Beyond oil battle, sanctions hit Iran's merchants

DUBAI, United Arab Emirates -- A Tehran shoe factory is abandoned by its European leather suppliers. Iranian cooking oil manufacturers are operating at nearly half capacity because they can't get enough imported grains.

In Tehran's bazaar, many merchants refuse to sell Western goods purchased with dollars because the downward spiral of Iran's currency has eaten their profit.

While Iran's mainstay oil exports remain the centerpiece of Western sanctions -- intended to wring concessions over Iran's nuclear program and ease Israeli threats of a military strike -- the Islamic Republic hangs on as OPEC's third-largest exporter as it feeds the hungry energy markets in China, India and across Asia.

Less noted -- but potentially more unsettling to Iran's leaders in the coming months -- is the increasing pinch on the workaday economy: the commerce, transactions and trading that provide the paychecks and economic lifelines for millions of people.

Despite evidence the sanctions are hurting individuals, it appears that Iran's economy continues to stumble along in large part thanks to Chinese imports and oil flows to Asia.

But hardships such as slumping sales, scarcity of high-quality imports and difficulties in making international payments have left many merchants and factory operators fearing lean times ahead in an economy already squeezed: Inflation is above 20 percent, and employment is officially tallied at 13.5 percent, yet believed to be far higher by many analysts.

Such uncertainties, including prospects of more layoffs and closures, could possibly emerge as complicated fallout for Iran if the street-level economic players lose faith in the ruling system's ability to cope with the mounting sanctions and confront the threats from Israel. Throughout recent history, Iran's merchant class has been the tipping point in upheavals such as the 1979 Islamic Revolution or provided critical support to keeping the ruling system intact as during the widespread unrest after the disputed 2009 re-election of President Mahmoud Ahmadinejad.

The future of talks between Iran and world powers over Tehran's nuclear program, meanwhile, remain uncertain after several rounds without significant progress. The West and others fear Iran's nuclear enrichment labs could eventually lead to the production of atomic weapons. Iran insists its nuclear program is only for energy and medical applications.

"As long as Asian countries keep buying Iranian oil, then the ruling clerics have a buffer," said Mehrzad Boroujerdi, a Syracuse University professor who follows Iranian affairs. "The real weak link could be if people take to the streets to demand some action to ease their economic pain."

Last month, consumers staged a rare public protest in the northeastern city of Nishabur over chicken prices that have more than doubled this summer. So far, however, the grumbling over the sanctions' reach has not stirred major unrest as happened with attacks on gas stations in 2007 when Iran imposed limits on fuel at state-subsidized prices.

Iranians have found ways to work around various U.S. and international economic embargoes for decades -- often responding by creating domestic industries such as automakers and appliance factories.

This time, though, many avenues are closed. Iran has been blackballed from the main international banking network, effectively leaving Iranian merchants and factories unable to buy goods abroad on Western markets. China and other Asian countries have stepped in with credit lines that have flooded Iran with even more Asian consumer products. But specific factory parts or materials are often unavailable or unable to meet specifications needed in Iran's assembly lines, which has long used European suppliers.

Iran's Donya-e Eqtesad economic daily reported Tuesday that domestic car production had fallen 37 percent in the past four months, citing the inability to transfer money to buy the assembly parts. The newspaper quoted Mohammad Reza Najafimanesh, a union official, as saying Iran had to produce 2 million cars in the current year, but the amount will likely reach around 1.5 million at most for a 25 percent overall drop.

A Tehran car parts dealer, Nasser Ahmadi, said sales have fallen by 60 percent. Shoe factory owner Nemet Emami said he can no longer deal directly with the European leather suppliers because of the banking restrictions.

"We have to import our raw materials indirectly through intermediaries," said Emami. "This has increased the cost of imports. In the end, our product will have to sell at a higher price."

Nematollah Zamanian, head of the cooking oil factory union, said production is down 45 percent because of a lack of imported grains and other products.

At the Tehran Stock Exchange, chief Hasan Ghalibaf Asl acknowledged that worries over sanctions were having a "negative impact on the market and investors." The exchange closed Wednesday for the Iranian weekend at just above 24,339, down from an all-time high of more than 26,000 in April 2011.

Perhaps the most visible sign of Iran's economic upheavals has been the tumble of its currency, the rial. Earlier this month, it hit a record low of 21,500 rials to the dollar -- dropping 5 percent in a single day over worries of a shortage of dollars and other foreign currencies in the country. Just a year ago, the rate hovered around 10,000 rials to the dollar.

Comprehensive details on the state of Iran's non-oil economy are impossible to assess. Iranian authorities last month imposed a virtual gag order on local media reports on the crunch from sanctions in places such as markets and manufacturers.

At the same time, officials have strongly dismissed any speculation that sanctions could force a rollback in uranium enrichment.

But an increasingly defensive tone from Iran also suggests high-level strategy sessions on how to face the pressures. In late July -- about a month after the 27-nation European Union halted Iranian oil purchases -- Iran's central bank chief Mahmoud Bahmani called Western sanctions akin to a "military war" that requires new economic countermeasures in return.

That mostly appears to rely on keeping oil flowing to Asian customers and seeking third countries to set up possible sanctions-skirting banking channels. The EU accounted for about 18 percent of Iran's crude exports, about 450,000 barrels a day, or approximately $43.2 million at current prices.

It's unlikely that Asian buyers could cover all the lost EU revenue, but powerhouses such as China alone already bought more than the EU total.

Washington has pressed hard for Iran's major Asian oil customers to look for other suppliers such as Iranian rival Saudi Arabia. The U.S., however, also does not want to undercut its standing in Asia by imposing penalties on critical trade partners such as China.

The U.S. has so far exempted some of Iran's most important oil export markets -- China, India, Japan and South Korea -- from possible Washington backlash for buying Iranian oil, which further eases the potential sanctions blow on Iran.

India and Japan are offering government-backed insurance for ships carrying Iranian crude to bypass European sanctions that blocked third-party coverage. South Korea has said Iranian oil imports will resume next month after a two-month boycott at levels that comply with U.S. sanctions.

Iran depends on oil sales for 80 percent of its foreign currency revenue, which further mutes the complaints from merchants and factory owners. But their unease could suddenly take on a greater importance in the approach to next year's presidential election if sanctions remain in place.

It's highly unlikely that Iran's ruling clerics will permit any staunch opposition figures on the ballot for the successor for Ahmadinejad, who wraps up his second and final term in June. The pro-government candidates, however, could still face disgruntled voters and even some officials willing to criticize how authorities have handled the sanctions.

"Over the past months, our officials have said the sanctions are not effective. This is not the reality," said a former deputy oil minister, Mohammed Reze Nematzadeh, in an interview last week with Tehran's moderate Hamshahri newspaper. "We should have announced that sanctions would damage industry, currency reserves and our international relations."

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Karimi reported from Tehran, Iran.