Do sanctions equal change in Iran? Slow down

This isn’t anything new or even that significant, as the first round of sanctions pales in comparison to the upcoming second round, which are set to be enforced in the beginning of November.

By EZRA FRIEDMAN
August 18, 2018 22:10
Do sanctions equal change in Iran? Slow down

Iranian cleric Ayatollah Seyed Ahmad Khatami delivers a sermon during Friday prayers in Tehran, Iran, May 26, 2017.. (photo credit: TIMA VIA REUTERS)

 
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On August 5, the United States officially began enforcing sanctions on the Islamic Republic of Iran. These sanctions targeted several important segments of the Iranian economy including the automotive, aerospace, banking, shipping and insurance sectors among others.

This isn’t anything new or even that significant, as the first round of sanctions pales in comparison to the upcoming second round, which are set to be enforced in the beginning of November. Those sanctions will target Iran’s lucrative petroleum sector, the country’s main export commodity to Europe and East Asia and the mainstay of its economy.

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Iran has profited these last few years from the Joint Comprehensive Plan of Action (JCPOA) – and the sanctions relief that was promised in the “spirit” of the agreement – to the tune of billions of dollars. It is no secret that much of that money was poured into foreign adventures of the Iranian Revolutionary Guards Corps (IRCG), with direct deployments in Syria, Iraq, Lebanon and Yemen as well as even larger operations to support proxies in those same countries through training, logistics and cash budgets worth hundreds of millions over the last few years.

It is common knowledge that the Iranian economy is in bad shape. Even before sanctions kicked in, Iran’s economy began to suffer in the expectation of the damage the sanction could potentially cause. But the Iranian economy had been suffering long before this latest round of sanctions, with serious structural problems that can be traced back to the overthrow of the Pahlavi dynasty that ruled Iran from 1925 until the 1979 Islamic Revolution.

When the Shah was forced into exile, he left behind a legacy of economic modernization with development in manufacturing and oil production.

There was a clear attempt at privatization in the 1990s by Iran’s leaders but many assets ended up in the hands of the IRGC, leading to their current status as the country’s most powerful military force and the biggest economic conglomerate within the Iranian economy. Former president Mahmoud Ahmadinejad compounded issues with his populist policies beginning in 2013, which fueled inflation during a time of effective sanctions enforcement by the Obama administration.

Today, the issue of corruption and money laundering is prevalent within the government-dominated economy.

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Combined with high unemployment of 12.5% (28% among the youth) and hyperinflation of the Iranian Rial (IR), which is unofficially trading around 142,000 IR to one USD, these are all signs of an Iranian economy in difficult shape and on the precipice of serious crisis during a time of otherwise positive global economic trends.

But we are forgetting some fundamentals of the Iranian economy and its ability to withstand even the most effective sanctions. Iran has a strong track record of keeping its head above water despite sanctions. This stretches back to the Iran-Iraq War when the US State Department designated Iran a state sponsor of terrorism for repeatedly providing “support for acts of international terrorism.” Successive rounds of sanctions were enforced in 1992, 1996, 2007-2008 and 2010-2013, either directly by the US or in tandem with other actors such as the European Union and the United Nations Security Council.

IRAN’S ABILITY to survive sanctions comes from a combination of different policies and current events that may allow it to function under economic pressure.

First, divide and conquer. President Trump is a divisive figure, and not all actors wish to comply with US sanctions that are being thrust upon them without their consent. The US trade war with China, tough Western sanctions on Russia and recently on Turkey, are creating a window of opportunity for Iran. China is the biggest importer of Iranian petroleum and has made it clear it has no intention of working with the US.

Sanctions by the West are forcing Russia to look elsewhere for investment.

Russia is also China’s largest energy provider.

Future investment may naturally include Iran where an “oil for goods” program is being proposed. This would allow Iranian companies to buy Russian products in exchange for oil to be sold to third parties.

Turkey’s Erdogan seems bent on going tit-for-tat with Trump, despite the clear damage it’s doing to the Turkish economy.

This may lead to Erdogan’s government refusing to comply with US sanctions.

Second, Iran’s government is adept at planning. A secondary budget has already been drawn up and can be put into effect on short notice to try softening the blow of sanctions in a worstcase scenario. Iran has done this in the past. Only when the international community was largely adhering to the Obama era sanctions regime did Tehran consider coming to the table – and then only to discuss the nuclear issue – resulting in the JCPOA.

Other factors include an economy that has in the past been largely self-reliant, as rounds of sanctions forced Iranians and their economy as a whole to look inwards, surviving off domestic products and markets. While far from comfortable and not always effective, it is a fact that Iranians and the Iranian economy are particularly tenacious and capable of self-sufficiency on some level.

Last, Iran is well known for its ability to evade sanctions. This is particularly true when discussing petroleum exports. Whether it is trucking oil over the mountains into Pakistan to be sold on the black market or working with its new-found economic partners such as China to circumvent banking sanctions, Iran has developed tools to effectively evade sanctions if the US does not step up enforcement.

There is a lot more to be said. But what is clear is that Iran has the tools and will to survive US sanctions. The Americans will need to be tenacious in enforcement and smooth out diplomatic issues with China, Russian Turkey and the European Union if sanctions have any hope of being as effective as before. If not, we will likely see Iran attempt to wait out Trump’s first term as president, biting the bullet in hopes of seeing a more friendly face in the White House in 2020.

The writer is a research assistant at the Institute for National Security Studies (INSS) in Tel Aviv, Israel.

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