Can Iran escape the backlash of biting sanctions?

Even as Iran braces itself for the second round of US sanctions next month in November, President Trump has stressed that not only will all sanctions lifted by the 2015 JCPOA nuclear deal be back in full force from 5th November, there will be more sanctions in the future to prevent Tehran from “developing the world’s deadliest weapons.”

Further sanctions would be implemented to “address the full range of Iran’s malign conduct,” he said. In August, the first set of sanctions targeted the purchase of US dollars, gold trade and automotive sector, and next week Iran’s oil and shipping sectors and its central bank would be hit.

Evidently, the US will not be placated easily and Washington has specified once again that those countries that continue to do business with Iran after 4th November would be blocked from accessing the American banking and financial system.

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Vowing to “take care” of countries that defy the US directives to bring their oil imports from Iran to zero from November the 4th, the US appears to be dead serious about implementation. Predictably, more countries will shy away from continuing business with Iran after this latest warning.

Evaluating the scenario, US National Security adviser John Bolton had said, “I think the return of the sanctions has had a devastating effect on their economy and I think it’s going to get worse.”

Apparently, the US aims to not only drastically severe Iranian oil exports it also plans to disrupt exports coming into Iran from main trading hubs to completely cripple its economy.

Domestic situation

Preparing for the onslaught, Iran is planning to bolster up its working class to keep the domestic situation stable. Keeping in mind the restive conditions last December due to raised food prices, the Iranian government plans to give financial support to a quarter of its population which constitutes around 20 million.

Meanwhile, the lower classes, which are around 11 million and earn $217 a month, would get a higher level of aid to reduce chances of discontent. Nevertheless, the country has already been hit by inflation at the rate of 30 percent as the 180-day notice to oil companies to get out of Iran is ending.

According to the International Monetary Fund (IMF), Iran’s economy is expected to shrink further by at least 3.6 percent in 2019 when only months ago in April before the JCPOA nuclear deal ended, it had predicted prospects for 4 percent growth.

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Inevitably, Iran’s domestic risks could also multiply if economic discontent hits the streets again and the risk factor will only rise with more and more sanctions in the days ahead.

Announcing a $5 billion state fund to encourage foreign investment, the Iranian government is trying to survive the coming squeeze and a special payments channel is also being set up to enable Europe to continue trade with Iran. Very soon, Iran’s energy sector would see a removal of around 1 million barrels a day from global markets and begin losing a major source of revenue.

Last year, Iran’s net oil export income was estimated at $55 billion but in the months ahead only China and Russia are likely to continue business as usual, many other countries might not risk Washington’s ire by dumping the dollar.

Special purpose vehicle

Many factors come into play, even the EU’s plan to create a “special purpose” financial company which would allow it to buy oil from Iran has been derailed recently.

All the major oil companies such as Total, ENI and CEPSA backed out and the CEO of Total, Patrick Pouyanne said that they “cannot afford to take the risk to be banned from using the US Financial system.”

Even the ENI went on to confirm that, “We have no presence in Iran anymore and our trading contract will naturally expire in November.” Unavoidably, these companies had to respect the wishes of their shareholders also who wish to play it safe.

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Escaping the backlash will not be easy for Iran and it has already gone in recession mode since the last few months. Even last year in December, the rising cost of food items had caused street rage that devolved into widespread protests by the working class and spilled over into the rural areas from the urban areas which is an unusual pattern.

This may be because Iran has a young population in the majority which requires employment and a better standard of living. Even before the JCPOA crisis started, Iran urgently needed to improve its long-term economic outlook, and the sanctions could not have come at a worse time.

Considering the state of affairs, if Iran enters an economic slump like the one during the last sanctions in 2012-15, the masses might not be easy to manage and the economic situation is already getting out of hand.
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Sabena Siddiqui is a foreign affairs journalist and geopolitical analyst with special focus on the Belt and Road Initiative, CPEC and South Asia. She tweets @sabena_siddiqi.