Iran & the Sanctions War

The worst thing that can be happen in a sanctions war is the disconnection of the country from the interbank SWIFT system and a ban on the purchase of its oil and gas. This is proven by the experience of Iran, against which sanctions began to be introduced in the early 50s, with a toughening over subsequent decades.

The United States intends to respond to Russia's expulsion of diplomats from Moscow. According to Secretary of State Rex Tillerson, Washington will make a decision by September 1. The Secretary of State did not specify how the United States intends to respond, but it is clear that the sanctions war, which entered an acute phase after Russia’s occupation of Crimea, will continue.

The Russian Ministry of Economic Development, with the help of experts from the All-Russian Academy of Foreign Trade, decided to analyze how the sanctions mechanism had been applied at the global level in the last 70 years.

Since 1970, the US has imposed 95 sanctions against various countries. During the same period, the EU introduced 35 sanctions. The USSR and Russia applied sanctions seven times during this time and 16 sanctions were imposed by the UN.

Sanctions began to be actively used as an instrument in world politics after the Second World War. The peak came in the period from 1991 to 1995 which saw 34 countries sanctioning each other. In recent years, such actions have become less popular, with many realizing that the weapon was double-edged.

The recent study says that sanctions are applied mainly to developing countries, "not having a stable political, social and economic system." Since 1970, with respect to the countries of Africa, 32 blocks of sanctions have been applied, to countries of Latin America - 20, Asia - 16, the USSR and the countries of the post-Soviet space - 14. The study further claims that only one third of the applied sanctions led to the desired effect.

Experts point to several reasons that reduce the effect of sanctions. For example, the absence of an international consensus on the need for such punishment. As a result, economic damage from the application of sanctions is substantially compensated or, in some cases, even overlapped by the effect of economic assistance from other countries. US sanctions against Cuba, for example, were extremely ineffective in the period from 1960 to 1990 due to active assistance from the USSR. After the collapse of the USSR in 1991 and the cessation of financing, the economic damage from sanctions became devastating.

And in the case of the USSR sanctions against Yugoslavia in 1948 and the United States against Ethiopia in 1977, the combined effect on the economy and social welfare of Yugoslavia and Ethiopia was even positive: thanks to active financial assistance from other countries.

Often, the reason for failure in such a policy is the "narrowly targeted nature of sanctions," for example, with regard to specific individuals or in cases where restrictions are applied in just the financial or commercial sphere. Complex sanctions, that is the simultaneous application of sanctions in the financial and trade spheres, appear to be more effective in 10-20% of cases.

The Russian study details how sanctions have affected the economies of countries such as China, Cuba, South Africa, Syria, Iraq, and Iran.

Of greatest interest to the Russian authorities is, of course, the mechanism of the sanctions and their consequences in the case of Iran, which can be used as a study of “the worst-case scenario”.

The economies of Russia and Iran are both largely dependent on the export of hydrocarbons, and the “emotional background” is very similar. Anti-Americanism in recent years, especially after the annexation of Crimea, has become an important component in the political field of Russia.

Parallels with Iran also arise in the case when the Russian Foreign Ministry suggests reducing the dependence of the Russian economy on the US dollar.

Iran has already passed this. And in return, Iran began to form mutual agreements with the countries included on the "black" list of the United States, in particular, with Syria, Pakistan, Afghanistan and Iraq.

In 2013, Iran's foreign trade was almost completely reoriented to Asian countries, whose share in Iranian exports exceeded 90 percent (while the share of European, North and South American countries was only three percent).

The total damage to the Iranian economy since 1995, when the United States first imposed sanctions for developing a nuclear program, amounted to $170 billion

According to Bloomberg, Iran, which is one of the largest oil producers in the world, is losing $133 million daily due to sanctions.

The International Monetary Fund (IMF) says that, under the impact of sanctions in 2012, the growth rate of Iran's economy fell to 0.4 percent. By March 2013, more than 6,000 Iranian enterprises (approximately 67 percent of their total number) were placed on the verge of bankruptcy.

The two most serious negative effects on the Iranian economy, experts claim, were the exclusion of SWIFT from the global interbank payment system and the ban on imports of Iranian oil and gas by the EU and US countries. As a result, in 2013, Iran's GDP contracted by 6.6 percent.

Sanctions against the Iranian banking system led to a reduction in Iran's foreign trade by about 30 percent. Inflation reached a record level: according to the Iranian Statistics Department, from March 2012 to March 2013, it exceeded 30 percent, which is the worst indicator in the history of the country. At the same time, food prices rose by more than 60 percent.

From the middle of 2012 to 2013, when the embargo on the purchase of Iranian oil by the United States and the EU came into force, unemployment rose by 25 percent. By early 2014, 44 to 55 percent of Iran's population was below the official poverty line.

International sanctions also led to a weakening of the automobile industry of Iran, which was in second place after the oil industry. In 2011, the automobile industry accounted for almost 10 percent of Iran's GDP, with nearly 1 million people employed in the industry. In 2011, imports of equipment and some components for the automotive industry were banned. That year, before the ban, the country produced 1.5 million new cars. A year later, production fell to 800 thousand.

In the sanctions war, the initiating countries also bear economic losses, experts warn. On average, such losses can reach 6 percent of GDP.

For the US and EU, sanctions against Iran resulted in significant losses. According to the assessment of the National American-Iranian Council, from 1995 to 2012, the United States, due to imposed sanctions, lost about $175 billion in potential export earnings from trade with Iran.

According to the US Department of Commerce, the loss of export earnings of $1 billion cost from 55 to 60 thousand jobs per year. Thus, for example, only in the crisis year of 2008, due to sanctions against Iran, more than 250 thousand Americans lost their jobs.

Sanctions against Iran also caused significant damage to the economies of some EU countries. In the period from 2010 to 2012, Germany's losses as a result of anti-Iranian sanctions, according to experts, amounted to $23.1 billion to $73 billion, Italy - from $13.6 billion to $42.8 billion, France - from $10.9 billion to $34.2 billion.

And so the sanctions war goes on…

David Drummers