Technological development by sub-sanction pressure: the case of Iran

Khudokormov Georgii Aleksandrovich ORCID: 0009-0002-1750-3694 Research Assistant, Faculty of International Economic Relations, Financial University under the Government of the Russian Federation 119421, Russia, Moscow, Novatorov str., 34k7, sq. 84 Gkhudokormov@yandex.ru

Introduction

Sanctions in one form or another have been imposed for many centuries. Economic restrictions were applied by States to reduce the capabilities of other countries and worsen their financial situation.

The first documented sanctions are considered to be the "Megarian Psephism", introduced in 433 BC ^[1]. Then the Athenian Maritime Union forbade merchants from Megara to trade in the ports and markets of Athens. Since then, sanctions have become one of the most well-known instruments of pressure in international relations. Under the influence of restrictions, economies collapsed, political regimes changed and various concessions were made.

Many scientists have devoted their works to the study of sanctions as a means of influence, but there is no unambiguous opinion about their effectiveness in the scientific community ^[2,3]. Some researchers consider such restrictions illegitimate and weakly effective, while others, on the contrary, attribute them to perhaps the best ways to influence opponents.

It is obvious that the sub-sanctioned countries can resist the pressure with varying success. If for some restrictions cause the undermining of the national economy, as happened with Venezuela, then other states are able to live and develop quite successfully under the pressure of sanctions ^[4]. One of the most impressive examples of opposition to restrictions is Iran. The concentration of resources in the high-tech industries of this state contributes not only to meeting domestic needs, but also to the creation of export earnings.

However, despite the positive experience, to date, the topic of countering sanctions from Iran has been little studied by the scientific community. Most of the works are devoted to the limitations themselves, and not to ways to overcome them ^[5,6]. Those studies that examined the processes of countering sanctions, as a rule, were conducted before the termination of the "Nuclear Deal", and therefore are no longer relevant today.

A brief history of sanctions against Iran

Before the 1979 Islamic Revolution Iran has been deeply integrated into international relations. Favorable geographical location, abundance of resources – all these factors contributed to the development of the state. Serious sanctions were imposed in 1979 after radical youth took American diplomats hostage at the US Embassy. The first restrictions were imposed by the American government – the accounts of funds, enterprises, companies and firms nationalized by the regime that came to power were frozen. Moreover, the United States imposed sanctions against states that violated the embargo against the Islamic Republic of Iran. Some EEC countries have also joined the restrictions. Sanctions were constantly being tightened, then partially lifted. 

The first multilateral restrictions were introduced in 2006 in response to the resumption of the nuclear program. First, the UN Security Council resolutions directed against the Islamic Republic of Iran (IRI) (№1696, 1737, 1803, 1835), They contained specific restrictions and encouraged the Iranian government to cooperate with the IAEA in the field of nuclear research and development ^[7]. However, already in 2010, according to Resolution No. 1929, sanctions were imposed affecting absolutely all sectors of the Iranian economy ^[8]. 

On November 24, 2013, successful negotiations were held between Iran and the members of the UN Security Council, to which Germany was added. Their result was the drawing up of a Joint plan of action, providing for the easing of sanctions for Iran's refusal to continue its nuclear program ^[9]. And in 2015, the so-called "Nuclear Deal" was concluded, which provided for the lifting of sanctions against Iran. However, in 2018, the United States unilaterally withdrew from the agreement and again imposed sanctions against Iran ^[10].

Separately, it is worth noting sanctions against Iran's technology sectors. Under the slogan of "containing the Iranian threat," restrictions were imposed not only on the supply of weapons, but also on dual-use goods. This measure does not allow interested parties to officially import into Iran any technologies that can be used indirectly or directly for the production of weapons. Accordingly, Iran has difficult access to some important innovations. Moreover, the EU has imposed an embargo on the supply of equipment for the energy sector, mining, as well as software supplies. All these restrictions could not have a positive impact on Iran's technological development. However, Iran still managed to build supply chains to circumvent sanctions.

