Iranian foreign minister Mohammad Javad Zarif\u00a0recently visited<\/a>\u00a0the Group of Seven (G7) at the invitation of French president Emmanuel Macron, in what was seen as an overture to the Trump administration to negotiate over sanctions that have plagued the Iranian economy. Back in 2018, after months of increasingly hostile rhetoric, the US government withdrew from the Joint Comprehensive Plan of Action, or \u201cIran Deal,\u201d and imposed a \u201cmaximum pressure<\/a>\u201d campaign that included unilateral, economy-wide sanctions. The Iran Deal was an agreement that provided Iran relief from existing sanctions in exchange\u00a0for limits on its enrichment of uranium, among other concessions. These sanctions hampered trade between the European Union, whose leaders have sought to salvage the Iran Deal.<\/p>\n When President Trump reimposed sanctions in November 2018, it cut off Iran\u2019s oil exports and access to the international financial system. At the time, he announced that Iran could either comply with new US demands or face \u201ceconomic isolation<\/a>.\u201d Additional US sanctions imposed since then have specifically targeted a\u00a0thousand individuals and entities<\/a>\u00a0with the goal of reducing Iran\u2019s oil revenues to \u201czero.\u201d More recently, Trump\u00a0said<\/a>\u00a0that although \u201c[Iran\u2019s] economy is crashing\u00a0.\u2009.\u2009.\u2009 it\u2019s very easy to straighten [it] out,\u00a0or it\u2019s very easy for us to make it a lot worse.\u201d<\/p>\n And so, according to Trump himself, the United States has the power to solve \u2014 or exacerbate \u2014 Iran\u2019s current economic problems. What is left unsaid, including by much of the media, is that sanctions that \u201ccrash\u201d the economy are an attack on the country\u2019s civilian population and create widespread human misery. Indeed, they appear to be contributing to widespread\u00a0shortages<\/a>\u00a0of medicine and medical equipment, particularly affecting cancer patients. In Venezuela, which is under a similar US sanctions regime, there have been similar effects, with more than\u00a040,000 people<\/a>\u00a0estimated to have died from 2017 to 2018 due to the \u201ccollective punishment\u201d inflicted on them.<\/p>\n Yet other statements from US administration officials often contend that sanctions have negligible economic or social effects on the general population of Iran. For example, the US State Department\u2019s special representative for Iran, Brian Hook, recently\u00a0denied<\/a>\u00a0that US sanctions on Iran affect the availability of medicine and agricultural products. In this argument, Hook divorces the connection between the economic damage caused by sanctions in Iran and the lack of basic\u00a0necessities like medicine and food, preferring to instead lay blame on the Iranian government, not on what the Trump administration calls \u201ctargeted\u201d sanctions.<\/p>\n Are the sanctions causing Iran\u2019s economic problems, or simply\u00a0a way to punish individual actors? Answering this question requires an examination of the impact sanctions have on Iran\u2019s economy and the mechanisms by which sanctions work \u2014 two important areas of inquiry that seldom receive attention in the US press.<\/p>\n Looking at Iran\u2019s oil sector, which has been directly targeted by the sanctions regime, is a good way to get a sense of how the sanctions have affected the country\u2019s economy, which remains dependent on the production and export of oil, according to a number of\u00a0indicators<\/a>. For example, around 70 percent of Iran\u2019s merchandise exports consists of fuel. Although this\u00a0dependence on oil production<\/a>\u00a0has decreased over the last decade, in large part due to government efforts to diversify the economy, the International Monetary Fund (IMF) reported in March 2018 (before the announcement of the resumption of US sanctions) that oil revenues accounted for nearly 40 percent of government revenues in fiscal year 2016\u201317, and projected a similar number for fiscal year 2017\u201318 (assuming, then, that there would be no new sanctions). Clearly, a large reduction in Iran\u2019s oil production would pose significant challenges to its ability to provide services to its people, as well as maintain essential imports including some foreign-produced medicines and other healthcare and life-saving goods.<\/p>\n Unsurprisingly, Iran\u2019s oil production moves very much in tandem with the enactment and repeal of broad sanctions over time (see the figure below). US sanctions in 2010 affected investment in Iran\u2019s oil infrastructure and prohibited some international transactions. Then, in early 2012, the United States and the European Union banned oil imports from Iran and froze its central bank assets. Shortly thereafter, oil production plummeted and reached its nadir in late 2012. After the Iran Deal was enacted in early 2016 and US and EU sanctions were repealed, Iran\u2019s oil production rapidly recovered to 2007 levels. This level of production was maintained until the announcement by the Trump administration in May 2018 that the United States was withdrawing from the Iran Deal. Since May 2018, Iran\u2019s oil production has fallen precipitously; it is down by over 40 percent over the last year.