by Djavad Salehi-Isfahani
The decision announced last Monday in Vienna to extend the talks aimed at a compressive agreement on Iran’s nuclear program for an additional seven months has resulted in Iran’s currency taking dive. In one week, the rial lost more than 5% of its value in the unofficial market. The devaluation has clear political and economic implications: it will revive inflation, slow or stop economic growth, and increase the pressure on Iranian President Hassan Rouhani as his government tries to make good on the election promises he made 18 months ago.
But will this soften Iran’s negotiating position? To answer this question, we need to look at the basis of this phase of the rial’s devaluation and what it means for ordinary Iranians.
The drop in the value of the rial after the extension was announced on Nov. 24 indicates that expectations in Iran for a final deal were high before the deal failed to materialize. This optimism had kept the rial’s value above what the economics of the situation warranted. In other words, rather than being in “free fall,” as several reports in the press have suggested, the rial is actually adjusting to a new equilibrium.
Two major factors have been putting pressure on the rial in the last few months, neither of which is related to the negotiations or the sanctions. The first is the decline of the price of oil, by more than 30% since this summer, which has reduced the already strained supply of foreign currency to the Iranian economy. As I noted in my previous post, prior to Nov. 24, the rial had remained surprisingly stable despite the falling price of oil.
The rial was also under pressure because Iran’s inflation exceeded that of its major trading partners, making Iranian producers less competitive. Prices in Iran have increased by 23% since Rouhani’s election in June 2013 when the rial traded around 31,000 per dollar. All else the same, the rial would have to fall by 23% to keep Iranian production competitive. That would mean an exchange rate of over 38,000 rials per dollar in the unofficial market and 32,500 in the official market. Presently, these rates are at 34,000 and 26,500.
Of course, all else is not the same. The price of oil is lower, Iran has started receiving around $700 million a month of its unfrozen assets, and there have been changes in economic policy. Some of these changes, like the lower price of oil, would require the rial to devalue further, while others would have the opposite effect.
At the same time, although the rial could continue to decline, currently it’s certainly not in free fall.
An overlooked fact in Western press reports on this issue is that the Rouhani government, populated in part by economists focused on the competitiveness of Iranian producers, had signaled its intention to officially devalue the rial before the Nov. 24 extension was announced. Indeed, officials spoke publicly last month about a (modest) 7.5% increase in the official exchange rate to be used in the 1394 (2015/2016) budget to 28,500 rials to the dollar.
Now on to that burning question: How long will this crisis last?
The pace of devaluation in the free market has quickly slowed down—the rial even rose against the dollar on Dec. 1—but as I mentioned earlier, further drops in the value of the rial are still possible as the reality of the lower price of oil sinks in.
Devaluation is a sign of an underlying imbalance in the economy, so when it happens, people are naturally alarmed. But it is also part of the solution to the same imbalances that need correcting. Consider, for example, that a cheaper rial is good for production and employment, even in a poor business environment hampered by international sanctions and domestic impediments to production, which business people refer to as “internal sanctions.”
Devaluations also redistribute income. In the short-run, inflation, which dropped last year below 20%, will rise as prices for goods bought and sold at the unofficial rate increase. The burden of the higher inflation will fall primarily on people living on fixed incomes, on the public payroll, and those who travel abroad or send money to their children abroad—all of whom compose the better part of the middle class.
Unlike former President Mahmoud Ahmadinejad, Rouhani does not believe in directly paying the poor, so what happens to this segment—about 10-20%— of the Iranian population is less certain. Wages of unskilled workers usually increase with inflation, though not always in tandem. They also rise with demand for labor, which could get a boost from devaluation. However, the 30% increase in the price of bread that was quietly implemented earlier this week, on Dec. 1, will hurt the poor disproportionately, as it was put through without any compensatory mechanism.
Of course, if the Rouhani government is forced to reduce the country’s much larger energy subsidies to balance its budget in the face of falling oil revenues, it may ultimately have to swallow its pride and take up the Ahmadinejad cash transfer mechanism, which Rouhani strongly criticized during his presidential campaign.
Ultimately, the drop in the price of oil will result in lower economic growth and loss of income across the country. But there is no policy that can fully compensate for a large decline in the terms of trade, which the recent decline in the price of oil represents—there are only good and bad policy responses. Allowing the rial to devalue is a good start, but not enough. The government should also be planning policies to help domestic producers rise to the occasion and measures required to protect the poor as prices for basic goods such as bread and energy rise.
]]>by Djavad Salehi-Isfahani
The diplomatic push by Iranian President Hassan Rouhani to resolve the decade-long dispute over Iran’s nuclear program reached its zenith during his visit to New York in late September, exactly one year after Iran’s currency collapsed under the weight of US-led sanctions. Although the timing is largely accidental, the [...]]]>
by Djavad Salehi-Isfahani
The diplomatic push by Iranian President Hassan Rouhani to resolve the decade-long dispute over Iran’s nuclear program reached its zenith during his visit to New York in late September, exactly one year after Iran’s currency collapsed under the weight of US-led sanctions. Although the timing is largely accidental, the correlation between sanctions and Iran’s willingness to negotiate is not. These measures have clearly hurt Iran’s economy, and its leaders are searching for an agreement with the West that includes sanctions relief.
Much analysis of the reasons for Iran’s new conciliatory approach credits sanctions for the improved diplomatic prospects for reaching a deal. Where opinions differ is how to respond to Iran. Should the West begin with positive gestures and take steps to ease sanctions or tighten them to squeeze a better deal from an adversary in retreat. The question then becomes: whose side is time on?
As Vali Nasr argued forcefully in the New York Times last week, Tehran does not feel pressed for time on political grounds because it sees itself approaching new negotiations from a position of strength.
Only a few months ago, Iran concluded a landmark presidential election that brought to power a popular government much closer to the reformist camp than to the Supreme Leader, challenging the notion of the Islamic Republic as a political system in demise. The charm offensive in this case is an olive branch, not a white flag.
Those who believe that time is on the West’s side argue that Rouhani’s election is actually a sign of Iran’s desperation. They argue that Iran’s economy is in such dire circumstances that it has forced Ayatollah Ali Khamenei into a domestic compromise that makes an external one possible.
So how bad is the state of Iran’s economy, and will it collapse with more sanctions?
The “collapse” scenario, which at times excites US sanctions advocates into a frenzy like what we saw following the crash of the rial last October, is being revived as a way to dissuade the Obama administration from reaching a compromise with Iran too soon.
