May 22, 2019 | Policy Brief

Defying Predictions, Iran Sanctions Exert Unprecedented Impact

May 22, 2019 | Policy Brief

Defying Predictions, Iran Sanctions Exert Unprecedented Impact

President Hassan Rouhani said on Monday that Iran, facing record-high inflation and a deep recession, has “never had such hardships and hurdles in banking relations and oil sales that we have today.” Tehran’s predicament defies predictions by President Obama and senior officials in his administration, who claimed that the global sanctions architecture would unravel if the United States walked away from the 2015 nuclear deal.

After concluding the accord, formally known as the Joint Comprehensive Plan of Action (JCPOA), Obama argued that if Congress rejected it, Washington would not be “able to keep sanctions in place with the same vigor and effectiveness as we have right now.” Yet the Trump administration has reinstated the sanctions that Obama lifted and then gone further, most notably by ending the waivers that allowed some oil exports and by putting new sanctions on the industrial metals sector.

The impact on Iran has been substantial. On May 11, Rouhani likened current conditions to Iran’s economic plight during the Iran-Iraq War (1980-1988), the most traumatic period of the Islamic Republic’s 40-year history. Yet during the war, he added, “we did not have a problem with our banks, oil sales, or imports and exports, and there were only sanctions on arms purchases.” The next day, Rouhani said the latest sanctions “are a divine test for all of us.”

Iran’s supreme leader, Ayatollah Ali Khamenei, admitted last week that the ailing economy constitutes the “main problem of the country.” As Iran’s enemies “themselves say, they have imposed unprecedented sanctions,” Khamenei declared. “They are right, the sanctions that they have imposed on the Islamic Republic are unprecedented.”

The latest economic indicators underscore Iran’s distress. In April, the 12-month point-to-point inflation rate hit 51.4 percent, according to the state-run Iranian Statistical Center. As of Tuesday, the rial traded at 143,000 per U.S. dollar, according to the foreign exchange tracker By contrast, when President Trump withdrew from the JCPOA on May 8, 2018, the rial was trading at 64,500 per U.S. dollar.

The International Monetary Fund forecast in early April that Iran’s GDP will contract by 6 percent in 2019. However, its projection preceded Washington’s moves to stop the export of oil and industrial metals.

U.S. sanctions have also led most European companies to exit the country. Meanwhile, efforts by European governments to establish an alternate payment system that would bypass the sanctions have foundered.

This reality remains inconsistent with warnings from senior Obama administration officials. If Congress rejects the JCPOA, said Secretary of State John Kerry in a September 2015 speech, economic “pressure on Iran will lessen.” In fact, he added, “absent new violations by Iran the sanctions are going to erode regardless of what we do.”

Similarly, Treasury Secretary Jacob Lew said in July 2015 Senate testimony that other countries would “balk” if Washington tried to maintain international sanctions without the JCPOA. It is “impractical to believe,” he argued, “that we could marshal a global coalition of partners to impose such pressure, after turning down a deal that our partners believe is a good one.”

As a practical matter, however, while most foreign governments oppose the reinstated sanctions, international companies have proven unwilling to risk losing access to America’s $20 trillion economy in order to conduct business with Iran’s $400 billion economy. Firms also do not wish to jeopardize their access to the U.S. dollar, which remains indispensable as a medium of trade. As Khamenei put it in March, Europe has left the JCPOA “in practice.”

The Trump administration should keep up the pressure by fulfilling its recent pledge to impose even more sanctions. “We are not done,” said Tim Morrison, a senior director at the National Security Council, earlier this month. “Expect more sanctions soon. Very soon.”

Tzvi Kahn is a senior Iran analyst at the Foundation for Defense of Democracies, where he contributes to FDD’s Center on Economic and Financial Power. Follow him on Twitter @TzviKahn. Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington, DC-based nonpartisan research institute focusing on national security and foreign policy.


Iran Iran Politics and Economy Iran Sanctions Sanctions and Illicit Finance