\u00a0Waivers<\/a>\u00a0the United States issued to purchasers of Iranian oil have expired over the last few months, eliminating one of the remaining factors that put upward pressure on production.<\/p>\n To get a sense of the size of these impacts, it\u2019s useful to compare what they would look like in the US economy. If applied to the United States, they would be\u00a0comparable to<\/a>\u00a0a 16 percent cut in the federal budget, or $521 billion in 2018. That would also represent about 85 percent of nonmilitary discretionary spending. While the United States would be able to borrow or create money to fill this deficit, Iran has much less capacity to do either without triggering more economic difficulties.<\/p>\n Broader economic impacts are also visible. The IMF\u00a0lowered<\/a>\u00a0growth projections for Iran due to the \u201ccrippling effect of tighter US sanctions\u201d in its July update. Based on this projection, it is estimated that the economy will contract by\u00a09.3 percent<\/a>\u00a0in 2019. This is a downward revision from a previous\u00a0projection<\/a>\u00a0in April of a decline of 6 percent. (Before the sanctions, the economy was projected to grow by 4 percent.) Other indicators also worsened after the reimposition of sanctions: the unemployment rate is estimated to be 25 percent; inflation has risen to 80 percent; and the currency has lost over half its value.<\/p>\n The main mechanism by which oil production has fallen is the same mechanism that prevents Iran from importing food and medicine: Iran cannot find buyers for its oil on the open market, just like it cannot buy food or medicine on the open market. In effect, it is cut off from the US-dominated international financial system.<\/p>\n Uniquely, the United States exerts broad control over international banking transactions. One way is via the SWIFT and CHIPS systems, which handle the vast majority of those transactions. The SWIFT system, which provides a common communication system for banks, is\u00a0controlled<\/a>\u00a0by US banks, which own the majority of the system and have officials on its board. On top of that, despite not being located\u00a0in the United States, SWIFT\u00a0makes<\/a>\u00a0all of the system\u2019s data<\/a>\u00a0available<\/a>\u00a0to the US government, even if those transactions do not involve the United States. The CHIPS system, which provides communication as well as settlement functions, is governed by US law, has many US banks as owners, and is directly overseen by US authorities. These systems rely on a network of correspondent banks \u2014 which link banks that might not have direct relationships with one another \u2014 to complete transactions. The apex of the correspondent system is the New York Federal Reserve Bank, under the control of US banking authorities, which also serves as a\u00a0lender of last resort to other central banks<\/a>.<\/p>\n A system designed in this way ensures that banks with no relationship with each other still can transact in a common currency (dollars) via a common bank (the New York Fed) in an agreed-upon framework (SWIFT and CHIPS). However, it also means that the United States has disproportionate power over transactions. Formally, the United States government, via the Office of Foreign Assets Control, can prohibit transactions involving Iran to pass through systems and banks in which it has jurisdiction. More informally, the US government can\u00a0pressure SWIFT<\/a>, other central banks, correspondent banks, and even specific firms to adopt policies of refusing to do business with Iran. Since these players fear retribution from US authorities (e.g., being sanctioned themselves), they are usually unwilling to take the risk of doing business with Iran unless they have no other business that might involve the United States or financial entities that can be pressured by the United States.<\/p>\n Because the international banking system is designed in this way, US sanctions on the Iranian economy effectively\u00a0mean that not only can Iran not easily sell oil on the open market, it cannot easily\u00a0buy food or medicine<\/a>\u00a0either, even if the latter are\u00a0nominally exempt<\/a>, as Hook says. This is because sanctioned Iranian banks and officials are ultimately involved in these transactions in the same way that they are with oil, often by virtue of the position they hold in the Iranian banking system. It is telling that hours after an October 2018\u00a0ruling by the International Court of Justice<\/a>\u00a0ordering the United States to \u201cremove any impediments\u201d that affect the importation of medicine, food, and civil aviation products (including impediments to payments and other transfers of funds related to these products),\u00a0the United States withdrew<\/a>\u00a0from\u00a0the treaty<\/a>\u00a0that formed the basis of the ruling, instead of complying with it. Unsurprisingly, efforts at importing food and medicine via the technical exemptions that do\u00a0exist\u00a0often fail<\/a>. It appears that the technical exemptions are used more to deflect criticism of sanctions overall than to actually permit the importation of food and medicine.