Following the most recent wave of EU sanctions on Iran, InsideIran’s Reza H. Akbari conducted an interview with Dr. Hossein Askari, the Iran Professor of International Business and International Affairs at the George Washington University.
Q: The Islamic Republic has endured economic sanctions for the past 33 years; however, the most recent wave of EU sanctions will directly impact the country’s Central Bank, financial sector, and oil sector. What specific measures are the Iranian government taking to get around these new restrictions?
A: The United States for the last 33 years has been saying that we have sanctions on Iran, but the sanctions have been more for politicians just to say we are doing something rather than acting as real, effective sanctions. However, it is true that over the recent years these sanctions have been tightened and are restricting Iran’s financial sector, Central Bank, and oil sector. First, let me tell you about how these sanctions are impacting Iran, and then I can explain what measures the Iranian government may be taking to counter them.
Basically, what the United States is doing is cutting off Iran’s banks from the world financial sector. When you transfer money you go through a system known as SWIFT, and the United States is cutting off Iran’s banking system from SWIFT. So, Iran basically cannot hold dollars in any accounts anywhere or use it to buy things abroad.
The way the United States enforces these sanctions is that anybody who helps Iran get around them, will have to pay a fine. As a commercial bank you have to ask yourself, do I want to have my business with Iran or do I want to risk having to pay the U.S. a fine and be cut off from the U.S. market? For most institutions, the United States is much more important than Iran, so they comply with American wishes.
So to get around the sanctions on Iranian banks, the Iranian Central Bank began to do business on behalf of Iran’s commercial banking system. Therefore, for these sanctions to be effective, the United States also had to impose sanctions on the Central Bank. This has been an effective way of cutting off Iran’s banking system. So, when Iran sells things abroad to any country it cannot really accept dollar deposits in exchange. If they maintain these deposits for the Central Bank or an Iranian commercial bank, then other countries would be subject to U.S. fines. Therefore, Iran is essentially forced to do either barter transactions or get countries to open accounts in their own local currencies for Iranian use.
For example, if Iran sells something to China and if China wants to comply with U.S. sanctions, then what would happen is that Iran would sell them oil and they would send Iran electronic equipment in a barter deal. Or, as India is doing, they would have to open up an account not in dollars, but in yens in China or rupees in India. Then Iran can use those rupees to buy goods in India.
The financial sanctions have forced Iran to conduct barter deals or restrict the country’s ability to buy goods from where it wants to buy them. This is one thing Iran has done to get around the sanctions.
The other problem now hitting Iran is in the oil sector. The demand for Iranian oil has gone down. Many of the countries that were importing Iranian crude oil have made arrangements to buy other crude oil from Saudi Arabia and other countries and they have now had enough time to change the configuration of their refineries so they can use other crudes instead of Iranian crude.
But Iran has another important problem. If you do not take oil out of an oil well at a certain rate, you damage that oil field. So, Iran cannot just shutdown its production, because it will damage its oil fields. They have to continue to pump oil out, but when they do, they don’t have buyers. The only option is for them to store it. Iran is running out of storage facilities. They are trying to build more storage facilities and also they are using their ships for storage purposes. They have been doing this for quite a while now. Iran owns about 45 very large tankers and it is using these ships as basically floating storage facilities.
In order to sell its oil, Iran is changing the name of its boats, so people don’t know that these are Iranian boats carrying Iranian oil. But that is impossible for Iran to continue to do. So the major problem is not just that Iran cannot sell its oil, but that non-Iranian tankers are unwilling to take Iranian oil. The major insurers of oil tankers are not willing to insure tankers that are carrying Iranian oil, something that is critical in case of oil spills and the like. Iran’s floating storage is basically limited to the country’s own tankers. Iran is not just getting squeezed on its oil revenues; it’s also getting squeezed in managing its oil fields, which may cause long-term damage to them.
Q: Many reports from inside the country indicate that the prices of goods have exponentially increased and some distributors are concerned about potential shortages. Could you please explain the economic process that causes the price of a commodity to increase?
A: Iran is not a diversified economy like the United States. I realize that countries like America also import a lot of goods, but the U.S. is not like Iran, which is reliant on a very wide range of imported goods, especially food items.
What has happened in Iran is that, due to sanctions, the Iranian currency has plummeted in value. Over the last three years the Iranian currency has depreciated by over 200%. When the currency depreciates, imports become much more expensive, roughly by the amount of the depreciation, and exports become cheaper. First, what we have noticed in the market is that the depreciation of the rial is causing a problem. Second, the Iranian government has stopped subsidizing basic food items. In the past, the government controlled the price of the basic food items to ensure that the price of such basic necessities would remain constant for the average Iranian. As you are aware, the price of bread has absolutely skyrocketed by over 1500% in a relatively short period. So, every time you go back to the store, you see the price of bread has gone up. The price of chicken has also gone through the roof.
The third reason causing the prices to go up is speculation. People are keeping goods off the market because they know the price is going to go up. The expectation for inflation has increased. So, if you have a commodity that you can sell today for 1,000 rials and you expect inflation to be 50% every month, you realize that if you keep this product off the market you will get a higher price down the road. So supply is down, which also fuels prices.
You also know that if you sell your goods now and get the Iranian currency in exchange, the rial will lose value. So, you tell yourself that I am better off holding my commodity off the market because it gains value as opposed to rials, which will lose value.
By all accounts the inflation on consumer goods is more than likely close to 60%-70%, as opposed to the 25%-30% that the Iranian government reports.
Q: Is there a way to know how much of the current economic crisis is due to the sanctions and how much has been caused by the government’s poor policies?