Economic development of Iran

Due to the extensive anti-Iranian sanctions, Iran gives priority to building foreign economic relations with the countries of the East. China remains Iran's main trading partner by a large margin. A new round of development of relations between the two states began in 2012, when many Western corporations left Iran. The PRC skillfully took advantage of Iran's disconnection from the SWIFT bank transfer system and established a relationship based on barter. For Iranian oil, China supplied electronics components and various technologies to the Islamic Republic. In 2021, China's share in the structure of Iran's exports was 43%, and imports – about 30% ^[11]. In the same year, a document on 25 years of comprehensive cooperation between the countries was signed. However, it is worth noting that Iran has a certain dependence on China, but at the same time the share of Iranian goods and services in the structure of Chinese imports is low. Despite some concerns among some elites, the integration between Iran and China is getting deeper. Thus, Iran's Deputy Foreign Minister for Economic Affairs Mehdi Safari said that in March 2023, the volume of trade turnover between China and Iran will amount to $ 30 billion.

Iran's relations with Arab countries, which act as foreign economic partners, should also be considered separately. It is thanks to them that Iran often gets access to international markets. For example, the United Arab Emirates, which is considered an ally of the United States in the region, occupies the second position after China in the volume of trade relations with Iran. Thus, in 2021, the trade turnover between the countries reached almost $ 15 billion. Moreover, about 2/3 of all American and European goods enter Iran through the UAE ^[12]. Also, a large number of Iranian enterprises operate in the Arab Emirates. According to various estimates, about 80 thousand companies with Iranian origin operate in the UAE, and their total investments reach about 200-300 billion dollars.

Oman is considered another key trading partner of Iran. A turning point in the history of relations between the states was the agreement on the delimitation of maritime borders between them. After the signing of the agreement, the countries began to increase cooperation. Oman has historically often acted as a mediator in the Middle East, for example, it was there that the nuclear deal was negotiated. In 2022, the trade turnover between the two countries reached $ 1.3 billion, while Iran exported goods for $ 716 million, and imported goods for $ 619 million, which indicates a balanced trade between the states.

It is also worth noting Iraq, with which Iran was at war about 25 years ago. Now Iraq acts as a kind of "window" to foreign markets. In 2022, trade volumes reached $13 billion, 20% of all Iranian exports are accounted for by Iraq. Free trade zones located in Iraq played a special role in the development of relations. They allow Iran to export its goods.

"The Economy of resistance"

Sanctions forced Iran to switch to a "resistance economy": the policy of accelerated import substitution and the bet on the development of their own industries. A ban was imposed on the import of certain goods that can be produced on the territory of Iran ^[13]. In addition, the state stimulated national entrepreneurs by reducing taxes on production, providing deferrals for payments on obligations and debt restructuring.

The development of transit projects has become an important factor. As noted above, Iran has a favorable geographical position, which allowed it to participate in the Chinese One Belt, One Road project and in the North-South transport corridor. The key aspect was the interaction with neighbors. Iran has reoriented its supply chains, focusing on interaction with neighbors and Asian countries.

Iran is creatively circumventing Western sanctions. For example, in order to export its oil, Iran manipulates the automatic identification system of ships. Often, ships carrying oil change their names and owners. In this issue, it is worth highlighting the interaction of Iran with Panama. Due to offshore zones and its geographical location, this Central American country attracts investors from all over the world. About 16% of the world's shipping fleet is registered there. According to the United Against Nuclear Iran organization, 39% of ships registered in Panama participated in transactions for the sale of Iranian oil under the flags of different states. Panama is very loyal to Iran's activities, which allows Iran to have its own fleet, which is almost impossible to track.

Much attention is also paid to the financial system. The central bank promotes the creation of various companies abroad that mask transactions conducted through them. Such companies receive revenue from the sale of various goods and services (mainly oil), and then acquire currency or the necessary technologies. Iran is also actively working with cryptocurrency. According to various estimates, up to 4.5% of the total volume of Bitcoins is mined in Iran, and the use of cryptocurrencies in settlements makes sanctions ineffective.

