Iran staggers as sanctions hit economy

Tehran: The owner of a bus manufacturing company here admits that he is a man who likes his routines, and so every day he continues to commute to his downtown office. There he orders cups of tea, barks orders to his factory foremen over the phone and signs a steady flow of papers his employees put on his desk.

"It looks like I'm working, right?" the owner, Bahman Eshghi, said, folding his hands. "No. In reality I am praying, either for a miracle to save our economy or for a fool to come in and buy my factory."

For years, Iran's leaders have scoffed at Western economic sanctions, boasting that they could evade anything that came their way. Now, as they seek to negotiate a deal on their nuclear program, the leaders are acknowledging that sanctions, particularly those applied in 2010 on international financial transactions, are creating a hard-currency shortage that is bringing the country's economy to its knees.

This was evident in New York last week when Iran's new president, Hasan Rouhani, emphasized the need to act swiftly to resolve the standoff over Iran's nuclear program, perhaps in three to six months. While there may well be political reasons for him to be in a hurry, Rouhani and other officials admitted that the sanctions were hurting.

In repeated meetings during the week, Rouhani and his foreign minister, Mohammad Javad Zarif, said the government's financial condition was far more dire than the previous president, Mahmoud Ahmadinejad, had let on.

Rouhani and Zarif did not publicly specify the severity of the cash squeeze. But Western economists believe the crisis point may be much closer than previously thought, perhaps a matter of months. Iran news outlets have reported that the government owes billions of dollars to private contractors, banks and municipalities.

Because of the sanctions, oil sales, which account for 80 percent of the government's revenue, have been cut in half. While Ahmadinejad had asserted that Iran had $100 billion in foreign exchange reserves, the total had shrunk to $80 billion by mid-2013, according to a new study by Roubini Global Economics, a research firm based in New York, and the Foundation for Defense of Democracies, a Washington group that advocates strong sanctions against Iran.

But even that vastly overstates the amount readily available to Iran. Three-quarters of the $80 billion is tied up in escrow accounts in countries that buy Iranian oil - the result of a U.S. sanctions law that took effect in February. Under that law, the money can be spent only to buy products from those countries.

Even gaining access to the remaining $20 billion is difficult - it has to be physically moved in cash because of Iran's expulsion from the global banking network known by its acronym SWIFT, which had allowed the money to be transmitted electronically.

"They can't repatriate the money back to Iran," said Mark Dubowitz, the executive director of the Foundation for Defense of Democracies. "This is the dilemma Iran finds itself in."

The sanctions pose other problems. Unable to arrange simple financing for business deals, executives are forced to transfer suitcases of cash through street-level money changers to shady bankers abroad. This is not only costly, with middlemen exacting fees every step of the way, but also dangerous, the cash making a tempting target for thieves.

Lower-level officials here and businesspeople are even more alarmed than the leadership, with some saying Iran's economy is already on the verge of collapse.

The frustrations encountered by Eshghi (pronounced Esh-REE) in trying to conduct normal business deals are by all accounts typical.

A self-made entrepreneur, Eshghi, 43, said he had enough savings to scrape by for four more months. After that, if nothing changes, he said, he will have to make the difficult drive to the poor city of Malayer and tell his remaining 100 employees - out of 200 a few years ago - that he is closing the factory. The sanctions have so increased the cost of doing business that he is losing money on every bus the factory turns out, he said.

"Like a camel can survive in the desert on the fat in his hump, I have survived on my savings in recent years," Eshghi said. "But now the end is near. I'm giving up."

Before the sanctions were imposed, Eshghi, whose thick hair has grayed since he started his business in 2005, would walk to the bank just around the corner from his office. There he would sign a letter of credit to buy parts from China, pay a small portion of his order up front, have tea with the clerk and be back behind his desk in less than an hour.

But things are far more complicated these days. When he wants to order components for his buses now, Eshghi has to follow a long, complicated and sometimes dangerous procedure.

His partner in China also works with European carmakers, who might drop him as a supplier if they know he is dealing with an Iranian, and is scared to death that "the Americans" will find out and punish him with high fines.

"They treat me like a mistress they have to keep secret," Eshghi said.

To avoid detection, his partner works through a third party.

"Let's call this middleman Mr. Chen," said Eshghi. "Mr. Chen says, 'No letter of credit,' because the Americans have already fined the only bank willing to work with Iran in China, the Bank of Kunlun."

So Eshghi, without any bank credit, must pay the banker all the money up front, through a bank in Dubai, where his wife and children have moved. First, he needs to gather all the cash rials, Iran's currency, and give them to a money-changer. The money-changers then send the cash through couriers to partners in other countries who have stepped in to fill the void, asking up to 10 percent in transfer fees.

"Just last week one of these money-changers disappeared into thin air, stealing around $160,000 from me," Eshghi said, lifting his hands in the air in a sign of desperation.

Barring theft, the payment slowly makes its way to the banker in China, who also takes a cut. Only then will the Chinese company begin to fill Eshghi's order.

"They promise loading in 10 days but take two months," he said.

When the shipment finally arrives at the factory, "there are lots of issues," Eshghi said, saying he felt he was losing on all sides. If the products are late or defective, he said, there is not much he can do about it.

"What do I do? Send it back? That's impossible," he said. "I have to trust everybody and take all the risks."

In July, he joked, he "nearly had a heart attack" when he found out that President Barack Obama had imposed sanctions against any company working with Iran's automotive industry.

"That's me," he said. "I feed 100 families in a city where nobody has work. Is Mr. Obama waging economic war on our leaders or on us?"

Businesspeople in Iran have seen this coming and have been adapting, said one economic analyst, who asked not to be named to avoid trouble with the government.

"But the government is slow and way too optimistic in their predictions," the analyst said. "Now they are starting to feel the full force of what has been unleashed on them."

The sanctions have introduced numerous distortions into everyday life. For example, Iran is allowed to use money it earns from oil sales only to buy products from the purchasing country. As a result, Iranian supermarkets are filled with low-quality Chinese products, while several infrastructure projects are being built by Chinese companies, rather than Iranian.

"We don't have an oil-for-food program like Iraq," the analyst said. "We have an oil-for-junk program."

One economist, Mohammad Sadegh Jahansefat, said the government had been taken hostage by countries benefiting from the sanctions - particularly China, which he called the worst business partner Iran had ever had.

"China has monopolized our trade - we are subsidizing their goods, which we are forced to import," he said, adding of its work in the energy industry: "They destroy local production and leave oil and gas projects unfinished so that no one can work with them."

The state's dire financial straits are especially tough on contractors and their workers. Akbar, 50, a building contractor from Isfahan, said a big state foundation had not paid $40,000 it owed him.

"I will never again work for the state," he said. "We just can't trust they will pay up."

Iranian business families are used to dealing with the roller coaster that Iran's economy is. Patience is key, said Ali Khalilpour, 34, who operates a chain of sports apparel stores with his father.

"We have fired many people, lost dozens of stores and lots of money following the collapse of the national currency," he said.

There were times when the rial would fall 20 percent in value in a few months while the Khalilpours owed the equivalent of millions of dollars to Western sports brands in Dubai. They were forced to absorb the loss.

"It's is hard, but some things are beyond your control," Khalilpour said, before finding a silver lining.

Most of his competitors have gone bankrupt, he said, leaving the field to his family.

"We have faith that good times are finally coming to this country," he said. "When they come, we will be the biggest player in the market."