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Business | Feeling the Pinch: Iran's Embattled Importers

by CORRESPONDENT

19 Jul 2012 17:20Comments
822516_orig.jpgDisabled financial system also undermines manufacturers, small business owners.

[ dispatch ] Seated behind a large wood-paneled desk in downtown Tehran, Mohammed irritably folds up his newspaper and asks the office tea boy to fetch him a glass of iced water. Removing his gold-rimmed glasses, he drops his head in his hands.

It is a day after the long-anticipated E.U. sanctions banning European refineries from importing Iranian oil went into effect. A headline screams: "Iran Will Confront Sanctions with Foreign Capital Reserves." The governor of the Central Bank of Iran has declared that the country has $150 billion in foreign currency reserves, enough to weather the storm until an economic plan is enacted.

"They are lying," Mohammed says. "They don't have enough foreign currency to cover the country's imports."

Mohammed owns a company that imports base chemicals to supply Iran's plastic industry. His office walls are adorned with colorful jars containing the resins and liquids that he previously imported from Europe, but which now -- following successive rounds of sanctions -- are sourced from China, Malaysia, and Turkey. The sanctions are designed to force the country's clerical rulers to make concessions on their nuclear program, which Iran maintains is for peaceful purposes. The most biting set of sanctions, enforced since last December 31, bars foreign companies that do business with the Central Bank of Iran from the U.S. financial system.

"It gets worse and worse every day," Mohammed explains. "Before the sanctions it took two days to get an import permit from the Ministry of Commerce or a letter of credit from the Iranian bank that pays the exporter.

"Now it takes two weeks for the import permit and 15-20 days for the letter. Customs is blocked up too. Last week we had a shipment that was held at Bandar Abbas for two months!" he said, referring to Iran's largest port.

These delays evidence a dry-up of foreign currency in Iran, caused by a drop in the oil exports that make up between 50 and 65 percent of all government revenue. This month, the volume of oil exports fell to third place in OPEC, slipping below Iraq for first time since 1989, just after the Iran-Iraq War.

Experts estimate that Iran's oil exports are down 35 percent compared with the beginning of the year, costing the country roughly $10 billion so far in lost revenue.

The remaining buyers of Iranian crude struggle to send their petrodollars to Iran due to a lack of banks that handle Iranian trade, creating a dearth in the foreign currency that is much needed by the country's importers. Until this past week, India was buying oil with grain and requiring Iran to deliver the crude to circumvent a ban on E.U. insurers providing coverage to Iran-bound tankers.

"It becomes easier and harder to buy dollars and euros depending on how the government's reserves look," says Mohammed. "Iran often takes payment for its oil from China by using IranAir planes to bring back vacuumed-packed bundles of dollars."

Mohammed is particularly bitter about what he sees as the free ride for Iran's government-affiliated firms, mostly linked to the Islamic Revolutionary Guard Corps. Labeled by many as "a state within a state," the Guards control a vast business empire estimated at around 30 percent of Iran's GDP, spanning construction to online shopping. This has attracted the ire of the many businesses outside what are seen as cosy government-protected circles, beset by patronage and nepotism.

"The sanctions only affect private businesses. Sepah [the Revolutionary Guards] are close to the banks so they can get all the cheap dollars they like and import whatever they like without permits. We can't compete."

Following the reports of "crippling" new U.S. sanctions at the end of last year, the Iranian rial crashed against the dollar, prompting the government to ban foreign exchange at the market rate and freeze the official rate at 12,260 rials per dollar. Individuals and businesses purchase illicit dollars at exchange shops that still trade at the market rate, which has run 20 to 65 percent above the government rate over the past six months.

Though it is technically illegal -- and potentially punishable by death -- companies buy foreign cash on the spot market because it saves them from supplying cheap dollars to importers who often now need to pay upfront in cash; the government tends to turn a blind eye.

The exchange shops are providing a lucrative but essential service to Iran's embattled importers. Through connections in the UAE and Turkey, they are flush with foreign cash and even the financial contacts to pay international suppliers, who then send cargos directly to Iran.

Years of having artificially inflated its currency has made Iran very reliant on imports, but inflation, which officially stands at 22 percent -- though this is widely perceived as an underestimate -- is ringing a death knell for Iran's small manufacturing base. Several factories have shut down or cut their hours.

Javad, a stationery business owner, has also been hit by the economic downturn. The currency crash coupled with rampant inflation has doubled the cost of imported paper since 2011. Javad can't pass on the costs, so he is sitting on around $35,000 of unsold stock, hoping that the beginning of the school year in September will change his fortunes.

"Companies close to the government get priority on the dollars at the government rate and they exploit their positions," he says.

Referring to the culture of speculation that has emerged from the wide gap between the government and market exchange rates, Javad says, "Government companies buy government-rate dollars like they are importing something, but then they just bring them back to the country and sell them. It's big business."

Javad's wife, Fatimah, a freelance lawyer, is sustaining him through the hard times. The economic gloom has prompted a growing number of divorces and small-claims disputes, making her law practice busier than ever, he says.

"Last year, my fruit and vegetable shopping cost about 10,000 tomans; this year, it's 30,000! When people worry, crime goes up and families break up," says Javad.

Theoretically designed to change the behavior of the clerical leadership in Iran, the weight of international sanctions falls onto the shoulders of the Iranian people. Nowadays, the cost of living is people's main complaint. Incredulous looks at supermarket tills are commonplace.

A housewife from a working-class neighborhood in downtown Tehran complains that the price of lamb has doubled in a year.

"I can't make aab gosht anymore," she says, referring to a simple lamb stew that is a Persian staple. "My family eats bread and beans."

Photos via government-affiliated Mehr News Agency.

related reading | Industry and Trade Minister: Western Sanctions 'Paralyzing' Iran | Iranians Watch as Country's Economy Withers | An Insider's View: Iran Ready to Do Business with the West

Copyright © 2012 Tehran Bureau

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