Easing sanctions no simple goal for Iranian president

TEHRAN, Iran -- Near Iran's border with Iraq, work crews are putting finishing touches on a petrochemical plant expected to pump out hundreds of tons a year of oil-based products that the country hopes can slip through the net of Western economic sanctions.

In Tehran's bazaar, merchants must rely on shadowy money transfer networks to make purchases abroad because Iran is blocked from global banking systems. Inflation is so high that prices can jump between breakfast and dinner.

The two sides of Iran under sanctions have come into sharper relief as the economic pain digs deeper -- and the country's new president seeks ways to roll back the restrictions.

On one level, government planners are working hard to find workarounds against the embargoes on oil exports and banking, while insisting Iran's "resistance economy" can ride out anything the West can throw in its direction. But there is also the daily struggle and frustration faced by businesses and families as inflation heads toward 40 percent and unemployment, officially 13 percent but likely higher, climbs alongside it.

The broad challenges posed by sanctions shape President Hasan Rouhani's agenda this week at the U.N. General Assembly. He hopes to win promises to restart talks over Iran's nuclear program and to make the case to the U.S. and its allies that easing sanctions could bring rewards in the form of concessions and greater cooperation from Tehran.

Rouhani's overtures have gained the attention of the White House. But Washington faces a policymaking quandary since many believe sanctions may have forced Iran into a bargaining mood. Reversing them as a confidence-building gesture -- even for the moderate Rouhani -- may bring an onslaught of criticism from Congress and ally Israel.

In a dress rehearsal for possible new talks, Iran's foreign minister, Mohammad Javad Zarif, plans to meet with Secretary of State John Kerry and counterparts from five other world powers later this week. It will mark the highest-level contacts between the U.S. and Iran in six years.

Rouhani, for his part, has to confront split personalities in Iran's leadership. His outreach apparently has the all-important approval from Supreme Leader Ayatollah Ali Khamenei, who has the last word on all key issues. Hard-liners, though, are not fully on board and could sharply turn against Rouhani if it looks like the West has snubbed him.

Just before leaving for New York on Monday, Rouhani urged Western leaders to heed his appeals for greater dialogue and take steps to ease sanctions as a way to "reach joint interests" -- a reference to the nuclear standoff, but also possibly other regional flashpoints where Iran carries influence such as Iraq and Syria.

The West should choose the "path of interaction, talks and leniency," the official Islamic Republic News Agency quoted Rouhani as saying. Hours later, Rouhani was handed another possible diplomatic boost after Iran's judiciary released 80 prisoners arrested in political crackdowns.

At the same time, the hard-line Kayhan newspaper warned in a commentary that shaking hands with President Barack Obama would be a "big mistake" and would represent a concession to Washington without any direct benefit for Iran. It further denounced Obama as a "war criminal" for the U.S. military presence in Afghanistan and its bases in the Gulf and elsewhere in the region.

"This is the same evil hand that signed the economic punishments against Iranian nations," it said.

The uncompromising tone suggests rifts at Iran's highest levels. Kayhan typically reflects the views of hard-liners close to Khamenei. These factions could pressure Khamenei to rein in Rouhani if they feel his efforts are heading off course.

This is what makes Rouhani's gambit over sanctions such a complicated move. It addresses a core issue in Iran -- getting some relief for the sinking economy -- but loosening the embargoes by the West would take some of the bite out of its main strategy, which many believe is now paying dividends by forcing Iranian outreach.

"For this to work, Rouhani has to show, in very clear terms, what Iran would do in exchange for easing some of the sanctions," said Mehrzad Boroujerdi, director of the Middle East Studies program at Syracuse University. "That remains to be seen."

Iran has ruled out any chance of closing down its uranium enrichment program, which the West fears could eventually produce material for nuclear weapons. Iran insists that it only seeks reactors for energy and isotopes for medical treatments.

That means Rouhani's proposals will most likely focus on greater openness and other assurances over Iran's nuclear ambitions.

If those fail to win the West's approval, Iran's economy will continue to suffer. But officials say that while the public feels the pain, the state -- and its nuclear program -- will survive.

"The economic effects of sanctions can't be denied at all," said Mohammad Nahavandian, an economist and Rouhani's chief of staff. "Unfortunately, the pressure of sanctions is on the poorest sections of the society."

The U.S. has been applying various levels of sanctions on Iran for decades, but tighter restrictions by the West on the oil sector have cut exports from 2.5 million barrels in 2011 to 1.2 million. The U.S. has granted exemptions from possible American penalties to some key customers of Iranian oil, including China and Japan. But most countries have scaled back on overall Iranian oil imports.

Further U.S. measures have blocked Iran from directly tapping into even the reduced income, forcing Tehran to set up barter agreements -- India paying in agricultural products and China giving subway trains in exchange for oil.

Steps to block Iran from international banking networks, meanwhile, sent the national currency, the rial, into free-fall in late 2012, losing 40 percent of its value in a matter of weeks. The rial has clawed back since Rouhani's election in June, but is still far below its exchange value before the latest wave of sanctions.

In response, Iran has tried to quickly retool its oil industry to concentrate on refined products, which can be more easily sold under the sanctions radar. The nearly complete Ilam petrochemical complex near the Iraq border, which is supposed to produce ethylene, fuel oil and other refined oil-based goods, is among more than half a dozen such facilities on the drawing board.

Non-crude oil exports, such as pistachios, carpets and oil byproducts, have steady risen since 2010 to about $41 billion with more aggressive marketing and a bounce from the weaker rial.

Officials -- even Rouhani's top allies -- have sent the message that sanctions will not halt Iran's nuclear program despite the crippling hits -- which his predecessor Mahmoud Ahmadinejad described as an "economic war" waged by the West.

"Regardless of pressure," said Marzieh Afkham, spokeswoman for Iran's Foreign Ministry, "sanctions did not lead to a change of policy or change the path of people."

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Murphy reported from Dubai, United Arab Emirates.