Will Iran successfully get through heftier US sanctions?
“Iran’s situation is better than pre-2016 because of high oil prices and the fact that the US is isolated this time,” said a European diplomat who asked not to be identified.
Iran emerged in early 2016 from years of global sanctions under a deal with world powers that curbed its disputed nuclear programme. But President Donald Trump withdrew the US from the deal in May, calling it flawed to Iran’s advantage, and reimposed far-reaching US sanctions in phases, with the most damaging oil and banking penalties taking effect on November 5.
Trump aims to force Iran to accept tougher restrictions on its nuclear activity, drop its ballistic missile programme and scale back support for militant proxies in Middle East conflicts from Yemen to Syria.
But the broadly united front of world powers that enforced sanctions on Iran previously, pushing Iran into nuclear restraint, has unravelled since Trump took office and clashed with allies over everything from trade to collective security.
The other signatories to the nuclear deal - Germany, France, Britain, the EU, Russia and China - have condemned Trump’s walkout from the pact. The EU is preparing a mechanism to enable payments for Iranian oil and other exports without US dollars.
“It will be a difficult period but Iran’s economy will withstand it for various reasons,” a second diplomat said, “including (the fact of) Russia being under (US and EU) sanctions, Saudi Arabia having its own financial and political issues, and (trade war) between China and the US.”
Big power disunity and EU moves to circumvent Trump’s sanctions regime have given Tehran a psychological boost - but not dissuaded foreign businesses ranging from oil majors to trading houses and shipping concerns from pulling out of Iran for fear of incurring new US penalties.
While the clampdown will probably trigger a recession in Iran next year, an economic meltdown should be avoided, with a reduced but significant volume of oil exports continuing, a Fitch solutions analyst said.
“Tehran is likely to see a substantial share of its foreign exchange earnings maintained,” Andrine Skjelland said. “This will enable Tehran to continue subsidising imports of selected basic goods, keeping the costs of these down and thus limiting inflation.”
In the hope of mitigating the immediate economic hit, Iranian authorities have hinted that Tehran might have to sell its oil at a discount.
“Oil revenues might decline but (they) will be enough to run the country,” said an official involved in Iran’s international commerce. “If we sell our oil for $1 (R14) less than market price, it will have tens of buyers.”
In a counter-measure made possible by state control of the oil sector, Iranian authorities are using exchange centres to sell dollars at cheaper rates to importers of basic foods, medicine and other essential goods.
IHS Markit senior economist Patrick Schneider doubted Iran could cushion the economic blow.
“Despite the rhetoric and attempts to mitigate the downside effects, uncertainty will remain prevalent for the next six to 12 months,” he said.
The International Monetary Fund has forecast that Iran’s economy will contract by 1.5% this year and 3.6% next year due to dwindling oil revenues. The World Bank anticipates inflation in Iran jumping to 23.8% in 2018/19 from 9.6% in 2017/18, and to 31.2% in 2019/20.
But Iranian officials are defiant, citing Trump’s isolation in repudiating the nuclear deal, climbing oil prices and Trump’s agreement to grant sanctions waivers to eight countries especially dependent on Iranian crude.
“Crude prices are rising," said a senior Iranian official. "Even if Iran’s oil sales drop to 800000 barrels per day (bpd), we will be able to run the economy. But we will send much more than that. Our economy will be far from collapse. Our budget is based on oil of $57 per barrel and it is now over $75 per barrel.”
In October, Iran’s crude exports were estimated at 1.82 million bpd by data intelligence company Kpler and 1.5 million bpd by another firm that traces Iranian shipments.
Trump granted 180-day sanctions waivers to China, India, South Korea, Japan, Italy, Greece, Taiwan and Turkey, which together took in more than 80% of Iran oil exports last year, Refinitiv Eikon data shows.
“Even without the exemptions, we will sell our oil. We will bypass sanctions. We have so many countries that are on our side. America cannot do a damn thing,” said a senior official close to Iranian Supreme Leader Ayatollah Ali Khamenei.
But the sanction will erode Iran’s finances and raise inflation and jobless rates, making life harder for Iranians.
Since May, when Trump took Washington out of the nuclear deal, prices of bread, cooking oil and other staples have soared and the value of the rial currency has plunged.
The rial’s weakness has sent prices of some imports rocketing, destroying jobs as some factories using imported parts have folded. Around 70% of small factories, businesses and workshops have begun to close due to a scarcity of raw materials and currency, according to the Iranian state news agency, IRNA. Moreover, Trump’s sanctions against Iran’s financial sector make 30 banks and their subsidiaries off-limits to foreign lenders, undermining its means to facilitate trade.
Still, Iran demonstrated considerable resilience and ingenuity in coping with earlier international sanctions. While citizens struggled, Iran’s clerical and security establishment and business world kept the economy running by resorting to barter as well as foreign currencies other than the US dollar. Reuters African News Agency (ANA)