US Report: Sanctions Biting Harder

            The Congressional Research Service periodically releases a comprehensive report on Iran sanctions impact. The following are excerpts from the latest update with a link to the full text at the end.

 

 

            Increasingly strict sanctions on Iran—sanctions that primarily target Iran’s key energy sector and its access the international financial system—have harmed Iran’s economy to the point where Iran’s public and some of its leaders appear willing to accept some international proposals to limit Iran’s nuclear program to purely peaceful purposes. The June 14, 2013, election as president of Hassan Rouhani, who ran on a platform that included achieving an easing of sanctions, is an indication of the growing public pressure on the regime.

 

•Oil exports fund nearly half of Iran’s government expenditures, and Iran’s oil exports have declined to about 1.1 million barrels—less than half of the 2.5

million barrels per day Iran exported during 2011. The causes of the drop have been a European Union embargo on purchases of Iranian crude oil and decisions

by other Iranian oil customers to obtain exemptions from U.S. sanctions by reducing purchases of Iranian oil. Twenty countries that buy Iranian oil have exemptions.

 

•The loss of revenues from oil, coupled with the cut-off of Iran from the international banking system, has caused a sharp drop in the value of Iran’s currency, the rial; raised inflation to over 50%, reduced Iran’s reserves of foreign exchange; and caused much of Iran’s oil revenues to go unused in third-country accounts. Iran’s economy shrank slightly from 2012 to 2013 and will likely do so again during 2013. There have also been unintended consequences, including a shortage of some advanced medicines.

 

•Iran has tried, with mixed success, to mitigate the effects of sanctions. Government-linked entities are creating front companies, and Iranian importers and exporters are increasingly using barter trade and informal banking exchange mechanisms. Iran is also increasing non-oil exports or exports of hydrocarbon products other than crude oil, such as gas condensates. Affluent Iranians have invested in—and driven up prices for—real estate and securities listed on the Tehran stock exchange.

 

            Sanctions might also be slowing Iran’s nuclear and missile programs by hampering Iran’s ability to obtain needed foreign technology. But U.S. assessments indicate that sanctions have not stopped Iran from developing new conventional weaponry indigenously. Based largely on its provision of arms to the embattled Assad government in Syria, Iran is also judged as not complying with U.N. requirements that it halt any weapons shipments outside its borders. And sanctions do not appear to have altered Iran’s repression of dissent or monitoring of the Internet.
            Some in Congress believe that economic pressure on Iran needs to increase. In the 112^th Congress, the Iran Threat Reduction and Syria Human Rights Act of 2012 (P.L.112-158) made sanctionable the shipping of Iranian crude oil, and it enhanced human rights-related provisions of previous Iran-related laws. A provision of the FY2013 National Defense Authorization Act (P.L. 112-239) sanctions transactions with several key sectors of Iran’s economy. A bill in the 113^th Congress, H.R. 850, passed by the House on July 31, 2013, would, among other provisions, accelerate the oil purchase reductions required to maintain a sanctions exemption. However, some argue that new sanctions should not be imposed until Rouhani’s diplomatic overtures on the nuclear issue are tested and that there be consideration of easing sanctions if a nuclear deal is reached.

 

            By all accounts—the United States, the P5+1, the United Nations, the International Atomic Energy Agency (IAEA)—Iran has not complied with the applicable provisions of the U.N. Security Council resolutions requiring that outcome. Five rounds of P5+1—Iran talks during 2012 and thus far in 2013, the latest of which took place in Almaty, Kazakhstan during April 5-6, 2013, produced no breakthroughs.

            Some experts are adopting the view that sanctions might have compelled a change in Iran’s nuclear approach. On June 14, 2013, Iranians elected the relatively moderate mid-ranking cleric Hassan Rouhani as President; he ran on a platform of achieving an easing of sanctions, and outcome likely only in the event there is a nuclear compromise. Since his election—and particularly during his September 23-27, 2013, visit to the U.N. General Assembly meetings in New York—Rouhani has stressed that Iran seeks a nuclear settlement, possibly within six months. He accepted a phone call from President Obama on September 27, 2013, in which the two countries agreed to direct their teams to seek a settlement of that issue.

 

            A related issue is whether the cumulative sanctions have directly set back Iran’s nuclear efforts by making it difficult for Iran to import needed materials or skills. Some U.S. officials have asserted that, coupled with mistakes and difficulties in Iran, sanctions have slowed Iran’s nuclear efforts by making it more difficult and costly for Iran to acquire key materials and equipment for its enrichment program. However, International Atomic Energy Agency (IAEA) reports have said that Iran’s capacity to enrich uranium more rapidly continues to expand, as does its stockpile of 20% enriched uranium. And, Director of National Intelligence James Clapper testified on March 12, 2013, that Iran “is expanding the scale, reach, and sophistication of its ballistic missile arsenal.”

 

 

            Sanctions do not appear to have materially reduced Iran’s capability to finance and provide arms to militant movements in the Middle East and to Syria. Extensive Iranian support to Syrian President Bashar Al Assad appears is continuing, by all accounts. Some press reports, quoting the U.N. panel of experts, say Iran has been exporting arms to factions in Yemen and Somalia. Iran’s arms exports contravene Resolution 1747, which bans Iran’s exportation of arms.