<\/p>\n But on top of these issues, even if food and medicine were, in reality, exempt from the sanctions regime, the \u201ccrippling effect\u201d on Iran\u2019s economy would impact the Iranians\u2019 financial ability to acquire food and medicine\u00a0anyway. Iran would have fewer resources to devote to domestic food and medicine production, and many fewer resources to import the same products.<\/p>\n It is surprisingly\u00a0difficult to bypass this financial system because it is so entrenched, although it is not impossible. For example, countries might set up a bilateral or multilateral system to carry out\u00a0transactions<\/a>\u00a0in their own currencies and settle accounts in a currency other than the dollar. Iran could negotiate bilateral trades with India: in exchange for oil, Iran would accept rupees, and then use those rupees to purchase Indian products. The downsides are that mechanisms would be needed to support these transactions (i.e., establishing parallel payment and banking functions). In addition, Iran would need to find a use for the rupees it received in exchange for oil, usually by buying Indian goods (this is because it would be difficult to exchange rupees for other currencies on the open market due to the sanctions).<\/p>\n One promising new multilateral mechanism, dubbed INSTEX, would allow trade between EU countries and Iran without relying on direct transfer of funds or the use of the US-dominated financial system. While in its beginning stage it will only deal with humanitarian trade, INSTEX\u2019s model could potentially create a new path to buy Iranian oil. It is telling, however, that EU countries set up an entirely different financial mechanism to use for humanitarian trade, rather than risk drawing the ire of the United States by using established channels.<\/p>\n Yet these alternative mechanisms are not immune from US influence either. In recent cases where countries have announced intentions to develop alternative trade arrangements, the United States has applied political pressure to\u00a0nip<\/a>\u00a0them<\/a>\u00a0in the bud. This involves overt\u00a0economic threats<\/a>\u00a0as well as rhetoric urging countries like India to refrain from using a \u201cnarrow bilateral lens\u201d in economic trade.<\/p>\n In the meantime, Iran is able to\u00a0sell<\/a>\u00a0some oil to countries such as China, Russia, and India; either to pay back debt or because some banks in these countries do not have significant business\u00a0that can be impacted by US retaliation. It also has had\u00a0some success<\/a>\u00a0in\u00a0covertly transferring<\/a>\u00a0oil to buyers, but this does not always\u00a0escape<\/a>\u00a0US control. Similarly, Iran is able to maintain imports of some items, like\u00a0bananas<\/a>, outside of the established financial system primarily due to the experience and ingenuity of importers, although usually at lower volumes.<\/p>\n It should be clear that the United States\u00a0is uniquely positioned to choke off imports and exports from a targeted country using sanctions with deep, negative consequences for that country\u2019s economy,\u00a0as well as severe constraints on its government\u2019s ability to address economic problems.<\/p>\n In Iran\u2019s case, US sanctions mean that production of oil \u2014 a vital export \u2014 is in free fall, unemployment is on the rise, and\u00a0record inflation<\/a>\u00a0due to scarce imports has made it harder for everyday Iranians to buy basic goods and\u00a0access<\/a>\u00a0life-saving<\/a>\u00a0medicine. Recent reports have detailed harrowing stories of\u00a0hospitals running out of crucial cancer medicines<\/a>\u00a0and\u00a0patients struggling<\/a>\u00a0to afford or even find their prescriptions. As in Venezuela and other targeted countries, US sanctions undoubtedly have a human toll associated with them, which will only grow as time\u00a0goes on<\/a>. This human impact is one of the main reasons that\u00a0experts in international law argue<\/a>\u00a0unilateral sanctions are illegal under the United Nations Charter and\u00a0international human rights law<\/a>.<\/p>\n While Iran has been exploring alternative ways of exporting and importing goods, it\u2019s unclear what more it could do\u00a0absent relief from sanctions. Even so, US officials will typically place responsibility for the social and economic problems resulting from the sanctions on the Iranian government, as Hook does. But Trump\u2019s comments are more revealing. Sanctions only work because they cause suffering\u00a0in the first place. In effect, the United States is risking \u2014 and sometimes ending \u2014 the lives of thousands of Iranians with the hope that the Iranian government acquiesces to its demands or is replaced by a more compliant government. That the United States could carry out such a strategy in the first place should raise serious questions among concerned US citizens and within the international community, especially among those who respect international law.<\/p>\n<\/div>\n Kevin Cashman is a senior associate at the Center for Economic and Policy Research in Washington, DC.<\/em><\/p>\n Cavan Kharrazian is a researcher at the Center for Economic and Policy Research in Washington, DC.<\/em><\/p>\n<\/div>\nSanctions Are Severely Impacting Iran\u2019s Oil Production<\/h4>\n
Sanctions Are Exacerbating Social Problems<\/h4>\n
Adapting to US Sanctions<\/h4>\n
Too Much Power<\/h4>\n