Iran Got More Than Expected Relief and Negotiating Leverage, Says New Economics Report

WASHINGTON – The Foundation for Defense of Democracies (FDD) and Roubini Global Economics (RGE) released their seventh joint report today on the effects of sanctions relief on the Iranian economy. The study used a detailed econometrics model developed by RGE, in partnership with FDD, to present new economic forecasts for Iran, which highlight the impact of both direct and indirect sanctions relief on the Iranian economy and implications for the nuclear negotiations currently underway in Vienna.

The study determined that the Obama administration’s decision to de-escalate sanctions pressure in mid-2013, and the direct sanctions relief provided as part of the Joint Plan of Action (JPOA), were key factors that led to an improvement in Iranian domestic sentiment, an increase in earning power, and a modest, albeit fragile, economy recovery from the depths of the 2012 and early-2013 recession. These benefits gave the Iranian government breathing space to maintain tighter monetary and fiscal policy to strengthen the rial, temper inflation, and to become more resilient to economic pressure from sanctions.

Moreover, with some of the JPOA sanctions relief measures only just recently coming into effect and starting to boost employment and economic output, the FDD-Roubini study concludes that the economic benefits will only grow in the coming months, even if the talks are extended without any additional direct sanctions relief.

“We estimate that Iran has benefitted from much greater economic relief than U.S. policymakers have acknowledged,” said FDD executive director Mark Dubowitz, one of the co-authors of the report.

“While the Iranian economy remains under pressure, its stabilization and improvement in key areas has diminished the severity of the economic pressure on Iran’s leaders and enhanced their negotiating leverage. This may account for the intransigence that Tehran has demonstrated at the talks in Vienna,” he added.

Paul Domjan of RGE and a co-author of the report, believes that “Iranian authorities so far have preferred to use the breathing room created by sanctions relief to build economic resilience than to maximize economic growth by accumulating reserves and savings and maintaining fiscal consolidation. This would increase the resilience of the Iranian economy to any future sanctions.”

In the event of an extension of the JPOA, Dubowitz said: “An honest accounting of the value of sanctions relief to date demonstrates that Iran will enjoy compounding economic benefits in the coming six months even in the absence of any new sanctions relief.”

Dubowitz concluded: “If Iran demands greater direct sanctions relief in order to extend the JPOA, our study gives ammunition to the P5+1 to reject these demands given the substantial overall relief Iran has already enjoyed. Any further reduction in economic pressure will only enhance Iranian negotiating leverage and diminish Western leverage to conclude a deal that peacefully dismantles Iran’s military-nuclear and ballistic missile programs.”

The study’s key findings include: 

• The external earnings and assets associated with sanctions relief amount to about $11 billion in the six months of the JPOA period. This amount includes additional petroleum and non-oil export earnings of around $7 billion and access to $4.2 billion in foreign exchange (FX) reserves. This compares to the Obama administration’s estimate of $7 billion in total direct relief.
• The greatest benefit to Iran in direct relief stems from the suspension of requirements that countries significantly reduce their purchases of Iranian crude oil, which facilitated an increase in oil exports (including condensates). This was reinforced by the decision by the Obama administration to not include condensates as part of these significant reduction requirements, and the decision to block the passage of congressional legislation, which would have mandated that condensates be included.
• The value to the Iranian economy of sanctions relief is much greater than the direct increase in FX assets and earnings suggests since it ignores the domestic economic benefits from relief. These domestic benefits can be summarized as a stronger currency, more moderate inflation, and an economy that we forecast to grow 2% in FY 2014/15 rather than contract as it has in previous years when escalating sanctions led to a drop in Iranian GDP of 6.6% in 2012/2013.
• These broader economic benefits exceed the value of the specific items of sanctions relief and reflect a general shift in sentiment and a change in the sanctions environment.
• It takes time for both specific items of sanctions relief and improved sentiment to feed through to economic growth. Because of these lags, if the terms of the JPOA were extended, the benefit felt in the second six months would be much greater than that felt in the first six months even if no additional relief were provided as part of this extension.
• Iranian authorities so far have preferred to use the breathing room created by sanctions relief to build economic resilience than to maximize economic growth by, for example, accumulating reserves and savings and maintaining an approach of fiscal consolidation. This makes Iran more able to cope with potentially tighter future sanctions.

Download the full report at: https://s3.us-east-2.amazonaws.com/defenddemocracy/uploads/general/RoubiniFDDReport.pdf

About the Foundation for Defense of Democracies:

The Foundation for Defense of Democracies (FDD) is a non-profit, non-partisan 501(c)3 policy institute focusing on foreign policy and national security. Founded in 2001, FDD combines policy research, democracy and counterterrorism education, strategic communications and investigative journalism in support of its mission to promote pluralism, defend democratic values and fight the ideologies that drive terrorism. Visit our website at www.defenddemocracy.org and connect with us on Twitter, Facebook and YouTube. 

About Roubini Global Economics:

Founded in 2004 by economist Nouriel Roubini, Roubini Global Economics is an independent, global macroeconomic research firm. The firm’s research combines expert insights with systematic analysis to translate economic, market and policy signals into practical intelligence for a wide range of financial, corporate and policy professionals. This holistic approach uncovers opportunities and risks before the come to the attention of markets, helping clients arrive at better decisions in a timelier manner. Roubini Global Economics is headquartered in New York, with offices in London and Singapore.

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