U.S. Sanctions on Iran: Diminishing Returns, Fading Impact
posted by Karim Pakravan on October 14, 2017 - 4:13pm
As expected, President Trump refused to certify the Iran nuclear deal (aka the JCPOA) reached in 2015 between Iran on one hand, and the P-5+1 (the United States, the United Kingdom, France, China, Russia and Germany). This multilateral deal is designed to restrict Iran’s ability to develop a nuclear weapon capability. Two points are important at this stage. First, the United States has not withdrawn for the deal, although Trumps action could lead to such an outcome. Second, the other six partners of the United states to the deal have indicated that they believe that Iran is in compliance and intend to continue to honor the agreement.
The Trump administration’s action is ostensibly designed to toughen the sanctions against Iran, forcing it to return to the negotiating table for a “better” and “broader” deal. While the U.S. can impose additional sanctions, its main problem it is facing is that it is playing a weak hand on the economic front. In effect, sanctions have reached the point of diminishing returns. Paradoxically, this has been the result of decades of sanctions on Iran, which has, as a result, reoriented its economic relations away from the United States over the past decades, shifting towards Europe and Asia, whether it be in trade in goods and services, technology and finance. As a result, the U.S economic influence on Iran has waned. Since the 1980s, economic relations between the US and Iran have been minimal. Total trade between the countries totaled $3 billion in the 2006-2016 decade. Furthermore, the July 2015 nuclear agreement between the so-called P5+1 (The United States, Russia, China, France and the UK, plus Germany) and Iran, aka the JCPOA did not live up to its promise to re-establish US-Iran economic relations. Quite the contrary: US-Iran trade in the first seven months of 2017 totaled $87.3 million, compared to $260 million in 2015 and a peak of $389 million in 2015, the year of the JCPOA agreement. On an annualized basis, the 2017 numbers show a 66% decline from an already small base. The only deal of any significance was the $22 billion agreement for the sale of Boeing aircraft to Iranian airlines. This data clearly illustrates the fact the fraying of the U.S.-Iran economic relationship. In contrast, Iran’s trade with the European Union is surging, up 94% in the first 6 months of 2017 to euros 10 billion. The EU is now Iran’s main trading partner. The next four are China, the UAE, South Korea and Turkey. In addition, European and Asian companies have entered major deals to invest in the automotive, tourism and energy sectors in Iran. (Peugeot, €400 million, Total, $4.8 billion, and Airbus, £25 billion pounds). Furthermore, China is using the opportunity to strengthen its grip on Iran through ambitious projects (Silk Road), the granting of credits and or tying Iran to the Shanghai Cooperation Organization. Europeans banks are finding ways to enter the Iranian without invoking US retaliation for using dollar denominated transactions.
Beyond sanctions imposed by the United States, the failure of the JCPOA to open up economic relations between the U.S and Iran has several sources. For one, it has also resulted from political choices made by the Iranian leadership, wary of opening the door to U.S. influence in the country—ergo, the campaign by the hardliners in Iran to sabotage any economic rapprochement by arbitrary arrests of Iranian-American businessmen. Furthermore, the continuation of some of the sanctions, particularly those denying Iran access to the global dollar payment system, discouraged U.S firms from attempting to deal with Iran. On the other,
As a result of the waning of the U.S-Iran economic relationship, Iran no longer needs the United States for trade, investment or technology. Of course, there are cost to Iran to being cut off from the most powerful, technologically advanced and wealthy country and the global dollar-based financial system. Iran also pays the price of cutting itself off the wealthy and highly educated Iranian diaspora, especially Iranian-Americans. Moreover, by thwarting the entry of U.S firms in Iran, the Iranian government has failed to gain allies in the U.S business community.
The waning of the U.S. economic presence in Iran has not only kept away the United States away from one of the most promising markets in the Middle East, but also allowed the other economic powers to use the opportunity to consolidate their long-term hold on the Iranian economy.
A broadening of negotiations with Iran on its regional policies, human rights and an extension of the JCPOA timetable are reasonable objectives and have the support of the US allies. However, given the refusal of America’s other partners in the JCPOA (including its closest partners) to cooperate with the U.S. decision to decertify the deal, the U.S. has few options. The waning of its economic influence weakens its negotiating position with Iran, especially if it is offering only sticks (sanctions and/or military confrontation), but no carrots. The U.S could make doing business in Iran difficult for its European allies—it has little clout in this regard with China or Russia. However, that would be a treacherous path, inviting retaliation against U.S businesses and fraying further an already tense relationship.
Moreover, much of the deals entered between Iran and either Asian or European partners have been with Iranian state or parastatal agencies, in particularly those controlled by the Revolutionary Guards. So, the absence of the United States in Iran has in fact benefited the regime by entrenching the hardliners and preventing the development of a true private sector.