Iran's Economy Feeling the Heat of Sanctions

The Gulf states' decision to halt trade in Iranian rials will impose more hardship on Iran's middle and lower classes. Whether it will alter the regime's nuclear policy is a different issue.

The decision by the Gulf states, and especially the United Arab Emirates, to stop trading in Iranian rials deals a harsh blow to the Iranian economy. Thousands of Iranian companies opened branches in Dubai in recent years, and tens of thousands of Iranian businessmen use the country to import and export non-oil merchandise. Now, they will have to come up with another way to run their businesses.

Iranian businessmen have a double problem: Not only are the banks refusing to accept Iranian rials, but Iranians are finding it difficult to pay for goods in other currencies, because their government imposes strict restrictions on taking foreign currency out of the country.

Iran currency - Bloomberg, sourced 20.3.12

Both businessmen and other Iranians, including commanders of the Iranian Revolutionary Guards, used to smuggle out money in suitcases filled with dollars or rials, either on flights to Europe or via boat to Dubai, where they could deposit their rials and purchase dollars in exchange. Now, the decision to ban trade in rials will seal off another crack in the wall of sanctions.

But so far, the sanctions against Iran have hurt only the middle class and the poor. Opposition media in Iran report that over 80 percent of the country's work force lives below the poverty line, while factories that provide thousands of jobs are closing because they can't obtain raw materials.

Workers never had it this bad

The workers' situation has never been so bad. In a textile plant in the city of Mazandaran, for instance, workers have not been paid for 16 months. This plant, the largest in the country, until recently employed about 7,000 people. But layoffs have since reduced the number to 700, and even they are forced to wait months for their salaries.

The same is true in the city of Qazvin, where some workers have not received wages for a year. And an employee of a pipe factory in the city of Ahvaz told Iran's Radio Zamaneh that he hasn't received a salary in two years.

Though labor unions are negotiating with the government and occasionally even hold demonstrations, to date, workers have not gotten anything beyond a verbal commitment to deal with the late payments. Meanwhile, in addition to causing rising unemployment, sanctions have sent the prices of consumer goods soaring by 30 to 70 percent, due to the difficulties of importing.

Iran may be the 13th-largest car manufacturer in the world, but it is now being forced to import wheat again, after having announced in 2004 that for the first time, it was able to supply all its needs domestically. Wheat imports are technically not included in the sanctions against Tehran, but because of the sanctions against its financial institutions, Iran is finding it hard to pay for the wheat. In other words, the banking sanctions are causing higher prices, forcing Iranians to pay more for staples like flour.

On the other hand, thanks to the restrictions on the purchase and sale of foreign currency, the real estate industry is booming: It has become the alternative investment channel for preserving the value of one's money. The result is that the cost of housing is rising steadily, and demand outstrips supply, especially for luxury apartments. According to Bloomberg, housing prices in Tehran have reached $1,600 per square meter, as compared to an average of $771 per square meter in Istanbul.

The government helps young couples and the needy to purchase apartments, but its assistance totals $15,000 at most: Buyers have to get the rest of the money from relatives or friends. Due to the plummeting value of the rial, a growing number of young people find it difficult to purchase apartments and are therefore forced to rent. But that is also becoming more expensive.

Nevertheless, the Iranian regime continues to broadcast optimism - not only about its ability to defend itself against, and retaliate forcefully for, an Israeli attack, but even about the country's economy. The business sections of pro-government newspapers talk about new projects like the construction of a subway in the city of Tabriz, the expansion of oil sales to India, future investments in the Egyptian economy, vows to increase trade with Turkey to $20 billion in 2012, and the discovery of more oil in Iran's oil fields. One might think sanctions and restrictions on the rial didn't exist.

The big question is whether the tremendous economic burden that the sanctions have placed on ordinary citizens is likely to ignite a civil uprising, or at least persuade the regime to change its policy. A survey conducted by Gallup in December 2011 and January 2012 found that 57 percent of respondents would support Iran's nuclear program if it were for nonmilitary purposes, while only 40 percent would support it if it were for military purposes.

More than a year ago, however, a poll conducted by the Rand Corporation found that 87 percent of respondents would support the development of a nuclear program for peaceful purposes. So if these figures are accurate, the decline in support for the nuclear program is significant.

But it evidently still isn't enough to engender the pressure that would cause a change in Iranian policy.