Ever since US President Donald Trump unilaterally pulled out from the nuclear deal with Tehran and reinstated the most draconian sanctions ever imposed, many have wondered whether Iran can withstand the pressure aiming to bring it to its knees. Although Iranian leaders are assured that they will resist stubbornly, and have vowed to beat the sanctions, their country faces an uncertain future as it slides into a deep recession.
While Iran is no stranger to intense economic pressure — it has lived under US sanctions for decades and survived harsh UN sanctions from 2010 to 2015 — there is no doubt that the impact of the latest imposition will be severe. Over the years, the US has also learned how to become more effective in cracking down on its arch foe in the Middle East.
According to Richard Nephew, a senior researcher at Columbia University and former lead sanctions expert for the US team negotiating with Iran, neither the Iranian nor the international economies have changed much in the three years since American sanctions were last fully in force. "The economic reality of the choice between doing business with the United States versus doing business with Iran remains as it was," he told MEMO. "So, the idea that we would see people stop doing business with Iran and that this would harm Iran should not be considered controversial."
However, the question about the effectiveness of sanctions is a tricky one, said Neil Bhatiya, an energy expert at the Centre for a New American Security, "because it depends largely on what you're trying to measure and what you're trying to accomplish." If the sanctions aim to cripple Iran's economy than they would surely inflict a great damage "putting economic pressure on the regime". The reinstatement of sanctions, especially those imposed on Iran's energy and financial sectors has scared away most of the foreign investors and significantly hit oil exports. Iran's GDP shrunk by 3.9 per cent in 2018 and it is expected to shrink by a further 6 per cent this year. According to consulting firm SVB Energy International, Iran's oil exports had fallen sharply from 2.3 million barrels per day (bpd) at the beginning of 2018 to 1.1 million bdp by March this year. Taiwan, Italy and Greece halted all imports of oil from Iran, even before Trump refused to extend waivers for such purchases in early May. China and India also significantly reduced the volume of their imports by 39 per cent and 47 per cent respectively.
Furthermore, the US has maximised its pressure by adding new sanctions on Iran's iron, steel, aluminium and copper exports. Industrial metals are Iran's largest export earner after oil and gas.
As a result, the Iranian rial has lost two-thirds of its value against the US dollar on the unofficial market, affecting most of the population. The falling value of Iran's currency has led to shortages of imported goods and products that are made with raw materials from abroad, as well as domestic products.
The aftershock of the currency devaluation and rapid inflation may trigger unrest across Iran, as we saw at the beginning of January. Although Trump's administration desires such an outcome, Nephew said that the Iranian government can contain domestic unrest. "[Tehran] has shown readiness and ability to do so consistently since the 2009 June elections crisis," he added.
While sanctions have already had a painful impact, the main question is whether this economic leverage translates into political leverage. According to Bhatiya, the US administration faces a few challenges in this respect. "It's almost unheard of for sanctions alone to lead to regime change," he explained. "It's especially difficult when the rest of the international community does not agree with the overall strategy." And the administration itself seems split on what it ultimately wants: a new regime, or a new deal with the current regime?
For Nephew, though, the kinds of concessions that Washington is demanding would go far too far for the Iranian government to accept and so he does not see sanctions leading to a change in Iranian policy. Indeed, the oppressive nature of the demands, as well as the way that they were presented by US Secretary of State Mike Pompeo last May, actually called the Iranian leadership to capitulate and openly called for its citizens to overthrow the current government. This, of course, leaves no room for any negotiation.
Instead, Iran is determined to pursue a policy of "resistance" through the mobilisation of public support while finding ways to keep its economy afloat. "Smuggling, evasion and limited business through legitimate channels will help Iran manage the situation," noted Nephew. "But, ultimately, the Iranian economy is still very exposed to international pressures and interests." Any foreign support from those who oppose the US sanctions — notably Russia, China and the EU — has produced very limited results that Iran cannot rely on. The outcome of Europe's efforts to oppose the Trump administration and expressed through the introduction of Instex, a special-purpose vehicle for non-dollar trade with Iran unveiled by France, Germany and Britain, remains unclear. Bhatiya thinks that Instex is unlikely to facilitate significant transactions as the US is watching the Iranian mirror entity very carefully.
Many believe that Iran's strategy could be described as a race against time; that it is trying to survive for another 18 months and hoping that Donald Trump will lose the 2020 election. Tehran hopes that such a scenario will see his Democratic replacement adopting a different approach towards Iran, lift the sanctions and then eventually re-join the Joint Comprehensive Plan of Action (JCPOA) nuclear deal.
Nephew disagrees with this observation, even though some elements of the expectations may be true. "There is realism that a new Democratic administration would still have to deal with political realities in the United States, including those that make it hard to do business with Iran," he explained. Although it is likely that Iran will stay in the deal until 2021, hoping for the best, Tehran may ultimately be disappointed if it expects that the US will simply re-enter the JCPOA. Bhatiya is quite convinced that any new US administration would be likely to address some of the points of dispute that were not in the JCPOA, such as ballistic missiles, support for terrorism and other malign regional activity. "The President may feel reined in by domestic politics, particularly if the Senate stays in Republican hands, since a new deal would be subject to Congressional review under the INARA legislation of 2015," he noted.
Nevertheless, Nephew thinks that what Iran really wants is to re-enter negotiations with a credible US negotiating partner, which means that it has no other option but to wait and hope for a new administration in Washington. However, surviving until then, although not impossible, looks like being very tough indeed.
The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.