Iran: One Nation Under Sanctions

Photo: Newsha Tavakolian/Polaris for TIM

Jay Newton-Small/Tehran

On Tehran's western outskirts is Iran's first and only wholesale supermarket--a kind of Persian Walmart-Costco hybrid. Women push giant carts around on gleaming white floors, past rows of the latest Apple computers and Sony flat-screen televisions--perhaps contraband, perhaps fakes. They sift through racks stuffed with designer clothes and stock up on everything from Norwegian salmon to Old Spice cologne. Except for the chadors, this could be any suburb in the U.S.

Can this be the capital of a country suffering under the toughest sanctions in modern history? Shelves are stocked with everything from Crocs to Louis Vuitton bags. Construction is everywhere. Restaurants are packed. Even Tehran's slums boast crops of satellite dishes and newer-model cars. "What did you expect?" asked one clearly prosperous store manager with a laugh. "Osama bin Laden at the airport with a shotgun?"

But the prosperity is largely an illusion. Ever since President Barack Obama's overtures for direct diplomacy with Iran were rebuffed, the Administration has succeeded in persuading its European and Asian allies to go along with severe sanctions aimed at forcing Iran back to the negotiating table. The results have been dramatic. Iran's currency has been devalued by more than 50%, and by U.S. estimates, Iranian oil exports have decreased by 45%. Some economists believe Iran is suffering from an annual inflation rate above 50%, double the Iranian government's estimate. U.S. officials are quick to claim credit. David Cohen, the Under Secretary at the Treasury Department responsible for squeezing Iran, says that "there are reverberations through the Iranian economy as we have broadened and intensified the sanctions."

Iran's ability to maintain the appearance of economic health may help determine whether there will be a new and destabilizing war in the Middle East. Iran is a decade into a determined effort to become a nuclear power. If U.S. sanctions don't force Iran's leaders to comply with international demands to prove their program is peaceful, Israel has said it will take military action to destroy it. As Tehranis go about their lives, their government shows no signs of backing down. A report in August from the International Atomic Energy Agency (IAEA) found that Iran has doubled its uranium refinement at an underground facility near Fordow, a virtually bombproof site that Western powers have insisted Iran shut down as part of a deal to end sanctions. International diplomacy has stalled. And politicians in Israel are openly debating bombing Iran's nuclear sites, possibly even before the U.S. presidential election in early November.

What I saw on a rare six-day trip to Iran suggests that sanctions are biting. The country has all but stopped issuing credible economic data in order to hide the depth of the distress. Everyone from the butcher to the industrialist will say that beneath the surface they are months from economic collapse. But even economic catastrophe may not be enough to stop Tehran's ruling mullahs from going nuclear.

Iran's resilience in the face of sanctions is partly a result of clever politics. In 2010, President Mahmoud Ahmadinejad pushed through reforms that did away with energy subsidies for businesses and redirected that money to the people. Now every month, every man, woman and child gets a check for roughly $25 thanks to Iranian oil revenue. This has helped insulate the poor from the effects of the sanctions. For a father of a family of four who earns $200 a month--the minimum wage in Iran--that check effectively increases his salary by 50%.

But inflation is eating away at that subsidy. A year ago, the government checks were worth $50 a month, and by the end of the year they could be worth $12--not much help when prices are spiking. When I landed at Imam Khomeini International Airport, the official exchange rate advertised there was 120,000 rials to the U.S. dollar; on the black market you get 225,000. Pistachio salesmen at the sprawling bazaar in southern Tehran have drawers 2 ft. deep to store their cash: it takes a fistful of rials to buy a bag of nuts.

The price of chicken spiked in July from 136,000 rials per lb. to more than 340,000, causing protests in towns across Iran. The government began to import frozen chickens from Turkey, and prices fell to 250,000 rials while I was there. In a poor neighborhood in southern Tehran called Piroozi, I met a woman named Azadeh haggling with her butcher. (All Iranian names in this story have been changed to protect sources and their families from retribution.) Azadeh used to buy twice as much meat for her family, but in the past two months she's been increasingly forced to substitute vegetables in her stews. The price of meat is three times what it was last year, she claims. "Inflation is very bad," Azadeh says, red hair peeking from beneath her headscarf. "But I can't stop eating meat."

