Trump Administration Sanctions’ Impact on Iran

Iran Issues Warning
Iran Remains Defiant
The Shrinking Economy
The Oil Sector Collapses
A Chinese Lifeline?
Snapback Sanctions

Even before U.S. sanctions went into full effect, they were having an impact on Iran’s economy. Iran’s currency, the rial, has been in a freefall compared with the dollar, making imports more expensive and forcing Iran’s manufacturers and exporters to cut production and cancel contracts. In one sign of turmoil in Iran created by the Trump administration’s policy, Valiollah Seif, governor of the central bank of Iran was fired. When Seif took over the bank in 2013, it cost 30,000 rials to buy $1; today a dollar costs 150,000 (New York Times, September 5, 2018). Iran’s annual inflation rate is now 203% (Forbes, July 29, 2018).

U.S. sanctions have a secondary impact by cutting off Iranian oil shipments to Syria, which are causing fuel shortages and skyrocketing energy prices. “It severs a longstanding oil lifeline for the regime of Syrian President Bashar al-Assad,“ the Wall Street Journal reported, “and deprives Iran of a key point of leverage in the region” (Wall Street Journal, March 22, 2019).

In another sign that sanctions are having a devastating impact on the Iranian economy, the Islamic Republic News Agency admitted that 70% of factories, workshops and mines in the country have shut down or gone bankrupt (Middle East Monitor, October 25, 2018). Unemployment is running at 12.1%, with 3 million Iranians unable to find jobs. In addition, the Iranian middle class is being hard hit by a spike in housing prices, which more than doubled in one year (AP, August 3, 2019).

Iran’s economy was already suffering from high unemployment and inflation, but had been projected to have modest growth as a result of the business activity that resumed following the signing of the JCPOA. Following the reimposition of sanctions, however, the economy was expected to grow by less than half the previously projected rate and to contract in 2019 (Wall Street Journal, July 18, 2018). In April 2019, the International Monetary Fund projected Iran’s economy would shrink by 6% in 2019, much worse than the IMF’s October prediction of a 3.6% contraction. IMF also estimated that Iran’s economy shrunk by 3.9% in 2018, more than double the earlier projection (24Pakistan, April 9, 2019).

On the 40th anniversary of its revolution, Gallup reported that “for the first time in a decade, a majority of Iranians (57%) said economic conditions in their communities are getting worse and a record 34% rated their lives poorly enough to be considered ‘suffering’” (Gallup, February 12, 2019). 

In addition to attempting to strangle the Iranian economy as a means of pressuring the government to change its policy, the Trump administration has launched a campaign to foment unrest by using social media, speeches and other communications critical of the government. Secretary of State Mike Pompeo said the U.S. is creating a Farsi channel across television, radio, digital and social media formats to circumvent Internet censorship in Iran “so that ordinary Iranians inside Iran and around the globe will know that America stands with them” (Washington Post, July 23, 2018). Some of the messages are meant to convince the public their leaders are corrupt and neglecting their welfare; for example, by portraying the government as squandering money on foreign adventures rather than spending it domestically on the Iranian people (Reuters, July 22, 2018).

Iran Issues Warning

On July 21, 2018, Iranian President Hassan Rouhani warned the Trump administration against continuing to oppose Iran and threatened to shut down international oil shipments in the Strait of Hormuz. “Mr. Trump, don’t play with the lion’s tail, this would only lead to regret,” IRNA, the state-run news wire, quoted Rouhani as saying. “America should know that peace with Iran is the mother of all peace, and war with Iran is the mother of all wars” (Reuters, July 22, 2018).

A day later, Trump tweeted:

NEVER, EVER THREATEN THE UNITED STATES AGAIN OR YOU WILL SUFFER CONSEQUENCES THE LIKES OF WHICH FEW THROUGHOUT HISTORY HAVE EVER SUFFERED BEFORE. WE ARE NO LONGER A COUNTRY THAT WILL STAND FOR YOUR DEMENTED WORDS OF VIOLENCE & DEATH. BE CAUTIOUS! (JTA, July 23, 2018).