A: Yes, there is a way. If you look at Iran’s economic performance from the period after the Iran-Iraq War until today, Iran’s economic performance has been miserable by all accounts. By overall economic growth, by per capita economic growth, any way you look at it, it has been bad. If you want to really assess the economy, you can look at it and say to yourself, how did Iran do during different sanction regimes? Then, you can build some kind of a relationship between these periods.
I would argue that from 1988 to about the early 2000s, the sanctions on Iran were ineffective. So you can look at that period, which was a period of loose sanctions, and see how Iran performed and compare Iran’s economic performance during that period to the period when sanctions were tightened. I think if you sat down and got all the numbers and you looked at economic growth, you could probably come up with an assessment of to what degree Iran’s problems are due to sanctions and to what degree they are caused by the government’s policies.
However, I don’t believe you have to do that. I have always maintained that Iran’s economic problems are of its own making. If Iran was doing well, the the U.S. sanctions would have been ineffective because no one would have wanted to give up the Iranian market.
Let me just give you an example of Iran’s relative performance. In 1975, Iran’s economy was double that of South Korea. My guess is that today, South Korea’s economy is multiples of Iran’s economy. You can look up the exact ratio, but my guess is that it is easily five times the size of Iran’s economy or maybe more. South Korea today is the tenth largest economy in the world and Iran has really not done well at all. So I don’t believe you have to do any type of sophisticated analysis to realize Iran’s bad economic performance. Iran’s economic problems are basically self-made and until Iran changes its direction, I don’t think things are going to improve.
Q: After an absentee period from the negotiating table, Iranian officials agreed to the Istanbul nuclear talks in April. Many observers claim Iran’s willingness to negotiate was due to the economic pressures imposed on the country. How correct is this assertion?
A: When was Iran more willing to negotiate? When the United States went to Iraq and within a few days it captured Baghdad, the danger became very clear to the Iranians, who fought the Iraqis for eight years without getting anywhere. They realized that if Iran ever got tangled with the United States it would have a really hard time. There was even a letter written by Sadegh Kharazi, Iran’s former Deputy Foreign Minister, on behalf of the Iranian government, which the United States disregarded. Iran wanted to negotiate. So I think that was the time Iran was more willing to negotiate.
I do also agree, however, that Iran wants to negotiate because of the economic pressures because these economic pressures are mainly on the average person, who could be a force if they rebelled. The regime members are rich and they will get richer no matter what happens. They are not exactly suffering.
The rulers have all the chickens that they want. It is the average Iranian who is not attached to this regime who is getting hurt. Due to the imposed sanctions, the economy is getting worse and of course this will start to impact the people in the bazaar and the people in the IRGC and other senior members because they have financial interests. At the end of the day, people can say whatever they want, but the reason people want to run countries is greed. They want to control countries, to take what they can, and when there is pressure and a lot of the people connected to the regime are losing- specifically the IRGC and big merchants- besides the average person, the regime will feel threatened.
So there is no doubt that the economic situation is having an effect. But there are those who say that sanctions don’t work because they put pressure on the whole population and if you look at the history, they don’t work. This is also true, but the sad part of the sanctions is that they normally affect the average person more, but in the case of Iran, I think they are also hurting the pocketbooks of the important people in the bazaar, important people in the government, so there is additional pressure making Iran want to negotiate.
I also want to add that the nuclear enrichment is basically one of the policies that the Iranian people support. I think the United States and the rest of the world has to understand why.
It is because the West supported Saddam Hussein and it was very shameful for the United Nations and United States to do what they did to Iran. Namely, they did not recognize Iraqi aggression and they supported Saddam Hussein, which really solidified the regimes’ presence and power and made the Iranian people support this particular policy. The average Iranian does not want to find himself in a situation where they are so vulnerable again. So, I don’t believe the Iranian nuclear program is for aggression. I think they just don’t want to find themselves vulnerable again.
No matter what happens at the negotiation table, Iran will want to develop nuclear warheads within a short period of time, if it is ever needed. Yes, the sanctions are making them negotiate, but what good will these negotiations will do? I simply do not know.
Q: Do you believe there is an economic red-line that Iran is not willing to cross? Will the international sanctions finally result in the country giving up its nuclear ambitions?
A: The regime will do anything to survive. We saw this after the 2009 presidential elections. Iran is helping its ally Bashar Al-Assad in Syria, which I think is wrong and shameful. But the Iranian regime will clearly do whatever is needed to survive. If the regime feels like that the average Iranian is under so much pressure and everyone is going to come to the street, the people who are closely connected to the regime are going to desert it. But the world committed a shameful act against Iran during the Iran-Iraq War and hundreds of thousands of people lost their lives. This is the fall out of that shortsighted policy and Iran does not want to be so vulnerable again.
There might be a red-line, but we are no where close to reaching it.
Lastly, I would like to again reiterate that sanctions are very blunt instruments. They hurt the average person and nobody can enjoy recommending sanctions. I believe that it is up to the Iranian people, those who live in Iran, not those who are outside, to decide what kind of a government they want. I do not think it is up to the United States or any other country to impose a form of government on any nation. Having said that, I think if the Iranian regime wants to demonstrate that it is a regime that believes in social and economic justice and the rights of people, Iranians should be allowed to revisit the constitution and make changes in an orderly and democratic manner.
But anyone who believes that sanctions will replace this regime with a wonderful government that all Iranians are going to support is mistaken. Sanctions will cause pain and problems and even if somebody else replaces the current leadership, that person will do other things that the people do not want. Human greed knows no limits. It will take time for Iran to become a truly democratic society with an independent legal system and equal justice for all. Sanctions will not achieve that goal. It requires time, drive, and the perseverance of the Iranian people.