US Sanctions on Iran: Limits and Prospects

EPC | 02 Feb 2020

US Secretary of State Mike Pompeo and Treasury Secretary Stephen Mnuchin announced a new package of sanctions against Iran. The new wave of sanctions affected the steel products sector, and the largest companies in this field, along with some security and military leaders. The announcement of the new packages of sanctions coincides with a new wave of political debate in Washington about the feasibility of the sanctions on Iran, and whether these sanctions are actually capable of achieving their main goal, which is forcing Iran to a come back to the dialogue table by breaking the backbone of this country’s, and exacerbating levels of popular discontent to force the Iranian regime stop its intransigence.

It can be said that the core of the conflict is now related to perceptions. The American public opinion wants to be reassured that the American pressure campaign against Iran has no cost on the American economy and the national security interests; whereas the perceptions of the Iranian masses are very important, because they represent the only factor that the Iranian regime cares about. The regime does not want these masses to be mobilized against it. To further enhance perceptions about the success of this campaign, the White House should maintain momentum when it comes to imposing new sanctions.

Talking about Sanctions Feasibility

Before talking about the feasibility of the sanctions, a relevant question comes to mind about whether the sanctions have reached their final limits and has the US administration exhausted all its cards in the strategy of maximum pressure? As the question seems important in light of the steadfastness of the Iranian economy in face of all the waves of sanctions imposed on it so far,  especially since the United States imposed repeated sanctions on areas that had been sanctioned in previous stages; which may suggest that the American administration did not find any more areas to impose additional penalties.

It can be said that each of the two questions raised about the feasibility of the sanctions, and to what extent they have reached, are closely associated and they refer to each other. So, it is not possible to find a clear answer for each of them without the other. This is while the third question resulting from these two questions relates to searching for other areas where sanctions can be imposed which have so far formed loopholes and outlets through which the Iranian economy breathes and ward off its collapse.

Despite all the sanctions imposed on its economy, which affected the most vital sectors (the sanctions have so far affected the oil, auto, banking, monetary and gold sectors, and parts of the petrochemical sector, along with personal sanctions imposed on dozens of symbols of the Iranian regime), Iran was able to maintain a positive trade balance in 2018. In 2019, it also maintained a slight positive balance, despite the negative balance that it suffered over the last six months of the year. Although the positive balance did not leave Iran with a room to save hard currency, yet it has protected the economy from breaking down and prevented a catastrophic return to sovereign sources of cash to pay the dues, fund urban projects and secure monetary support. The abovementioned points leads to several conclusions:

1. In imposing sanctions, the US administration focused on the sovereign sectors, and left a margin of the commercial sectors in which many companies belonging to the government operate, such as the food sector, the petrochemical products, and the energy sector. Much of the focus was on the oil sector, whose figures showed that the focus on it had yielded a strong impact, as Iranian oil sales went down to record levels. As for the other sovereign sectors, such as the auto sector, it was able to recover part of his health despite all the crises it has passed through which brought it to the level of the bankruptcy of hundreds of operating companies and the layoffs of tens of thousands of workers. The figures indicate that the volume of car production in Iran has increased after a decline lasted for several months, before the sector adjusted itself to the sanctions situation.

2. The American administration attempted to control other sectors and reduce their levels by placing obstacles on the path of banking cooperation; what might be called a mist of sanctions, which covered all sectors. But this blurring was not enough to strangle the Iranian economy and prevent it from dealing with destinations outside the country. According to sources in the Iranian Chamber of Commerce, the sanctions did not cut off the Iranian trade, but rather increased the cost of this trade and lower its profits, as a result of two main factors: "the activists are forced to sell their goods at lower prices", and "the high cost of returning the prices of these goods to the Iranian economy "as a result of the sanctions on the Iranian banking sector, and the attempt to circumvent these sanctions (which is the same situation that Iranian officials have spoken about previously, confirming that the sanctions carried them an additional cost of about 15 percent to transfer money back to Iran).

However, it is not possible to talk about the uselessness of sanctions, not only on the oil sector that has reached rock bottom, but also at the level of other sovereign sectors facing problems due to the sanctions including the level of trade. Figures indicate the high pace of evading the return of the currency resulting from the exports to the Iranian economy. Iranian  Ministry of Economy indicated in a statement in October 2019 that 45 percent of the currency resulting from exports to Iran is returning. Anyhow, three points can be concluded from this:

A.The sanctions imposed on the economy did not cut trade with Iran, in as much as they raised the cost of the country’s trade with the world.

B. There is a possibility that different sectors of the Iranian economy will adapt themselves to the state of sanctions, despite the low rates of their profits.

