Sanctions on Iran – How Economic Vulnerability Could Increase the Risk of Conflict

By Annika Schulz, Transatlantic Economy Analyst

The sanctions imposed on Iran by the United States and the European Union are receiving a significant amount of media attention, and are supported by numerous states and international institutions. Iran’s nuclear program and its potential to produce weapons led to the decision to put pressure on Tehran; for more transparency and as a demonstration of the global importance of this issue. Although the U.S. and EU-spearheaded sanctions are intended for the greater good of regional and international security, they could be having the opposite effect.


The Non-Proliferation Treaty (NPT), ratified about 40 years ago, states that countries do not have the right to question another nation regarding its intention to make peaceful use of nuclear energy. Nevertheless, the international community requires transparency for actions taken with atomic energy and assigned the International Atomic Energy Agency (IAEA) the task of controlling and supervising nuclear energy. Due to a lack of transparency and numerous unanswered calls for a full explanation of Iranian intentions, the U.S. and the EU decided to impose sanctions on the country. For the U.S., sanctioning Iran is old news; it has done so since the Carter administration.


The European Union defends its decision to implement sanctions by citing its support for the NPT and Iran’s non-compliance with its duties in regard to international security. The EU embargo of Iran, which came into effect in July of this year, “is meant to cut Iran off from the global oil market.” Apart from sanctions by the EU and the U.S., the United Nations Security Council (UNSC) has expanded sanctions on Iran by banning exports and financing intended for or even just related to its nuclear and military programs.


The Iranian economy depends to a large extent on its oil industry, especially its petroleum exports, and 60% of the government’s budget originates from its oil industry. Before the EU embargo came into effect, Iran’s oil exports were down by 20-30%. After the implementation of sanctions, the trend looks even more negative. This economic downward trend is also visible in the decline of Iranian stocks. In the past two years, moreover, the Iranian rial has fallen constantly. While one dollar was worth 9,890.0 rial in May 2010, it has skyrocketed to 26,500 rial as of last week. This means that over two years the rial has lost more than fifty percent of its value. The value of the rial could be brought back up if the Central Bank of Iran was not also under sanctions. The U.S. has banned financial institutions doing business with the Iranian Central Bank from doing the same in the U.S. since the implementation of a new set of sanctions in January 2012, which was further expanded through the freezing of all assets originating from the Iranian government in February 2012. The asset freeze, even though aimed at damaging oil firms, is without question a measure that reduces economic output as a whole.


Although Iranian economy grew at a rate of 4.3% in 2010, it is slowing sharply. The World Bank estimates that Iran grew by only 2.7% in 2011. Luckily for Iran, China refuses to sanction the Middle Eastern country, and Japan too continues to import oil from Iran. That gives Iran the opportunity to keep some of its largest oil importers despite Western sanctions. While more specific estimates cannot be made because economic data on Iran is limited, it is clear that the sanctions are having an economic effect. But the question to be asked is whether they are having the desired political effect.


Domestically, the impact of sanctions on Iran’s population is already visible in public demonstrations against increasing chicken prices. If the U.S. and Europe aim to increase pressure on the Iranian government through public unrest, it might have achieved its goal. Yet an increase in food staples prices and the discontent of the Iranian people are likely to be blamed on foreign sanctions and result in rising Occidentalism. Most media coverage on this topic outlines why sanctions on Iran are justifiable, but the primarily political motivations of the U.S. and EU are likely to turn the West into a scapegoat for Iran’s economic decline; especially when even the country’s minister of finance and economic affairs is referring to the West as intentionally implementing “hurdles” for its economic progress. Also, Israeli officials, including the defense minister, have already publicly spoken about the possibility of an airstrike against Iran. As a result, the sanctions have so far failed to defuse a brewing military conflict between Israel and Iran.


Iran’s opaque nuclear program and its unwillingness to cooperate with the West and the IAEA is a major threat to regional and international security. So far, however, political pressure has neither resulted in any positive response from Iran nor reduced the likelihood of an attack by Israel. Therefore it might be wise to reconsider the sanctions as they are not leading to the intended goal and could be consolidating Iranian opposition to the West.

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