(This article first appeared in the November edition of the Near East Report, which can be found here.)
On Nov. 5, the United States imposed a second round of sanctions on Iran—reinstating the remainder of sanctions lifted by the 2015 nuclear deal, formally known as the Joint Comprehensive Plan of Action (JCPOA).
America’s reinstitution of these sanctions constitutes the next step in the Trump administration’s policy of “maximum economic pressure” to compel Iran to abandon its support for terrorism and its nuclear ambitions. As President Trump put it, “Our objective is to force the regime into a clear choice: either abandon its destructive behavior or continue down the path toward economic disaster.”
Of course, the question arises as to whether the sanctions will be effective.
We believe that tough sanctions on Tehran offer the best chance to persuade the Iranian regime that it must return to the negotiating table. And U.S. sanctions have already dramatically impacted Iran’s economy, hindering the regime’s ability to fund some of its malicious activities.
Financial indicators illustrate the sanctions’ impact.
Inflation is rampant in Iran: Iran’s currency—the rial—has lost an estimated 50 to 75 percent of its value this year. In late October, the official exchange rate was 138,000 rials to the U.S. dollar, compared to 42,000 rials to the dollar in January. In September, the rial reached a record low of 190,000 rials to the dollar on the unofficial market, according to foreign exchange websites.
On Oct. 9, the International Monetary Fund (IMF) released projections that the Iranian economy would shrink by 3.6 percent next year; this estimate comes after an April IMF prediction, before the reimposition of sanctions was announced, that Tehran’s economy would grow by 4 percent.
The most recent round of sanctions targeted Iran’s main industry—petroleum. From August to October, oil exports from Iran dropped by about 1.5 million barrels per day, or 30 percent. This rapid decrease in exports—even before sanctions on Iran’s petroleum were reinstated—was unprecedented.
U.S. officials from the State and Treasury Departments have visited more than 30 countries with ties to Tehran over the past several months, making the case for ceasing trade with Iran and supporting U.S. sanctions. The administration’s efforts have had a significant impact, demonstrated by the fact that a number of key Iranian partners have either ceased or significantly decreased their oil shipments, including China, India, South Korea and Turkey.
Days before sanctions on Iran’s petroleum industry were reimposed, Secretary of State Mike Pompeo announced that eight countries would be granted temporary waivers from the sanctions. However, the waivers would require states to significantly decrease their oil imports over the next six months and would prevent any funds related to these imports from being transferred back to Iran.
Notably, SWIFT (Society for Worldwide Interbank Financial Telecommunication)—the Belgian-based international financial messaging system that enables cross-border transactions—has already taken action to comply with U.S. sanctions. On Nov. 8, Secretary of the Treasury Steven Mnuchin commended SWIFT for ending its service with the Central Bank of Iran and other designated Iranian financial institutions. The following day, SWIFT confirmed that it would be disconnecting from some Iranian banks for the sake of the “stability and integrity of the wider global financial system.”
The Iranian leadership is increasingly concerned about the difficulty it is facing in selling oil. Iran has sought to cope with this problem by: (1) discounting oil prices; (2) concealing its ships by turning off their GPS trackers; and (3) increasing its use of floating storage to enable it to continue oil production while waiting for buyers.
The loss in oil revenues has already limited Iran’s ability to support malign activities throughout the Middle East. Hezbollah—the Lebanon-based Iranian terrorist proxy that has received around $800 million from Iran annually—is reportedly looking to reduce its costs and find other sources of revenues. While funding Hezbollah is a high priority for Tehran’s terrorist regime, continued decline in oil revenues will make it increasingly difficult for Tehran to support Hezbollah to the extent it has in the past.
In addition to the reimposition of pre-JCPOA sanctions, the administration has sought to put pressure on Tehran through a variety of other channels. For instance, in mid-October, the Treasury Department levied sanctions on financial supporters of the Basij network, a militia that supports Iran’s Islamic Revolutionary Guards Corps (IRGC) and commits brutal human rights abuses, including torture and the use of child soldiers. On Oct. 23, the U.S. sanctioned eight Taliban and Iranian agents, including IRGC officers accused of training fighters in Afghanistan. These sanctions, too, will directly limit Iran’s ability to carry out destabilizing activities throughout the region.
