Opinion |

Biden’s Iran-sanctions Card Isn’t as Strong as It Looks

The Trump sanctions hit Iran’s oil industry hard but for Iranian manufacturing and the Revolutionary Guard Corps, they’ve been a blessing

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Joe Biden probably has a lot of things on his mind right now, but the president-elect should take time to study Tehran’s Janus-faced response to the prospects of U.S. sanctions being lifted.

On the one hand, Iranian President Hassan Rohani said this week that reviving the 2015 nuclear agreement would be “very easy” if the new administration abandons the Trump sanctions. A government spokesman said foreign companies are already looking around for office space in Tehran in anticipation, and predicted that investments will quickly follow.

Then on the very same day, Supreme Leader Ayatollah Ali Khamenei threw cold water on the whole idea of returning to the agreement at all. “We once tried the path of having the sanctions lifted and negotiated several years, but this got us nowhere,” he said.

By the numbers, Trump’s Iran sanctions have had a devastating effect on the Iranian economy. Gross domestic product fell 6% or more in each of the first two years after they were imposed and the World Bank expects it to contract another 4.5% this year as the sanctions are aided and abetted by the coronavirus. Inflation is running at more than 30% and the Iranian rial has lost half its value in the past year.

As Biden and his foreign policy team form their strategy on Iran, the punishing impact of sanctions and the rewards Iran can expect if they are even partly lifted should be America’s strong card as the two sides negotiate an agreement.

But are they? What may look like economic devastation from the vantage point of Washington or Jerusalem, looks very different if you’re one of the ruling elite in Tehran. Even Rohani, who is anxious to return to the nuclear deal, insisted this week that Iranians had emerged victorious from Trump’s “economic war.”

Iran ‘victorious’

This isn’t just regime propaganda or pre-negotiation position-taking; there’s a degree of truth to it. And it’s enough truth that Tehran shouldn’t be expected to be coming on its hands and knees to the negotiating table.

The economic devastation that the sanctions have wrought has been concentrated mainly in Iran’s oil industry. Oil exports amounted to just 160,000 barrels a day last month, versus as much as two million before sanctions. In the fiscal year running through March 2020, the oil portion of Iran’s GDP plunged 38.7% from the year before.

The rest of the economy, however, isn’t in bad shape. The Iranian economy isn’t all about oil: it also has a large manufacturing sector, which has actually been creating jobs. That’s why Iran’s non-oil GDP declined by just 1.1% in the last fiscal year. Non-oil exports actually exceeded oil exports for the first time in the country’s modern history.

If anything sanctions have actually given a boost to Iranian industry. Since no one is willing to sell anything to Iran, local manufacturers have stepped in and grabbed the market for themselves. Meanwhile, the rial’s plunging value – which was spurred by the sanctions – has made their exports more price-competitive.

A thriving industrial sector isn’t anywhere close to being enough for Rohani to run an it’s-the-economy-stupid reelection campaign, but Iran isn’t a real democracy. The real center of power is the Islamic Revolutionary Guard Corps, which not only wages Iran’s wars but controls a vast business empire. How vast no one knows for sure, but guesses are that it controls a quarter of the economy and is worth $100 billion.

Sanctions have been good for the IRGC. Having pushed the private sector off to the side years ago, it has little competition at home or from imports. Much of its business derives from sanctions-busting, facilitated by the fact that it controls Iran’s borders.

Conversely, lifting sanctions is bad for the IRGC. Its businesses would not only face new competitors, but foreign firms would make annoying demands for a level playing field with the IRGC, less corruption and more transparency from the government, all of which would undermine the way the IRGC does business. The IRGC is Khamenei’s base, not ordinary Iranian voters, and he’s not going to undermine it.

Strangely enough, the IRGC may be needlessly anxious about a post-sanctions economy. Everyone assumes that once sanctions are lifted, the world’s suits will be stampeding to Tehran to make deals and that Iran will start pumping oil with abandon.

But the world oil market is in a glut and no one needs Iranian oil. JPMorgan estimates that exports might return to half their pre-sanction levels, but if Iran reaches that number, it will be putting more supply on the market and forcing prices lower. And, as to those investors and businesspeople, between the global recession, the coronavirus and Iran’s endemic corruption and mismanagement, don’t expect too many of them to pack their bags and briefcases any time soon.

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