Iran again upped the ante with Iran’s Major General Qassem Soleimani warning that the Red Sea was no longer safe for U.S. vessels. “You may begin the war, but it is us who will end it,” the Iranian commander said (Asharq Al-Awsat, (July 27, 2018).).

On August 16, 2018, Pompeo announced that Brian Hook, the State Department’s director of policy planning, will serve as the administration’s special representative for Iran and lead a new “Iran Action Group” to oversee “our new strategy [that] addresses all manifestations of the Iranian threat.” Hook said the group will be comprised of an “elite team” of foreign affairs professionals at the State Department and across the administration. At the heart of the strategy are the twelve demands made of Iran by Pompeo in his May 21 speech. Hook also warned the U.S. is “prepared to impose secondary sanctions on other governments that continue to trade with Iran” (Algemeiner, August 16, 2018).

Less than a week later, U.S. prosecutors announced charges against Ahmadreza Mohammadi Doostdar, a dual U.S.-Iranian citizen, and Majid Ghorbani, an Iranian citizen and resident of California. The two men are accused of acting as agents of the government of Iran, covertly monitoring the Rohr Chabad House, which serves students at the University of Illinois at Chicago, and surveilling American members of an Iranian opposition group in exile. “This alleged activity demonstrates a continued interest in targeting the United States, as well as potential opposition groups located in the United States,” namely the Mujahideen-e Khalq (MEK) or People’s Mujahedin of Iran, said Michael McGarrity, acting executive assistant director of the FBI’s national security branch (Washington Post, August 20, 2018).

Iran Remains Defiant

Iran has also been engaging in a variety of malevolent cyber activities. This includes spear-phishing attacks (using fake emails to induce recipients to reveal confidential information), the spread of malware and efforts to infiltrate computer systems. Social media platforms also discovered fake accounts, and the spread of false information and propaganda by Iranians using websites designed to look independent, videos and social media posts. Google, YouTube, Facebook and Twitter subsequently deleted videos and accounts traced to Iran (Wall Street Journal, August 24, 2018).

Admitting that sanctions were damaging their already weak economy, Iranian lawyers asked the International Court of Justice on August 27, 2018, to order the United States to lift sanctions imposed by the Trump administration against Tehran on grounds they violate the 1955 Treaty of Amity between Iran and the U.S. Secretary of State Pompeo described Iran’s suit as “an attempt to interfere with the sovereign rights of the United States to take lawful actions, including re-imposition of sanctions, which are necessary to protect our national security.” He added the United States, “will vigorously defend against Iran’s meritless claims this week in The Hague” (Reuters, August 26, 2018).

Lashing out at the United States and others pressuring his government, President Hassan Rouhani warned that Iran would flood Western countries with illegal drugs if the country is weakened by U.S. sanctions (AP, December 8, 2018).

Another area where Iran is feeling the pinch is in its airline industry as European countries ban flights by Mahan Air. Iranian airlines are also being forced to maintain their aging fleets, which also burn more fuel. The company is, however, continuing many flights including those secretly carrying operatives, weapons, and funds to Syria (Washington Institute, April 17, 2019).

The impact of the sanctions became more serious as Iran’s Asian allies have also become wary of running afoul of U.S. law. Asian companies had “provided a lifeline to Iran.” For example, the Chinese Bank of Kunlun Co. told its clients in April 2019 it was ceasing transfers with Iran. Huawei, the world’s second-largest smartphone maker, laid off most of its Iranian staff and Lenovo, the world’s largest computer manufacturer, “banned its Dubai-based distributors from selling to Iran after a warning from the U.S. Treasury Department” (Wall Street Journal, April 25, 2019).

