Wednesday, July 6

Iran Has Lessons on Grim Survival for Russia Under Sanctions


Tehran’s past experiences of collapsed growth, smuggling crude and oil well preservation provide a template for Russia’s future.

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(Bloomberg) — The founder of one of the first Iranian ad agencies to focus on social media has some advice for Russian businesses, now their country too is under international sanctions: You’ll adapt and survive, but it’ll be brutal.

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Ahmad Norouzi, chief executive officer of Click, said it took a while to accept that the firm’s clientele of multinationals were gone for good, but that they found domestic replacements soon enough. The catch: annual revenues fell from about $2.3 million before sanctions struck again in 2018, to $285,000 today.

Russia is a Group of 20 member with an economy some seven times that of Iran’s. Even so, as an energy-rich nation of some 84 million people, Iran still offers Russia the closest case study for what may lie ahead under penalties imposed since Moscow’s Feb. 24 invasion of Ukraine.

Tehran has been subject to economic bans and penalties since the US hostage crisis in 1979, but only since the exposure of a clandestine nuclear fuel program have those become extreme. Twice, in 2012 and 2018, sanctions all but severed it from the global economy, costing about 5% and 3.5% of gross domestic product respectively in the two years that followed.

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The main lesson, eagerly absorbed by Russian officials, is that both the country and its regime survived without having to capitulate on foreign policy. Iran’s experiences may hold more pointers for Russia, from industrial scale smuggling techniques to exploiting sanctions loopholes.

In April, Russia hosted an unusually large Iranian trade forum. Late last month, Deputy Prime Minister for Energy Alexander Novak went to Tehran to talk to counterparts, among other things about ways to trade in local currencies, avoiding exposure to the US dollar.

One top Russian official from the state sector that said his colleagues increasingly draw parallels with Iran’s experience as a major oil producer under sanctions. At first life will be difficult, according to the official, who asked not to be named due to the sensitivity of the matter. But then the economy will start to grow, much as happened in the 1990s after the collapse of the former Soviet Union. Sanctions, the official added, aren’t that scary.

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If Iran’s experience is any guide, they probably should be. True, the economy adapted and life carried on. But the cost to living standards and the nation’s growth potential was high.

China — the greatest hope for replacing lost markets, investment and technology — ultimately disappointed, unwilling to tangle too directly with secondary US sanctions. While China was Iran’s largest trading partner in 2021, the volume of trade was less than half the $32 billion recorded in 2018.

Efforts at import substitution were only partly successful. Unable to buy modern aircraft, for example, Iran watched in envy as Russia and neighboring Turkey bought or leased fleets of gleaming new passenger aircraft to develop successful national flag carriers that helped expand their foreign trade and influence .

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A $40 billion project for Iran to buy its own fleet of Boeing Co. and Airbus SE jets, announced after sanctions were lifted in the aftermath of the 2015 nuclear deal — known as the Joint Comprehensive Plan of Action — died with it. Then-US President Donald Trump pulled out of the JCPOA and reimposed sanctions in 2018.

The impact on the production and export of oil was, by the end of 2019, extreme and began to recover only this year, as US attention has diverted to Russia.

Iraq, with which Iran shares a massive 38 billion-barrel oil field, exported slightly less oil than its larger neighbor in 2010. By the end of last year it was exporting over 10 times as much, and extracting almost twice as much oil from their shared field — known as Manbooj in Iraq, and Azadegan in Iran.

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Norouzi’s Click agency, with a clientele of foreign multinationals that vacated the Iranian market en masse in 2019, was particularly exposed. Those Norouzi has managed to hold on to, including a food company, are struggling to import the raw materials they need to make their products.

“So the digital campaign that we’d planned for them has been suspended for now,” Norouzi said.

The heavy reliance on China also raised costs for Iran due to the lack of an option to buy goods elsewhere, according to Mahmood Khaghani, ex-Director General for Caspian Oil & Gas at the National Iranian Oil Co. Sanctions created vested interests in their continuation , as powerful Iranian oligarchs cashed in on the profits to be made in smuggling and monopolizing imports, he added.

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“Iran has a lot of mineral wealth, gold, copper, iron, and no one knows who’s exporting these or who’s making the money from it,” Khaghani said. “We have a dark economy and they won’t let it become transparent. “

To be sure, Russia has made adjustments already as a result of being the target of US and European sanctions since its 2014 annexation of Crimea, even if only this year have those approached the levels seen in Iran. Plus there are, of course, big differences between Iran and Russia, a much larger, nuclear-armed nation of 144 million that spans from Europe to the Far East.

For one thing, Russia has become far more integrated into the global economy, meaning it has more to lose from decoupling than Iran. Consumers will lose easy access to everything from Italian suits to German cars. Already, the nation’s substantial car industry has collapsed as supply chains for foreign components have choked. The International Monetary Fund projects Russia’s economy will contract by 8.5% this year.

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Under sanctions, China was key to keeping Iran’s oil exports alive, says Homayoun Falakshahi, a senior analyst focused on Iranian oil and gas at the commodities data and analytics firm Kpler. That’s a lesson Russia already drew for itself, increasing oil sales to China since the start of the war, he says.

There are some areas where Iran’s experience can teach a thing or two, though.

One is that while sanctions waivers and high oil prices can neutralize the impact on budget revenues, those defenses disintegrate as soon as prices fall.

A second lies in the complex network Iran has developed to evade penalties.

Iran stores oil on tankers that switch off their transponders to disappear at critical moments, often on reaching Malaysian waters, according to Falakshahi. There they launder the product by transferring it to other ships that can steam openly through the Malacca strait to deliver the disguised oil to Asian markets.

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Just as important is the expertise Iran has developed in rotating the closure of oil wells that, if shut down for more than a few months, can be permanently damaged.

With much of Russian production in the northern Urals region, where winters can be extreme, that’s a more acute problem than in Iran’s hot deserts, where the crude remains less viscous. “Such a big cut in production has never been done in Russia,” says Falakshahi.

Those colder temperatures, combined with Russia’s much greater exposure to global supply chains, are likely to create some challenges for President Vladimir Putin that even Iran hasn’t faced.

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