The structure of modern Iranian economy

Iran, one of the active players in the anti-Western and anti-Ukrainian coalition, has been under international sanctions since 1979. How can its economy allow the Ayatollahs [a Shia clergy title] to develop fearsome weapons and keep the ruling regime afloat?

Iran is mostly known now for its military and technical support for Russia’s war against Ukraine and for turning the country into one of the main threats to Western civilization. However, it was not always like that.

It was a completely secular state with a relatively developed economy 40 years ago. But the Islamic Revolution of 1979 changed everything.

NV Business explains how the current Islamic Republic’s regime marshals resources for its political goals.

Shah Pahlavi’s country: Iran’s economy before the Islamic Revolution

Iran’s rulers succeeded in transforming a largely agrarian country into an industrialized economy by 1979. Before WWII, Iran built 800 plants to reduce its dependence on imports.

Iran invested in mining industry, production, and infrastructure, as well as developing road and railway networks. However, in the 1940-50s, the agricultural sector still employed up to 90% of the population, while the more modern branches of the economy (fishing, port work, oil extraction) attracted less than 4% of Iran’s workforce.

One of the key events for understanding Iran’s further economic history took place in 1951, namely the nationalization of the oil industry by Prime Minister Mohammad Mossadegh. Two years later, the UK and the United States overthrew him in a coup.

On the one hand, it led to a short period of economic growth in 1954-1960. Iran freely earned from the export of its “black gold.” But on the other hand, it led to the growth of inflation and the fall in the value of the local currency, the Iranian rial (IRR). In response, Iran developed its banking sector and launched new rounds of attracting foreign investment.

Until the 1970s, the socio-economic situation remained consistently mediocre compared to other countries in the region: GDP was $80 billion, 46% of Iranians lived below the poverty line, and only 36% of the population was literate. Due to the low level of medical development, high infant mortality prevailed along with a low average life expectancy of 55 years. The oil and mining sectors accounted for up to 75% of GDP.

The middle class in major cities gradually expanded thanks to a combination of oil revenues, government spending, and foreign aid. During 1964−1978, Iran’s GNP [gross national product] grew by 13.2% annually. Later, such indicators (12.5%) were repeated only in 2016, after the signing of the nuclear agreement with the European Union and the United States, and the significant easing of Western sanctions.

Over 74,000 women were college students (5,000 in 1967) in 1978. In the five years before the Islamic Revolution, oil generated a profit of $1 trillion in 2018 prices, the country had good relations with the world. The Yom Kippur War in Israel in 1973 and the oil crisis provoked by the Arab world helped the Iranians earn even more cash.

However, the Shah’s regime also had limits: competition between enterprises remained weak, and there were problems with human and property rights. This prevented the nation from fully developing its, at that time, great potential. The division of Iranians along social and political lines flourished, with most of them not involved in making or debating economic decisions.

Money for theocracy

Both before the Islamic Revolution and after it, Iran remains highly dependent on world oil prices and the physical ability to sell it for export.

After large-scale nationalization in 1979, 80% of the country’s economy was owned by the state. Privatization was ran rather strangely, because the companies ended up either in the hands of law enforcement agencies, large conglomerates, or state organizations, such as pension funds.

However, Iranian politicians’ rhetoric and economic actions changed to pro-market ones in the 1990s. But still, they were tied to populism, appealing to the poor rural population (as opposed to the urban and educated people who were supported by Shah Pahlavi’s regime).

Iran’s GDP structure in 2020 looked like this:

·       service sector – up to 50%

·       plants and mines – 32%

·       agriculture – 13%

·       oil – only 5%

The maximum amount of oil that Iran could sell was 3.8 million barrels per day, and this was back in 2018. Each Iranian received only a tenth of profits of the 1970s. Oil ceased to be the sector that could bring most of the funds to the budget, e.g., it was possible to sell only 1 million barrels per day in 2022.

Faced with such a problem, Iran followed two paths:

1) modernized petrochemical plants and began to sell oil products rather than oil itself.

2) increased natural gas production and exports to compete with the United States and Russia (producing 256.7 billion cubic meters in 2021). But most of the gas still goes to domestic use and only a small amount is sold abroad to Iraq and Turkey.

Sanctions against Iran restrain the development of not only the oil and gas industry, but also all others, including the real sector. Local businesses are involved in corruption, illegal practices, and strange contracts. Therefore, it’s quite difficult for the country to attract foreign capital.