On May 8, 2019, President Rouhani announced Iran would begin to build up its stockpiles of low enriched uranium and of heavy water. If the Europeans fail to compensate for U.S. sanctions, he threatened, Iran will resume construction of the Arak nuclear reactor. He added that if the Europeans do not help them evade sanctions, particularly those relating to petroleum exports and banking transactions, Iran will no longer limit the level of enrichment of uranium. He gave them 60 days to comply (New York Times, May 8, 2019).

Iran did not pull out of the deal as some feared. “Iran’s future actions will be fully within the (nuclear deal), from which the Islamic Republic will not withdraw,” Foreign Minister Mohammad Zarif said. “The European Union and others ... did not have the power to resist U.S. pressure, therefore Iran ... will not carry out some voluntary commitments” (Reuters, May 8, 2019). A few months later, Iran began to openly violate the agreement.

The sanctions have not softened the position of the Iranians. “We said before that we will not negotiate with America, because negotiation has no benefit and carries harm,” Ayatollah Khamenei said on May 28, 2019. “We will not negotiate over the core values of the revolution. We will not negotiate over our military capabilities” (Reuters, May 29, 2019).

One reason may be the ongoing efforts to circumvent U.S. sanctions. A New York Times investigation, for example, found that at least 12 Iranian tankers loaded oil after sanctions took full effect and delivered it to China or the Eastern Mediterranean, where the buyers may have included Syria or Turkey (New York Times, August 3, 2019). In August 2019, two Lebanese companies were accused of smuggling Iranian oil to Syria (Asharq Al-Awsat, August 14, 2019).

The Shrinking Economy

The situation in Iran continues to deteriorate. In September 2019, Fox News reported that Iran’s pension system is on the verge of collapse. National Security Council documents indicated 17 of the 18 retirement funds are in the red, including funds for the armed forces. In addition, the network said, “There are also signs of a growing crisis in Iran’s real estate market. Pompeo told Fox, “We think the Iranian government will shrink, that their GDP will shrink by as much as 12 or 14% this year.” He added, “This will reduce their capacity to purchase the things they need, the equipment they need, the materials they need, to inflict terror around the world” (Jerusalem Post, September 15, 2019).

In early October 2019, it was reported that more than 20 ships carrying approximately one million tons of grain were stuck outside Iranian ports. These and other ships have been hampered by the inability of Iran to process transactions due to sanctions on banks (Asharq Al-Awsat, October 4, 2019).  

In a major blow, one of Iran’s principal defenders, China, pulled out of a $5 billion deal to develop a portion of the South Pars offshore natural gas field. France’s Total SA earlier withdrew from the project due to U.S. sanctions (Times of Israel, October 6, 2019).

By mid-October 2019, the impact of the sanctions led the IMF and World Bank to revise their projections on the health of the economy. The IMF said Iran’s economy is expected to shrink by 9.5% in 2019, down from a previous estimate of a 6% contraction. Similarly, the World Bank, said the Iranian economy would be 90% smaller than it was just two years ago (Asharq Al-Awsat, October 15, 2019).

Protests erupted in dozens of cities across Iran after the government decided at midnight November 15, 2019, to cut gasoline subsidies causing a spike in prices. Even before this latest move to offset the impact of sanctions, Iranians were finding it difficult to get by. According to a 2018 Gallup survey 55% said they were finding it difficult or very difficult to get by on their present incomes, up from 36% a year earlier (Gallup, November 19, 2019).

Rouhani acknowledged that Iran faced a deficit amounting to nearly two-thirds of its annual $45 billion budget (New York Times, November 16, 2019).

U.S. sanctions have cost Iran $200 billion in foreign-exchange income and investment, Rouhani admitted. Oil exports are at a record-low, falling from a peak of 2.8 million barrels per day in May 2018 to less than 0.4 million barrels a day, resulting in a loss of $100 billion in oil revenue in the last two years (Bloomberg, December 31, 2019; Reuters, January 15, 2019). 

