount of almost 50 percent. And yet even at that price, Tehran was able to realize only about 56 percent of its anticipated oil revenues. The government's calculation of revenues and expenditures suffers chronically from unrealistic forecasts, which explain the need to channel additional funding to it via “future coffers,” which accumulated surplus income from the sale of oil in previous years, although it is not known how much money remains in them.
Another harsh criticism relates to the strategy adopted by Iran in the negotiations over the nuclear accord with the Western powers. A spokesman for the Iranian negotiating team, Mohammad Marandi, said last summer that “a hard winter in Europe will force those powers to conduct [more lenient] negotiations with Iran”; similar comments were published on the conservative website Kayhan. These scenarios proved wrong, and “Iran is now being pushed out of the world oil market,” according to a former head of the parliament's National Security and Foreign Policy Committee.
It only remains to be seen whether various domestic pressures, added to the demonstrations and protests that have been going on already for about three months, will jump-start the nuclear negotiations, which have shown some signs of awakening, at least on the part of the Iranians.