New U.S. sanctions on Iran, combined with secondary sanctions and withdrawal from the JCPOA, are having a profound effect on the Iranian economy. Dr. Ali Fathollah-Nejad, Visting Fellow at the Brookings Doha Center, says a combination of internal and external factors are driving the downturn
SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries, coming to you from Baltimore.
After withdrawing from the Joint Comprehensive Plan of Action, commonly known as the Iran nuclear deal, the Trump administration has vowed to escalate sanctions against Iran, disregarding Iran’s cooperation with the deal. It is important to also remind ourselves that there are other parties to the agreement here, the Five Plus One, which includes China, France, Germany, Russia, the United Kingdom, and the United States, as well as the European Union and Iran. It is only just a short time ago on July 14, 2015 that this agreement was signed. It is an agreement to ensure that Iran’s nuclear program will be exclusively peaceful.
And yet the U.S. has unilaterally withdrawn from this agreement, even though most everyone involved who are party to the agreement has stated that Iran is in compliance. So why is the U.S. taking this unilateral and aggressive move to once again impose sanctions on Iran? Further, U.S. and Israel are openly calling for regime change in Iran, adding fuel to the fire. Some speculate this is economic warfare to isolate Iran, to create a blockade on Iran’s economy through not only direct U.S. sanctions, but also secondary sanctions, and to strangle Iran’s economy and propel it into chaos to create a crisis so deep that it can be intervened on, and also where war might become necessary. And so this is all creating a huge controversy, not only between Iran and the U.S., but in the entire region.
Now, today we’re going to take up and take a closer look at how the U.S.’s withdrawal from the JCOPA and threats of further sanctions against Iran is affecting Iran’s domestic economy. The mere fear of more sanctions has caused a rapid devaluation of the Iranian currency, the riyal. It has lost over 50 percent of its value in just a few months. Now, although the riyal is pegged to the U.S. dollar, actual U.S. dollars are traded in the black market for twice the value in Iran. Now, major importers of Iranian oil who are also U.S. allies like Japan and South Korea, and of course as well as China, but China might be able to withstand these kinds of sanctions that other countries aren’t able to do. Even on Thursday, just this week, the spokesperson of the Chinese Ministry of Foreign Affairs, Hua Chinying, sharply criticized the unilateral U.S. sanctions. Let’s listen.
HUA CHINYING: There is still a long way to go in terms of safeguarding and implementing the Iranian nuclear deal. China will continue making efforts to safeguard the results of multilateralism. China will never accept any unilateral sanctions that are not based on international laws, and will firmly uphold its own legitimate rights and interests.
SHARMINI PERIES: Now, meanwhile, domestically, protests have erupted in all parts of Iran since January over the soaring prices of imported goods, levels of poverty and inequality. Now, the domestic economic situation can be largely attributed to the sanctions and the falling of the riyal, but also to the economic policies of the government that favors the ruling elite over the people. And not only the ruling elite, the agencies within the government as well, like the Iranian Revolutionary Guard.
On to talk about all of this with me, I’m being joined by Dr. Ali Fathollah-Nejad. He’s an independent scholar based in Doha and Berlin, with a focus on Iran, West Asia, and North Africa. He’s a visiting fellow at the Brookings Doha Center. Ali, good to have you back on The Real News.
ALI FATHOLLAH-NEJAD: Thank you for having me.
SHARMINI PERIES: All right. Ali, let’s start with discussing why U.S.’s withdrawal and threats of more sanctions are having such a profound impact on the domestic economy in Iran.
ALI FATHOLLAH-NEJAD: The Trump administration’s decision to unilaterally withdraw from the Iran nuclear deal, as you have alluded to, has of course deepened the economic crisis in Iran, but this economic crisis preceded this decision. But when it comes to the immediate impact, of course there are a lot of companies, Europeans and, European and others, will because of this threat of the reimposition of U.S. secondary sanctions, where those companies can be punished for continuing any kind of Iran-related trade, have stopped their Iran business ties, commercial ties. So that also, you know, the prospect of further investments in the Iranian economy has now been shelved.
So of course, so this decision of the reimposition of U.S. sanctions will have quite a profound impact on the future trajectory of the Iranian economy. There is, there will be, basically, Iran will not be able to export oil from November onwards, because it’s according to a timeline set by Washington. So all this is important, and has, as I said, helps exacerbate the economic and financial crisis. But the economic problems of Iran do not have only, do not only have a relation with the United States. Because what’s basically the problem in the Islamic Republic of Iran is that we have a monopolization of economic and political power at the hands of the very same elite groups. And when it comes to the economy, you have a parallel structure. You have a shadow economy that is basically outside of much of the influence of the government. So the government, despite its problematic economic policies, cannot do really much about it.
The bulk of the Iranian economy is in the hands of the Islamic Revolutionary Guard Corps, which is basically the most powerful military force in Iran. But that actually has an economic empire. There is a huge social, political, and economic conglomerate that is in control of basically the majority of the Iranian economy. In addition to that, you have the so-called religious foundations that are basically economic empires that are exempted from tax, from paying taxes. Plus other semi-state and state entities that are in control of much of the country’s GDP. So you do have the domination of those semi-state and state entities, and you have a very marginalized private sector that is very weak and almost nonexistent. And because of that, you have the combination of mismanagement, corruption. And this is, those are the structural problems that have faced the Iranian economy even before Trump.
