Iran’s resistance economy is kicking in

Bourse and Bazaar | Esfandyar Batmanghelidj: Farzaneh Sharafbafi, the first-ever female CEO of Iran Air, has just lost her job, a victim of U.S. sanctions on the Islamic Republic. Appointed in July 2017, Sharafbafi’s tenure was dogged by failures beyond her control. Of the 200 aircraft Iran ordered from Boeing, Airbus, and ATR, only 21 were delivered before the U.S. Treasury revoked the relevant licenses as part of the Trump administration’s “maximum pressure” campaign on Iran.

Sharafbafi’s replacement is Touraj Dehghani Zanganeh, a former air force commander and CEO of Meraj Air, a small airline which at one point operated the aircraft used by Iran’s president and foreign minister for diplomatic travel. Zanganeh was placed on the sanctions list by the U.S. last May.

The appointment of an individual sanctioned by the Trump administration is freighted with political symbolism: the Iranian government is signaling that sanctions designations will not influence decisions over the leadership of key industries.

More important, Zanganeh’s appointment exemplifies Iran’s renewed reliance on what its Supreme Leader, Ayatollah Ali Khamenei, has called a “resistance economy.” In order to overcome the restrictions imposed by sanctions, Iran will turn increasingly to a cadre of “resistance managers,” elevating individuals and empowering networks with unique capacities to keep Iran’s trade flowing under duress.

Given its long experience of economic sanctions, Iran has plenty of experienced “resistance managers” like Zanganeh. But their skills will be tested like never before as the U.S. ratchets up its sanctions regime—the latest round targets Iran’s metals sectors—and the economy sinks deeper into recession.

Government officials have vowed to adopt better monetary and fiscal policies in order to protect the public from the recession. But with trade with major partners like Europe and China collapsing, Iran needs to continue buying and selling goods, and earning hard currency, in sufficient quantities to keep the economy turning, even at a slower speed.

In the case of Iran Air, sanctions don’t just end the acquisition of new aircraft, but also significantly restrict the ability to secure spare parts for its existing fleet, to receive ground handling services at airports, and to sell tickets to passengers around the world. Iran Air no longer needs a CEO who represents the renewal of Iran’s aviation industry.

The government is betting that Zanganeh is a manager who can procure—by any means necessary—what the airline requires to keep its planes aloft. It is telling that he was designated by the U.S. Treasury as part of a procurement network. With his military background, Zanganeh also has the authority necessary to cut Iran’s national carrier to size as its commercial prospects darken. The airline has a workforce of over 11,000 and a fleet of just 53 aircraft. Competitor Mahan Air, which has 64 aircraft, has a third of the employees.

Not all companies will change their CEOs, but across Iran’s industrial sectors, many will increasingly outsource their procurement needs to intermediaries and front companies that use both legitimate and illegitimate channels. Such measures can already be seen in the embattled oil sector, reeling from the Trump administration’s recent decision to revoke waivers that allowed Iran to export its crude oil to major customers such as China and India. Speaking on the sidelines of a major oil and gas conference in Tehran, where the presence of foreign exhibitors had fallen from around 600 companies in 2017 to just 60 companies this year, deputy oil minister Hossein Zamaninia told journalists Iran could sustain exports, adding: “We have mobilized all of the country’s resources and are selling oil in the ‘gray market.’”

Analysts expect Iran can sustain exports of around 500,000 thousand barrels per day by leveraging gray-market channels. Zamaninia argued this would not constitute “smuggling,” because Iran doesn’t regard the sanctions “as just or legitimate.” Zamaninia has a point, considering that the U.S. is the only country seeking to enforce a global embargo on Iran’s oil exports.

But definitions aside, it was long expected that Iran would respond to attempts to limit its oil exports by resorting to smuggling, with the Islamic Revolutionary Guard Corps (IRGC) and other quasi-state intermediaries resuming the lucrative roles they had played in the previous sanctions period. Every day, hundreds of motorbikes strapped with jerrycans cross the border between Iran and Pakistan, taking Iran’s cheap gasoline to markets where it can be sold for a hefty profit. Some estimates suggest that 22 million liters of gasoline are smuggled out of Iran daily.

By choking off key exports and limiting access to banking channels, U.S. sanctions seek to limit Iran’s ability to earn and repatriate enough foreign currency to keep its market supplied. But the cash economies of Iraq and Afghanistan, flush with dollars due to the U.S.-led invasions, offer an important lifeline. Reports suggest as much as USD 2-3 million dollars in hard currency are daily being transported from Afghanistan to Iran. A similar trade exists with Iraq.

Central to these methods of “resistance management” is a selectively porous border. Iran needs to allow goods and money to cross into the country away from the scrutiny of the usual trade routes. But at the same time, the state cannot allow uncontrolled export smuggling, instances of which have already exacerbated shortages of basic foods and consumer goods at home. In March, officials from Iran’s agricultural ministry announced that due to a failure to “monitor and control the movement of livestock,” which saw whole herds smuggled to neighboring countries, and which drove the price of meat to historic highs, the responsibility for counter-smuggling activity had been handed over to the IRGC.

Iran needs to keep the economy turning with the bandaid solutions of resistance management, even if it means undoing the hard-fought reforms that had helped make Iran’s economy a little more globalized, more transparent, and less state-controlled over the past few years. As one senior Iranian official told me at a recent meeting: “If we are going to be treated like bandits, we might as well behave like bandits.”

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