 

            Some experts assert that sanctions could accomplish their core goals if they spark dissension within the senior Iranian leadership or major public unrest. During 2011-2013, there was a split between then President Ahmadinejad and Supreme Leader Ali Khamenei, but the rift was driven primarily by institutional competition and differences over the relative weight to attach to Islam or to Iranian nationalism—not sanctions.

            Most of the candidates permitted by the regime to run for president in June 2014 were conservative allies of Khamenei, but the support of Iranians who want significant change powered the most moderate candidate in the race, Rouhani, to a first round victory. The Supreme Leader welcomed Rouhani’s election and has publicly affirmed that he backs, at least for now, Rouhani’s approach to settling the nuclear issue. However, it is possible that differences between

            Rouhani and the Supreme Leader will emerge over potential compromises with the P5+1 and possibly on other issues such as the potential easing of domestic social restrictions. At the popular level, since 2012, there has been labor and public unrest over escalating food prices and the dramatic fall of the value of Iran’s currency. However, public strikes and demonstrations have been sporadic and do not appear to threaten the regime

 

            U.S. and international sanctions have not, to date, had a measurable effect on human rights practices in Iran. Executions increased significantly in 2012, according to the State Department (human rights report for 2012, released April 19, 2013), but that is likely a result of a continued crackdown against opposition activity. Nor has the regime’s ability to monitor and censor use of the Internet and other media been evidently affected to date, even though sanctions have caused several major firms to stop selling Iran equipment that it could use to for those purposes.

 

            Many experts attribute Rouhani’s attempts to settle the nuclear issue to the dramatic toll sanctions have taken on Iran’s economy. Before taking office, president Rouhani received briefings on the Iranian economy from the outgoing Ahmadinejad economic team, and said that the economy was in worse shape than that portrayed by the outgoing administration. However, analysis by some U.S. experts, and assertions by some Iranian officials, suggest that Iran may be adjusting to the sanctions and mitigating their economic effects more successfully than has been thought by experts.Indicators of the effect of sanctions and mismanagement on Iran’s economy include

 

•Oil Export Declines. Oil sales have accounted for about 80% of Iran’s hard currency earnings and about 50% of government revenues. As noted in Table 2,

sanctions have driven Iran’s oil sales down nearly 60% from the 2.5 mbd of sales in 2011. This drop is expected to reduce Iran’s revenue from crude oil to about $35 billion in 2013, down from over $100 billion in 2011.

 

• Falling Oil Production. To try to adjust to lost oil sales, Iran has been storing unsold oil on tankers in the Persian Gulf and it is building additional storage tanks on shore. Industry reports in June 2013 indicated Iran might have as much as 30 million barrels of crude oil in floating storage. The storage represents an attempt to keep up oil production because shutting down wells risks harming them and it is costly to resume production at a shut well. However, Iran’s oil production has fallen to about 2.6 - 2.8 mbd from the level of nearly 4.0 mbd at the end of 2011.

 

•Hard Currency Depletion. Not only have Iran’s oil exports fallen by volume, but it is no longer receiving easily usable and transferrable hard currency for its oil.

As of February 2013, as noted, oil customers must pay Iran in local currency—a sanction that is reportedly causing about $1.5 billion per month to pile up in foreign accounts (out of about $3.4 billion in the value of oil sales).Iran is unable to repatriate those funds, and it reportedly is having trouble identifying a sufficient amount of goods in those countries to import to make use of that balance. The IMF estimated Iran’s hard currency reserves to be about $101 billion as of the end of 2011, but estimates indicate the reserves have fallen to $60 billion to $80 billion as of October 2013.

 

•GDP Decline. Sanctions have caused Iran to suffer its first gross domestic product contraction in two decades. Many businesses are failing and there are a

large number of non-performing loans. An IMF global report issued in April 2013 said that Iran’s economy shrank 1.9% from March 2012-March 2013, and will likely shrink another 1.3% in the subsequent one year period. U.S. officials testified on May 15, 2013 that GDP 2012-2013 would drop even more—about 5% - 8%. The IMF report predicted the economy would return to growth, at about 1%, for the one year after that (March 2014-March 2015). As a consequence of the downturn, the unemployment rate has risen to about 20%, although the Iranian government reports that the rate is 13%.

 

•Currency Decline. The regime has been working to contain the effects of a currency drop, which took the value of the rial on unofficial markets from about 28,000 to one U.S. dollar to about 40,000 during September-October 2012. Prior to that, the rial’s value had fallen from 13,000 to the dollar in September 2011 to 28,000 to the dollar in mid-September 2012. The unofficial rate was about 37,000 to the dollar in May 2013, but optimism over Rouhani’s presidency caused the rial to appreciate to about 30,000 to the dollar by October 2013.

 

•Inflation. The drop in value of the currency has caused inflation to accelerate. An April 22, 2013, government attempt to unify the exchange rate set off a wave of hoarding of key foodstuffs by Iranians who are expecting the prices of those goods to rise sharply. The Iranian Central Bank acknowledged an inflation rate of 31% rate in April 2013, and a 45% rate in late July 2013. Many economists assert that these official figures understate the actual inflation rate substantially, and that is between 50% and 70%. Some assert that inflation has been fed by the policies of Ahmadinejad, particularly the substitution of subsidies with cash payments.

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