And so this is, so those structural deficiencies have been there, and because of sanctions they get exacerbated. Because what sanctions actually do, in a nutshell, is that they illegalize legal trade. As we’ve seen during the crippling sanctions regime era during the Bush and Obama administrations is that these same entities, the Revolutionary Guards and others, the semi-state and state entities, have been able to benefit from the imposition of sanctions because they could monopolize many imports, and thus extend their political, economic power over other sectors of the economy.
So at the end of the day, despite, you know, rhetoric to the contrary by many Western politicians as to the real effects of sanctions being imposed, not society is basically emboldened, but the authoritarian elements within that system, so that back then in that era of the crippling sanctions, we’ve seen the extension of the power gap between the authoritarian state, on one hand, and civil society on the other. You know, on a societal level it is also quite important because, you know, for many, political activism will become more difficult because they have to strive for just surviving. But it doesn’t mean that political activism has stopped, as we’ve seen from, you know, during the past months after the rebellion that has shaken Iran at the turn of the year. We’ve seen the continuation of protests, despite this deteriorating economic situation. So it doesn’t mean that the imposition of sanctions and these kind of hawkish policies from Washington will necessarily produce and generate a rallying around the flag effect in Iran.
People are, basically, very upset about the performance of their state. This is their main target of criticism; not so much any foreign power that might be, might be pursuing counterproductive policies with no doubt. But the blame is mostly put, also as in other countries as well, at their own government.
SHARMINI PERIES: So then, Ali, it’s not just the U.S. withdrawal from the agreement, but also the secondary sanctions that is affecting companies that work in Iran, but based in France, and Germany, and other European nations who do business with Iran. And these secondary sanctions are having a profound effect as well.
ALI FATHOLLAH-NEJAD: So basically we see the same dynamic that we witnessed during the crippling sanctions era, which is to be understood against the backdrop that the United States has dominance over the international financial system, because of the U.S. dollar being the world’s currency. This puts a lot of pressure on any other countries. And this, you know, shows the effectiveness of U.S. secondary sanctions.
So basically what is happening is that when the U.S. imposes secondary sanctions, companies in Germany and elsewhere who also do a lot of trade with the United States, who export a lot of their goods to the U.S. and therefore are, you know, dependent on having this kind of access to the U.S. marketplace, will have to decide whether it is more smart for them to continue their Iran business or the U.S. business. And since if you look at the figures you cannot really compare the two, although Iran has been hailed as an economic bonanza after the fall of the Soviet Union, a huge market of 80 million people with huge potential for also consumer goods and industry and so forth, these companies in most cases will decide to stop their Iran business in order not to endanger their U.S. business, and not to be punished by the U.S. Treasury.
And so this is there the reality of the economic world. And this is why we’ve seen also a lot of German companies and other European companies announcing that they will slowly but surely retreat from their Iran business. So this is, so this is an independent dynamic from the political arena. In the political arena we see that there are European state leaders of states who have repeatedly as, for example, recently at the JCPOA meeting in Vienna pledged to continue Iran business. So whatever politicians might say on this regard, that despite the pressure from the United States they want to keep ongoing doing business with Iran, this is of no great relevancy to the economic operations on the ground, because you know, companies will decide on their own, according to the logic that I have said before.
So the reality is that we will see a decline of European-Iranian business on one side. On the other side, when it comes to the export of Iranian oil, we’ll see on one hand that Iran will resort to the same kind of tactics that it had during the crippling sanctions era. That is, it might offer a reduction of its oil purchases by others; for example, to India. You know, Iran exports the bulk, the majority, the great majority of its oil exports to Eastern Asia and other Asian states. But for example, the South Koreans, who are also a top buyer of Iranian oil, have already now stopped purchasing Iranian oil while seeking waivers from the U.S. Treasury. But this is, you know, uncertain if the Treasury will give them this kind of exemption from the sanctions. China is quite independent from the United States, so China can basically continue, you know, doing business with Iran. And nevertheless, as a whole it is also quite bad for the Iranian economy. Because the sanctions, in practice or in theory, offer the kind of legitimacy to those buyers of Iranian oil to exchange their imports of oil with goods that they can, they can export to Iran. And in the Chinese case this has been, you know, quite cheap Chinese products that were flooding the Iranian market, and therefore also destroying domestic production in Iran.
So those are the various effects of sanctions. So that, geopolitically and economically speaking, the reimposition of U.S. sanctions will push Iran into more authoritarian waters when it comes to its alliances. So it will be pushed more towards Russia and China. And if you look at those two powers’ kind of political relations in Iran, they’re much closer to the hardline elements than to the moderate ones. So those sanctions have very bad effects on the Iranian economy, on the development of the political economy of the country, and also on the, on the politics of the country, because in all cases the more hardline elements will benefit.
SHARMINI PERIES: All right, Ali, let’s take a break here and flow into Segment 2, where we will take up more discussion about the domestic economic situation. Of course, the impact that the reimposition of the sanctions will have on the domestic economy. So I thank you for joining me for now, and please stay tuned for Part Two.