Iran’s economy is “already on the verge of collapse”, wrote the Times last week, failing to mention that it has been regarded as on that verge for quite some time. A Brookings report in 2009 called Iran’s economy “teetering”, when in fact it was one of the few countries in the world that was still growing after the Big Recession.
However, unlike political systems, economies do not collapse, they shrink. Economic activity in Iran declined by 2.9% last year (5.4% if you count oil activity) according to government figures, and unemployment is at historic levels, though not as bad as what we’re seeing in Greece or Spain.
If sanctions tighten, Iran’s economy will continue to slide for a year or two but will eventually reverse course. Per capita income will probably fall from about 20% below Turkey today to 30% below, but still more than 50% above that of Egypt. This doesn’t foreshadow a collapse as much as it does a slow adjustment to more difficult circumstances.
Positive steps to push Iran’s economy onto a recovery path were in fact taken in the last months of the Ahmadinejad administration and continue today. The rate of growth of Iran’s money supply and inflation started to fall before Rouhani took office. For the past three months, the average rate of inflation has been below 20% annually, about half of what it was in the months before.
The new economic team is also much more competent and looking in the right direction — to the private sector — for solutions to Iran’s economic problems.
Rouhani’s administration is the most business-friendly team to rule the Islamic Republic. The head of Iran’s Chamber of Commerce, Mohammad Nahavandian, is Rouhani’s chief of staff and the closest person to the president. The head of a private bank is also the governor of the Central Bank. Former president Hashemi Rafsanjani, whose men fill key posts in the new administration, encouraged the private sector to view Rouhani’s government as “family”.
Unemployment is approaching 20%, a record level, but will not surpass it. One reason is demography. For every person who entered retirement age in the last few years, 5 new people reached the working age. In the next few years this ratio will fall to 3, substantially reducing the pressure on the labor markets.
Future growth will also likely bring more jobs. After 2005, a large inflow of oil revenues opened a floodgate to cheap imports that hurt local production, causing jobless growth. Thanks to a more realistic value for the rial, the local production of most consumer goods has become more economical for local producers. The easing of sanctions, especially on the banking sector, would be of enormous help to these producers, but this will not be the game-changer.
In deciding how far they can push Iran, the P5+1 negotiating team should bear in mind another important fact about the political context in which the peace initiative of Iran’s new president is taking place. For Rouhani, reaching a compromise with the West is important, but not if it risks losing the support of his conservative rivals who are deeply suspicious of this process.
Rouhani sees his election as a historic opportunity to move Iran closer to a more pluralistic and tolerant society and not merely to settle the nuclear dispute. Forcing him to choose between making peace abroad and keeping it at home, which more sanctions would do, will not yield a better outcome for Iran or the West.
]]>by Robin M. Mills
Hassan Rouhani is known as a man who sprays air-freshener in the room before a meeting. When it comes to Iran’s oil industry, Iran’s fastidious president-elect may have a great deal of spring-cleaning to do.
Much outside attention has been paid to the impact of sanctions on Iran [...]]]>
by Robin M. Mills
Hassan Rouhani is known as a man who sprays air-freshener in the room before a meeting. When it comes to Iran’s oil industry, Iran’s fastidious president-elect may have a great deal of spring-cleaning to do.
Much outside attention has been paid to the impact of sanctions on Iran and global oil markets. There has been less discussion of what Iranian policymakers should be doing with their oil, and what effect different policies would have within the country. Turning around the petroleum sector is crucial to Iran’s economy, and in turn, to the success of the centrist-reformist current that the pragmatic Mr. Rouhani is now representing.
During the phase of post-war reconstruction under Akbar Hashemi Rafsanjani, oil production rose by more than 3 percent annually and grew by more than 1 percent per year under Mohammad Khatami as major foreign investment flowed in from European, Russian and Asian companies. In 1995, Bill Clinton vetoed a contract for US oil company Conoco to develop the offshore Sirri fields, which allowed France’s Total to step in. The National Iranian Oil Company (NIOC) as well as domestic engineering and service companies also significantly improved their technical capabilities.
In contrast, the economic consequences of Mahmoud Ahmadinejad were oddly similar to those of Hugo Chávez in Venezuela — the replacement of skilled oil technocrats by less qualified allies, leading to stagnant output. Two giant oil field discoveries of the early 2000s, Azadegan and Yadavaran on the Iraqi border, have barely been developed.
Driven by South Pars, the world’s largest field — shared with Qatar — natural gas production continued to rise impressively under Ahmadinejad, albeit at a slower rate than with his predecessor. But with lines being drawn all over the map like spaghetti, minimal progress was made on gas export plans — to Turkey and Europe; Pakistan and India; the UAE, Bahrain, and Oman — and as liquefied natural gas. The country that, according to British Petroleum, now has the world’s largest reserves, is barely a net exporter of gas.
Development of the oil sector was, of course, hampered by increasingly tight sanctions. Western companies essentially suspended new activities by 2008, while Chinese and Russian firms did no more than keep a foot in the door. But bigger barriers — already apparent during Khatami’s second term — were unattractive contract terms, interminable negotiation periods and decision-making paralysis.
Three of Ahmadinejad’s nominees for oil minister were rejected by the Majlis in 2005; in 2011 he attempted to act as his own oil minister, again ruled out by parliament. As Kevan Harris has documented, from 2006, Ahmadinejad accelerated a process already underway since the 1990s — the pseudo-privatisation of a wide range of state-controlled entities, including oil development and engineering companies and petrochemical plants. In a process reminiscent of the “nomenklatura capitalism” of post-Soviet Russia, many of these companies have fallen under the control of regime insiders and government bureaucrats.
High and rising oil prices permitted complacency as Iran received more oil revenues than in the entire previous century of production during Ahmadinejad’s two terms as president. An increasingly overvalued exchange rate made domestic industry uncompetitive and attracted a flood of cheap imports in a vain attempt to keep down inflation sent soaring by excess liquidity. In a curious reversal of monetary orthodoxy, Ahmadinejad insisted that interest rates not exceed the inflation rate.
The main positive achievement of Ahmadinejad’s administration was reforming Iran’s ruinous energy subsidy scheme, which was replaced by direct cash payments to families. The plan was conceptually sound and surprisingly well-executed; consumption fell and the basic income provided made a substantial difference for poorer Iranians. But the scheme stalled as a result of further infighting between the Majlis and president, the sanctions-induced collapse in the rial, severe inflation and the failure to compensate affected businesses.
The administration did not anticipate how successful the US would be, from early 2012 onwards, in cajoling both allies and rivals to eliminate or cut oil purchases from Iran, as well as targeting insurance, shipping, financial transactions and exports of other Iranian products. Iran’s oil sales fell by a million barrels per day, while increased output from Saudi Arabia and from the US itself prevented global prices from rising too far.
