Can Iran survive US economic sanctions?

As of this week, Iran is effectively shut out from the dollar-dominated financial system, as the United States’ sanctions have been reimposed.

The sanctions are aimed at the heart of the Islamic Republic’s economy, oil. They also target shipping, banks, and financial entities that enable Iran’s oil trade.

Eight countries have been given a sixmonth waiver to trade with Iran: China, Taiwan, India, South Korea, Greece, Italy, Japan and Turkey. That helped to keep the lid on any global oil price disruption, for now.

While the US tries to use its currency as a weapon, “all of the eight countries that are importing oil from Iran - none of them are going to give any types of currency back to Iran,” explains Dr Sara Vakhshouri, founder and president of SVB Energy International. “Iran can only import humanitarian goods or necessary goods, those goods that are not subject to sanctions back to Iran, so they’re kind of bartering for food and medicine.”

Additionally, the European Union is exploring “specific channels of trade with Iran banking and transactions with Iran, and if these channels are built for more formal or usable ways of working with Iran, this will of course weaken the dollar as a weapon,” says Vakhshouri.

“Also, Iranians are selling their oil in local currency to these eight countries, so if we push this more or if we want to use [the dollar] as a weapon, it’ll lose its influence.” But at the same time, “we cannot deny the fact that all of these things have their own consequences on Iran’s economy.”

Major oil producers such as Saudi Arabia and Russia will stand to benefit from Iran’s absence in the oil production game, especially in mid-2019 because the market is expecting an over- surplus of oil.

However, Iran’s economy is not expected to collapse under the sanctions, contends Vakhshouri. “This is not the first round of sanctions on Iran ... so the Iranian government’s psychology is built on living under the sanctions. Their priorities and policies are always shaped based on how they can be more resistant ... Iran’s economy can still survive this round of sanctions, but what is really hurting its economy is the domestic corruption and lack of management. But would the sanctions cripple Iran’s economy to the extent that the whole system would collapse? We don’t expect that.”

While the EU, along with China and Russia, remains committed to the 2015 nuclear deal, fighting the sanctions is proving difficult. The bloc is trying to set up a special-purpose vehicle to avoid penalties, but that plan still lacks practical details.

In the meantime, companies that need access to US markets are leaving Iran. For instance, SWIFT, the Belgium-based global financial messaging system, also said it would fall into line with the US restrictions and is disconnecting blacklisted Iranian banks.