‘Resistance economy’ offers Iran no way out of US pressure

The effect of America’s economic squeeze has been resounding on the Iranian economy, which is forecasted by the World Bank to shrink approximately 5% this year.
Saturday 07/09/2019
Risky gambles. An Iranian cleric walks past a mural painting of the national flag, August 27. (AFP)
Risky gambles. An Iranian cleric walks past a mural painting of the national flag, August 27. (AFP)

Since the revolution in 1979 that deposed the shah, Iran’s economic development has unfolded under a long shadow of economic sanctions. Shortly after the revolution, reforms were instituted as the new Iranian state went about setting the price of goods, subsidising high-demand commodities and nationalising industries.

Iran’s economy was divided into the state, cooperative and private sectors as central planning was developed to manage economic activity and future direction.

Championing the ideals of independence and self-sufficiency, Iran not only learnt to live under economic sanctions but used the concept of a “resistance economy” for achieving a broader set of objectives. Those ranged from creating sources of revenue for the state and consolidating internal control to directing industrial activity, ensuring job creation and cultivating future investment programmes.

It was a risky strategy but Iran’s experience with its “resistance economy” proved largely effective. By 2015, when the Joint Comprehensive Plan of Action (JCPOA) nuclear agreement, was signed, fewer than one-in-ten Iranians was classified as poor. It was four times that number in 1972.

Iran’s industries evolved over the years, producing goods ranging from medicines to refrigerators, vehicle and aircraft parts and even uranium-enrichment centrifuges. For its defence needs, in particular, Iran adopted an approach of prioritising domestic production of armaments and weapons systems as much as possible. Few of these goods had export potential but Iran was able to live through pressing sanctions and find enough domestic consumers for what it produced.

A grand strategy designed around regional and wider international economic integration would have delivered greater economic growth and strategic benefits over the years but largely because of its oil exports the country remains the region’s second-largest economy.

A key turning point came under the firebrand leadership of Mahmoud Ahmadinejad, whose populist policies saw subsidies widen but falling investment and increasing sanctions as Tehran opted for defiant positions against the United States, particularly in its competition in Iraq and around Iran’s suspected nuclear activities.

The subsequent electoral success of Hassan Rohani was built around his promise of a new economic vision that was to begin with a grand bargain involving Iran’s nuclear activities in return for the lifting of long-standing economic sanctions and an end to the country’s growing international isolation.

The Clinton administration lifted some sanctions against Iran in the 1990s but it was the signing of the nuclear accord in 2015 that saw economic sanctions against Iran eased significantly for the first time.

However, events did not develop as expected for the Rohani government. Two years later, the United States withdrew from the nuclear agreement under the Trump administration, which called for a renegotiation that is more comprehensive in its coverage of strategic disagreements related to Iran beyond its nuclear activities.

The “maximum pressure” campaign imposed on Iran’s economy by Washington is designed to force Tehran to the negotiating table or face the prospects of a government unable to cover its expenses and a non-functioning economy.

US aims to drive Iran’s oil exports to “zero” may not be fully realised but July saw exports plunge almost 80% year-on-year — their lowest levels since the Iraq-Iran War that ended in 1988. Iran is exporting approximately 400,000 barrels of oil per day (bpd), down from a peak of nearly 2.5 million bpd in April 2018, which led a to a crunching fall in revenues that sustained its “resistance economy.”

As Iran’s revenues from oil exports, which used to account for approximately 40% of its income, began to nosedive, Rohani condemned the United States for waging “economic terrorism” against his country. The effect of America’s economic squeeze has been resounding on the Iranian economy, which is forecasted by the World Bank to shrink approximately 5% this year.

When the nuclear deal was signed in 2015, the Iranian rial was trading at 32,000 to the US dollar. Today, it is more than five times that. Last year, currency exchanges were forced to close as the government attempted to control depreciation with a failed effort to fix the rate to 42,000 rials to the dollar. Now, Iran is mulling legislation that would cut four zeroes from its currency by moving from transactions in rials to tomans (one toman is worth ten rials).

With its currency woes, Iran’s annual inflation rate remains at more than 40%. More than one-in-four Iranian youth are unemployed. Locked out of the US-controlled global financial system, Iranian exporters and importers alike are struggling to find ways of conducting even “permitted” transactions.

In recent speeches, Iranian Supreme Leader Ayatollah Ali Khamenei has aimed to rally renewed support for the “resistance economy” by arguing that national progress has been hindered because of reliance on “easy” income from oil exports. Khamenei wants the country to rely less on oil exports and a greater focus on domestic production to achieve a more dynamic and sustainable resistance economy.

There are serious questions about how Iran can realistically sustain a “resistance economy” without the “easy” income from oil exports. What is clear is that, in the absence of viable options to work around US sanctions that have a chance of sustaining over the next few years, Iran’s new economic trajectory spells economic troubles not seen before.