Iranians who can afford it are fleeing the rial for gold coins called Bahar Azadi, or Spring of Freedom, which they stuff under their mattresses. Others have invested in the work of local painters and sculptors, creating an art-market bubble as investors seek havens for money that would otherwise lose value. Such sentiments have also fueled the construction boom, but Tehran can use only so many apartment buildings.

But if Ahmadinejad's reforms are losing value for everyday Iranians, their effect on businesses is becoming clearer. In Tehran, I met a man named Ali Reza, whose family owns a factory that produces industrial air filters. Eight years ago it had 40 employees and plans to expand to 100. "We used to import raw materials from the U.S., if you can believe that," says Ali Reza with a laugh. "Then it was the U.K. when sanctions made that impossible. Now we have to go to Dubai with suitcases of cash--they won't take anything else from us--hand them to a guy and hope he has what we need."

Ali Reza has cut his staff by half and would sell the company if he could. "Nobody is starting a business. Everything is frozen. If you own stocks or a company, you can't sell them. You're stuck. We're stuck." Every day, people knock at his door looking for work. "You see more and more people selling things in the streets. Every metro stop has them--toothpaste, umbrellas. And their voices are increasingly desperate."

And this is only the beginning. The harshest U.S. and E.U. sanctions just took effect in early July. These include an embargo on Iranian oil by the E.U. and U.S. banking measures that have isolated Iran's financial sector from the global economy. Obama signed a fresh round of sanctions into law in August that have yet to be implemented, and the U.S. Congress is busy mulling yet more sanctions.

Credit no longer exists in Iran; only local debit cards are accepted. Shortages are kicking in. Women beg their friends traveling abroad to bring back Always menstrual pads and Tampax tampons, both of which have disappeared from stores. Many of the brand names gracing supermarket shelves are fakes (Iran doesn't respect international copyrights), so the Adidas T-shirts, Johnson's baby powder and Rolex watches are Chinese or Iranian knockoffs--and bad ones. Tehran used to export fruits and vegetables; now they are kept for local consumption.

Some bigger manufacturers are showing signs of stress, suggesting the sanctions are reducing Iran's industrial capacity. Renault and Peugeot both used to supply carmaker Iran Khodro with parts. They recently suspended shipments. Iran Khodro's production is down 40%, and the company laid off 950 workers in the spring.

If the U.S.-led sanctions are proving painful for housewives and businesses, it's less clear what effect they're having on their intended targets: Iran's leaders and the nuclear program they are committed to defending. Treasury's Cohen says those effects are harder to see. "The purpose of our sanctions program is not to make it difficult to find a green Benetton sweater in the right size," he says. "You're not going to see on the street how hard it is to get steel for centrifuges or high-end electronics for their nuclear program. You're not going to see how hard it is to find sheet aluminum. But the sanctions are having a ripple effect across all these areas."

Meanwhile, trade has been forced into illegal routes, benefiting the Iranian Revolutionary Guards Corps, which runs the nuclear program and is widely believed to facilitate most of the smuggling into Iran. Washington has attempted to cut into the Revolutionary Guards' profits. The U.S. Treasury penalized two Iraqi banks for doing business with Iranian entities.

How long can Iran hold out? A year, maybe two, is the most common refrain from average Iranians. Many believe in Iran's right to nuclear power and even a nuclear weapon. "If Pakistan and India have them, if Israel has them, then why not us?" asks a woman named Dorri. That said, Dorri doesn't think a bomb is worth the sanctions. But like most other Iranians, she plans on doing nothing to protest her government's policy, no matter how bad the economy gets.

Iran's leaders insist their program is purely for energy and medical research, yet they continue to refuse U.N. inspectors access to their sites. The longer the standoff drags on, the more bellicose Israeli rhetoric becomes. Prime Minister Benjamin Netanyahu has been heated about the U.S.'s setting clear "red lines" for action on Tehran's nuclear program. And the IAEA has called on Iran to allow inspectors into a military site at Parchin.

Meanwhile, in order to shop at that glossy supermarket in west Tehran, Dorri has already had to sell some of her gold jewelry. Luckily, she says, she has more. But at some point, Dorri will run out of gold, Azadeh won't be able to afford chicken, and Ali Reza's company will go under. Then there'll be no one left to buy the smuggled, glittering piles of merchandise at the supermarket.

Jay Newton-Small/Tehran, TIME, september 24, 2012