The path of Iran’s oil industry under Dr. Rouhani will depend on progress made in nuclear negotiations and the easing of sanctions, as well as his administration’s domestic policy choices. A military conflict with the US and/or Israel would have highly unpredictable but damaging effects on Iran’s oil industry and possibly those of its neighbours.
If the current sanctions regime remains in place, Iran’s new administration will have to do its best to survive on a severely diminished income. As the Mossadegh government did in the early 1950s under somewhat similar circumstances, it can reorient the economy further towards domestic production and consumption, eliminating the luxury imports that boomed over the past decade. Better management and tackling corruption would reduce the social impacts and inequality — at the potential cost of harming some leading regime figures.
Bringing back Iran’s capable technocrats — and some of its talented diaspora, with more relaxed social conditions, as under Khatami — would keep oil production steady. Two candidates helped manage Rouhani’s campaign – former deputy oil minister Akbar Torkan and former refining and petrochemical chief Mohammad Reza Nematzadeh. Discounts, loopholes and disguised shipments can maintain exports, even at a reduced level. Over time, the enforcement of the sanctions can be eroded.
But, with the demand for OPEC oil set to be stagnant or falling over this decade, the prospect of lower oil prices, and Iraq’s taking an increasing share of the pie, the path ahead could be hazardous. Iran’s purported ally Russia has no interest in encouraging a competing oil and gas exporter. Given the Islamic Republic’s paranoid (if not unjustified) suspicion of the West, it would be ironic if it ended up yet more dependent on the Kremlin and China.
In the event of a breakthrough on the nuclear issue, and a lifting of most oil-related sanctions, the stage would be set for a pragmatic, Rafsanjani-style reconstruction. If the shutdown could be managed correctly, oil production could bounce back to near pre-2012 levels quite quickly.
But fully realising Iran’s petroleum potential requires foreign investment and expertise, ideally including Western companies. This will have to be under better contractual terms than the “buybacks” offered in the early 2000s that provoked so much nationalist debate within Iran.
Giving international companies a long-term stake in fields can be done with modern contracts that still provide Iran with full sovereignty and control over its industry. This would achieve two objectives. First, it would ensure efficient operations and maximum recovery from the country’s mature fields while encouraging technology transfer. Second, it would give momentum to the removal of remaining sanctions and create a barrier against their reinstatement.
In the same way, gas exports — to the GCC, Turkey and Pakistan — would anchor Iran more tightly within the regional economy and make it indispensable to its neighbours. The window for major exports to Europe has probably closed, with Azeri and Iraqi Kurdish gas set to flow. But Iran could still resurrect its liquefied natural gas plans, where it has fallen infinitely behind Qatar.
Domestically, Iran’s subsidy reform needs to be revived — more propitious when the economy is growing and government finances are increasing. The web of pseudo-privatisation also needs to be untangled and replaced by a balance of true private investment and commercially focused state enterprise.
The sine qua non is a resolution to the nuclear issue and an end to the major sanctions. A whole-hearted pursuit of these policies would amount to a revolution in Iran’s energy affairs — likely to provoke major domestic opposition and run into significant international hurdles. But even a pragmatic, technocratic house-cleaning of Iran’s oil sector would help set the economy on a path to recovery and give hope for the success of Dr. Rouhani’s tenure.
– Robin M. Mills is Head of Consulting at Manaar Energy and author of The Myth of the Oil Crisis and Capturing Carbon. Email him or follow him on Twitter.
]]>Talking to ordinary people in Neishabour and Tehran about Iran’s June 14 presidential election, economic issues seem foremost on their minds. But whom they will vote for is based on vague promises to pull the economy out of its deep crisis rather than well-defined economic programs.
Significant differences on economic philosophy divide [...]]]>
Talking to ordinary people in Neishabour and Tehran about Iran’s June 14 presidential election, economic issues seem foremost on their minds. But whom they will vote for is based on vague promises to pull the economy out of its deep crisis rather than well-defined economic programs.
Significant differences on economic philosophy divide a confused public about how to end economic stagnation and high inflation.
In the last three decades of the Islamic Republic’s history, Iranians have experienced both market-based economic growth and populist redistribution.
This election cycle would have been a good time to debate which of these two economic development strategies should be used in moving forward.
However, the decision by the Guardian Council to eliminate two important candidates, Ali Akbar Hashemi Rafsanjani and Esfandiar Rahim Mashaei, from the list of those eligible to run has sharply limited the value of this election as a space for vibrant public debate about the issues that are of greatest daily concern to most Iranians.
These two politicians could have represented the contrasting economic strategies and turned the election into a referendum on the past eight years of populist economics practiced by the Ahmadinejad administration.
Mr. Rafsanjani, the former two-time president, is well known for his preference for market-based economic growth as a solution to poverty and equity issues.
Early on in Mahmoud Ahmadinejad’s tenure, Mr. Rafsanjani rejected Mr. Ahmadinejad’s populist policy of cash distribution as “fostering beggars.”
His elimination from this election has deprived voters of a critical assessment of Mr. Ahmadinejad’s populist program that has inflicted serious damage on Iran’s economy.
A further blow to a meaningful debate on populism came from the elimination of Mr. Mashaei, who was Mr. Ahmadinejad’s close associate and in-law.
It would have been highly interesting, if not very informative, to watch him debate Mr. Rafsanajani on such important issues as the record of the government’s three ambitious populist programs — low-interest loans to small and medium producers, low-cost housing and cash transfers.
What this election should be about is how to achieve a key promise of the Islamic Revolution.
More than three decades ago, a vast majority of Iranians supported the revolution, expecting that it would divide Iran’s oil wealth more equitably.
Early on, Ayatollah Khomeini, the revolution’s leader, tried to limit these expectations by famously saying that “economics is for donkeys.”
But the failure by two previous administrations (Mr. Rafsanjani and Mohammad Khatami, each serving for eight years as president) to reduce inequality has kept the issue of income and wealth distribution at the forefront in recent elections.
Mr. Ahmadinejad came to power in 2005 promising to take the “oil money to peoples’ dinner table,” which he tried to do.
The last two years for which we have survey data, 2010 and 2011, show falling poverty and inequality, but the economy is in shambles.
Prices rose by 40% last year according to official figures, and the same surveys show unemployment at about 15% overall and twice as high for youth.
It would have been valuable for the public to learn if Mr. Ahmadinejad’s redistribution policies are responsible for the current economic mess, or something else, like incompetence in execution or international sanctions.