The confrontation with the Western world is not cheap for Iran’s ordinary citizens. The country’s living standards are among the worst among the Gulf oil regimes.

Per capita GDP is at $4,388 (2023, World Bank), compared to $114,000 in Qatar, $87,000 in the United Arab Emirates, and $59,000 in arch-rival Saudi Arabia.

The minimum wage across Iran with all allowances is $152 per month, against $570-590 per month (2023) in its capital city Tehran. The national average annual household income is about $5,000.

The cost of one square meter of housing in Tehran depends greatly on the city area. It stands at $1,300 per square meter of old housing in the city’s poorest southern part, against $18,250 per square meter of the luxury apartments in the northern rich neighborhoods. It’s possible to buy a whole apartment in southern Tehran for that kind of money.

Analyzing the economic dynamics, Iran is experiencing its biggest economic crisis right now. Iran’s Supreme Leader Ruhollah Khomeini proclaimed the revolution would erase the income gap, but it’s still growing. Corruption nullifies most economic initiatives. Iran’s gross national income (a measure of the country’s national welfare) in 2021 was only 57% of its 1976 figure.

The populist methods of President Mahmoud Ahmadinejad (2005−2013) drove up inflation and devalued the money he himself distributed to the population. Few jobs were created, with only 27.5% of Iran’s population being officially employed. That is, the rest (72%) are pensioners, unemployed or working in the shadow economy.

New sanctions from former U.S. President Donald Trump following the termination of the nuclear deal caused a new financial crisis in Iran. Such a deficit could be covered either by printing money (and increasing inflation) or by selling state assets (i.e., privatization). But historically, Iran failed with the second one. When the United States withdrew from the nuclear deal in 2018, the situation for Iran in the financial markets became even worse.

Real incomes of the population, especially civil servants, have fallen by 40-50% over the past few years. Prices rose sharply (up to 100% in some cases) when the new [Iranian President] Ebrahim Raisi administration abolished the preferential exchange rate ($1 costs IRR 42,000).

The government used it to buy food, medicine, and fodder for livestock on farms. Already in 2019, 33% of Iranians were poor, and the economy shrank by 4.99% the following year. The exchange rate flew “into space” as $1 was sold for IRR 250,000 on the black market. A weak currency means higher prices for imported goods, while inflation has driven up the cost of living.

The country may face the indicators of the 1940s and 1950s. Today, according to experts on the Iranian economy, 50-60% of the population are below the poverty line. As often happens in such political regimes, the fall in people’s incomes coincides with the increase in spending on the state’s security apparatus and propaganda. Iran is not an exception here.

How Iran bypasses sanctions and finds money for wars and weapons

The Ayatollah regime’s strategy of bypassing sanctions is based on shady oil deals. Cooperation with the Kremlin and China has contributed to this. Especially considering that Russian colleagues are engaged in the same and really needed practical advice, while Iran has been dealing with it for almost 40 years.

U.S. officials and experts believe that German banks helped Iran bypass sanctions, particularly Commerzbank and Deutsche Bank, as well as Citigroup in the United States.

Clearinghouses in Iran and shell companies registered abroad operated billions of dollars a year, according to U.S. news outlet Politico. But U.S. diplomats interviewed by journalists believe that financial institutions may not have known that they were working with Iranian money. Clearinghouses often find no formal connection to Iran when money comes from China, Hong Kong or elsewhere.

The shadow financial network helps keep Iran’s economy afloat and helps at least minimally develop. In addition, the regime has partially succeeded in diversifying the economy, focusing mainly on metals and petrochemicals. In 2021, Iran’s foreign trade grew to $100 billion, which was a record high. The country even managed to sell oil through “indirect export to China” for $19 billion.

A simple scheme is typical for illegal exports: buying tankers that would otherwise be scrapped and transferring them to transport Iranian oil.

The vessels can be registered with a company from Dubai and enter the ports of northern China. Of the 103 old ships carrying Iran’s “black gold,” 42 did not do so in 2022, and 27 did not at all. The Iranian government covers insurance.

