Oct. 9 (Bloomberg) -- When Mohammad-Reza needed parts for his heater company in Iran last month, he carried a bagful of 500-euro notes on a plane to Dubai and paid his German supplier over coffee in a hotel lobby. Often, he says, he has to use even riskier channels.
Mohammad-Reza, who declined to give his surname for fear of reprisals, says he uses informal currency transfers called hawala to get around the sanctions that cut Iran off from the global banking system. “Everything’s based on mutual trust,” he said in an interview in his Tehran office, describing a widely used network of unofficial middle-men. “The currency shops in Tehran don’t give you a receipt, and it’s not clear when the supplier in Germany, the Czech Republic or South Korea will receive it. Sometimes money gets lost in transmission.”
Like the Iranian economy, Mohammad-Reza’s business has shrunk under the impact of the trade and currency curbs imposed by the U.S. and allies to restrain the Islamic republic’s nuclear program. Iran’s oil exports have plunged by more than half, slashing government revenue. President Hassan Rouhani described the recession as a national security issue during the campaign that culminated in his election in June.
In his first months in office, Rouhani is pushing for a thaw in ties with the West that would help him meet election pledges of reviving the economy. There’s a direct link between that diplomatic shift and the impact of the sanctions, said Afshin Molavi, senior research fellow at the New America Foundation in Washington.
“Iran is in a spider web of sanctions that have hurt its economy, and Iranian leaders know it,” Molavi said in a phone interview. “The pain was felt more acutely this year, and this was something that made Iranian leaders more conciliatory.”
Talks between Iran and world powers are due to resume in Geneva next week, amid optimism sparked by Rouhani’s trip to New York last month. Oil is down more than 6 percent from a 2 1/2-year high a month ago, as expectations of détente with Iran followed the easing of tensions over Syria. The U.K. yesterday agreed to take steps toward reopening its embassy in Iran.
While in the U.S., Rouhani had a historic telephone conversation with President Barack Obama, and told the Washington Post he’s eager to resolve the nuclear dispute within six months.
That timescale may have been put forward with the risk of an economic crisis in mind, said Mark Dubowitz, president of the Foundation for Defense of Democracies, which advocates tougher sanctions on Iran. The U.S. House of Representatives voted in August for the restrictions to be tightened, though the measure hasn’t gone into effect.
“Rouhani has limited time to deliver on his promise to stabilize the economy,” said Dubowitz. “Iran is facing a serious foreign exchange crisis.”
Dubowitz, together with Rachel Ziemba at New York-based research firm Roubini Global Economics, published a study of Iran’s currency resources last week that found reserves will probably drop to about $70 billion by the end of this year. Iran’s central bank said in July that it had reserves of more than $100 billion.
What’s more, Iran probably only has immediate access to $20 billion, covering less than three months of imports, Dubowitz and Ziemba said. About $50 billion is tied up in countries that buy Iranian oil, such as China and Turkey, and can only be spent there under the sanctions regime.
‘No Other Option’
Iran gets about $3.4 billion of oil revenue a month, and almost half of that is accumulating in escrow accounts in those countries, suggesting that Iran is struggling to find goods there that it wants to import, Dubowitz and Ziemba said.
With trade links to Europe shut off, the shift in Iran’s imports is visible in the shopping streets of Tehran. The Amin-Hozor neighborhood is full of appliance stores that mostly stock Chinese goods, with the European brands that Iranians once preferred becoming increasingly scarce. “It seems like there’s no other option in Iran,” said Akbar, 55, the owner of one of them, as he slapped price tags on washing machines and dishwashers.
Jafar, 35, a salesman in one of the largest shops, said the import of “high-quality goods” decreased sharply, though there’s no shortage of Iranians ready to pay for them even with inflation above 40 percent. He said some German brands are still available, though those products actually come from Turkey.
It will take more than a drop in the quality of appliances to force a change in Iranian policy, said Djavad Salehi-Isfahani, an economics professor at Virginia Tech in Blacksburg.
“Iranians complain about stores full of Chinese goods that are inferior in quality, but that’s not the end of the world,” he said. “These are not the kind of hardships to force the government to swallow its pride and make concessions in the nuclear talks.” Salehi-Isfahani calculates that Iran can finance about 18 months of imports.
Iran is classified as a mid-income country by the World Bank. Its per-capita economic output of $13,000 at purchasing-power parity is double Egypt’s and only about 15 percent below Turkey’s, according to the IMF. On that measure, it ranked 78th among 183 countries, according to IMF data from April.
Living standards are sliding, though, and official data may conceal the decline. Rouhani’s new economy minister, Ali Tayyeb Nia, said last month that conditions are far worse than previous President Mahmoud Ahmadinejad had let on.
The rial lost more than half its dollar value in the 12 months before Rouhani’s election in June, though it has since rebounded about 20 percent. Gross domestic product shrank 5.4 percent in the year through March, and Tayyeb Nia said last month that it may take as much as four years to fix the economy.
‘Time and Energy’
At the current rate of decline, not much of Mohammad-Reza’s business would be left by then. Smoking cigarettes as he paces around his office, he says his sales are down to about 200,000 euros ($272,000), from more than 600,000 euros three years ago.
Mohammad-Reza said he delivers the cash to suppliers himself when he can, citing trips to Seoul and Frankfurt last year as well as Dubai. Otherwise, he relies on money transfers that “take a long time and aren’t reliable.”
“Even for small transactions, I need to spend a lot of time and energy going through different channels,” he said.
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