What the candidates have said in the short time they have had to campaign is that they will do something different. What and how is not clear.
The four front-runners, Saeed Jalili, Mohammad-Baqer Qalibaf, Hassan Rowhani, and Ali Akbar Velayati, have expressed their differences on how to deal with sanctions.
Sanctions loom large in voter minds, but few believe that whoever is elected will be able to influence Iran’s nuclear policy, which is being tightly directed by the Supreme Leader, Ayatollah Ali Khamenei.
What seems to distinguish these candidates most clearly at this point is social rather than economic issues.
They all promise to reduce inflation, increase employment and run a less corrupt and more efficient administration. The differences exist in emphasis rather than specifics.
Mr. Jalili is the most conservative candidate in the race and closest to Mr. Ahmadinejad in economic philosophy but has also been careful to neither defend nor criticize the latter’s policies.
He has defended Iran’s stance in the nuclear negotiations with the P5+1 group (the U.S., Britain, France, China, and Russia plus Germany), which he led in recent years, with the usual anti-Western rhetoric.
By saying the least of any candidate about the economy, he has clearly indicated that economic issues are not his top priority.
In the televised debates, Mr. Jalili made it clear that a more effective enforcement of cultural values was the right way to solve the country’s economic problems.
More specifically, he seemed to reject compromising with the West over Iran’s nuclear program in order to lessen the pain of Western sanctions on ordinary Iranians.
If Mr. Jalili is Mr. Ahmadinejad’s favorite candidate, Mr. Ahmadinejad has not said anything.
He has not made any public statement regarding the candidates so far, except to request time on national television to respond to their criticisms, which was denied.
Word on the street in Tehran is that Mr. Ahmadinejad secretly roots for Mr. Jalili because he believes a President Jalili would be the most likely to make him look good, not by defending his policies, but by taking the economy further into the deep end.
Mr. Rowhani, the only cleric in the race, is the most moderate candidate among the four front-runners.
In the eyes of liberal voters, following this week’s departure of reformist candidate Mohammad-Reza Aref (after an explicit request from the popular former president, Mohammad Khatami), Mr. Rowhani has inherited the reformist mantle of Mr. Khatami as well as Mr. Rafsanjani’s pro-business legacy.
Mr. Rowhani energized Iran’s young voters after the second televised debate in which he criticized the heavy hand of security forces in social affairs.
He appears to have gained the same lift that former presidential candidate Mir Hossein Mousavi achieved four years ago upon declaring he would end police enforcement of public chastity.
However, like Mr. Mousavi, Mr. Rowhani has not offered clear economic policies to address the youth’s more serious problems of unemployment and family formation.
A formidable challenge to Mr. Rowhani comes from Mr. Qalibaf, the current mayor of Tehran and a moderate conservative.
During a recent televised debate, they clashed over how the police should treat student protests, but they have not tried to distinguish themselves on how they would help university graduates get jobs.
If the election goes to a second round run-off between these two candidates, which now seems likely, there is a chance that voters will hear more about their approach to revive the economy.
But then the candidates may find it easier to appeal to voters’ emotions than to their pocketbooks.
Photo: The campaign headquarters of presidential hopeful Mohammad Baqer Qalibaf in the Iranian city of Neishabour. Credit: Djavad Salehi-Isfahani
]]>by Jasmin Ramsey
Press reports about medical supply shortages in Iran, some of which have described devastating consequences, have been surfacing in the last two years, while debate rages on about who’s responsible — the Iranian government or the sanctions regime. Siamak Namazi, a Dubai-based business consultant and former Public Policy [...]]]>
by Jasmin Ramsey
Press reports about medical supply shortages in Iran, some of which have described devastating consequences, have been surfacing in the last two years, while debate rages on about who’s responsible — the Iranian government or the sanctions regime. Siamak Namazi, a Dubai-based business consultant and former Public Policy Fellow at the Woodrow Wilson Center for International Scholars, admits the Iranian government shares responsibility but says sanctions are the main culprit. Humanitarian trade may be exempted from the sanctions, says Namazi, but that isn’t enough when the banking valve required to carry out the transactions is being strangled. “[I]f [sanctions advocates] maintain the sanctions regime is fine as it is, then how come they try to promote substitution from China and India?” asks Namazi. The following Q&A with Namazi was conducted in Washington, DC.
Q: You recently authored a policy paper published by the Woodrow Wilson Center where you essentially blame medical shortages in Iran on Western sanctions. How did you reach this conclusion?
Siamak Namazi: We concluded that the Iranian government deserves firm criticism for mismanagement of the crisis, poor allocation of scarce foreign currency resources and failing to crack down on corrupt practices, but the main culprit are the sanctions that regulate financial transactions with Iran. So, while Tehran can and should take further steps to improve the situation, it cannot solve this problem on its own. As sanctions are tightened more and more, things are likely to get worse unless barriers to humanitarian trade are removed through narrow adjustments to the sanctions regime.
My team and I reached these conclusions after interviewing senior officers among pharmaceutical suppliers, namely European and American companies in Dubai, as well as private importers and distributors of medicine in Tehran. We also spoke to a number of international banks. None of us had any financial stake in the pharmaceutical business, whatsoever, and we all worked pro bono.
Q: What is your basis for this claim given the humanitarian exemptions to the sanctions regime that allow for the trade of food and medicine?
Siamak Namazi: The US Congress deserves kudos for passing a law making it abundantly clear that humanitarian trade in food, agricultural products, medicine and medical devices are exempted from the long list of sanctions against Iran. This law is the reason why the Western pharmaceuticals can do business in Iran. I sincerely applaud that gesture.
Unfortunately, what we see is a case of what lawyers refer to as “frustration of purpose.” Iran can in theory purchase Western medicine, but in practice it is extremely difficult to pay for the lifesaving drugs it needs. Despite the Congressional directive, a number of Executive Orders that restrict financial transactions with Iran remain in place, making it all but impossible to implement that exception.
Sanctions also limit Iran’s access to hard currency. The country’s oil sales are seriously curtailed and have effectively been turned into a virtual barter with the purchasing country, mainly China and India.
Q: Not all Iranian banks are blacklisted by the US and there is a long list of small and large international banks that could carry out humanitarian transactions. Why can’t Iran use these channels for importing the medicine it needs?
Siamak Namazi: The non-designated Iranian banks are small and lack the international infrastructure required to wire money from Tehran to most foreign bank accounts. They rely on intermediary banks to process such transactions. Unfortunately, it’s extremely difficult, if not outright impossible, for these Iranian banks to find such counterparts, even when they are trying to facilitate fully legal humanitarian trade.
