Iran: Are the Sanctions Working?

By Isaac Kfir

In 2006, the United Nations Security Council adopted six resolutions, four of which included targeted sanctions against Iran. The aim was to stop Iran’s uranium enrichment program. In the face of Iranian obduracy, the European Union and the United States in January 2012 imposed additional sanctions focusing on Iran’s oil industry. By cutting off Iran’s ability to export oil and to attract investment, the sanctions further crippled the Iranian economy so that by the time Hassan Rouhani, a former nuclear negotiator, was elected president in June 2013, stagnation had set in (in April 2013, the International Monetary Fund forecasted that Iran’s GDP would decline by 1.3% (in 2012 it declined by 1.9%)).[1] On Nov. 24, 2013, less than a year after the additional sanctions were imposed, the P5+1 (UN Security Council Permanent Members plus Germany) reached an agreement with the newly installed Rouhani government to curb the uranium program (that is, cease enrichment of uranium above 5% purity at the Natanz and Fordo facilities; dilute Iran’s stockpile of uranium enriched to 20%; and offer greater access to IAEA inspectors).

The UN and the EU/US sanctions froze the assets of Iran’s Central Bank in the EU nations and, more importantly, banned the importation of Iranian oil into the EU, which also meant that European companies could not export petrochemical equipment and technology to Iran, an area that is in dire need of investment.[2] Iran has faced US unilateral sanctions since 1979, which have been crippling.[3] An integral aspect of Iran’s economic reform program is attracting foreign investment, as Iran recognizes its over-reliance on six giant oil fields that are facing high depletion rates of approximately 8% to 13%, compounded by a low recovery rate of 20% to 30%.[4]

Consequently, because of the new sanctions, Iran has seen a drastic decline in oil production and export, from more than 3 million barrels per day to less than 1 million in 2013,[5] which explains the rumors that the government is running out of money.[6] Lack of money supply is a huge issue for Iran where government subsidies are integral to its existence. The austerity budget of March 2014 was 9% lower in real terms from the previous year’s budget.[7] The government is determined to wean Iranians off government subsidies, mainly because Iran can no longer afford to keep giving them. Thus, successive Iranian governments have been moving toward direct cash handouts of $18 to Iran’s poor.[8] Masoud Nili, an economic adviser to President Rouhani underlined the commitment of the government to address five key structural issues: welfare reforms (reduce subsidies and cash grants); privatization of the economy (including challenging the ultra-governmental companies[9]); currency exchange reform (grant the central bank more autonomy); bank sector reform (deleverage); and fiscal discipline (pay off state debts).[10] However, without the removal of the sanctions, these goals are unattainable.

As significant as the potential economic reforms are, what has been more interesting is how the loss of revenue and the concerns of widespread demonstrations akin to those that took place in 2009 and 2010 have impacted the Iranian Revolutionary Guard Corps (IRGC) and even the Supreme Leader. Both actors have shown greater tolerance toward Rouhani’s attempts to curtail the power and influence of the IRGC. This tolerance does not mean that they have accepted the program. The IRGC emphasizes the need for resistance economy,[11] with its focus on self-sufficiency and self-sacrifice, infusing the call with jingoistic hyperbole as a way to disguise the weak state of the economy and to sustain the IRGC’s role in it. Mohammad Ali Ja’fari, the commander of the IRGC, recently said, “[u]nfortunately, the government has not welcomed the Basij’s and the IRGC’s deeds and capabilities as well as proposals made in relation with the resistance economy. We hope that the government will use [the IRGC’s] capabilities.”[12]

Furthermore, the IRGC seems to pin some hope in Ayatollah Ali Khamenei’s call for the regeneration of Iranian cultural education as a way to advance its agenda as “defender of the revolution” at a time when there is increased anger at the corps, whose members have been accused of corruption and malfeasance.[13] Ja’fari has declared that “we [the IRGC] must make appropriate plans and must expand what was done in the past because activities in the area of culture will not bring forth result in the short-term owing to its extensiveness—we need more time.”[14] Such statements suggest that the IRGC is likely to resist Rouhani’s economic reforms, especially when one sees the conservative-dominated parliament issuing 7,549 official warnings to the Rouhani Administration in the past six months.[15] On Feb. 19, 2014, two days after Parliament adopted Rouhani’s first budget,[16] Ayatollah Khamenei, the Supreme Leader of Iran, reiterated the call for a “resistance economy”[17] as a way to attain self-sufficiency and counter the sanctions.[18] Nevertheless, the IRGC also is a pragmatic force; it seems to recognize that the P5+1 is serious about the sanctions and that Iran cannot grow and develop—and with it the revolution—if the country is crippled economically and socially fragmented, which in turn would undermine the IRGC’s advantaged position in Iranian society.

President Rouhani has shown a willingness to engage in reform, particularly vis-à-vis the IRGC. It began with a call on the corps to meddle less in politics, which included, on March 1, 2014, Rouhani telling the IRGC not to undertake provocative military exercises, despite a declaration by Jafari, that “[o]ur forefathers primed us for the final epic battle.”[19] Second, it appears that, at least for the moment, Khamenei is supporting Rouhani’s call for widespread systematic reform, which is vital if Iran is to become more open to negotiation and economic reform. On Sept. 17, 2013, for example, Khamenei declared that the IRGC need not guard the political sphere.[20] Ultimately, though, the IRGC seems willing to accept the Rouhani reform program, which has meant losing key governmental ministries to Rouhani appointees, most visibly with Mahmoud Vaezi, the new minister for information and telecommunication, replacing Mohammad Hassan Nami, a former IRGC commander.

Clearly, the next challenge for Iranian government is to persuade the P5+1 to end the sanctions regime, which will necessitate a major shift in Iran’s commitment to its uranium program. Rouhani and many ordinary Iranians recognize that after 12 years of debilitating sanctions, things must change. Iran cannot remain a pariah because that position undermines all elements of the state, from the economic to the political to the social.[21] One suspects that the decision to appoint Hamid Aboutalebi as Iran’s designated ambassador to the UN and the threat of an Iranian naval exercise in the Atlantic are all attempts by Iran to test the resolve of the international community—this is, after all, a country that has been portrayed for more than two decades in very negative light, that has experienced deleterious sanctions, and that has had to contend with competing internal actors, each with their own agendas and interests.