The economy shrank by 4.6% in the 2018-2019 fiscal year and the contraction is expected to deepen to 7.2% in the current fiscal year. Inflation is running near 40 percent.

In another blow to the economy, Iran’s closest ally, Russia, has also succumbed to U.S. pressure. In February 2020, Russian Railways withdrew from a $ 1.3 billion project for electrification of a railway line in Iran (Radio Farda, February 26, 2020).

The Oil Sector Collapses

At least one-fourth of Iran’s oil rigs are out of action, and many cannot be repaired because spare parts cannot be imported, or have become prohibitively expensive, due to U.S. sanctions. According to Reuters, “The lack of rig activity could damage the OPEC member’s capacity to produce oil from older fields, which require continuous pumping to maintain pressure and output. That would make it difficult for Iran to raise production back to pre-sanction levels if tensions ease with the United States” (Reuters, March 10, 2020).

Since 2018, oil output has been cut in half, to less than 2 million barrels per day, and the country’s revenues have been further reduced by declining oil prices caused by the coronavirus epidemic on global demand. The drilling companies have also been forced to lay off large numbers of workers.

In June 2020, Iranian Vice President Eshaq Jahangiri admitted the devastating impact of U.S. sanctions on Iran’s oil revenues: “We were a country with $100 billion in oil revenue in a single year, but the total oil revenue in 2019 was about $8 billion.” Jahangiri did not say what year Iran had $100 billion in oil revenues, but OPEC figures indicate Iran’s 2018 revenues were about $60 billion (Al Arabiya, June 17, 2020).

Iran sent five tankers with at least $45.5 million worth of gasoline and similar products to Venezuela to bring in revenue. Nevertheless, Iran’s currency dropped to its lowest value ever in June. At the time the nuclear deal was signed in 2015, the rate has subsequently fallen from 32,000 to 190,000 rials for each dollar (AP, June 20, 2020).

In August, the administration decided to take measures to prevent further exports to Venezuela. A lawsuit was filed to allow the United States to seize Iranian oil being shipped in violation of sanctions. The government alleges that the shipments were arranged to evade sanctions by an Iranian businessman with ties to the Islamic Revolutionary Guards Corps, which is on the U.S. designated terrorist list. Four tankers were subsequently seized while at sea and were being rerouted to Houston. Officials hoped the action would discourage other shipping companies from dealing with Iran and Venezuela (Wall Street Journal, August 13, 2020).

A Chinese Lifeline?

New reports indicate that China may be willing to help Iran resuscitate its economy by signing a 25-year partnership agreement that could lead to investments up to $400 billion in Iran’s oil, gas, banking, telecommunications, and transportation sectors. “By fueling talk of an imminent agreement,” James Dorsey observes, “Iran is signaling Europe and a potential Biden administration after the U.S. November presidential election, American and European policies might drive the Islamic Republic into Beijing’s arms” (BESA Center, July 22, 2020).

Iran’s desperation was admitted by Khamenei’s top economic adviser, Ali Agha Mohammadi, who said Iran needs to produce at least 8.5 million barrels of oil a day and cannot do so without purchases from China.

The draft agreement was leaked but has not been implemented, prompting the Trump administration to warn it “will continue to impose costs on Chinese companies that aid Iran” China, however, believes it can defy the United States.

The New York Times also reports that China has ramped up military cooperation with Iran. The two navies have participated in military exercises at least three times since 2014 with the most recent occurring in December 2019 when a Chinese missile destroyer drilled with the Russian and Iranian navies in the Gulf of Oman (New York Times, July 11, 2020).

Snapback Sanctions

On September 19, 2020, Pompeo announced sanctions were being re-imposed on Iran pursuant to the snapback process under UN Security Council Resolution 2231 due to Iran’s “significant non-performance of its JCPOA commitments” (State Department, September 19, 2020). The rial subsequently fell to roughly 272,500 to the dollar, about a tenth of its value when the agreement was signed (The Times (London), September 21, 2020).