Altogether, the Trump administration imposed 17 rounds of sanctions on Iran before the most recent round, which added an additional 700 individuals and entities, including 300 new targets.
Efforts to counteract U.S. sanctions have failed to gain traction.
The economic challenges facing Iran have caused panic among its rulers. Popular protests throughout the country have roiled the country, on and off, since December 2017. Senior Iranian officials continue to insist that Iran will not negotiate over its aggressive policies and are instead working to bypass U.S. sanctions. “We will proudly break the sanctions,” Iranian President Hassan Rouhani said during a Nov. 5 meeting of government officials in Tehran. Iran named a new Economics Minister on Oct. 21 to try to divert domestic pressure; but this has not worked, as ordinary Iranians have escalated their opposition to the regime’s corruption in the face of growing economic pressure and inequality. In late September, the government allowed the Central Bank to intervene in the foreign exchange market to try to stem the rial’s decline; however, high inflation continues.
The Europeans—who are still party to JCPOA—have similarly been working to circumvent U.S. sanctions, and thus maintain European access to Iran’s economy. Despite official announcements that European companies could not comply with the sanctions, more than 100 companies worldwide have left Iran since May. These include major European firms such as Total, Air France and Daimler. The Association of Germany Banks reported that German exports to Iran decreased by 4 percent from January to August due to U.S. sanctions. It is expected that companies will continue to forgo the Iranian economy in order to maintain access to the far more lucrative American market.
The latest European effort to counter the impact of U.S. sanctions was announced at the U.N. General Assembly in September. This initiative involved the use of a so-called special purpose vehicle (SPV)—a financial mechanism that would use a barter system to continue trade with Iran and avoid interacting with the U.S. financial network. However, numerous experts have suggested that such a vehicle is unlikely to be successful. And, to date, no European country has been willing to host the SPV.
The United States has taken a firm position on Iran. Secretary of State Pompeo is insisting that Iran meet the 12 requirements that he laid out last May—requirements that would bring Iran’s behavior in line with international norms. These include ending its support for terrorist groups, ceasing its threatening behavior against its neighbors, allowing international inspectors full access to ensure Iran’s compliance with its nuclear agreements, and releasing Americans and other dual citizens imprisoned in Iran on spurious charges.
U.S. sanctions are designed to target the Iranian regime and its aggressive behavior, while ensuring the continued provision of humanitarian goods. The challenges facing the Iranian people today are a direct result of the regime’s corruption and commitment to illicit activities over the welfare of its citizens. President Rouhani has announced that, in light of U.S. sanctions, Iran plans to provide financial support to over 20 million citizens, around a quarter of the population. But even if implemented, this temporary solution sidesteps the more significant problem: The Iranian people have protested in more than 80 cities this year against their government’s insistence on meddling in regional conflicts instead of providing for its own people. Around one-third of Iranian youth are unemployed, and food and water shortages are commonplace.
Tehran has sought to distract the Iranian public from its failures. To commemorate the anniversary of the 1979 takeover of the U.S. embassy, Iran’s government led protests outside the former U.S. embassy last month. Protesters burned American and Israeli flags and chanted “Death to America,” “Death to Israel” and “Down with the U.S.” But if Tehran actually wanted to improve the lives of its people, it would give up its nuclear ambitions, abandon radicalism and attend to the business of governing. Sadly, any hope that the regime would adopt this stance appears far off today.
The full impact of U.S. sanctions remains to be seen. But maximum economic pressure combined with an open invitation to negotiations offers the best opportunity to persuade Iran to change course. The administration should continue to challenge Iran’s malicious activities and Congress—on a bipartisan basis—should reinforce these efforts.
Type: Near-East-Report Near East Report