The problem with Donald Trump, to put it bluntly, is that he such a loudmouthed, lying, ignorant, divisive vulgarian that when he does succeed, the kneejerk reaction of any intelligent person is to ignore or reject it. But the fact is, the sanctions the president and his men have imposed on Iran are working better than anyone expected—so far.
The U.S. sanctions only go into force fully on November 4, when they expand to encompass Iran’s energy sector. But they have already caused an exodus of European companies from Iran, and Iran’s economy is crashing through the floor.
The one weak link in the sanctions was, or so it was believed, oil. The assumption was that the global market was too tight and Iran too big an exporter for countries like China and India to abide by the sanctions. At best, experts shrugged, the sanctions might shave 500,000 barrels per day (BPD) from Iranian exports, which were running at 2.5 million in April.
In fact, well before the oil sanctions kick in, exports of oil were down 800,000 BPD or 900,000 BPD in the first half of September, depending on who is doing the estimating. It seems that the Trump administration has put such a fear of God into the global energy industry (or more properly fear of U.S. banking and insurance sanctions) that no one is even willing to risk stocking up on Iranian oil while they still technically can.
The Iranians can’t simply cap wells when there’s not enough demand for their oil without causing damage to them. So they have taken to warehousing it in supertankers off the coast.
The official U.S. target is zero Iranian oil exports. But even if zero is an impossible dream, if the sanctions halve Iranian exports, Tehran will be in an untenable position. Petroleum accounts for 70% of their exports and 80% of the country’s tax revenues.
Thus, Trump could achieve a win-win from what was regarded a few months ago as a lose-lose. The working assumption had been that if Trump’s oil sanctions failed, Iran would remain defiant; and if they succeeded, the absence of Iranian oil on the market would drive prices up, angering the only constituency the president cares about, his voter base in America.
In fact, oil prices have risen to about $80 a barrel, but even with Iranian exports plunging the increase has been modest. The winter and doubts about OPEC ability to step up production could bring prices higher, but if the U.S. lets just enough oil seep out of Iran to satisfy world demand, that would be more than adequate to leave Iran teetering on the brink economically.
Where Trump is wrong
I’ve argued before that even if the Iranians could export reasonable amounts of oil, it wouldn’t solve their economic problems. Even when oil exports were growing, during the brief interlude between the signing of the nuclear deal and Trump’s pulling out of it, oil revenues failed to trickle down to the rest of the economy. Iran needs foreign trade and investment, but after the sanctions were lifted, very little of that emerged. Unemployment remains in the double digits and inflation has eaten away at the pay for the rest.
The Iran economy is too corrupt, inefficient and dominated by the Revolutionary Guard-owned enterprises to present great opportunities for foreign business. When Trump re-imposed sanctions, it wasn’t a hard decision for multinational companies whether to choose access to the American market or to Iran.
So, Trump has succeeded as a tactician vis-a-vis Iran, but he may well fail as a strategist.
Officially, the his administration is seeking to negotiate a treaty with Iran to rein in Tehran’s ballistic missile program and end its interference in the Middle East, but there’s no question it would even more pleased if the economic pressure brought down the rule of the ayatollahs.
Trouble is that regime change is a risky business that can end in unexpected ways. If that is what the Trump administration really wants, it is playing a very dangerous game, especially with a country as big as Iran.
But even the more modest goal of a new treaty is not going to be easy to achieve by economic pressure. It assumes Tehran’s leaders are anxious to head off street protests or economic collapse.
My guess is that the hard liners -- the ones who really run things in Iran -- have a high level of tolerance for economic distress and an equally high distrust of American intentions. They won’t come to the negotiating table very quickly.
However, the biggest strategic blunder may end being the sanctions strategy itself.
Sanctions are working because the world economy revolves around the U.S. dollar and, as a corollary, the U.S. financial system. But Trump’s unilateral sanctions policy against Iran – in contrast to Obama’s – has raised hackles from America’s European allies, not mention rivals like China and Russia.
The Trump administration has little regard for the international system, including the financial system, but it should be worried when European leaders and China talk about ways of dethroning the dollar, in particular its role as the currency in which oil is bought and sold. As much as Trump & Company disparage the global economic order, they take for granted American dominance and are risking it by turning America into an economic power at war with the world rather than a global referee.