After disconnecting from the SWIFT system, Iran began to actively use gold in settlements. For example, Iran supplied raw materials to Turkey for the Turkish lira, after which it exchanged it for gold in local banks ^[14]. It is worth noting that Turkey is a NATO ally of the United States, so US discontent was a matter of time. As soon as the United States expressed concern, an intermediary, the UAE, was added to the chain of settlements between Turkey and Iran.

Most importantly, Iran has managed to achieve success in the technological development of a number of industries whose products have proved to be in demand on the international market. First of all, two of them stand out. The first is the production of unmanned aerial vehicles. After the sanctions were imposed, Iran faced an acute shortage of ammunition and weapons. Drones are a cheaper analogue of missiles. For several decades, Iran has managed to create an entire air fleet. In addition to drones, it is worth noting the Iranian automotive industry. After the sanctions were imposed, it became difficult to import foreign cars. At the same time, Iran ranks 17th in the world by area and has a very capacious domestic car market. Iranian manufacturers borrowed the achievements and infrastructure of foreign concerns that assembled cars on the territory of the country, and began producing their own cars. After satisfying domestic demand, Iran has established the export of domestic cars. Each of the industries will be discussed in more detail below.

UAV production

One of the most successful and world-famous developments of Iran has become their unmanned aerial vehicles (UAVs). The first development program in the field of UAVs began in the 80s. After the breakdown of relations with the United States and other former allies, it became obvious that it would not be possible to import high-quality military equipment from abroad. I had to rely only on my production capabilities. Of course, Iran could not compete with Western military projects, so the bet was made on creating cheap alternatives. The war with Iraq (1980-1988) exposed many problems of Iranian aviation, which at that time had a serious shortage of aircraft, spare parts and ammunition. Because of all the sanctions against the military-industrial complex, it was much easier to import compact components for UAVs into the country than massive parts of other types of weapons. Such circumstances made drone production a priority. The program gave its first fruits already in 1985. Then the state-owned company Qods Aeronautics Industries produced the first Mojaher-1 drone, and a year later the Ababil-1 device was tested. Up until 2009, work was carried out on only a few models and mainly in order to improve them. However, in 2009, a prototype of the Karrar drone, created on the basis of the American MQM-107 Streaker, was presented, followed by the presentation of other models. It is worth noting that the MQM-107 Streaker, a drone adopted by the US Army in 1984, was no longer particularly relevant at the time of 2009.

The turning point was on December 4, 2011, when Iran announced the interception of the American drone RQ-170 Sentinel. Developed in 2007 by the American military-industrial company Lockheed Matrin, the RQ-170 Sentinel was an advanced reconnaissance drone. It is worth noting that about 20-30 such UAVs were produced in total, and the cost of creating one drone was $ 6 million. The US authorities almost immediately asked to return the intercepted device, which was refused. Subsequently, the Iranians managed to create the Shahed-171 drone based on the American prototype, and later its improved version, the Shahed-191. In 2012, the Iranian military again managed to intercept an American drone. This time it was ScanEagle, developed in collaboration with one of the largest aircraft manufacturing corporations Boeing and its subsidiary specializing in the development of Insitu drones. Already in 2013 Iran has presented the Sayed-2, created on the basis of an intercepted drone.

At the moment, Iran has an extensive line of various UAVs designed for various purposes:

1. Ababil is one of the first in the Iranian program. In 1990 it was modernized and modified. Initially, this drone had a significant limitation – its operation was possible only within the line of sight of the operator. At the moment, Ababil-3 can stay in the air up to 8 hours and climb to a height of up to 5 km ^[15].

2. Fotros – launched in 2013 and remains the largest among all drones produced in Iran. According to the specifications, this UAV can climb up to 8 km in height, fly at a distance of about 2000 km and stay in the air for up to 30 hours.

