WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

By Mahdi Ghodsi
photo: istockphoto/claffra

• US President Donald Trump has threatened new sanctions on Iran, keeping with his policy of ‘maximum pressure’ as Iran surpasses limits on uranium enrichment set by the JCPOA.
• US-Iran tensions have led to a volatile global oil market, including tanker attacks, the shooting down a US drone, and cancelled US strikes on Iran.
• Sanctions have exacerbated the already difficult lives of ordinary Iranians, while contributing to the ascendency of hardliners in the political sphere.
• Other world leaders should seek to open and expand communication channels between the US and Iran, and both sides should look for a compromise.

On July 8, 2019, the International Atomic Energy Agency (IAEA) announced that Iran had exceeded its uranium enrichment to about 4.5%, beyond the 3.67% limit set by the landmark nuclear deal, the Joint Comprehensive Plan of Action (JCPOA). Although this amount is far from the 90% enrichment level needed for a nuclear weapon, Iran also surpassed the 300 kilogram enriched uranium limit mandated by the deal. Iran gave a 60-day deadline to the other signatories of the JCPOA to save the deal before Iran takes further steps away from the deal. In response to this policy, US President Donald Trump has threatened new US sanctions, keeping with his ‘maximum pressure’ policy. On June 25th, the US imposed sanctions on Iran’s Supreme Leader.

Iran’s decision to increase uranium enrichment levels may be intended to send a strong signal to other signatories of the deal (i.e. the EU) that they should make more efforts to deliver the economic benefits to Iran that were also mandated by the JCPOA. The Iranian government may also be hoping that by only increasing enrichment by a small amount above the agreed limit, they will not automatically lead to the imposition of new sanctions, as long as the IAEA could inspect and monitor Iranian nuclear facilities. However, if economic hardship continues in Iran (which has increased significantly under new US pressure), the government might eventually go back to its pre-deal conditions, withdraw from the safeguard agreement of the non-proliferation treaty, and ban inspections by the IAEA. This would effectively nullify the JCPOA. Sanctions by the UN Security Council and the European countries, which were removed following the original signing of the deal, would automatically be re-imposed on Iran.

Threat of new US sanctions

There could be three main reasons behind the imposition of new sanctions on Iran by the US.

The first reason could be a purely political response to Iran’s Supreme Leader. Since the United States withdrew from the JCPOA many world leaders have intermediated between Iran and the US to start new round of negotiations. One of the most prominent was the first visit of the Japanese Prime Minister, Shinzo Abe, to Iran in the history of the Islamic Republic since 1979. Abe was conveying Trump’s messages. However, the Iranian Supreme Leader returned no response as he found Trump ‘unworthy of exchanging messages’. Therefore, it seems that Trump is retaliating to this perceived snub by means of sanctions.

The second reason could be to send a signal to Iran that the US government is aiming at their rulers rather than their interests. The former unilateral US sanctions have disconnected Iran from the international banking system, which have even hindered humanitarian imports such as food and medicine. Thus, the intense pressure of sanctions are felt by the nation rather than the rulers. Therefore, the recent sanctions might send a friendlier signal to Iranians who were caught between a rock and a hard place (see also below).

The third and the most important reason could be economic. As noted in an earlier report, Iran’s economy is controlled by a large semi-public sector. This sector of the economy is controlled by Foundations and Executions, which are very large conglomerates who are also exempted from taxation. ‘Islamic Revolution Mostazafan Foundation’ (Bonyad), and the ‘Execution (Setad) of Imam Khomeini's Order’ are the major examples of these companies whose heads are directly selected by the Supreme Leader. These two companies alone are estimated to control around 10-15% of Iran’s physical capital. ‘Astan Quds Razavi’ is another large foundation owning parts of Iranians’ residence areas, lands and companies across all cities. While these companies have not been under any previous sanction, the new US sanctions would harm all of them because the Supreme Leader owns them by law. Therefore, any arms-length contract with these semi-public companies would be punished by US penalties.

Population suffering due to hard-line policies on both sides

Within Iran, the impact of existing and new sanctions has created significant difficulties for the government and the population. However, the US campaign of ‘maximum pressure’ has not achieved its main objective to change Iran’s behaviour or to ultimately lead to a ‘regime change’. In contrast, its impact on the economy, society and politics strengthened the hardliner agenda. While Iranians have been experiencing social problems and suppression of freedom dictated by the Islamic law in favour of the religious elite, economic conditions have been exacerbated due to both sanctions and the mismanagement of economy. Two political leaders are still under the house arrest for about six years without any fair court convictions giving further excuses to the US administration to pressurize further. The obligatory Hijab for all women residing in Iran and the arrests of those violating it is another example that has been highlighted in the media.