In the end, Iran needs to go through many loops and plays a constant cat and mouse game, creatively trying to find a channel to pay its Western suppliers of medicine. Not only does this increase the costs of medicine for the Iranians, it also causes major delays. In the meanwhile, pharmacy shelves run empty of vital drugs and the patient suffers.
Q: Isn’t that just a reflection of the international banks being too cautious rather than shortcomings in US sanctions laws? In a recent testimony to the Senate, US Treasury Undersecretary David Cohen was clear that no special permission is required to sell humanitarian goods to Iran and foreign financial institutions can facilitate these permissible humanitarian transactions.
Siamak Namazi: What Mr. Cohen actually said is that all is fine “as long as the transaction does not involve a U.S.-designated entity,” meaning a sanctioned Iranian bank.
How, exactly, does an international financial institution guarantee that none of Iran’s main banks, all of which are blacklisted, were involved in any part of the long chain involving a foreign currency transfer from Iran? Recall that foreign currency allocation for pharmaceutical imports start with the Central Bank of Iran, which is blacklisted. Maybe the CBI wired these funds to the non-designated Iranian bank from monies it holds in say, Bank Tejarat or Bank Melli, potentially adding further layers of banned banks to the chain.
Given the severity of the risk involved — fines that have reached nearly $2 billion in recent months — international banks seek clear indemnity. They want legal clarification that basically says, “You will not be fined for clearing humanitarian trade with Iran, period.”
So far Treasury has refused to grant such a measure, though recent comments by senior officials suggest that the US government has sent out delegations reassuring the banks, without actually making any changes to the letter of the law. While this is a welcome move, and indeed one of the recommendations in the report published by the Wilson Center, it is far from sufficient.
Q: You say that Iran has a hard time finding a banking channel to pay for Western medicine. At the same time, for the first time in many years, Iran purchased $89 million in wheat from the US in 2012. Why were they able to find a banking channel to pay for wheat, but have difficulty purchasing medicine?
Siamak Namazi: My claim is supported by recent US trade statistics showing that exports of pharmaceuticals to Iran dropped by almost 50 percent, but these numbers are ultimately misleading. My understanding is that US trade data only reflects exports from an American port, directly entering an Iranian port, which is a thin slice of the overall trade. This is while most companies send their goods to Dubai, Europe or Singapore and cover the entire Middle East, including Iran, from these hubs. So, when the statistics refer to a drop of sales of medicine from around $28 million in 2011 to half that figure in 2012, the figure grossly misrepresents the scale of the problem.
Let me stress this point again: the loss of $14 million in American-made drugs does not make for a crisis. The real problem is exponentially bigger than this. We are talking about the loss of hundreds of millions of dollars worth of American and European medicine.
You must also keep in mind supplier power in trade. Wheat is a perfectly substitutable good, so Iran is bound to find one supplier that is willing to sell its wheat with extended credit terms, until it secures the hard currency and banking channel to pay for it. A vital drug is often perfectly un-substitutable; meaning that a single company — most often American or European in the case of the most advanced medicines — enjoys a 20-year patent to manufacture it. So if Iran cannot find a banking channel to reimburse the manufacturer for it, it will have to do without that medicine until it can pay.
Q: Why can’t Iran procure its medicine from China, India or Japan — the countries it’s selling oil to?
Siamak Namazi: Iran has already increased its purchase of medicine and medical equipment from all the countries you listed. However, as I stated earlier, due to the highly regulated and patented nature of the pharmaceutical business, vital drugs are often un-substitutable.
Even when there is an alternative drug made by the Chinese, Indians or Japanese, there is an additional barrier. Medicine has to be registered before its importation is permitted. Just like the US has the Food and Drug Administration, Iran, like most countries, has an equivalent body that must approve the medicine. The specific molecule must be registered after thorough testing. In Iran, this process takes an exceedingly long time and should no doubt be improved, though recently they have taken steps to expedite it by making exceptions. The Ministry of Health sometimes allows a drug that was approved for sale in another country to also be imported and sold in Iran. But this rushed process has had major consequences in terms of side-effects. There are even press reports of deaths when substandard drugs were imported.
To be honest, I don’t understand the logic of the advocates of this solution. They argue that the existing humanitarian waivers are sufficient and claim any shortage of medicine in Iran is the consequence of Tehran’s own mismanagement. I have even heard accusations that Iran is intentionally creating such shortages to create public outrage against the US. But if they maintain the sanctions regime is fine as it is, then how come they try to promote substitution from China and India? Besides denying Iranian patients their right to receive the best treatment there is, aren’t they also rejecting the American pharmaceutical companies’ right to conduct perfectly legitimate business?
Q: To be fair, Iran’s own former health minister, Marzieh Vahid Dasjerdi, also accused the government of failing to allocate the necessary resources and lost her job after doing so.
Siamak Namazi: I actually commend the former health minister for her courageous intervention and have also voiced my concern about the misallocation of hard currency in various forums.
That said, I am not in a position to know or comment on the exact nature or circumstances of her dismissal. I can only reference our direct research and findings. We found and verified ample cases where Iran had allocated hard currency for vital medicine, yet the purchase fell through because they could not find a banking channel. This includes the sale of an anti-rejection drug needed for liver transplants by an American pharmaceutical that ultimately failed. Can you imagine waiting years for a donor and when your operation time arrives, being told that you cannot have it because the drug you need is missing?
You need not take our word for it. It is very easy for the US government to verify our claims by talking to the American pharmaceuticals that do business with Iran, or even by reviewing some of OFACs own files. In fact, the US industry lobby USA*Engage recently wrote a letter refuting Undersecretary Cohen’s claims that American companies have no problems dealing with Iran. In their own words: “Despite … clear Congressional directive and long-standing policy, the U.S. Treasury implements Executive Branch unilateral banking sanctions in a manner that blocks the financial transactions necessary for humanitarian trade.”
Q: So is there a solution to all this?
Siamak Namazi: Absolutely, and I have spelled it out in my op-ed in the International Herald Tribune and also in the Wilson Center report. It simply makes no sense to say humanitarian trade is legal, but the banking channel needed to facilitate the trade is restricted. In the case of medicine, the solution is arguably simpler than other humanitarian goods. With fewer than 100 American and European companies holding patents to the most advanced drugs needed, we can craft narrow, but unambiguous exemptions to the banking restrictions, essentially allowing these companies to sell medicine to Iran without undermining the sanctions regime overall.