C. The sanctions imposed in their current formula leave the loopholes and outlets through which the Iranian economy can breathe. Even if they are working to collapse it in the long run, this breakdown will be slow, which means that the Iranian regime may hold out for a longer period before having to succumb to the option of returning to negotiations in accordance with the American dictates.

How can the sanctions system be rationalized and matured?

The sanctions system imposed on Iran, despite its rigidity, suffers from several loopholes , which are necessary to be attended and addressed in order for the sanctions to yield a real impact, represented in returning Iran to the negotiating table, and retracting it from its current positions. The most important pivots of what can be called rationalization of sanctions and their maturity are the following:

1. Bridging the loopholes: US sanctions system suffer from several gaps, which can be closed to lead to the completion of its system. In this regard, one of the most important loopholes the sanctions suffer from is related to the Iranian banking system. The sanctions do not stop commercial and monetary transactions between Iran and the world, insofar as they work to narrow its scope. This is because of the existence of small and medium banks that  cooperate with Iran despite the sanctions. And also because Iran uses the exchange system as an alternative to the banking sector, despite the additional cost that this alternative system carries to Iran. The Financial Action Task Force (FATF) mechanism and the systems that oppose monetary and financial exchanges with Iran can play a major role in filling this gap. This can work, especially in light of Tehran's refusal to pass banking transparency laws to counter money laundering and support to terrorism as well as the termination of many cases of banking cooperation between Iranian entities and banks and exchange companies outside Iran. There was an attempt by several influential parties in the FATF organization during the last period to give Tehran successive opportunities, despite its reasoning for approving the necessary laws in this regard, which implies attempts to leave this gap open.

2. Using Iraq as an outlet: Observing Iranian behavior closely reveals another wide gap in the sanctions’ wall shows. It is the role played by Iraq being an outlet that the Iranian economy tries to survive by breathing through it. Figures released by Iranian official sources have shown that trade between the two countries reached amounted to $12 billion in 2018, ranking Iraq second after China in the list of Iran’s trade partners, amidst aspirations that trade exchange between the two countries will reach $20 billion within two years. The importance of this level of trade exchange between the two countries lies in the fact that exports to Iraq constitute about 87% of the total trade exchange between the two countries, which means that Iraq is a source of about 22% of the hard currency resulting from exports, with the possibility that it will become a source of 45% of this hard currency, in case the trade exchange between the two countries reaches $20 billion. And if the American behavior has so far been lenient with Iraq by granting exemptions from sanctions in trade with Iran, these exemptions were a loophole that mainly helped in the resilience of the Iranian regime. Such gaps in trade between Iran and other countries can be observed, which means that bridging these gaps can contribute significantly to breaking the Iranian resilience.

3. Internationalizing Sanctions: American sanctions suffer from the fact that they are unilateral sanctions by the American administration, which gives the Iranians a room for maneuver in order to rebel against and circumvent these sanctions as much as possible. From this standpoint, the work to internationalize sanctions will yield results in terms of increasing their impact and making them more effective. The US pressures on the European Union to withdraw from the nuclear agreement (according to which many of the imposed sanctions have been eliminated by UN resolutions) can be seen a step in the direction of internationalizing sanctions. The American administration can pressure on the position of the European Trio for withdrawing via Britain's position, which is more identical with the American position. The United States will seek to use its mechanisms of economic pressure on the European Union to pressure in turn on the European Trio in order to change its position regarding the nuclear agreement, with the aim of abandoning its supportive mechanisms to the Iranian economy such as the mechanism of the Instrument in Support of Trade Exchanges (INSTEX).

Despite some positions that are close to this American viewpoint, such as the decision to implement the “Trigger” mechanism which some consider mechanism the beginning of the end of the nuclear agreement, there are European positions that can be considered an obstacle in the way of the American scheme. On top of them is the German position that still supports the nuclear agreement in terms of being the file which allowed Germany to penetrate the walls of the Security Council, and if the file returned to the Security Council, this means that Germany will lose one of its main gates to penetrate the walls of this Council. However, working to get the European Union out of the nuclear agreement by applying the Trigger mechanism being the most important way to restore international sanctions on Iran and to the internationalization of sanctions could push the project of pressure on Iran and bring it back to the table of a comprehensive dialogue forward.

4. New domains: Despite its effectiveness to a large extent so far, the US sanctions system has left outside its umbrella vital economic areas that are considered one of the most important economic gates for Iran. The system also needs to cover new areas that the Iranian government is thinking of relying on as an alternative to oil resources. Among the most important of these sectors are:

A. The sector of selling electricity and its revenues: This sector is among the main resources of the Iranian economy that the US sanctions regime has ignored. Despite the distribution of electricity exported by Iran to several countries, Iraq enjoys the lion's share of these exports bringing to the Iranian government revenues around $3.5 billion. The draft general budget for the next year estimates that the government aims to obtain $4 billion from exporting electricity to Iraq. In case that the sanctions cover this area will deprive Iran of a large part of the reliable revenues, especially as it is gaining importance in terms of the easiness of transferring funds from Iraq to Iran compared to other situation.

