Story Stream
recent articles

The image of Iran's economy as oil, carpets, and pistachios was always flawed, but has now become badly dated. The Islamic Republic is in the midst of a non-oil export boom -- it has the potential to remain a middle-income country even with no oil exports, and the reserves to finance the transition in the meantime. For years, Iran's leaders called for reduced reliance on oil but did little to meet that goal. Western sanctions have seemingly spurred them to action -- in his annual Nowruz address on March 21, Supreme Leader Ali Khamenei acknowledged for the first time that restrictions on the country's oil exports had made a serious impact: "The sanctions have had an effect, which is because of an essential flaw that we are suffering from. The flaw that our economy is suffering from is that it is dependent on oil." He also acknowledged that Iran's "economic weakness" had led to "harsh conditions for certain groups of people." Rather than change Iranian nuclear policy, however, he argued, "We can turn every threat into an opportunity...The sanctions caused the massive domestic capacities of the Iranian nation to become activated."


While still important, oil is becoming a smaller part of Iran's trade. In 2012, the country imported $57 billion in goods and exported $34 billion in non-oil products, meaning that non-oil exports covered 60% of the import bill, compared to 24% in 2002 and 14% in 1992. It produced this shift in part by converting more of its oil into industrial products for export; according to the Iranian Customs Administration, the $29.2 billion in non-oil exports over the first eleven months of fiscal 2012/2013 included $9.0 billion in chemical products (mostly petrochemicals such as urea fertilizer and polyethylene) and $3.2 billion in plastics made from oil. But other products are also being exported at high rates, including $8.2 billion in minerals, stone, cement, and related products, $5.3 billion in agricultural products, and $800 million in carpets. The country's largest market is Iraq, which took $5.6 billion in goods over the same period, including much of Iran's manufactured exports (e.g., more than $300 million in automobiles). The next-largest customers were China ($4.8 billion), the United Arab Emirates ($3.9 billion), Afghanistan ($2.5 billion), India ($2.4 billion), and Turkey ($1.3 billion).

With the rial plunging and the dollar becoming more valuable in comparison, Iranian merchants are moving from their traditional role as solely importers to seeking export opportunities as well. This shift is reviving any Iranian production that can find an export market. For example, Mohsen Jalalpour, the head of Iran's pistachio association, recently told the Financial Times, "Many pistachio farmers feared their farms would go bust a year and a half ago, but the strengthening of the U.S. dollar had led to a boom." The effect has been to price Iranian pistachios beyond the reach of most Iranian consumers, but the national economy benefits from the higher exports.

The non-oil trade deficit is also shrinking because of declining imports. Higher prices and direct administrative measures are responsible for this reduction. Last November, Tehran banned the import of seventy-five goods described as "nonessential," which Industry and Business Ministry official Sasan Khodaei said accounted for $4 billion in imports the previous year (other estimates are higher). The government is also vigorously substituting oil for natural gas at home, reversing decades of policy that had made Iran the most gas-dependent economy in the world (e.g., gas constituted 60% of domestic energy use in 2011, according to the BP Statistical Review of World Energy). Iran has long been a net importer of gas, but the oil substitution will allow it to reduce its gas imports from Turkmenistan and increase its gas exports to Turkey.

Overall, Iran's 179-page monthly customs report shows in great detail how the balance of trade is steadily improving, with category after category of exports headed up and category after category of imports headed down. To be sure, the country still has a large non-oil trade deficit, a problem exacerbated by the deficit in services and on the capital account. But its capital outflow also appears to be decreasing -- Central Bank data reported in Tehran's Donya-e Eqtesad newspaper pegged this outflow at $2.4 billion in April-May 2012 compared to $11.4 billion the previous year, in no small part because international banks cut their exposure to Iran. If the declining deficits continue, Iran could use its ample reserves to finance a moderately smooth transition to an economy without oil exports.

The West has sought to hamper Iran's trade through banking restrictions, but Minister of Industry, Mines, and Commerce Mehdi Ghazanfari recently claimed that "41% of the hard currency needed for imports in the first half of the year were provided by non-banking sources." Although that may be a considerable exaggeration, Iranian officials perceive themselves as masters of evading rules, so it will be difficult to persuade them that they cannot find a way around any Western restrictions.


Replacing oil in foreign trade is easier than replacing it in government finances, but Tehran is making progress on that front too. President Mahmoud Ahmadinejad's proposed budget for March 2013/March 2014 assumes oil revenue will fund 40% of expenditures. Although the official budget documents are not very informative, the Majlis Research Center (MRC) -- the parliament's research arm -- has prepared dozens of detailed reports on the subject. As these reports explain, the budget assumes Iran will export around $45 billion in oil in 2013/2014, based on an average price of $91 per barrel and a volume of 1.33 million barrels per day (b/d). This includes natural gas liquids; like the United States, much of Iran's oil exports are from such liquids rather than crude oil. After deductions for the National Development Fund (NDF) and National Iranian Oil Company costs, that translates into around $26 billion for the government. The budget's assumptions are largely reasonable: it will be difficult for the West to reduce Iran's exports below the current 1.3 million b/d or drive its earnings below $91 per barrel.