Sanctions on Iran and Its Effects (Part I)

By Amir Taheri

What are sanctions? They can be best described as economic arm-twisting to reach a certain goal. While most can agree on its purpose what has been debated over the years are its effects and it impacts. Are they able to change minds and directions? Cases of western sanctions being used include Cuba, Iraq, North Korea, Sudan, Syria, and of course Iran.

There have been claims that they are "torn pieces of paper" as president Ahmadinejad often says. Other officials have been more pragmatic and said that while sanctions will have a negative effect in the beginning, in the long run Iran will come out ahead. Lets analyze that a little further. Could there be truth to this statement.

We know that sanctions have definitely had an impact. Reports from varies news agencies have claimed Iranian businesses having difficulties sourcing parts or equipment but in the end they purchase their wish lists but with a higher price. Iranians have millennia of experience as traders and today practically anything can be bought whether American, European or even Israeli if needed. You just need the right front companies and delivery ports in place. Iran famously received many spare parts and equipment upgrades during its war with Iraq in the 80s from Israel, showing to be quite pragmatic in its economics when needed.

What makes the impact of sanctions vary amongst target countries is the size of the targeted market and its industrial base of course. Iranian officials have said their plan is to reduce imports and increase home production to meet demand aiming for as much self-sufficiency as possible. Now if Cuba or any other sanctioned country were to claim this, one might have reason to have doubts. But Iran is truly in a unique situation with having a population nearing 80 million (above 70 million is considered economical for a home industry) and an industrial base that is able to produce a wide variety of products, no other current targeted sanctioned regime approaches this.

Starting in the war years of the 80s, Iran due to funds being targeted to the war front and hard currency needed for military imports, Iran started a massive "do it at home program". Necessity is truly the mother of all inventions and by the 90s Iran was practically producing most of its needs albeit with a lower quality and higher costs than international products. On many of my trips in the late 90s I was amazed how much of the product offerings were "made in Iran". Surprisingly, new consumer items that would showcase in the US market would be instantly copied and sold to a receptive home market hungry for a piece of the outside world. This was all of course supported by low oil prices at the time and heavily restricted imports and high tariffs on foreign products by president Khatami. What changed was the beginning of the oil price surge. And with the entry of president Ahmadinejad, ironically a populist president, further reduced tariffs that had partially begun under the later years of Khatimi's presidency. Local production was reduced and we have a situation today where many Iranian brands are even outsource their manufacturing to China. These include many home appliance brands.

Today, faced with having to pay two to three times the normal price for any standard product like auto parts, home electronics, mechanical machines and other vital items why would any sane importer go through front companies, higher interest rates, lack of obtaining letters of credit, lost time and simply being treated like a terrorist for wanting to import a car alternator. Local manufactures that were pushed out of the market in the early 2000s due to lower import tariffs will be happy to again sell their products and maybe even now for a higher price than what they would normally have been charging for. In the long run prices will come down as more domestic suppliers aim for a piece of the pie. Not to forget that Iran has a powerful dragon patron as well. There have been numerous reports lately of massive multi-billion Chinese investments. Apart from subway expansions, steel factories, railroad projects, and shipping there have been billions invested in those areas where sanctions have been targeted, gasoline imports. Plans are progressing for complete self-sustaining gasoline refineries coming online in 2 years with funds from China. Additionally, it has been said that Iran has been stockpiling gasoline and enough is stored for a 2-year supply. With this stockpile in place, even though providers from China and Turkey have guaranteed future gasoline supplies; August gasoline imports from Turkey have been lowered by 90%. A sign that Iran might be drawing on stored supplies purchased when gasoline prices were experiencing a glut across the world. With all of this no wonder Ahmadinejad is not having trouble sleeping at night and can claim sanctions as torn pieces of paper.

Written by Amir Taheri