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Case Analysis 04 November, 2012

The impact and repercussions of Western economic sanctions against Iran


The Unit for Political Studies

The Unit for Political Studies is the Center’s department dedicated to the study of the region’s most pressing current affairs. An integral and vital part of the ACRPS’ activities, it offers academically rigorous analysis on issues that are relevant and useful to the public, academics and policy-makers of the Arab region and beyond. The Unit for Policy Studies draws on the collaborative efforts of a number of scholars based within and outside the ACRPS. It produces three of the Center’s publication series: Situation Assessment, Policy Analysis, and Case Analysis reports. 

Economic and financial blockades have been the cornerstone of US policy towards Iran for over three decades, and have set the pace for all EU sanctions against Tehran, which were imposed due to a lack of Iranian compliance with the demands of the International Atomic Energy Agency (IAEA) regarding the country's nuclear technology program. It is too soon to give an academic assessment of how these European sanctions are affecting Iran's economic and financial system, but it is possible to examine their repercussions based on present developments in Iran. The latest set of EU sanctions brought against Iran in July 2012 is a turning point in the ongoing Western blockade against the Islamic Republic. Contrary to Iranian expectations, world oil prices dropped immediately after these sanctions were imposed, followed by a sharp increase in the prices of basic goods in the Iranian domestic market.

The Iranian economy sustained huge losses in spite of the measures the country took to try and soften the blow of the sanctions. The Iranian Riyal lost 80 percent of its value against the US Dollar this year alone, a reality that drove the governor of the Central Bank of the Islamic Republic of Iran to describe Western sanctions as "open war" on the Iranian economy. While there have been some setbacks to societal wellbeing, and to the aspirations of their society's wealthier strata, available data from Iran has shown that the economy has been able to accommodate the siege, leading experts on the global economy to the conclusion that US-EU sanctions will not directly impact the stability of the Iranian regime.

With a gross domestic product (GDP) of USD 337.9 billion, Iran has the Middle East's third-largest economy and is ranked 29th worldwide. Meanwhile, 80 percent of the country's exports, and 60 percent of the state's income, comes from the sale of oil and natural gas. In addition to containing 10 percent of the world's proven oil reserves and 15 percent of the world's proven reserves of natural gas, Iran also possesses a wealth of other natural resources and primary materials, including 20 percent arable landmass. The question is, however: will the Iranian economy manage to benefit from all of its resources to fend off a financial and economic siege that is nearly global in scale? 

Available data up to this point suggests that Iran has lost 40 percent of its oil exports (by volume) while the International Monetary Fund (IMF) suggests that Iran's GDP has fallen by 0.9 percent in 2012. Between 2011 and 2012, unemployment in Iran also increased, reaching 25 percent. In the industrial sector, the withdrawal of French carmaker Peugeot from the Iranian market led to a drop of 42 percent in car manufacturing. At the same time, Iran has been forced to increase the value of its US imports to USD 199.5 million in 2012, a 30 percent upturn compared to 2011. In fact, US grain imports into Iran alone accounted for USD 89.2 million.

The Iranian domestic political scene was fragmented in the face of the series of US and European sanctions against their banking and petroleum sectors, a situation that was intensified by the way in which accusations were traded between the supporters of the Islamic regime-including both Ahmadinejad and his supporters-and their opponents, domestically and abroad. In the meantime, none of the government's hastily executed procedures, including its security crackdown, have managed to stop the downward spiral of the riyal.

It seems clear that the Iranian regime had no strategic alternatives to help it deal with the surprises brought forward by the enchanced Western sanctions. Additionally, Tehran's confidence in its ability to pull off deceptive ruses to avoid the sanctions-such as selling the greatest possible quantity of oil on the high seas or in certain ports away from the gaze of international inspectors-appears to have been misplaced. Another misguided Iranian attempt to assuage the pressures of the economic sanctions and confront them was found in the country's bombast and belligerent posturing toward its neighbors and other opponents.

The withdrawal of foreign investors from the Iranian market, in addition to the drop in Iranian oil exports, led to a sharp deficit in the country's foreign currency reserves. Ahmadinejad's government was driven to use some of its reserves to carry out governmental plans, and forced to adopt a basket of multiple currencies to adjust its exchange rate. The Iranian government was also obligated to establish a new financial institution that sold foreign currency at below-market rates and end the practice of subsidizing Iranians travelling abroad with foreign currencies. Iranian authorities had to cancel subsidies for the more than 37,000 Iranian students studying abroad on scholarship programs.

These hasty governmental measures shook citizens' confidence in the state's plans. As a result, merchants were driven to move their funds into foreign currencies to preserve their capital. In fact, even Iranian households switched their domestic savings from the riyal to other currencies. Of course, such steps are completely understandable when it comes to the continuing downward spiral of the riyal, which has lost its fixed benchmark value.

While a number of merchants in Tehran and other cities were closed for business, and others were involved in limited protests, none of these protests were on a scale large enough to threaten the stability of the regime. We believe that this is further evidence of the unwillingness of the Iranian people-exhausted by revolution, war, and the failure of its 2009 popular protests-to engage in another adventure of protests. This societal-level conviction will remain temporary, and there is no guarantee that wider protests will not break out in the future, particularly if the crisis continues and its negative impacts on Iranians' lives are more widely felt.

One other factor exacerbating the domestic budget deficit in Iran is the regime's intervention in Syria, and its financial and military support for the al-Assad regime. This support further sharpened the divide between the Iranian regime and all sectors of the Iranian population, who regard this support for the al-Assad regime as a waste of national resources, further entrenching their own crisis-ridden economic situation. A number of protests being held by merchants, who are demanding that the regime desist from supporting the Syrian regime, corroborate this.

