The consequences of US “maximum pressure” policy on Iran

In September 2019, Donald Trump announced new sanctions on Iran as a retaliation for its attacks against two oil plants in Saudi Arabia, an US ally in the Middle East. These sanctions targeted the Iranian Central Bank and the National Development Fund, accused of funding terrorists’ groups. This measure is only the latest of a series of increasingly severe sanctions starting in November 2018. What have been the effects of these measures so far, in particular on the oil industry, and what is going to happen next?

To answer this question, it is useful to provide background knowledge of past sanctions put in place by the United States (or by the international community, through the UN Security Council) on Iranian economic and political sphere.

The first sanctions date back to 1979, the year of the Iranian Revolution. A popular uprising led to the dismissal of the Shah and the establishment of an Islamic Republic, with an ideology which was strongly anti-colonial and anti-Western. The American embassy in Tehran was put under siege and the US President Carter froze millions of dollars in Iranian assets, to be released only once the hostages had been freed. In the subsequent years, Iranian oil imports were banned and, after the Iraqi invasion of Iran, also selling weapons to Iran was prohibited. In 1987, following Iranian actions in the Persian Gulf and support for terrorist groups, Reagan put an import embargo on goods and services from Iran. In 1995, Clinton forbid any involvement with the whole Iranian petroleum industry. When Iran refused to comply to UNSC resolution 1696, that forced Iran to halt its nuclear program, the Iran Sanctions Act of 2006 expanded the existing sanctions to include also banking transactions, shipping and web services. In 2012 EU Sanctions banning oil imports were introduced.

Although the economic impact of these sanctions was strong, the political one was disappointing. None of these measures could lever the country into compliance with international rules regarding terrorism or nuclear energy. Iranian reiterated threats to close the Strait of Hormuz, a fundamental passage for oil trade, indicated that the country was looking for relief on its oil industry: it was time for a new strategy to be put in place. The 2015 Joint Comprehensive Plan of Action, commonly known as Iran Nuclear Deal, between Iran and China, France, Russia, UK, US, Germany and the EU, bound Iran to destroy its uranium-stockpile in exchange for lifting sanctions. In the aftermath of the JCPOA, Iranian economy witnessed an incredible development. GDP grew by 13% in one year, inflation dropped, oil production rose up to 2 MBD more than during the pre-deal period, peaking in January 2018 at 4.8 million barrels per day, as can be seen from the graph below. Gas condensates increased too, also thanks to the development of the South Pars gas field in the Persian Gulf.

In May 2018, Trump unilaterally pulled out of the deal, while the other parties expressed their support of the pact, because the International Atomic Energy Agency did not find signs of Iranian non-compliance with the JCPOA.  In November 2018 he reintroduced the sanctions and added new ones, in a “maximum pressure” campaign targeting 80% of Iranian economy. After US withdrawal, Iranian oil production fell down to 2.7 MBD., the GDP lost 6 percentage points and inflation surged over 30%. The restrictions hindered any capability of Iranian government to make long-term investments to develop the petroleum sector following the plans. According to the IMF, Iranian economy has shrunk by 9.5 per cent in 2019. Today Iran finds itself in the worst recession since the Iraqi War years.

The US expected Iranian economy to collapse immediately under the enormous weight of sanctions, but this has not happened yet. During the years, Iran has diversified its economy, becoming more resilient to fluctuations of the oil market and sanctions. Contrary to other Middle Eastern countries, the Iranian economy is service based, with the petroleum sector accounting for only 14% of GDP, although it remains the major source of hard currency thanks to export items such as crude petroleum and petrochemicals. Moreover, Iran has put strategies in action to face the economic loss, such as increasing energy efficiency of production and improving national refining capacity. It is true that sanctions have limited the access to modern Western technologies, but Iran has reacted by finding new international trade partners and by developing domestic industry, diversifying its economy even more. The projections of the IMF and the World Bank even predict that in 2021 Iranian economy will slowly start growing again, once adjusted to the primary effects of sanctions.

On one side, it can be argued that the impact of US pressure on Iran has been huge on the economic side, but not as effective as expected on the political one, at least until today. Even more, it is likely to have made Iran more resilient and less progressive. In the upcoming years, Iranian economy could readjust and grow again, thanks to better connections with China and  stronger domestic capabilities. Another drawback is that Iran is likely to continue to invest in the nuclear sector, now that it has no more incentive to maintain full compliance with the JCPOA.

On the other side, sanctions have raised disappointment in the population, that has suffered much, and have strengthened anti-governmental groups. In mid-november, the Iranian government has announced a drastic increase in the price of fuel, which has generated a wave of protests among people, profoundly hit by the economic recession. The regime has responded with strength, blocking Internet for 24 hours and arresting over 1000 people, of which over 200 are expected to be dead already. The question is whether this is the beginning of the Iranian collapse expected by the US, and whether  the government will be able to handle the discontent of the population or will it be forced to make political concessions to the US in order to obtain relief from sanctions?

Sources

“Islamic Republic of Iran and the IMF.” IMF, www.imf.org/en/Countries/IRN.

Jones, Steve. “U.S. Sanctions Against Iran – History and Updates.” ThoughtCo, ThoughtCo, 29 Jan. 2019, www.thoughtco.com/a-history-of-u-s-sanctions-against-iran-3310088.

Mohsin, Saleha, et al. “Trump Announces Sanctions on Iran Central Bank for Saudi Attack.” Bloomberg.com, 2019, www.bloomberg.com/news/articles/2019-09-20/trump-says-u-s-sanctioned-iran-s-national-bank-for-attack.

Reuters. “Iran’s Economy to Contract by 9.5% This Year as Tighter US Sanctions Bite, IMF Says.” The National, The National, 16 Oct. 2019, www.thenational.ae/business/economy/iran-s-economy-to-contract-by-9-5-this-year-as-tighter-us-sanctions-bite-imf-says-1.924292.

Vogt, Achim, and David Jalilvand. “One Year After the Re-Imposition of Sanctions.” 2019. https://library.fes.de/pdf-files/iez/15761.pdf

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