Analysis |

American Sanctions on Iran Are a Boon for Russia and Turkey

The sanctions on Iranian oil intensified, but gave rise to a symbiotic relationship with Russia: The less oil Iran can export, the more Russia is able to take over lost markets

A photo of Dr. Zvi Bar'el.
Zvi Bar'el
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Iranian protesters burn American flags, Tehran, May 9, 2018.
Iranian protesters burn American flags, Tehran, May 9, 2018.Credit: Vahid Salemi/AP
A photo of Dr. Zvi Bar'el.
Zvi Bar'el

The meat mafia in Iran was dealt a hard blow recently: The government decided to cancel the benefit hitherto given to meat importers, which enabled them to obtain dollars at an exchange rate of 42,000 rials to the dollar, while the free market exchange rate ranged from 160,000 to 180,000 rials.

The importers, who obtained cheap dollars, then sold the meat at the free market rate, making a fortune off the sanctions industry. As a result, the consumer price for a kilo of beef topped 25 dollars – similar to the price in Israel. But while the minimum salary in Israel is $1,200, in Iran it is just $360.

Beef importers also exploit the cheap dollar to export the beef they’ve imported to neighboring countries at high prices, thereby causing a shortage in the Iranian market and, of course, a further rise in prices.

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This new struggle against beef importers is indicative of the Iranian regime's confusion, if not total lack of control, of the market in general. The meat industry is just one example. Last summer, Iran announced that importers of a number of basic products would be able to enjoy a cheap dollar, but now that policy is being reconsidered in light of the lesson learned from the beef importers. The administration may blame the sanctions for hurting Iran’s economy, but a lack of efficient planning, hasty decision-making, slow-moving legislation and deep corruption were all around for years before the new sanctions went into effect.

Now there are the additional new sanctions, designed to impact Iran’s metal industry. This is the second-most important industry after oil, comprising 10 percent of Iranian exports. However, domestically, the industry does not produce the highest revenues for the government. According to estimates, revenue from growing and selling nuts is $649 million, while revenue from the metal industry is about $500 million.

In addition to impacting government revenue, these sanctions will also severely impact jobs. The metal industry directly employs 600,000 people, supporting three million people on average. Another casualty of these sanctions will be the automobile manufacturing industry, which employs about a million people. The two industries combined employ about 6 percent of Iran’s workforce.

Even before the latest sanctions, the automobile industry had been hard hit and shrank by 40 percent. Now hundreds of thousands of workers in these industries could lose their jobs without any alternatives on the horizon. This is where the real threat to the regime lies. Even with all the revenue it took in from the oil industry, the regime did not invest in infrastructure that could create new jobs.

The nuclear deal, which was supposed to affect a turning point in the employment market, brought big investors to Iran who focused mainly on heavy industries like oil drilling, the automobile industry and plans to develop communications networks – but these agreements never came to fruition. When the United States withdrew from the nuclear accord, the big corporations pulled out too, leaving Iran with partial investments it is incapable of completing.

The blow to the metal industry and to the main concentrations of the labor force is being interpreted in Iran as part of a deliberate ploy to topple the regime. Those thousands of suddenly unemployed workers could launch mass protests on a much larger scale than anything the country has seen in recent years.

The U.S. says it is not aiming to take down the regime, but the political effect of the sanctions cannot be ignored. The question is whether the U.S. has a plan of action ready in the event that the regime feels threatened at home and employs massive force to halt the protest movements.

To date, Washington has a bad track record when it comes to intervening in other countries’ domestic policy – from failing to build a stable government in Afghanistan, which has had to negotiate with the Taliban, to the mess in Iraq, which is far from being a strong economy despite its huge underground oil reserves.

The sanctions on Iranian oil intensified this month after the U.S. canceled the exemptions that had been granted to eight countries, but gave rise to a symbiotic relationship with Russia. The less oil that Iran is able to produce and export, the more Russia will be able to take over Iran's lost markets. These include some of the world's biggest oil consumers like India, Japan and South Korea, which will have to supplement their oil needs not only from the Gulf States but from Russia as well.

Ever since the European Union imposed sanctions on Russia over the Ukraine crisis, the EU countries have been looking for alternative sources of oil. The EU countries import 30 percent of their oil from Russia and 39 percent of their gas. When the nuclear deal was signed, the EU countries expected to be able to import oil and gas from Iran and reduce their imports from Russia. The American sanctions have shown these countries that Iran cannot be counted upon as a stable alternative, and that Russia will apparently continue to be their main supplier, both directly and via the new pipeline through Turkey.

Thus, paradoxically, the latest American sanctions are a boon for the economies of Russia and Turkey, two countries whose relations with the U.S. are full of friction. The Iranian people aren’t concerned with these side effects. Their only concern is how to make it through the next month. But the situation is compelling the Iranian regime to reassess Iran’s status as an oil supplier – For once this crisis passes and the country returns to the world market, it will have to woo back clients who have meanwhile shifted to new suppliers.

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