In Tehran’s bustling markets, high hopes for sanctions relief may not live up to the reality
By Reese Erlich
August 13, 2015
TEHRAN — Thousands of shoppers wend their way deep into Tehran’s bazaar, the ancient Persian answer to the shopping mall. Among the wealthy rug merchants and housewives bargaining for clothes, the main topic of conversation is the recent nuclear deal struck between Iran and six world powers, known as the P5+1.
Mahdi Panahi, a stocky man in his early 40s, sells electric shavers and hair dryers from a cramped stall in the bazaar. It’s so small that he holds his breath while squeezing past a business partner to reach customers.
“Many fewer people come here than before,” he said. “They don’t have money to spend. So they put off new purchases.”
However, the nuclear agreement has given Panahi hope that a cash infusion will soon revive Iran’s beleaguered economy.
“Sanctions are bad for business,” he said. “When they are lifted, it will benefit America and Europe, too. Iran is a big market.”
Panahi is not alone in his optimism. The accord reached in Vienna last month has led many Iranians to believe that better times are ahead for their country’s economy, which has long been plagued by high inflation and unemployment. An opinion poll found that 57 percent of Iranians support the accord, although 63 percent mistakenly believe that it will result in the eventual lifting of all U.S. sanctions targeting Iran.
U.S. and European sanctions have long isolated Iran’s economy, raising the costs of even the most basic purchases. The sanctions made it virtually impossible to transfer money through normal banking channels. Students studying abroad, for instance, were stranded when parents could no longer send money for their expenses.
Elsewhere in the bazaar, a woman is trying to find a simple electrical plug.
“I came here to fix something, and it cost $1 for just this plug,” she said. “The prices have all increased.”
Inflation currently stands at 14 percent, eating into regular Iranians’ salaries each day.
According to Iranian businessmen and economists, sanctions help fuel inflation by driving up the cost of imported goods. Iranian businesses can still buy industrial spare parts, for example, but pay extra by channeling funds through Dubai or other countries. Each middleman charges a fee. Such workarounds increase prices by about 10 percent, according to Saeed Leylaz, an economist who teaches at Tehran’s Shahid Beheshti University.
Iranians blame the sanctions for hurting ordinary citizens, but many do not exempt their own government from its share of the guilt. As one homemaker in the bazaar put it: “Our government hasn’t done its job either.”
She was referring to the widespread discontent with former President Mahmoud Ahmadinejad’s administration, which Iranians blame for the country’s dire economic straits. As a right-wing populist, Ahmadinejad courted support by hiring more government workers and raising their salaries. He established direct payments to every Iranian to make up for cutbacks in long-standing subsidies for food and gasoline. But the direct subsidies cost $400 million per month, and because they didn’t help create jobs, they were highly inflationary.
Expenses kept rising, government revenues fell as sanctions tightened, and Tehran simply printed money to cover the deficit. Inflation hit a high of over 40 percent in 2013. During one 8-day period that year, Iran’s currency dropped 60 percent against the dollar.
After Ahmadinejad left office and Iranian voters elected Hassan Rouhani in 2013, the government got serious about fighting inflation. The new administration reined in expenses and gradually cut back on direct subsidies. This month, Rouhani’s government slashed subsidies to wealthy Iranians — just one part of overall cuts that will save the government an estimated $30 million per month.
The cutbacks will continue in the months ahead; under the terms of a parliamentary budget law, the government must stop the direct subsidies to 6 million people by spring 2016. And the reforms are working: While the country’s GDP declined 7 percent during the last year of Ahmadinejad’s administration, it is growing at a 3 percent clip today.
With the prospect of sanctions being lifted, Iranians look forward to bringing the frozen assets home and using them for domestic investment. U.S. critics of the Vienna accords claim Iran will have access to as much as $150 billion, and they fear the money will be used to fund the Lebanese political party and paramilitary group Hezbollah, Syria’s President Bashar al-Assad, and Iran’s other regional allies.
That fear, according to some observers in Tehran, is unfounded. One Tehran businessman, who requested anonymity due to the delicacy of the subject, said that Iran’s support for its regional allies had always continued regardless of the domestic economic situation. “It doesn’t matter if we have money or not,” he said. “Hezbollah will be funded.”
The sanctions relief that will be provided, Leylaz believes, will go to upgrading technology in the oil industry and bolstering other withered business sectors. He argues that the sanctions had the opposite effect of what the West intended — rather than harming the country’s elite, they only hurt ordinary Iranians.
“Sanctions accelerated corruption in the country,” said Leylaz. “I call the sanctions a gift by the government of the [United States] to Iranian authorities.”
Iranian officials also dispute how much of the frozen assets can actually be repatriated. Iran’s Central Bank estimates about $130 billion is frozen abroad, but only about $29 billion can be returned to Iran. The rest must remain outside the country to pay for equipment and services already contracted.
For example, said Leylaz, the economist, Iran has over $20 billion deposited in Chinese banks. But even after sanctions end, the money will remain in Beijing to pay for infrastructure projects and services, which can now legally move forward.
Iran also hopes to double oil production once sanctions are lifted. It is planning to resume petroleum sales to Germany, France, and other European countries, and is hoping to attract foreign investment to modernize its oil fields. Leylaz said Iran could eventually earn an additional $20 billion per year in oil revenues after sanctions, depending on international oil prices and how much petroleum is actually produced.
But the total amount of additional money won’t come close to $150 billion — and some Iranians are already pushing for greater sanctions relief than the nuclear agreement provides.
Mostafa Zahrani, director-general of the Institute for Political and International Studies, a think tank operated by Iran’s Foreign Ministry, argues that the United States is changing the terms under which the money was originally frozen. “The sanctions have been imposed on Iran with the claim that this money goes for development of nuclear technology,” he said. Now that the nuclear issue has been resolved, the United States has no right to complain how Iran will spend the funds, he said.
But back at the Tehran bazaar, some Iranians nurse even grander hopes for the new accord. Small-business man Panahi, for one, expressed his aspiration that the deal will bring Americans and Iranians closer together. Quoting from the great 14th-century Persian poet Hafez, he said: “Plant a tree of friendship to reap the fruits of fulfillment.”
Even at a place as focused on dollars and cents as the bazaar, Iranians still celebrate poetry. If Hafez were alive today, said Panahi with a smile, “he would say, ‘Support a deal that benefits both sides.’”
This article was supported by a grant from the Pulitzer Center on Crisis Reporting.