3. Shahed is considered the most common in the Iranian army. In 2012, at the presentation of the Shahed-129, it was stated that the flight range reaches 2000 km. At the same time, the design of the drone assumes the placement of up to 8 Sadid-1 missiles on it. In addition to the previously mentioned Shahed-171, Shahed-191 and Shahed-129, it is worth highlighting Shahed-136. First released in 2020, this drone has a number of advantages. Firstly, according to various estimates, its cost varies between 30-50 thousand dollars, which makes this drone incredibly profitable. Secondly, it has the same flight range as significantly more expensive UAVs.

Iranian-made drones have also proved to be in demand on the international market. According to the chief military adviser to the Leader of the Islamic Revolution, in 2022, 22 countries approached Iran with a proposal to acquire drones. For example, already in 2008, Sudan acquired an Ababil-3 UAV to confront the rebels. There are also reports of deliveries of UAVs to Yemeni Houthi rebels in 2014. According to the US State Department, in 2021 Iran sent its UAVs to Ethiopia, violating, according to the agency, UN Security Council resolution 2231. Iran has also acknowledged drone deliveries to Russia. 

Iran also provides an opportunity for interested States to produce UAVs on their territory. For example, in 2010, a drone manufacturing plant was opened near the city of Maracay in Venezuela, among which there was Mohajer-2 (adapted name – ANSU-100) and later Shahed-171 (ANSU-200) ^[16]. Also in 2021 Iran and its allies have established the production of drones in Syria. In 2022, a factory was opened in Tajikistan, which produces the Ababil-2 drone.

Despite the ban on the import of dual-use technologies, components for Iranian drones enter the country. For example, according to the independent organization Conflict Armament Research, which tracks the flow of weapons around the world, there are components of 70 companies from 13 countries in Iranian drones. These conclusions were made after studying three models: Shahed-131, Shahed-136 and Mojaher-6. Moreover, the same study noted that 82% of all components were manufactured in the USA and more than half of all components were produced in the last few years (Fig.1).

Figure 1 – year of production of components in Iranian UAVs ^[17]

From the presented data, it can be concluded that Iran is dependent on imported technologies. Nevertheless, it should be noted separately that parallel import chains are clearly built, because the import into Iran of the overwhelming number of components found in drones is prohibited by the UN convention. At the same time, Iran succeeded in creating not only a worthy replacement for combat aircraft, but also established exports to other countries. The Iranian experience in this direction can become a good example for other countries under sanctions.

Automotive industry

The automotive industry in Iran was born in 1952, when Iran Khalij Company appeared, which carried out the assembly of Mazda cars. Initially, all Iranian automobile companies were engaged in either production under license or distribution of cars within the country. The first significant changes occurred after a series of reforms (the so-called "White Revolution" of the 1960s and 70s), contributing to the integration of Iran into the international capitalist community. In the period from 1962 to 1963, the main Iranian automotive companies appeared: Iran Khodro (1962), Shahab Khodro (1962), SAIPA Diesel Company (1963), Zamyad Company (1963). Subsequently, many firms created subsidiaries to scale production. The automotive industry was experiencing the dawn until the Islamic Revolution. Distinctive features of the period from 1961-1979:

· In 1967, Iran Khodro creates a Peykan car based on the British Hillman Hunter prototype.

·                   Production of an extensive range of car models – primarily French.

·                   Production facilities are concentrated in Tehran and its suburb of Karaj

· Assembly is mainly made of imported parts.

Before the 1979 revolution, the volume of demand for cars in Iran was continuously growing. Domestic production was not able to satisfy it completely, so it was necessary to import a significant part of cars from abroad. For example, in 1976, 60 thousand units were purchased (about 40% of domestic demand), and in 1978 – 70 thousand units (about 35%) ^[18].

After the Islamic Revolution, cooperation with almost all foreign partners was interrupted, companies were nationalized. There was a sharp decline in production, which put the automotive industry in the state at risk of survival. In the revolutionary 1979, 120 thousand passenger cars were produced, and 10 years later – in 1989, only 5 thousand ^[19].