To address the shortage of hard currency, Iran should be allowed to convert some of its current holdings in Chinese, Indian and other banks around the world into hard currencies for the exclusive purpose of buying medical supplies. Alternatively, the US could revisit its earlier decision on the matter and allow European companies that owe billions of dollars to Iran to settle this debt by paying a pharmaceutical company on Iran’s behalf.
US policymakers are reminded that medicine is highly subsidized in Iran. Imported drugs receive hard currency allocations at a greatly subsidized rate and are again supported through government-owned insurance companies. That means that the Iranian government ultimately gains far fewer rials for every dollar it allocates to an importer of medicine than it does selling its hard currency to importers of most other goods.
– Siamak Namazi, a Middle East specialist whose career spans the consulting, think tank and non-profit worlds, is currently a consultant based out of Dubai. His former positions include the managing director of Atieh Bahar Consulting, an advisory and strategic consulting firm in Tehran. He has also carried out stints as a fellow in the Wilson Center for International Scholars, the Center for Strategic and International Studies and the National Endowment for Democracy. A frequent contributor to international publications and conferences, he has authored chapters in six books and appeared regularly as a commentator in the international media. He holds an MBA from the London Business School, an MS in Planning & Policy Development from Rutgers University, and a BA in International Relations from Tufts University.
]]>by Sara Vakhshouri
In the last week of April, the US Energy Department issued a report showing that Iran’s crude oil and condensate exports have dropped to their lowest level in the past 26 years. The Energy Information Administration (EIA) estimates that Iran’s net oil export revenue in 2012 was $69 [...]]]>
by Sara Vakhshouri
In the last week of April, the US Energy Department issued a report showing that Iran’s crude oil and condensate exports have dropped to their lowest level in the past 26 years. The Energy Information Administration (EIA) estimates that Iran’s net oil export revenue in 2012 was $69 billion, down from $95 billion in 2011.
In 2012, the average export of crude oil and condensate declined to around 40 percent, from 2.5 million barrels a day (mb/d) in 2011 to about 1.5 mb/d in 2012. Due to the substantial drop in exports and a lack of sufficient storage capacity, the EIA estimates that Iran had to reduce 17 percent of its crude oil and condensate production. Iran was, on average, the second largest producer of OPEC in 2012. But for some months, its production fell below Iraqi levels for the first time since 1989, moving it from second to third place.
This dramatic drop in oil production and exports are the result of the US and EU sanctions implemented since late 2011 that targeted Iranian oil income, which makes up 80 percent of Iran’s total export earnings and about 60 percent of the government’s revenue.
The new sanctions ban European insurance companies from offering any coverage to refineries that process Iranian crude oil. Although a tight market combined with higher prices has made up for some of Iran’s income losses, it is believed that these sanctions have hurt Iranian oil exports in an unprecedented and significant way.
The new sanctions also present a major challenge for Iran to sell its oil to major customers, particularly India, Japan and South Korea. According to the US Energy Department, Iran’s crude oil export to India and South Korea is particularly going to be influenced by these sanctions as their refineries rely mainly on European insurance companies. Previously, Iran could skirt the EU ban on insurance by offering its domestic insurance. But the new sanctions make this impossible. This means Tehran is going to have an even harder time marketing and selling its crude oil: its major customers have to start searching for alternative supplies in the market.
The refinery overhaul season is also going to make it harder for Iran to sell its oil. The second quarter of each year is the period for maintenance overhaul for refineries in the Northern Hemisphere that results in a seasonal decline in demand. It is expected that the spike in Iranian crude oil from the last quarter of 2012 will drop once again due to the new EU restrictions on refinery insurance and seasonal demand.
It is not expected that Iranian crude oil production will rise soon. According to the EIA report, Iran’s oil production in 2012 was around 700 thousand b/d, lower than in 2011. The natural production decline of Iran’s matured fields is playing a major role in curbing its crude oil production. Iran needs to invest in its oil fields in order to maintain its production but the large scale of prohibitions on investments in the country’s oil and gas fields imposed by the US and EU prevents any further increase of the country’s production.
]]>by Djavad Salehi-Isfahani
The latest round of talks between the P5+1 (the US, Russia, China, Britain, France, and Germany) and Iran in Kazakhstan concluded on Saturday without any tangible progress. While details of the reciprocal offers remain unclear, what we have learned indicates that neither side is in any particular hurry [...]]]>
by Djavad Salehi-Isfahani
The latest round of talks between the P5+1 (the US, Russia, China, Britain, France, and Germany) and Iran in Kazakhstan concluded on Saturday without any tangible progress. While details of the reciprocal offers remain unclear, what we have learned indicates that neither side is in any particular hurry to conclude the lengthy negotiations. In the meantime international sanctions, which have plunged Iran’s economy into its deepest crisis since the war with Iraq, will remain in force and may even be tightened. An important question now is whether the delay in resolving the crisis favors Iran or its Western foes, and the answer has to do in part with what one believes is happening to Iran’s economy.
Just before the talks restarted, a report in the New York Times entitled “Double-Digit Inflation Worsens in Iran” may have strengthened the belief of those in the US who think that time is on their side. If inflation — the most obvious, if not the most painful, effect of sanctions — has gotten worse for the sixth month in a row, then waiting a few more months might weaken Iran’s position. The article was based on new data released by Iran’s Statistical Center, which, when looked at more closely actually shows that inflation has been up and down in the last six months, falling as many times as it went up, though prices go only up (see a detailed graph of monthly inflation rates here). The persistence of high inflation has as much to do with sanctions as with Mr. Mahmoud Ahmadinejad’s insistence on making good before he leaves office and ahead of the June presidential election by pushing ahead with his unfunded (and therefore inflationary) promises of cash transfers and low-cost housing.
Iranian officials who were last year denying the impact of sanctions now praise them for helping Iran wean its economy from oil. Last month, Iran’s Minister of Economy, Shamseddin Hosseini, said that “Thanks to the sanctions [imposed] by enemies, a historical dream of Iran is being realized as the oil revenues’ share in the administration of the country’s affairs has been reduced.” The Minister for Industry, Mining and Commerce also added a humbling note, “What we had been unable to achieve on our own, sanctions have done for us.” He was referring to the huge inflow of cheap imports paid for by the oil revenues over which he has presided since 2009.
As these officials have discovered lately, oil money can stock the kitchens and living rooms of the average family while keeping their educated son or daughter out of a job. While imports increased eightfold over the last ten years, many local producers in agriculture or industry have either shut down or increased the import content of their production. Either way, jobs have been lost. Between 2006 and 2011, census figures show that Iran’s economy created zero new jobs, as the working age population increased by 3.5 million.
