Iran’s strategy for US economic sanctions

In 2015, Iran made a long term deal (Joint Comprehensive Plan of Action) on its nuclear programme with world’s major powers, known as P5+1. Under the accord Tehran agreed to limit its nuclear programme and allowed the international community visit and observe that programme in return for the lifting of economic sanctions. US President Barack Obama said on that occasion that the deal would prevent Iran having a secret programme.

Under this deal, Iran was able to get over $100 billion from foreign investment and the sale of petroleum products, and use the global financing system for trade. The Iranian economy hadGDP growth of 12.3 percent after the agreement. International companies flocked into Iran.

In May 2018, President Trump abandoned the landmark deal announcing that “It didn’t bring calm, it didn’t bring peace, and it never will”. Trump’s supporters argued that “Tehran had deceived the international community and that it continued to destabilize the Middle East undeterred, via proxy in Lebanon, Syria, Yemen and other parts of the region”.

Then in November 2018, it reinstated economic sanctions targeting both Iran and countries trading with Iran. Washington wanted to apply maximum pressure on Iran to compel it to renegotiate the deal but Tehran remained defiant. Other European parties to the deal like Britain, France and Germany opposed the pulling out, because they argued that Iran is complying with the agreement. European countries also announced that they would establish a mechanism to protect their trade with Iran. Despite this opposition, the US economic sanctions had a substantial impact. The sanctions made Tehran more isolated and its economy was also badly affected. Real GDP growth started dropping.

Even before the sanctions, the Iranian economy had started to decline, particularly its currency. Western firms and businessmen started fleeing from Iran to avoid jeopardizing their connections with the US financial system and market. Some European and Asian countries did continue to support Tehran and refused to cooperate with the USA. Iran apparently intended to ride out these sanctions in the hope that the post-Trump US government would return to the nuclear deal. But it is still worth evaluating the Iranian strategy to escape geopolitical isolation.

The isolation reduced Iranian economic activities both at home and abroad. Currency was a major barrier for the Iranian economic activities fireugn and domestic. Mostly people were avoiding trading, business and transactions in dollars. To get around this, Iran decided to allow trading partners to use their own currencies in bilateral trade and settle any imbalance at the end of a specific period.

The history of sanctions on Iran demonstrates that Iran has the ability to survive them. They have a record to find a way to sell oil and also rely on their previous experience. Although Iranian people are forced to bear the bitter taste of economic sanctions, but it may compound grievances of economic, political and social hardship. Sanctions have a great effect on the social life and economic activities, but Iran  is working hard to maintain trading links with its trading partners.

Iranian Foreign Minister Javad Zarif stated in New York on 29 September 2018, “Sell stuff in your own currency, buy stuff in THE other country’s currency and at the end of a specific period, balance it out in non-dollar currency.” It may be possible and even profitable for all its trade partners. Therefore, Tehran has formatted the policy of offering incentives to its trade partners and those countries who are opponents of Washington’s policies like Beijing and Moscow. China and Iran are each other’s largest trade partners as Iran fulfills Chinese oil needs and China helps Iran with diplomatic, political, defense and economic benefits. Trading in Yuan is an attractive opportunity for China to enhance bilateral trade and to promote Yuan. Likewise, Russia also faces US sanctions because of the Ukraine issue and the use of chemical agents. Similarly, it is moving away from the payments in dollars. In the same way, European Commission President Jean-Claude Juncker also said that the EU may plan to increase the use of the euro to trade, particularly to buy oil and gas. For many months, European countries have been looking for an alternative money transfer electronic system which could not be blocked by the US Treasury Department.

Moreover, the EU has been discussing the need for a Special Purpose Vehicle (SPV) to protect economic freedom and to pursue legitimate business with Iran. Such a system could possibly facilitate Iran for the payment of exports and imports. In the past, during the multilateral sanctions, Iran had been managing oil export of more than one million barrels a day. After sanctions were reinstated, the Trump Administration wanted to reduce Iranian oil exports to zero but failed. Due to the Iranian incentive scheme, China, India, South Korea and the EU disliked US intentions against Iran.

At that time, Iran relied on front companies to do business in China, Iraq and the UAE to lessen the effect of sanctions. The front companies were registered under obscure names. They bought goods and legally shipped them to Afghanistan, Iraq and the UAE, and finally smuggled the goods to Iran through the water and land routes. Iran has been hiring such individuals and private companies owned by Arabs, Iraqis, Syrians and Emiratis. Also, Iranian businessmen opened new companies with Chinese, Russian, Arab and other partners worldwide. According to The Wall Street Journal, the Iranian Revolutionary Guard Corps has opened 150 front companies in partnership with Georgian businessmen. For the medicines, the Foreign Investment Company of Iran, which also had made investments in Afghanistan, Oman, Brazil, and Germany, facilitated Iran. On the other hand, Iranian Parliament considered legislation to increase imports of essential goods and to subsidize exports to mitigate the impact of sanctions. Although French and Indian companies are pulling out from the huge pledged investment projects, China is ready to replace them and to earn benefits. Meanwhile, fishermen in the Gulf have also been complaining that Chinese boats and fishermen are entering their areas.

Another strategy of Iran has been relying upon neighboring countries to circumvent sanctions, and it has been purchasing dollars from Afghanistan, Iraq and Pakistan. Almost three million Iranians enter Iraq as religious pilgrims and visit Karbala and Najaf. A large number of essential goods have been smuggled to Iran via UAE and Oman. But due to the pressure of the USA, UAE and Oman cracked down and Iran turned towards Iraq.

Due to the incompetence of Iraqi authority, Iranians are allowed to bypass many rules because they have leverage in Shia groups and militia. Similarly, Iranians use another tactic of couriers and porters. Iraqi Kurds bring money and food for their relatives in Iranian Kurdistan. It has become a profitable business for the Kurds of both sides. In the past, Afghan banks have been used to pay for Iran’s imports. Once the president of money exchangers union in Afghanistan said that Iranian rials “come across in trucks” then they are converted to dollars. From this, Afghan middlemen earned five to seven percent commission. A money exchanger in Kabul told Bloomberg TV in September 2018 that dollars are transferred to Iran in remote areas of the Afghan-Iran border. The traders of both sides have multiple entry visas so that border police does not ask them many questions. Moreover, Eastern European countries like Belarus Hungary and Romania had been getting benefits during the previous sanctions periods, but now they are unclear during the present sanctions.

The history of sanctions on Iran demonstrates that Iran has the ability to survive them. They have a record to find a way to sell oil and also rely on their previous experience. Although Iranian people are forced to bear the bitter taste of economic sanctions, but it may compound grievances of economic, political and social hardship. Sanctions have a great effect on the social life and economic activities, but Iran  is working hard to maintain trading links with its trading partners.

It is looking towards China, Russia and other Eastern countries to forge new links to fill the gap left by lost Western Investment. China’s role may prove very critical in  who the largest Iranian oil importer is. President Hassan Rouhani has encouraged his people by stating “There is no doubt that United States will not achieve success with this new plot of economic sanctions against Iran as they are retreating step by step”. He further said that Iranian nation will ride out  the storm of sanctions.