UANI

THE EFFECT OF SANCTIONS ON IRAN

Introduction

Sanctions have been imposed at the national and international levels to compel Iran to comply with its international obligations and abandon its nuclear program. In addition, in the U.S. individual states have imposed measures intended to increase the economic isolation of the Iranian regime.

The UN, U.S., EU, UK, Japan, South Korea, Canada, Australia and Israel have all separately imposed financial and trade sanctions that target Iran’s energy, banking, and shipping sectors, the airline industry, as well as Islamic Revolutionary Guard Corps (IRGC)-controlled entities and other entities involved in proliferation activities. Sanctions in the form of asset freezes and travel bans have also been imposed on Iranian officials complicit in human rights abuses and acts of terrorism.

The UN has passed four rounds of sanctions, the most recent of which specifically targets Iran’s shipping and nuclear and proliferation activities. In addition, separate EU sanctions have been imposed against Iran’s energy banking sectors and also provide for inspections of shipping vessels. Iran’s shipping industry has been further affected by the divestment of Western insurance companies, which fear violating US sanctions.

Several U.S. states, including California, Florida and New York have implemented measures that preclude companies involved in certain sectors of the Iranian economy from bidding on or receiving state contracts.

In September 2010 Iranian President Mahmoud Ahmadinejad said, “Even if the U.S. administration increases the sanctions and — 100 times more, and even the Europeans join the United States to impose heavier sanctions, we in Iran are in a position to meet our own requirements.” Yet one day prior, prominent opposition politician Akbar Hashemi Rafsanjani admitted that “We have never had such intensified sanctions and they are getting more and more intensified every day. Wherever we find a loophole, they [the Western powers] block it.”

Sanctions are having a strong adverse impact on Iran’s nuclear program and the Iranian economy. In October 2011, Iranian Foreign Minister Ali Akbar Salehi also conceded that “Iran is facing the toughest political and economic sanctions in the past 32 years.” The next month, even Ahmadinejad came full circle, recognizing the impact of sanctions: “Our banks cannot make international transactions anymore.”

In the words of Secretary of State Hillary Clinton, “the sanctions are working, their program, from our best estimate, has been slowed down.” The White House has also stated that the sanctions "have enormous bite and enormous scope" and have ground the Iranian economy "to a halt".

This document details seven of the key effects of sanctions on Iran: 1) Impeding Development of its Nuclear Program; 2) Inflation & Cost of Goods; 3) Currency Fluctuation; 4) Investment Climate and Corporate Divestment; 5) Iran’s Energy Sector: Falling Oil Output, Exports & Gasoline Imports; 6) Subsidy Cuts and 7) Internal Dissent.

Nuclear Program

Sanctions have caused a substantial setback in Iran’s nuclear program. According to an October 2011 report by the Institute for Science and International Security (ISIS), “Iran's nuclear program has been hampered by machine design flaws, equipment breakdowns and problems getting parts because of international sanctions.” David Albright, President of ISIS and a former IAEA inspector, stated, “‘sanctions have taken a toll and driven Iran to do things that are not normally done,’ such as using lower-quality local material for key centrifuge parts.”

The report specifically notes Iran’s increasing difficulty in acquiring such sanctioned materials as maraging steel and carbon fiber. In short, “Constraints on Iran’s advanced centrifuge program have resulted directly from the effectiveness of targeted sanctions against critical goods necessary for the manufacture of centrifuge components.” A separate ISIS report notes that Iran’s shortage of key material is also preventing it from making more of its basic design IR-1 centrifuges.

Albright concluded that “Without question, they [Iran] have been set back,” which has “hurt Iran’s ability to break out quickly” to produce nuclear weapons. This has been confirmed by Iran’s sharp drop in enrichment output in 2009 and 2010.

As Secretary of State Hillary Clinton stated in January 2011, “the sanctions are working. Their program, from our best estimate, has been slowed down. So we have time, but not a lot of time.”

Inflation & Cost of Goods

Sanctions have caused an increase in both inflation and the cost of goods in Iran. Reports in October 2010 “paint a picture of unsteady supply chains and disrupted exports.” Sanctions have prevented foreign direct investment (FDI) in Iran outside its energy sector (“even in the energy sector it has been small relative to Iran’s potential”), as prices rise and Iranian companies are precluded from working internationally. As importing becomes more expensive, the cost of goods within Iran has risen dramatically: “According to Iranian customs, the imports of goods have decreased by 13.9 percent in volume in the first three months of the current Iranian fiscal year which began in March [2010], compared to the same period last year.”

Additionally, a Wall Street Journal report in October 2010 states that: “An industrial-machinery importer says operating costs have risen at least 30% because of new shipping and insurance restrictions on Iran-bound cargo, costs to be passed on to consumers. A retired accountant in Tehran says her pension is now stretched thin. ‘Inflation is putting a lot of pressure on people,’ she says. ‘It's on everyone's minds.’… [A] pharmaceutical company owner said he recently curbed production and laid off at least 40 employees because of the increasing time and cost of importing raw materials.” The Chairman of Iran's plastic-industry union “expects prices of plastic items such as water bottles to double over the next few months because of the shortfall of raw materials.”

As a result of this economic pain, “Disaffection among traditional supporters of the government over its handling of the economy has even come from some senior members of the Islamic Republic's clergy.” Grand Ayatollah Naser Makarem Shirazi warned officials not to play down economic challenges, stating, “It is reported every day that inflation has dropped but this is the opposite of what people are witnessing.”

