Why Iran pays more for each kilogram of European medicine

Bourse and Bazaar | Esfandyar Batmanghelidj: Since the year 2000, Iran has about doubled its annual imports of pharmaceutical products from the European Union, reflecting both advances in Iranian healthcare and the growth in Europe-Iran trade ties. This growth has remained durable in the face of multilateral—and more recently—unilateral sanctions. Pharmaceutical products can be sold under longstanding humanitarian exemptions under both the US and EU sanctions regimes.

Yet, reporting from Iran has highlighted the significant disruptions in the price and availability of many medications in Iran. Iranian medical professionals complain that despite the exemptions, sanctions are making it more difficult for patients to reliably and affordably access medication. US officials have countered that there has not been an dramatic drop in pharmaceutical exports to Iran, but their defense relies on an incomplete picture of the nature of the trade disruption. Iranian patients are not principally struggling because of a supply disruption. They are suffering because of a price distortion that can be observed in the relationship between the quantity of European pharmaceutical exports to Iran, and the declared value of those exports.

To contextualize the distortions in European pharmaceutical exports to Iran, it is possible to conduct Pearson correlation analyses for the quantity and value of monthly pharmaceutical exports from the European Union to Russia, Turkey, Pakistan, and Iran for the period between January 2000 and June 2019. Intuitively, we would expect that an increase in the quantity of exports from Europe to these countries would be correlated with an increase in the declared value of those exports—if Europe is selling more it should be earning more.

This is clearly the case when looking to European pharmaceutical exports to Russia, Turkey, and Pakistan in this period. The observed correlations are strongly positive and statistically significant. However, the underlying data tell slightly different stories for each country. In the case of Russia, the magnitude of the increase in the value of exports since 2000 has been greater than the increase in quantity. In Turkey, the opposite is true. To put it more simply, Russia is buying slightly more medicine at a significantly higher price, while Turkey is buying significantly more medicine at a slightly higher price. That is an observation that deserves its own analysis, but in the context of understanding comparative differences with Iranian purchases of European medicine, what matters is that in both cases an increase in quantity of medicine exported correlates with an increase in the value of medicine exported.

The data for Russia, Turkey, and Pakistan shows relatively low levels of volatility. This can be seen when the value and quantity of monthly exports are indexed. Fluctuations each month can be explained by a range of factors such as seasonal or cyclical demand, as well as variation in the composition of exports, particularly in terms of price. Many medicines weigh roughly the same amount, but have vastly different prices—consider the price of aspirin and the price of pills used in the treatment of rare diseases.

Sudden spikes in pharmaceutical exports are often related to disaster response. The December 2005 spike in European exports to Pakistan corresponds to the 2005 Kashmir earthquake, which killed nearly 90,000 people. The August 2010 spike in exports to Russia corresponds to a weeks long heatwave that led to thousands of deaths and triggered extensive wildfires.

Putting these spikes in context, and looking to fluctuations over time, we see that the expected relationship holds—the greater the quantity of pharmaceutical products exported from Europe to Russia, Turkey, and Pakistan, the greater the declared value of those exports.

In the case of Iran, the expected relationship also holds, but not so definitively. Looking to the period between January 2000 and June 2019, the correlation between quantity of exports and value of exports is still positive and statistically significant, but is notably weaker. The explanation becomes clear when looking at a chart of indexed export quantity and value. Sales of European pharmaceutical products to Iran are marked by huge volatility. In more recent years, it appears that the declared value of exports has increased without a commensurate increase in the quantity.

There has been extensive reporting on the impact of sanctions on Iran’s ability to reliably important pharmaceutical products. To test whether the relative weakness in the relationship between export quantity and value is sanctions related, it is possible to test the relationship in two time periods. Multilateral sanctions on Iran reached their apogee in July 2012, when the United States imposed strict sanctions intended to cut off Iranian banks from the global financial system. The number of correspondent banking relationships dwindled, meaning that even for trade in pharmaceuticals, which remained an exempted category, European exporters and Iranian importers faced significant challenges in identifying viable banking channels. When such channels were found, their use typically entails higher transaction costs and payment delays.

Looking to the period prior to July 2012, we can observe a moderately positive and statistically significant correlation between export quantity and value. When limiting the analysis to the period after July 2012, that relationship is only weakly positive. This is a remarkable finding, suggesting that since 2012, the price paid by Iranian importers for European pharmaceuticals is only loosely related to the quantity of goods ordered. Sanctions may have exacerbated whatever factors led the relationship between quantity and value to be weaker than that observed for Russia, Turkey, and Pakistan.

As a consequence of the weakened relationship between quantity and value, Iranian importers are paying significantly more for each kilogram of European medication they purchase than importers in Russia, Turkey, or Pakistan. In the period between June 2018 and June 2019, European exports to Iran can be “priced” at EUR 8464 for each 100 kilograms exported. By comparison, exports to Russia were just EUR 5707 for each 100 kilograms, while exports to Turkey were EUR 5645. In the case of Russia and Turkey there may be economies of scale at play—the value of monthly European pharmaceutical exports to these countries are on average 9 and 3.5 times higher, respectively, than those to Iran. But even Pakistan, which imports less than half the pharmaceutical products that Iran imports from Europe each month, benefits from a significantly lower price of EUR 7509 per 100 kilograms. Taking the average of the price enjoyed by Russia, Turkey, and Pakistan, in the most recent 12 months for which data is available, Iran paid EUR 2723 more for each 100 kilograms of pharmaceutical products. This premium is almost certainly being passed onto consumers, with devastating effects.

It is difficult to say to what extent distortions in Europe-Iran pharmaceutical trade are attributable to sanctions impacts. Certainly Turkey, Russia, and Pakistan do not share the same experience of being targeted by unilateral and multilateral sanctions, though they do share many of the same political and economic risk factors that can serve as an impediment to bilateral trade. There are other possible explanations for Iran’s highly volatile pharmaceutical imports, including issues related to the devaluation of the Iranian rial, the use of middlemen in transactions, and changes in the composition of imports related to protectionist policies.

Looking to total relative proportion of total export quantities in 2018, it is possible to take a snapshot of the composition of European exports to the four countries. What we find is that the composition of exports is broadly similar, with nearly all of the top ten export categories for Iran represented among the top ten for Russia, Turkey, and Pakistan, albeit with differences in proportion. What is clear is that all of the countries import significant volumes of pharmaceutical ingredients, such as vitamins, for use in domestic pharmaceutical manufacturing. Iran imports significantly more vitamin E than the other countries, but significantly less wadding. Neither is a particularly expensive good.

What is most remarkable about the price distortion is that it can be observed through European customs data. In this data, the value of goods is reflective of the value declared by the European seller at time of export. This distinguishes the analysis here from reports focusing on the price increases observed by Iranian consumers. It would appear that at least some of the exorbitant increases in the price of medication for Iranians are attributable to disruptions in trade that originate outside of Iran, rather than tariffs, hoarding, price gouging, or other market disruptions that are known to exist within Iran.

The price distortion also challenges the conception of sanctions impacts on pharmaceutical trade as being principally about reduced export volumes or shortages within Iran. The analysis presented here suggests that European pharmaceutical exports to Iran could theoretically grow in both absolute value and quantity under sanctions, and yet there could still be harms felt by Iranian consumers if the price of medication continues to rise unchecked. This means that sanctions policy cannot be defended on the basis that trade data shows limited disruption in the value or quantity of exports. The price related disruption shown here only becomes clear when looking to the relationship between export value and quantity over time. Any significant increase in the price of medication at time of export will necessarily lead to circumstances where the sick and dying in Iran cannot afford the medication they need.