B. Gas sector: Gas is one of the important fields that the sanctions regime has not effectively covered. Besides, it is one of Iran's most important sources of hard currency and its revenues from gas sales in next year's budget is estimated at $ 3.45 billion. Although the sanctions system includes provisions that place Iranian companies active in the field of extracting gas and selling it under the umbrella of sanctions but Iran has so far managed to circumvent this system and sell gas in regional and global markets. It will continue to do so, giving it a room to breathe and withstand the sanctions unless the sanctions clearly include the Iranian gas sector.

C. The fuel sector: Fuel is one of the important resources that the Iranian government relies on its revenues according to the draft general budget for the coming year, as this draft budget plan places within the powers of the government the exportation of about 20 million liters per day of gasoline resulting from low consumption due to high prices. Afghanistan, Pakistan and Iraq will be among the countries to receive this quantity fuel. Government sources indicate that this will provide maximum revenue of $ 4 billion to the government in a sector not covered by the sanctions.

The Scenarios

First scenario: continuation of US American sanctions and steadfastness of Iran: This scenario assumes that the sanctions continue their current course, as the American administration will try to control the sanctions that have been imposed so far, and may add to them names and fields that cannot be described as vital, without exceeding that to new fields. Thus, the Iranian regime will be under very heavy sanctions, but it is not lethal, and it is not working to break down this regime. Rather and in an optimistic view, it may grant it the ability to stand for a longer period. Therefore, the decision to return to the negotiating table remains unlikely or very unlikely. Although this scenario seems unlikely to happen given the repeated American assertion of the need for Iran to sit at the dialogue table and in light of the new steps of the European trio including the decision to activate the trigger mechanisms which raises the possibility of the return of the Iranian file to the Security Council, it will only come to the surface if an American and international desire is envisaged to keep the situation in general and the Iranian situation in particular as they are, where Iran renounces a large part of its project for regional expansion, and from its ballistic missile program with imposing large limits on its nuclear program without reaching any radical solutions to these three files.

Second scenario: imposing new sanctions, Iran's return to dialogue: This scenario assumes that the United States impose new complementary sanctions, fill gaps in order to rationalize the sanctions, and raise them to a level that will force Iran to surrender  to dialogue. The latest indications show that this is what is happening now. In this case, the US administration will impose sanctions on sovereign areas that one can make sure to stop its flow completely, such as imposing sanctions on fuel sales, the liquid gas sector, as well as seeking to bridge artificial holes on top of which is the Iraqi gap as possible, and that of the  (FATF) .

In the event that this process, which can be called "rationalization of sanctions," is applied, the Iranian economy will move more quickly towards collapse, as a result of the negative balance in trade and the low level of hard currency in the markets, to secure its needs. This, in turn, would lead to a rise in the price of the dollar, and to a decrease in the currency in the hand of the government to provide basic commodities to society leading eventually to a large  inflation in prices. As a result, severity of social discontent will increase, leading to pressure on the political system, and forcing it to accept a political solution. It is also assumed that the percentage of disagreements within the official departments will rise, and that the language of dealing with the American side and entering negotiation with it will prevail. However, this will be very difficult in light of Khamenei's explicit rejection of negotiations with the American side.

Third scenario: imposing new sanctions, Iran's refusal of direct dialogue with the US: This scenario starts with the same point from which the second scenario starts as it assumes to continue the sanctions and implement the process of completing and rationalizing them, but it is assumed that this will not lead to a comprehensive dialogue with the United States. Rather It will lead to the start of separate dialogues by the Iranian regime (which can be serious in them or may start them to buy time) with the European side, and with the Arab parties in order to reach agreements to reassure the world about its nuclear program, in addition to agreements with Arab parties on regional issues.

Although the Iranian desire represented in the Iranian Supreme Leader's assertion that Iran is ready for dialogue except with the United States and in the Iranian Foreign Minister's assertion that Iran is ready to start a regional dialogue with its Gulf neighbors is moving in this direction, yet this scenario will remain so far unlikely to happen especially if we take into account several points including : first, an agreement with the European Union may not lead to an end to US sanctions; second, there is a great disagreement within the European attitude itself about the feasibility of dealing with Iran in isolation from the United States, especially in light of the explicit British calls to replace the nuclear agreement with Trump’s accord, and third, the Gulf states’ unwillingness to enter regional negotiations with Iran independent of seeing comprehensive negotiations with this country.

 

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