Tankers are usually loaded at Kharg Island in the Strait of Hormuz. To bypass the local traffic, it can also be done at the Port of Jask, which is further south in Iran. After that, they can sail for weeks through the Indian Ocean with the transponder off until they reach the shores of Malaysia or Indonesia. There, they unload the oil onto smaller ships, which deliver the goods to China. In the holds, it can be transported together with petrochemicals or imports from Russia or Venezuela. Old ships rarely go all the way on their own as they are too unreliable.

In China, oil is processed by small independent refineries, which are called “teaspoons.” Sometimes the carriers are caught. A trial began in the autumn of 2023 regarding one million barrels of Iranian oil seized by the United States. The cover was provided by companies associated with the IRGC (Islamic Revolutionary Guard Corps) and the Al-Quds Force (IRGC units for extraterritorial operations). The court also noted that the IRGC uses oil revenues for all their activities, including the development of weapons of mass destruction, terrorism, and human rights violations.

When the United States seizes a tanker, others quickly take its place, and the illegal trade continues. If Iran’s neighbors, including the Gulf monarchies, will fight more actively against illegal chartering and sales, up to 400,000 barrels per day may disappear from the market (which will push oil prices up by about 10% for a short time).

Many so-called shadow “exchange points” operate under the regime’s close supervision. These are Iranian-controlled clearinghouses. They run shell companies in Turkey, the United Arab Emirates, China, India, and Singapore. If an Iranian business wants to carry out a transaction prohibited by sanctions, it applies to a local bank. The latter transfers the money to a clearinghouse so that it secretly passes through several filters and its true origin is lost. The United Arab Emirates is the main hub of such operations (as well as for Russian oligarchs).

Like Russians, Iranians make some of their payments in local currency, especially with China and Turkey. But this is risky since few companies will agree to accept payments in the Iranian currency, which continues to devalue. Gold, with which Iran is also trying to pay, is not infinite, as well as the country’s gold and currency reserves.

What weapons does Iran produce?

Iran has openly supported Russian dictator Vladimir Putin’s terrorist regime since the beginning of the full-scale invasion of Ukraine. The country supplies Russia with Shahed kamikaze drones and promotes the deployment of drone production in Russia and Belarus. There were even talks about the possible transfer of Fateh and Zolfaghar long-range missiles to the Russians, but this has not yet happened.

One contract examined by Sky News involved the sale of more than $1 million worth of ammunition and weapons. The goods sold included barrels for T-72 tanks and howitzers, shells, and drones. Iran sold 300,000 artillery shells and 10 million bullets through the Caspian Sea between October 2022 and April 2023. Moscow paid for all this in cash, air defense systems and anti-tank missiles, a total of $140 million.

Experts call this route the main one for supplying weapons to the Russian side. Ships from Turkmenistan and Iran sail to Makhachkala or Astrakhan to unload. It’s almost impossible to prevent this as neighboring countries actively support such operations.

And considering the fact that UN Security Council Resolution 2231, which prohibited Iran from selling weapons, has already expired, it’s possible to expect an increase in arms exports. For example, these can be 155mm Raad-2 self-propelled howitzers, better and more dangerous UAVs, missiles, tanks, and armored vehicles.

Iran built a drone factory in Tajikistan in 2022. After signing the nuclear agreement, Tehran decided to buy Su-35 fighter jets from Russia.

The Simourgh plane, formally entirely locally produced, made its first flight on May 30 of the same year. But in fact, it was a secretly converted Ukrainian An-140 aircraft, which Iran previously purchased. It was originally a passenger plane but became a transporter in Iran. The Russians from the Aviakor company helped the Iranians with this. They operated a fleet of several An-140s until 2015, but later the company faced a shortage of spare parts due to the breakdown of relations with Ukraine as a result of the annexation of Crimea and the start of the war in Donbas.

Venezuela, Cuba, and other Latin American countries may become clients of the Iranian regime in the near future. Bolivia has already expressed a specific interest in upgrading its army with Iranian weapons.

Iraq remained the main arms partner a few years ago, with $10 billion for Iranian military equipment in 2014, including communication means, multiple launch rocket systems, anti-tank missiles, and rifles. Some air defense systems were also sold to Syria.

Such pariahs as North Korea, Sudan, and Russia can also become Tehran’s long-term clients. Tehran is also discussing nuclear technology sharing with the Russians, Chinese, and North Koreans, since Iran clearly remains determined to become a nuclear power.

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Read the original article on The New Voice of Ukraine