As I have argued before, the devaluation of the rial, which many saw as the reason why Iran restarted negotiating, is actually a reason why it may not be in such a hurry to resume its oil exports. A study last week that was surprising for its source — the Washington Institute for Near East Policy, which has always pushed for tougher sanctions on Iran — admitted that Iran is doing a good job of adjusting to reduced oil revenues. It shows how the balance of trade in non-oil items is improving and how the government budget is becoming less dependent on oil.
But adjusting to the financial sanctions is an entirely different story. After being cut off from the international banking system and with limited access to global markets, Iran is finding it extremely hard to turn its import-dependent economy around. If Iran could choose which of the two sets of sanctions to lose first, oil or financial, it would definitely be the latter.
]]>by Djavad Salehi-Isfahani
Four months after the collapse of the rial earlier this fall, Iran’s economy is still reeling from its effects. The rial lost 40% of its value in one week late last September, succumbing to accumulating pressures from free spending by the Ahmadinejad government, overvaluation caused by years of [...]]]>
by Djavad Salehi-Isfahani
Four months after the collapse of the rial earlier this fall, Iran’s economy is still reeling from its effects. The rial lost 40% of its value in one week late last September, succumbing to accumulating pressures from free spending by the Ahmadinejad government, overvaluation caused by years of booming oil revenues, and international sanctions.
Financial sanctions imposed by the United States against third-party countries that trade with Iran have seriously disrupted Iran’s international trade, reducing its ability to sell its oil or spend the revenues from what it can sell. Sanctions have inflicted enormous pain on millions of Iranians, who have watched the boom of the last decade deteriorate into stagnation, inflation triple and critical items such as medicine disappear from stores. Iranians are meanwhile unsure who to blame, those who have imposed the collective punishment or their own government.
For the moment, there is no sign that what the West was hoping sanctions would do — soften the position of Iran’s leaders as a result of rising dissatisfaction — is actually happening. There are three reasons for this. First, the government has so far skillfully protected the poor from the worst aspects of the economic crisis. It has done so by offering cash payments (amounting to half the minimum wage for a family of four), and by keeping the price of basic necessities like food and fuel from rising as fast as inflation.
Second, those who suffer most — the salaried middle class — are least likely to pour into the streets in protest. And third, even those who believe that sanctions are the root cause of the current economic mess are not likely to ask their government to capitulate to Western demands.
Bringing inflation down and reviving investment are the two biggest challenges that the Iranian government currently faces. There are signs that inflation, after jumping to 4.5% per month (equal to an annual rate of 70%) during October and November, is coming down. Monthly inflation was 2.5% in December and fell to 1.7% in January 2013.
The moderation in inflation is no thanks to Iran’s free-spending president, whose two most important programs — cash subsidies and an expensive low-cost housing program — have been largely financed by printing money. The parliament has been trying to rein him in, and even tried to fire his Central Banker last month on a charge that he had raided the reserves of member banks, a move that had ironically helped reduce inflation.
But success in harnessing inflation will not shield the population from the worst effects of the sanctions. The government has done well in fighting them by finding alternative sources of supply for basic imports, and has successfully engaged in bilateral trade with several countries that are willing to withstand the wrath of Washington such as China, India, Turkey and Argentina, but it will have a very hard time getting private investment back on track with cumbersome arrangements for international trade.
Iran’s private sector is the main source of jobs for the country’s 20 million youth, and the only hope for its 4 million unemployed. The more realistic value of the rial after devaluation has done much to bring the productivity of these youth closer to their wages, which should boost their employment. But uncertainty surrounding the future of the dispute with the West will keep private money on the sideline and in liquid assets, waiting for a sign that normal times are about to return.
Remarks by US Vice President Joe Biden and Iran’s Foreign Minister Ali Akbar Salehi this past weekend that raised the prospects of direct talks between the US and Iran was perhaps a sign, for it immediately sent the rial up against the dollar by nearly 5% in the free market for foreign exchange. If this means that Iran’s private investors have not given up on the country’s future, it should serve as an inducement for Iranian leaders to do their best to reduce tensions with the West — even better, to resolve the nuclear standoff once and for all.
]]>by Sara Vakhshouri
Sanctions against Iran by the European Union and the United States, which aim to change Iran’s attitude toward its nuclear program, have increased pressure on its oil export and revenue. This resulted in the reduction of Iran’s oil exports from 2.2 million barrels per day (bpd) in late 2011 [...]]]>
by Sara Vakhshouri
Sanctions against Iran by the European Union and the United States, which aim to change Iran’s attitude toward its nuclear program, have increased pressure on its oil export and revenue. This resulted in the reduction of Iran’s oil exports from 2.2 million barrels per day (bpd) in late 2011 to around between 900 thousand to slightly above 1 million bpd until October 2012. On 30 January 2013, Reuters reported that Iran’s crude oil exports hit its highest level in December, at around 1.4 million bpd since EU sanctions took effect last July. What was the reason for this sudden hike?
Seasonal Demand
Winter and summer months traditionally mark peaks in global fuel demand. The cold weather during November and December, compared to September and October, usually creates higher energy demand and consumption. As expected, heating fuel consumption increased during the last two months of 2012, particularly in the US, Japan and other members of the Organisation for Economic Co-operation and Development (OECD), due to colder than normal weather conditions. According to the Energy Information Administration (EIA), the global demand for liquid fuels surpassed production in November and December 2012 due to seasonal increases in consumption. This caused a 1.4 million bpd draw from the global oil stocks. The average global demand for liquid fuels in November and December 2012 was estimated at around 90.2 million bpd, or about 0.9 million bpd higher than the consumption of September and October. However, the global supply outside of Iran was about 86.7 million bpd during this period.
Easing of Shipping Restrictions
Iran has increased its shipping capacity by purchasing super tankers from China. It also decreased its oil production, which eased the country’s shipping capacity. Beginning with the EU oil embargo in July 2012, Iran had to use some of its tanker capacity to store its extra production while searching for buyers. After it made an adjustment between its production, domestic consumption and average monthly export, this shipping capacity was free to transport crude oil. Increases in Iran’s tanker capacity allowed Iran and its customers to skirt the EU ban on tanker insurance. Iranian tankers could, in some degree, transfer oil to its customers. Market data suggest that China, Iran’s biggest oil customer, imported 593,400 bpd of oil in December. According to Chinese officials, an easing of shipping delays was the reason behind this increase. This could suggest that some of this amount might have been from purchases made in previous months that reached China with a delay.