In addition to the above is the disenchantment felt by a large group of Iranian merchants toward the wide-scale commercial and economic concessions given to the Chinese at the expense of the economic interests of Iranian capitalists. Following the swamping of the domestic Iranian market with Chinese goods in recent years, a large number of Iranian factories have had to close their doors, striking at the heart of Iranian economic policy, which is based on independence. This new economic trend might ultimately lead to the Iranian regime's loss of some of its most important strategic proponents within the country-the merchants and owners of small- and medium-sized enterprises.

Developments do not appear, in general, to be in the Iranians' favor. Iran has failed to not only turn the dire crisis their economy is going through into grounds for a consensus, but also formulate a strategic vision that would see the country through. In fact, the fall in the riyal provided Iran's President Ahmadinejad's (whose term of office is due to expire in June of 2013) opponents with the opportunity to settle political scores; they now even accuse Ahmadinejad of intentionally causing the destruction of the Iranian economy. Members of Iran's parliament have gone so far as to suggest that the president stood to gain from the fall in the riyal's value-and the attendant rise of consumer prices-by now having the ability to implement his governmental plans. Up to 102 members of Iran's parliament called for Ahmadinejad to appear and testify before the chamber for the second time this year.

Despite this, there is a controversy over the real causes of the present crisis as expressed by the drop in the riyal's value. Some observers place the blame on the economic sanctions, while Khamenei's supporters have stated that the real reason behind the crisis is President Ahmadinejad's policies. This same divergence of opinions is also apparent in the conflicting statements between members of the Revolutionary Guard's leadership, members of parliament, and certain politicians associated with Khamenei. While of these groups acknowledge the severity of the present economic situation, others suggest that it would be difficult to weaken the Islamic Republic's regime given that the country has been able to acclimatize to a similar situation for over 30 years. What proponents of the latter statement neglect, however, is that Iran is now faced with a completely different situation: the present sanctions are rapidly gaining an international character, and if the present situation holds, it may lead to the complete paralysis of the Iranian economy.

Only recently, for the first time, has Khamenei acknowledged the impact of Western sanctions, describing them as "brutal". While the supreme leader criticized government officials for inadequately dealing with the crisis, he also adamantly defended his country's positions and reaffirmed its readiness to face these sanctions. Ahmadinejad, meanwhile, has accused forces and apparatus within the regime of preventing him from addressing the financial crisis, at the same time placing the blame for the riyal's collapse squarely on the economic sanctions and rejecting the blame of his own economic policies.

This divergence of opinions in assessing the situation is reminiscent of the perennial conflict at the center of the Iranian regime, a conflict that pits the president and the government against the supreme leader and those subordinate to him. Undoubtedly, this conflict plays a large role in worsening the economic and financial crisis plaguing Iran. It appears that the Iranian regime is incapable of overcoming this structural failure, which would otherwise give it the ability to "institutionalize" the state and bring responsibility in line with accountability. What all parts of the Iranian opposition agree on, however, is that the present regime, including Ahmadinejad's government, carries the blame for the present situation.

Despite the fact that the foreign-based Iranian opposition has so far opposed a military option, which it believes would destroy the hard-won gains of the Iranian people, it also regards the economic sanctions in their present form as having the worst possible effect on the livelihoods, health, and education of Iran's citizens. Notably, this has led some sections of the opposition to demand that sanctions be imposed directly on the regime's leaders and its diplomats, as well as its offshore interests. The Israelis, in contrast to domestic Iranian discord, have been making efforts over the past several months to bolster their home front and overcome their internal political differences. This began with the formation of an Israeli coalition government several months ago, and is witnessed anew in Netanyahu's latest call for early parliamentary elections. The aim of these measures is to allow Netanyahu a comfortable majority in the Knesset, which would give him the chance to achieve his aims and face the challenges of the Iranian nuclear program.

The Israelis are not satisfied with the sanctions. In the Israeli way of thinking, no matter how much of an impact these sanctions have, they will not halt the progress of the Iranian nuclear program which they believe is close to achieving its final goal. This is what drives Israeli demands on the US administration to carry out a military strike against nuclear installations in Iran. In these demands, the Israelis are exploiting the atmosphere prevalent during the US presidential race between Barak Obama and Mitt Romney (Obama has expressed his satisfaction with the efficacy of the sanctions against Iran.). It should be noted, however, that when it comes to the Iranian nuclear program, the Americans and Israelis do not disagree on the objective, though the means needed to achieve this objective is up for discussion. It is not a remote possibility that these means could be formulated in favor of the Israelis following the US elections.

In today's circumstances, it would be difficult to conclude that any economic and financial blockade against a political regime would empower it to build and rely on itself. The increasing complexity of global economic networks and the strength of the bonds between the world's financial and economic systems make such a suggestion untenable. It is also true, however, that regime collapse does not follow from sanctions and international isolation: evidence from Libya, Iraq, and North Korea refutes this suggestion. In fact, this evidence further suggests that those who stand to lose the most from such sanctions are the people of the country affected, costing them the future of their development. 

In conclusion, one can see that the Arabs are the party most conspicuously absent from the present situation between Iran and its Western, as well as Israeli, foes. To date, the Arab states have not put forward any kind of vision articulating their positions and the future of their national interests. Even though each of they would have an undoubted, direct influence on the stability of the Arab states and their interests, particularly those in the Gulf Cooperation Council, they have remained silent on the possible trajectories for the situation: a rapprochement between the West and Iran leads to a deal between both sides; a complete Iranian economic collapse, along the same lines as the Soviet Union's; or possible military strikes against Iranian plants.

*This Assessment was translated by the ACRPS Translation and English Editing Department. The original Arabic version published on December 4th, 2013 can be found here.