The Real Value of Auto Sanctions Relief to Iran

American sanctions on “Iran's auto industry, as well as sanctions on associated services,” like insurance, transportation and financial, will be suspended, according to the Joint Plan of Action (JPA) reached last month in Geneva between the P5+1 and Iran. The White House fact sheet on the JPA notes that this relief, plus the easing of “certain sanctions” on gold, other precious metals and petrochemicals, will provide Tehran with “approximately $1.5 billion in revenue.” Of those funds, the White House projects that easing auto industry sanctions will yield only $500 million over the six-month interim period.

The White House has not explained how they arrived at their $500 million valuation, but it appears that it is derived from expected revenue from exports of Iranian cars, not the total impact on the Iranian economy, including cars produced for the domestic market, wages paid, and other economic activity.   

The U.S. imposed sanctions on the Iranian auto sector on June 3, 2013, because of the dominant role played by Iran’s Islamic Revolutionary Guard Corps (IRGC) in its control of Iran’s major auto companies, Khodro, Saipa, and Bahman. At the time, according to CBS News, Obama administration officials identified the auto sector as an important source of both revenues and dual-use equipment for the Iranian regime and its IRGC-controlled nuclear and ballistic missile programs.

White House spokesman Jay Carney described the auto sanctions, and other measures, as “part of President Obama's commitment to prevent Iran from acquiring a nuclear weapon, by raising the cost of Iran's defiance of the international community.”

The impact was significant. The auto sector was a major source of export earnings, industrial production and assembly, employment and GDP. Specifically, the auto sector employed some 700,000 Iranians, or 4% of the total Iranian workforce. It accounted for about 10 percent of Iran's GDP, which was estimated at over $500 billion. In other words, it provided approximately $50 billion annually to Iran’s economy.

The imposition of automotive sanctions, on top of the financial and economic measures in the previous few years that already hurt the auto sector, further hammered the sector. According to the Washington Post, auto production dropped by 40 percent, after its global ranking already fell from 13^th to 21^st in just two years.

Sanctions relief could now reverse this rapid decline in both Iranian auto production and exports. Iran produced 1.65 million units in 2011.  Even when production was down significantly, Iran reportedly earned more than $294 million from the export of about 50,000 cars in the Iranian year beginning March 2012. Iranian industry minister Mohammadreza Nematzadeh now says that Iran is aiming to produce 900,000 cars this Iranian calendar year, which began in March 2013, and Iran has already reportedly produced more than 425,000. If Iran sold just 85,000 of those vehicles at the same average export price it earned in 2012, it would earn the White House’s estimate of $500 million in export revenue.

But automotive sanctions have impacted much more than just Iranian export revenue.

According to the Associated Press, sanctions have led to “some 100,000 Iranian auto workers” being laid off, and plants running “at less than half their capacity.” With Iranian auto companies reportedly unable to receive parts from their foreign suppliers, the Financial Times reported that Iran’s two largest state-run carmakers, Iran Khodro and Saipa, were “suffering from overstaffing – or ‘hidden unemployment,’ as the domestic media call it – due to the decline in output.” Relatedly, in July 2013, an Iranian automotive representative noted that, since the previous year, many production units had been forced to lay off between 30 to 50 percent of their workforce.

Sanctions relief, then, is likely to generate direct economic value for the Iranian economy. Any recovery in such a critical sector that recently generated about $50 billion annually for Iran’s economy will have a multiplier effect on recovered jobs, wages paid, GDP growth, and improved investor, and consumer confidence. Indeed, employment in the auto sector could prove to be the most politically visible form of sanctions relief for Iranian president Hassan Rouhani, who has promised to revive Iran’s struggling economy.

There is also the projected growth of the domestic Iranian auto sector. This explains the significant interest from global auto manufacturers in returning to partnerships with Iranian auto companies.

Shortly after the signing of the Joint Plan of Action, Iran held an international automotive conference attended by representatives from German, Indian, Japanese and South Korean auto companies. Other major auto manufacturers that formerly invested in the Iranian auto sector, such as France’s PSA Peugeot Citroen and Renault SA, have expressed optimism that they will be able to reap significant benefits in the coming months. A spokeswoman for Renault recently said, “Renault is satisfied by the signing of this accord… If the sanctions are lifted, our activity which is currently slowed could return to its normal course.” For Renault, this “normal course” could mean the sale of approximately 100,000 vehicles in Iran, while for Peugeot it could mean more than 450,000 vehicles.

These companies also know that Iran’s auto sector is poised to experience even greater growth on the horizon. A recent study by the Boston Consulting Group assessed that Iran had the “theoretical potential to attain an impressive 1.5 million in new-vehicle sales by 2020, which would make it the third-largest Beyond BRIC market.” Such production would be “on par with Canada’s 2012 car sales and well ahead of Italy’s,” according to Canada’s Globe and Mail.

The valuation of automotive sanctions relief also doesn’t include the value of loopholes that the JPA may create, and which Iran could exploit for additional economic gain. Since foreign banks, insurers, and shippers now can legally conduct automotive transactions, there may now be less deterrence and less oversight on other types of business. If a shipping company, for example, legally can transport auto parts to and from Iran, it may try to ship goods that are not permitted. Turkish, Chinese or South Korean banks may transfer money for permitted automotive transactions, but also for those that are not technically legal. It may be difficult to value, but these loopholes should not be ignored.

To be sure, the White House could be correct that Iran’s auto sector will only generate $500 million in revenue over the next six months. Export revenue growth may still be limited by the sanctions still in place that complicate international transactions. Growth could be further hindered by the ramp-up required in domestic production. And loopholes on insurance, transportation, and banking transactions could be closed by rigorous enforcement. More broadly, given the depreciation of the overall Iranian economy, it is highly unlikely that the auto sector could return to its peak levels, when it was contributing about $50 billion in annual GDP to Iran’s overall economy.

But the suspension of automotive sanctions will undoubtedly generate additional economic benefits for Iran, beyond what was stipulated in the JPA. It is inconceivable that the Iranian automotive sector will fail to contribute to increased GDP over the next six months through production, domestic sales, wages paid, and other economic activity beyond the administration’s estimate of $500 million in export revenue. 

Even if Iran’s auto sector contributed only ten percent of the sector’s previous $50 billion annual contribution in GDP to Iran’s overall economy, that would be worth $2.5 billion in additional economic activity over the next six months not included in the White House’s calculations.

By helping to revive the auto industry, the most important economic sector after energy, the Obama administration may end up providing far greater economic benefits to the Iranian government, and to the IRGC, than previously believed.

Mark Dubowitz is executive director of the Foundation for Defense of Democracies, where Jonathan Schanzer is the vice president for research. This analysis is the fifth in a series from FDD’s Iran Sanctions Project’s ongoing assessment of sanctions relief on Iran’s economy. Previous reports include “The Geneva Joint Plan of Action and Iran’s Petrochemical Sector,” “The Dollar Value of the Proposed Sanctions Relief at Geneva,” “Iran’s Golden Loophole,”(co-authored with Roubini Global Economics), and “When Will Iran Run Out of Money?”(co-authored with Roubini Global Economics).