US Waivers
The US State Department grants 180-day waivers on Iran sanctions to countries that prove they have reduced their Iranian purchases. State Department officials, though, have not insisted on any specific percentages for these waivers. Countries are expected to reduce the average amount of their purchases from Iran compared to previous purchases. These countries can adjust their purchase amount from Iran based on their monthly demand and the available supply in the market. This means they can increase their purchase of oil during high demand season and adjust it during the months when demand is relatively lower.
Senators Robert Menendez, an architect of US sanctions legislation, and Mark Kirk, have urged President Obama to require oil importers to reduce purchases by 18 percent or more to qualify for further waivers. Iranian oil customers are expected to maintain the average of their purchase from Iran at around at least 18 to 20 percent lower than pre-sanctions purchases during each period of 180 days in order to have their waivers renewed. We are therefore expecting the average Iranian oil exports to remain at around 1.1-1.2 million bpd throughout 2013.
]]>By Erich C. Ferrari and Samuel Cutler
Contained in the Defense Authorization Act (NDAA) of 2013, and signed into law by President Obama on January 2, are sweeping new sanctions targeting Iran over its disputed nuclear program. The new measures target foreign entities engaging in a wide array of transactions with [...]]]>
By Erich C. Ferrari and Samuel Cutler
Contained in the Defense Authorization Act (NDAA) of 2013, and signed into law by President Obama on January 2, are sweeping new sanctions targeting Iran over its disputed nuclear program. The new measures target foreign entities engaging in a wide array of transactions with Iran, including the sale of any goods supporting Iran’s energy, shipping and shipbuilding sectors, the sale of raw materials such as aluminum, steel, and coal, the provision of insurance, or underwriting services in support of any activity for which Iran has been subjected to US sanctions.
Lawmakers quoted by the Wall Street Journal said that the new sanctions move closer to a complete trade embargo on Iran. Importantly, the US currently maintains a complete trade embargo, with exceptions for humanitarian exports and a positive licensing program for divestment activities and certain academic and cultural exchanges with Iran. The new sanctions will therefore have little impact on the legality of US companies still engaging in licensed trade with Iran. Any new steps that restrict Iran’s ability to buy or sell goods and services would need to be enforced through the threat of US secondary sanctions.
Secondary sanctions, known pejoratively as extraterritorial sanctions, are designed to prevent foreign individuals and entities from conducting activities that US primary sanctions seek to prohibit by imposing various penalties, including revoking access to the US market. They have been increasingly used over the past 3 years by the United States to pressure foreign countries and entities into curtailing their business dealings with Iran. Beginning with the Iran Sanctions Act of 1996 and gaining wide spread notoriety with the Comprehensive Iran Sanctions Accountability and Divestment Act of 2010 (CISADA), the US government maintains the authority to impose secondary sanctions on a wide variety of activity involving Iran, including but not limited to the importation of Iranian crude oil, dealings with entities sanctioned under Weapons of Mass Destruction (WMD) or Terrorism-related programs and the export to Iran of refined petroleum products.
By and large, these measures have been extremely effective at cutting Iran off from large swaths of the global economy. Sanctions on Iranian financial institutions have been particularly effective as most foreign banks are loathe to risk their access to the all-important American financial system and have responded by cutting off all ties with Iran.
The effectiveness of secondary sanctions is largely dependent on buy-in from the rest of the world. Following the passage of new sanctions included in the 2012 NDAA, Iranian oil exports have dropped to under 1 million barrels per day. A number of factors contributed to the sanctions’ success. For example, international concern over the continued development of Iranian enrichment capabilities convinced some states that additional economic leverage was needed to pressure Iran to resume negotiations. While the NDAA directed countries to “significantly reduce” their purchases of Iranian oil, the European Union announced its intention to institute a full oil embargo just 3 weeks after the act’s passage.
This does not mean that all of Iran’s trading partners would have acted in the same manner without the existence of sanctions. An increase in the global supply of crude oil due to greater production levels in Saudi Arabia, Iraq, and Libya coupled with lower demand as result of the global economic slowdown has allowed Iran’s customers to reduce their purchases without dramatically increasing the price of crude. Waivers included in the law have also allowed importers of Iranian oil to gradually reduce their purchases so as not decrease the associated economic costs. So, despite repeated denunciations of US unilateral sanctions in public, China has quietly reduced its purchases of Iranian oil, as have Iran’s other East Asian customers. By complementing new sanctions with robust diplomatic engagement and managing the economic costs of compliance, the United States has been able to ensure fairly broad acceptance of its efforts to economically isolate Iran.
Indeed, secondary sanctions targeting Iran have faced roadblocks in the past when a consensus regarding their utility was lacking. In 1996, Congress passed the Iran and Libya Sanctions Act, which was renamed the Iran Sanctions Act (ISA) in 2006 following Libya’s decision to give up its WMDs. The bill directed the President to sanction foreign companies that provided investments of over $40 million towards the development of petroleum resources in Iran. The EU responded by threatening to file a World Trade Organization complaint against the US due to French petroleum giant Total SA’s involvement in a $2 billion deal to develop Iran’s South Pars gas field. President Bill Clinton was forced to issue a waiver for the project in 1998 and Secretary of State Madeline Albright later promised that similar projects would not be sanctioned. It would be another 12 years before any entity was subjected to ISA sanctions.
The reality is that the Executive’s use of secondary boycotting measures has been fairly limited. For example, only two banks have lost their ability to maintain correspondent banking relationships with the US because of the Iranian Financial Sanctions Regulations mandated by CISADA: Elaf Islamic Bank and Kunlun Bank. Moreover, the Executive branch, not Congress, is tasked with the implementation of the secondary boycotting measures. In other words, while Congress can continue to provide tools for the Executive to impose additional sanctions, the actual implementation is left to the President.
Yet the impact of numerous rounds of congressionally mandated secondary sanctions is greater than the sum of its prohibitions. Due to the confusing and oftentimes overlapping nature of different US sanctions programs, the international business community has in large part withdrawn from the Iranian market in fear of running afoul of US law. Sanctions on Iranian financial institutions have been particularly effective, as the mere existence of CISADA-authorities have convinced most foreign financial institutions to cut off all ties with Iran.
In practice, secondary sanctions are the equivalent of speaking softly, but carrying a big stick. However, the US has departed from the diplomatic strategy of Theodore Roosevelt. Indeed, the latest round of secondary sanctions are a form of neo-big stick diplomacy; the US is now speaking loudly and carrying a big stick.
- Samuel Cutler is a policy adviser at Ferrari & Associates, P.C. and Erich Ferrari is the principal of Ferrari & Associates, P.C., a Washington, DC boutique law firm specializing in US economic sanctions matters.
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