Iran’s Economic Resistance Buckling under U.S. Maximum Pressure

Over recent months, various Iranian government and senior military officials have publicly stated that the most important challenge the Islamic Republic is facing is the economic pressure of sanctions. In his recent remarks, Supreme Leader Ayatollah Ali Khamenei called economic problems “the most important issue for Iran that affects culture and security of Iran.” Since its withdrawal from the nuclear deal, or Joint Comprehensive Plan of Action, and as a part of its “maximum pressure” strategy, the U.S. government has added two major elements to previously existing sanctions: tightening sanctions on Iran’s energy sector by ending all waivers on imports of Iranian oil; and expanding the list of sanctioned Iranian individuals and entities, capturing a larger segment of the Iranian political and economic landscape, including steel and petrochemical companies and all businesses that have any affiliation with the Islamic Revolutionary Guard Corps or supreme leader.

As a result of the United States’ “maximum pressure” campaign, the devaluation of the Iranian rial has continued. By May, the exchange rate of the rial against the U.S. dollar had increased to about 156,000 rials for every dollar from 40,000 rials 15 months earlier. Additionally, the price of gold had increased by 150 percent. According to the Statistical Center of Iran, food and tobacco prices increased by 75 percent between May 2018 and May 2019. Housing and utility prices increased by 26.6 percent over the same period and transportation costs increased by 60 percent. At the same time, the unemployment rate has continued to increase.

The end to sanctions waivers the United States had granted to some countries to continue importing oil from Iran has imposed renewed pressure on the country’s energy industry. According to Iran’s minister of oil, the government is working “day and night” to find ways to continue exporting its hydrocarbon resources. Iran has been hiding the destination and volume of oil sales by using “ghost tankers” and ship-to-ship oil transfers as well as loading and discharging at remote ports. According to some estimates, Iranian crude oil exports had declined to 500,000 barrels per day or less by May. Despite the U.S. sanctions, countries like Brazil, China, and India have been purchasing petrochemical products at a reduced price. In addition to the challenges with transporting oil, Iranian authorities have been struggling to find ways in which they can receive proceeds from their oil. The government has been using oil for goods agreements, such as the one Iran has with Russia, and replacing the dollar with buyers’ currencies to settle oil sale payments. Iran’s needs for oil and non-oil trade and revenue, however, are not fully met through such methods.

The government has negotiated a special purpose vehicle, Instex (Instrument in Support of Trade and Exchanges), to facilitate limited trade with Europe and avoid U.S. sanctions. European officials have restricted items for export to Iran to “humanitarian” items such as food and medicine. The major source of Iran’s export income from Europe is oil, but Instex does not allow for European imports of Iranian oil. Considering these limitations, the Iranian negotiators have strongly rejected what Europe has offered through Instex. A member of the Council of Expediency and a former member of the Parliament, Ahmad Tavakkoli, referred to Instex as “a humiliating formula that is not even as efficient as the ‘oil-for-food’ program offered to Iraq under Saddam Hussein.” Meanwhile, Iran has begun to reduce its compliance with the JCPOA and has announced that it would increase the country’s enrichment level every 60 days if the economic sanctions are not lifted.

The U.S. government has been expanding the list of Iranian individuals and institutions targeted by sanctions. On April 8, the United States designated the IRGC a foreign terrorist organization. Even prior to this, Western businesses refrained from conducting business with the IRGC since the United States designed the IRGC’s Quds Force a supporter of global terrorism in 2007. Multinational companies have closely studied their Iranian business partners to ensure they have no connection with the IRGC at any level. But the formal designation of IRGC requires any foreign company that wishes to do business with Iran to critically scrutinize its Iranian business partners and associates.

For decades, the IRGC and its affiliates have had a strong presence in the Iranian economy. The economic activities of the IRGC are spread across “every profitable and strategic field” from owning football clubs and banks to construction and telecommunication companies. After the designation of the IRGC, its economic activities through a network of front companies will also be heavily inspected by Western entities. This puts a blanket prohibition on all economic activities of the IRGC and can affect the stability of the heavily state-controlled Iranian economy.

In addition to the economic importance of the IRGC, it plays a significant role in protecting the establishment domestically and maintaining the Islamic Republic’s regional interests. Therefore, the IRGC’s designation may have domestic and regional consequences for Iran. First, as the risk of direct military confrontation between the United States and Iran is escalating, a military action against Iran could be justified as part of Washington’s global counterterrorism effort. Second, any collaboration between Iran and the United States over regional security issues, particularly regarding extremist groups in Iraq and Syria, will be banned by the U.S. regulations. Iran’s deputy foreign minister, Abbas Araghchi, called the U.S. measure “a political and strategic mistake.” Referencing the Quran, Khamenei called it a failed attempt to topple the rule of Islam. Such strong-worded comments from Iranian officials highlight the importance of the IRGC for the political and economic stability of the establishment.

Mounting economic sanctions have imposed extensive pressure on the Islamic Republic. The government has been constantly seeking strategies to circumvent U.S. sanctions. Nevertheless, these efforts have not led to any sustainable and secure solution. Europe has not been able to deliver what the Iranian economy needs to survive through Instex. Russia does not offer sufficient economic support to slow Iran’s economic downturn. Moreover, economic links with China will not provide a sustainable solution as long as the risk of jeopardizing economic relations with the United States remains high. The narrative of “economic resistance” is now being replaced by the threat of a nuclear weapons program, neither of which seems to be a solution for Iran’s feeble economy.

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