US Report: Limited Sanctions Impact

 

            Increasingly strict sanctions on Iran—which target primarily Iran’s key energy sector as well as its ability to access the international financial system—have harmed Iran’s economy, but not to the point where key Iran leaders have been compelled to reach a compromise with the

international community on Iran’s nuclear program. And, the strategic effects of sanctions might

be abating as Iran adjusts to them economically and advertises the adverse humanitarian effects.

 

• Oil exports fund nearly half of Iran’s government expenditures, and Iran’s oil exports have declined to about 1.25 million barrels—a halving from 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 several other Iranian oil customers to avoid U.S. sanctions by substantially reducing purchases of Iranian oil. To date, 20 of Iran’s oil customers have received and maintained an exemption from U.S. sanctions for doing so.

 

• 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, and caused inflation to increase to over 50%, according to many experts. Iran’s economy shrank slightly from 2012-2013 and will likely shrink again during 2013. There have also been unintended consequences including a shortage of some advanced Western-made medicines.

 

• Iran has found some ways to mitigate the economic and political effects of sanctions. Government-linked entities are creating front companies and making increased use of barter trade. Iranian traders are using informal banking exchange mechanisms and, benefitting from the fall in the value of Iran’s currency, increasing non-oil exports such as agricultural goods, minerals, and industrial goods. Affluent Iranians are investing in hard assets such as real estate.

            Sanctions have not compelled Iran to change its position on its nuclear program, but sanctions may be slowing Iran’s nuclear and missile programs by hampering Iran’s ability to obtain needed foreign technology. However, Department of Defense and other assessments indicate that sanctions have not stopped Iran from developing some new weaponry indigenously. Iran is also judged not complying with U.N. requirements that it halt any weapons shipments outside its borders, particularly for providing arms to the embattled Assad government in Syria. And, sanctions do not appear to have altered Iran’s repression of dissent or its efforts to monitor public use of the Internet.

 

            There is a consensus that U.S. and U.N. sanctions have not, to date, accomplished their core strategic objective of compelling Iran to verifiably limit its nuclear development to purely peaceful purposes. 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. The talks have centered on P5+1 proposals that Iran suspend enrichment of uranium to the 20% purity level in exchange for a modest easing of international sanctions…

 

            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. Iranian support to Syrian President Bashar Al Assad appears to have escalated since early 2013, according to U.S. officials. 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—either of which could cause Iran to assess as too high the costs of rejecting a nuclear agreement with the P5+1. There has been a split since early 2011 between President Ahmadinejad and Supreme Leader Ali Khamene’i, but the rift has been driven primarily by institutional competition and differences over the relative weight to attach to Islam or to Iranian nationalism—not primarily about international sanctions. These tensions escalated as Iran entered its June 14, 2013, presidential election period, and most of the candidates permitted by the regime to run for president are considered close allies of Khamene’i.
            At the popular level, 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. Without an uprising or the major threat of one, the Iranian leadership is unlikely to feel significant pressure to curb its nuclear program.

 

            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 stimulated by the 2009 uprising in Iran. 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. German telecommunications firm Siemens, accused by Iranian and outside activists in 2009 of selling technology that Iran used to monitor the Internet, announced on January 27, 2010, that it would stop signing new business deals in Iran as of mid-2010…

 

• 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 1, sanctions have halved Iran’s oil sales from the 2.5 mbd of sales in 2011. This drop is expected to deprive the Iranian government of over $50 billion in revenue for all of 2013.

• 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

• GDP Decline. Sanctions have caused Iran to suffer its first gross domestic product contraction in two decades. An IMF global report issued in late 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, to a larger GDP drop for 2012-2013—on the order of 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). The recession has elevated the unemployment rate to about 20%, although the Iranian government reports that the rate is 13%. Economists assess that there is a burgeoning number of non-performing loans.

• Currency Collapse. The regime has been working to contain the effects of a currency collapse. The value of the rial fell on unofficial markets from about 28,000 to one U.S. dollar to nearly 40,000 to one dollar in early October 2012. Prior to that, the rial’s value had fallen from about 13,000 to the dollar in September 2011 to about 28,000 to the dollar as of mid-September 2012. Observers say the unofficial rate is about 37,000 to the dollar in May 2013.

• Hard Currency Depletion. The currency collapse has fed analysis that Iran might deplete its hard currency reserves—hard currency is needed to support the value of the rial. The IMF estimated Iran’s hard currency reserves to be about $101 billion as of the end of 2011. Experts estimated the reserves probably fell below $90 billion at the end of 2012,

but Iran’s economics minister told journalists in late April 2013 that the reserves were still approximately $100 billion…

• Inflation. The drop in value of the currency has caused inflation to accelerate collapse. 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—the highest rate ever acknowledged by the Bank. 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.

• Industrial Production. Almost all Iranian factories depend on imports and the currency collapse has made it difficult for Iranian manufacturing to operate. Iran’s production of automobiles has fallen by about 40% from 2011 levels, and will likely fall further as a consequence of Executive Order 13645 of June 3, 2013, discussed earlier. Iran produces cars for the domestic market, such as the Khodro, based on licenses from European auto makers such as Renault and Peugeot.

• Shipping Difficulties. Beyond the issue of the cost of imported goods, the Treasury Department’s designations of affiliates and ships belong to Islamic Republic of Iran Shipping Lines (IRISL) reportedly are harming Iran’s ability to ship goods at all, and have fed inflation by raising the prices of goods to Iranian import-export dealers. Some ships have been impounded by various countries for nonpayment of debts due on them.

• Domestic Payments Difficulties. Some reports say the government is in arrears in salary payments to military personnel and other government workers. In order to conserve funds, in late 2012, Iran’s parliament—against Ahmadinejad’s urgings—postponed phase two of an effort to wean the population off subsidies. -That effort provides for cash payments to about 60 million Iranians of about $40 per month to 60 million Iranians to compensate them for ending subsidies for commodities such as gasoline. Gasoline prices now run on a tiered system in which a small increment is available at the subsidized price of about $1.60 per gallon, but amounts above that threshold are available only at a price of about $2.60 per gallon, close to the world price. Before the subsidy phase out, gasoline was sold for about 40 cents per gallon.

• Flights Curtailed. Because of the decline in Iran’s trade with European countries, KLM and Austria Airlines announced in January 2013 that they would be ending flights to Iran later in 2013. Lufthansa, some other European airlines, and most airlines in the Persian Gulf, Middle East, and South Asia region still fly to Iran regularly.