How US sanctions are impacting Iran
The US strategy on Iran, particularly its initial parameters, has been further refined since President Donald Trump began his electoral campaign in 2016. Trump, in his campaign, rejected the 2015 nuclear deal and demanded a new agreement or the addition of appendices, as well as substantial amendments to the provisions of the existing deal. These demands were a cornerstone of Trump’s campaign promises on this issue. His position on the nuclear deal was clear, even before he won the presidential election, particularly after Iran violated the spirit of the deal by using it to expand its influence in the Middle East and threaten its neighbors.
Iran’s crude oil exports make up about 53 percent of the total revenue of its general
2018 budget. The US goal to reduce Iranian oil exports to zero and to end foreign direct investment flows to Tehran would result in significant challenges, particularly for the regime to cover its military, nuclear and missile program expenditures. It is hoped that these challenges will lead Iran to reduce its hostile policies in the region, especially as it faces increasing pressures domestically, with the country being shaken by massive demonstrations that first broke out in December 2017.
The US decision to pull out of the nuclear deal has clearly impacted the Iranian economy, particularly in terms of oil export growth rates, the flow of foreign investment and the stability of its exchange rate. This happened as follows.
Firstly, Iranian oil exports fell by 16 percent in the first half of June — the largest decline since December 2016. Major oil companies, such as France’s Total and Royal Dutch Shell, halted their purchases of Iranian oil, with most other international companies similarly refusing to ship, transport or insure Iranian oil. Approximately 70 percent of oil shipments have been transported by ships owned by Iranian companies, with the aid of Indian companies.
Other major global firms working in Iran also quickly pulled out of its market. Most of these firms worked in crucial sectors, such as oil, gas, aviation, banking, insurance, maritime transportation, and manufacturing. Meanwhile, many other firms revoked already signed contracts worth billions of dollars.
The US dollar exchange rate against the Iranian rial in the parallel market shot up by more than 110 percent, rising from 4,200 tomans to the dollar in December 2017 to 9,000 on June 24. By July 30, the toman had declined further, with the dollar reaching 11,900 tomans. In August, a US dollar purchased 20,000 tomans, although this has since declined slightly, with the rate standing currently at between 13,000 and 15,000 tomans per dollar.
Meanwhile, the deficit in Iran’s budget in the third quarter of 2018 has risen at a dizzying rate compared to the past few months. According to official statements, the inflation rate has reached about 35 percent and the price of some consumer goods has increased by 400 percent.
The US exemptions granted to some Asian and European countries to temporarily import Iranian oil or conduct trade transactions with Iran represent a safety net for the regime, enabling it to make the necessary arrangements it requires to cope with the sanctions. The regime may store the biggest part of these oil shipments in allied countries or on vessels in its fleet that may be docked in different parts of the world, or remain at sea. The regime may then sell the oil after making significant price reductions and facilitations in repaying the cost of the purchases in the medium- or long-term to maintain its partnership with some countries and to not lose its stake in the market entirely.
Many indications suggest mounting public anger and dissatisfaction in Iran at the regime’s policies and its inability to respond to public demands, in particular to rising inflation and unemployment, as well as its failure to release withheld wages at many semigovernmental institutions.
To date, efforts to create alternative financial channels for dealing with Iran have comprehensively failed. The EU has proposed a “Special Purpose Vehicle” to maintain trade with Iran under European law, with non-EU partners able to join this mechanism. Transactions between Iran and concerned parties would be concluded by dealing in currencies other than the dollar or conducted beyond the regular financial system. However, this option still faces technical problems and may take a long time to be implemented.
The overall impact of US sanctions on Iran will depend upon Washington’s seriousness, and on its ability to woo Iran’s neighboring countries, as it will have to offer alternatives to Iranian oil importers at competitive prices. The US will also have to open communication lines with those countries hesitant to withdraw from Iran’s market or others wishing to enter it by offering investment packages in other developed markets.
The Iranian government, meanwhile, has so far not announced what economic measures it will take in light of the sanctions, only commenting via various affiliated sources that the US will not be able to impose a blanket ban on Iranian oil exports and insisting that the global market cannot do without Iranian oil.
Iran’s leadership has claimed that, with support from its allies, it will pursue measures that will allow it to survive the embargo. In the meantime, it has begun to implement some policies that aim to enable the country to bear the sanctions. This is important so that it is not forced to renegotiate the nuclear agreement in accordance with America’s new strategy and principles.