At the present stage, Iran has managed to restore production facilities. At the moment there are 12 car manufacturing companies in Iran: Saipa, Iran Khodro, Pars Khodro, Kerman Khodro, Bahman Autos, Bonro, Zaymand, Kish Khodro, etc. ^[20]. There are also about 1,200 distributors in the country. This was largely due to foreign prototypes, on the basis of which modern Iranian cars were created. For example, the most common Samand sedan is assembled on the basis of the French Peugeot 405. In 2021, the Tara sedan was released, the prototype of which is the Peugeot 301. Chinese, Korean and Japanese automakers have also contributed to the Iranian auto industry. Many foreign companies withdrew from the Iranian market after the United States unilaterally withdrew from the nuclear deal in 2018. At the same time, the Iranian market did not experience the same shocks as in 1979, which indicates a high level of independence in terms of technology and production.

According to the Information Agency of the Islamic Republic of Iran, Iran ranked 13th in the world in terms of passenger car production in 2022. According to the European Association of Automobile Manufacturers, Iran produced 1086 thousand passenger cars in 2022, in 2021 - 980 thousand ^[21].

Being under sanctions, Iran has learned to meet the demand not only in the domestic market, but also abroad. Cars are exported to Azerbaijan, Armenia, Venezuela, Turkey, etc. In 2022, a record agreement was signed with Russia for $ 300 million for the supply of cars.

According to the data of the Statistical Center of Iran, in 2021, about 142.1 thousand vacancies were created in the industrial sector. Of these, 13.5 thousand (9.5%) are in the production of motor vehicles, trailers and other transport equipment ^[22]. More jobs appeared only in the food and chemical industries.

Thus, thanks to protectionist measures (import duties), the government manages to support local producers. Of course, Iranian cars are in the low-price segment of the market and technologically inferior to competitors from Europe, the USA or Japan, which does not allow them to be in demand in developed countries. At the same time, in a number of developing countries, the products of the Iranian automotive industry are finding more and more buyers.

Conclusion

Iran has been living under aggressive sanctions pressure for more than 40 years. The restrictions were periodically tightened, then weakened, but all the time they continued to put pressure on most spheres of Iranian society. Despite the fact that sanctions have had a serious impact on the economy, the government has found ways to minimize their negative impact. Moreover, Iran did not stop in its development and did not switch to survival mode, but continued to develop systematically.

The main success factor was the competent accumulation of resources and their disposal, as well as the high-quality implementation of state programs. Thanks to the five-year plans, all levels of government understand the indicators that need to be achieved at one stage or another. Iran's "resistance economy" allows sanctions to be turned into opportunities. The Government has diversified the raw materials sector, thereby reducing dependence on energy exports. An important factor was the ability to find allies. Some of the trading partners have warm relations with the United States (Turkey, UAE), however, this does not prevent them from successfully increasing the volume of trade between them and Iran.

The Russian Federation can use the Iranian experience to overcome sanctions. For example, to support parallel import channels for the import of foreign technologies into its territory. In addition, special attention should be paid to the creation of firms abroad that allow masking Russia's foreign economic activity. In comparison with Iran, our country has a much greater potential and a large amount of resources to resist sanctions. It is only necessary to adopt someone else's experience correctly and not repeat mistakes. 

One of the problems of the Iranian economy is the periodic occurrence of deficits. Due to the lack of quick access to world markets, Iran is sometimes deprived of the opportunity to quickly purchase the necessary goods. A similar situation developed, in particular, during the Covid-19 pandemic, when this country had an acute shortage of microelectronics for medical equipment.

Another of the few tasks that the Iranian authorities failed to solve is to contain inflation. Since 2019, the national currency has depreciated by at least 30% per year. Moreover, the Iranian rial is devaluing against foreign currencies much faster than official indices show. On the black market, freely convertible currency is traded at a rate several times higher than the rate of the Central Bank of Iran.

This situation makes imported goods inaccessible to the majority of the population. At the same time, this situation creates additional incentives for domestic production.

Thus, the key to success for Russia will be a competent monetary policy and adaptation of Iran's experience in various spheres of the economy.