The latest round of U.S.-led sanctions is about to level a tremendous blow upon Iran. These sanctions effectively isolate it from the majority of the world’s markets and financial institutions. Many like to proclaim that these sanctions are working to squeeze Iran financially, and this is definitely true. However, sanctions are more of a final twist of the knife than a standalone, start to finish strategy.
Iran’s economy has been on life support for years. Because of its susceptibility to the “oil curse,” gross internal economic and political mismanagement, and outdated oil infrastructure, sanctions levied against Iran hurt far more than they would if the regime utilized effective policies and institutions.
Iran has always relied on its vast oil reserves as its main source of income. This reliance makes it susceptible to oil price volatility. When prices are up, Iran does well, when they’re down, it doesn’t. In 1979 when Ayatollah Khomenei nationalized most of Iran’s industries, he effectively closed off the oil infrastructure to technological advancement through foreign investment. Because of this, Iran has not been able to increase its output by much, nor has it been able to build a solid refining capability so that it does not have to import gas from abroad. This has proven extraordinarily expensive. Additionally, the nationalization of industry has been incredibly profitable for the Revolutionary Guard, who wins the majority of contracts and benefits from rampant corruption.
The Iran-Iraq war took its toll on Iran as well. After the war ended, Iran instituted a subsidies program that has cost it 18% to 35% of its GDP on average since their implementation. Although President Ahmadinejad cut out these subsidies in 2010, there has been no effective alternate strategy put in place to stimulate the economy. As a result, prices for some goods have multiplied 4 or 5 times, further straining the Iranian middle and lower classes.
While most think of “targeted” sanctions as meaning the sanctioning of specific businesses and individuals who are known to act illicitly, the true meaning is the focused pressure applied to areas in which Iran is already incredibly weak.
Iran desperately needs outside investment in its oil infrastructure, but sanctions do not allow any foreign companies to invest in Iran. Even oil majors are terrified to go near it. Additionally, since Iran’s Central Bank has been cut off from most of the world, credit is almost impossible to come by. As Iran loses more and more money, and since its Oil Stabilization Fund only has about $20-$30 billion in it (meant to have $80-$100 billion), Iran is going to face much harder times ahead as inflation skyrockets and it needs to dig into these reserves.
Such financial penalties have undoubtedly forced Iran to cut its subsidies program, thus playing right into the hands of the Unites States. Sanctions have always meant to expose the regime as corrupt and inept once the money runs out. The Revolutionary Regime can no longer hide from the Iranian people as they increasingly look to their government for answers as to why the price of gas quadrupled overnight.
So are sanctions working to at least some end? Yes. Are they hurting the regime? Maybe. Are they inadvertently penalizing the Iranian people? Absolutely. Are they the real cause of Iran’s long-term economic malaise? No way.