Meanwhile on the economic side, conditions for ordinary people are becoming increasingly difficult. Year-to-year inflation rate has increased to 40%. The active population has shrunk by 43,000 compared to the spring last year, indicating very tough labour market conditions, and causing young people to lose hope about the future. On the one hand, Iranians have managed to neither demand nor acquire their social rights; on the other, they struggle to meet living costs. During four decades of US-Iranian hostility, neither Iran’s rulers nor their enemies have been able to demonstrate a clear path to prosperity for ordinary Iranians.

Since the US withdrew from the JCPOA on May 8, 2018, Iran’s President Hassan Rouhani has threatened to close the Strait of Hormuz if Iran cannot sell its oil. While Iran had been applying a resistance policy and a strategic patience against the US ‘maximum pressure’ campaign, recently it changed its strategy. Since mid-May, several tankers have been attacked and oil trade has been disrupted. On June 20th, Iran shot down a US drone allegedly carrying out a mission against Iran’s military facilities.

These events have led to a very volatile price of Brent crude oil. In fact, in the past year, while the Iranian rial has depreciated against the US dollar, the global oil price has also increased (see Figure 1). This shows that the uncertainties around the US-Iran tensions affect both Iran’s economy and the global oil market simultaneously. Due to the threat of war, world leaders have pushed for Iran-US restraint. Trump called off the military strikes against Iran’s military facilities just a few minutes before the strike could have taken place. However, President Trump’s national security adviser John Bolton has refused to rule out the possibility that the US is preparing for a full-fledged war, beyond simply striking Iran’s facilities, and has suggested that the US could also deploy troops and contain Iran’s potential offensives across the region.  

On July 4th near the coast of Gibraltar the UK seized an Iranian tanker carrying 2.1 million barrels of oil to Syria. The reason behind is that Syria is under the EU sanctions. However, the legal ground is a bit loose as the EU sanctions are not extraterritorial to prohibit non-EU trade with Syria. In a retaliation, Iran seized a UK flagged ship in the Strait of Hormuz. Consequently, the US has deployed some troops in Saudi Arabia.

Source: US Energy Information Administration, Iranian sources, author’s calculations

Events: 1- Trump decertifies JCPOA, leaving its fate to US Congress; 2- Congress leaves the decision to Trump; 3- US withdraws from the JCPOA; 4- Rouhani threatens to close Hormuz; 5- Rouhani threatens again; 6- Fresh US sanctions, and waivers; 7- Rouhani threatens again; 8- US waivers end; 9- First tanker attacks in Fujairah; 10- Second tanker attacks, Shinzo Abe visits Iran

New sanctions would make the situation even worse

Two important negative consequences of the new US sanctions could be on the budget and labour market conditions. In April 2019, the US government ended sanction waivers to major importers of Iranian oil. Consequently, Iranian oil exports dropped to around 300 thousand barrels per day (bpd), while on the side of revenue of this year budget, oil exports were envisaged to be between 1 and 1.5 million bpd. Due to the reduction in oil revenues, the government has turned to large semi-public companies. Mr Rouhani’s meeting with the head of the Astan Quds Razavi ten days prior to the new US sanctions consolidated their support for the major policies of the Republic. The new sanctions now harm these semi-public companies too.

Hopes for a compromise

The absence of communication channels between the US and Iran could make war more likely. Leaders in Iran and the US, plus others such as the EU, Russia and China, must make efforts to ensure that this doesn’t happen.

From the Iranian side, there is clearly a problem of trust. Iran lost trust after the US withdrew from the JCPOA and believes that there is no guarantee for the implementation of any future deal with the US.  The first step to restoring this trust is for the US to keep open, and expand communication channels with Iran. By giving some concessions to Iran, the US could motivate Iran to negotiate. For example, via sanctions relief or buying directly Iran’s oil, the lost trust on the Iranian side could return (a full return to the nuclear deal, as Iran desires, looks highly unlikely). Iran is an important regional power, which should motivate the US to seek a compromise.

Meanwhile other key global powers also have an important role to play. The other signatories of the JCPOA (China, Russia, France, the United Kingdom and Germany) should all contribute to the re-building of trust between Iran and the international community rather than adding to the friction as the UK seizure of the Iranian tanker and its retaliation did. The Instrument in Support of Trade Exchanges (INSTEX) has yet to save the nuclear deal. And they should make better efforts in bringing third countries like Russia in to the INSTEX to facilitate Iran’s export of oil to third countries, which can inject some credit for Iran to import commodities. Furthermore, the EU should offer long-term strategic support to Iran’s development and infrastructure policies by opening lines of credit. These efforts might prevent Iran from fully withdrawing from the JCPOA, the child born of one and a half decades of diplomacy, which still needs to maturate to a full détente.