An August 2011 Congressional Research Service (CRS) report states that due to sanctions, “merchants are reportedly having trouble obtaining trade financing, insurance, and shipping availability, which has driven up their costs an estimated 40%, if they can complete transactions at all.”

Currency Fluctuation

The Iranian rial plummeted by 15 percent on September 25, 2010, shortly after the United Arab Emirates issued its own sanctions against Iran. An October 2010 World Policy Institute article from October 2010 states “it seems that the American-inspired sanctions have led to a disruption of relations between the Iranian banking system and their correspondent banks abroad... As exporters and individuals have trouble transferring dollars from abroad, there is a lower level of supply of the American currency in the Tehran market for foreign exchange.”

In October 2010 The Washington Post reported: “‘People were literally screaming and yelling at the foreign exchange counters,’ said a middleman operating in Iran's vibrant steel industry, on the condition of anonymity. ‘They wanted dollars because the prices of goods they bought abroad was rising by the minute but nobody could give them any. It was chaos.’”

The sanctions are also making transactions for oil payments very difficult, reducing the Iranian regime's supply of hard currency.

For example, in August 2011, Reuters reported that billions of dollars in payments for Iranian oil were trapped in South Korean banks due to the inability of the South Korean banks to repatriate the money to Iran. A similar issue has unfolded in 2011 involving Indian payments for Iranian oil. The sanctions on Iran were making it difficult for India to transmit international bank payments for Iranian crude. Iran even threatened to sever its oil trade with India if payments could not be made.

Investment Climate and Corporate Divestment

Through 2011, many prominent international firms, particularly those involved in Iran’s energy sector, have either ended or curtailed their business in Iran due to the unstable financial climate in the country and the threat of sanctions. As mentioned earlier, a severe lack of foreign direct investment coupled with the increasing cost of imports is helping to cripple the Iranian economy, especially in highly state-controlled sectors such as the petroleum industry.

Provided is a list of international firms that have ended or curtailed their business in Iran:

Energy

Sanctions have specifically sought to hinder Iran’s energy sector, causing scores of international energy firms to flee Iran. For further information, read the section below: “Iran’s Energy Sector: Falling Oil Output, Exports & Gasoline Imports.”

Banking & Financial Services

Between 2006 and 2010, the U.S. Treasury and State Department declared they have persuaded at least 80 banks to remove operations from Iran. As already noted, Iran is having difficulty repatriating money from oil sales to countries like India and South Korea due to international financial sanctions. As a result, billions in funds are trapped in banks around the world.

Shipping

In the shipping sector, sanctions have hindered trade financing, insurance and shipping availability for Iran, especially involving shipments of gasoline and other petroleum-based products. On June 23, 2011, the U.S. sanctioned Iran’s major port operator Tidewater Middle East Co. on proliferation concerns. As a result, the world’s largest shipping container company, Maersk, announced it would no longer operate out of Iran’s three largest ports, which will likely further raise shipping costs for Iran.

Additionally, according to the CRS, the U.S. “Treasury Department’s designations of affiliates and ships belong to Islamic Republic of Iran Shipping Lines (IRISL) reportedly are harming Iran’s ability to ship goods and raised the prices of goods to Iranian import-export dealers.”

Construction, Manufacturing and Engineering

Automakers

For more information see:

• U.S. State Department. “Companies Reducing Energy-Related Business with Iran,” 5/24/11
• UANI. “Corporate Announcements”

Iran’s Energy Sector: Falling Oil Output, Exports & Gasoline Imports

International sanctions are causing significant harm to Iran’s energy sector, the lifeblood of the Iranian economy. In 2011, U.S. officials claimed that Iran has lost close to $60 billion in investment as numerous major firms have announced pullouts from projects, declined to make further investments, or resold investments to other companies. In October 2011, David Cohen, the Undersecretary for Terrorism and Financial Intelligence, testified before the U.S. Senate Banking Committee that “Iran has been increasingly unable to attract foreign investment, especially in its oil fields, leading to a projected loss of $14 billion a year in oil revenues through 2016.”

The slowdown in investment in Iran’s energy sector has not been limited to Western firms. Chinese firms are responding to sanctions by curbing their investment in Iran’s energy sector as well. It was long assumed that China would immediately step into the void left by Western oil firms exiting Iran, but the threat of sanctions and the danger of falling outside the international consensus have compelled China to slow its investment in Iran’s energy sector. In September 2011, Reuters reported that “The slowing of China’s energy investments in Iran was prompted, at least partly, by Beijing’s efforts since late 2010 to ease tension with the Obama administration and cut the risk of Chinese oil firms being hit by U.S. sanctions that Congress has vigorously backed, said officials.”

As noted in preceding sections, countries such as South Korea and India are facing difficulty in processing oil payments to Iran due to the denial of bank payment mechanisms. This clearly demonstrates that sanctions in the banking industry have made it significantly more difficult for Iran to carry out energy transactions.

Critically though, as a result of sanctions, the Iranian energy industry, increasingly controlled by the IRGC, has witnessed a dramatic fall in both oil output, exports and gasoline imports. The IRGC uses the profits from its oil exports to wage a brutal campaign of domestic repression, fund and train terrorists worldwide, and carry out direct operations such as the failed assassination plot of Saudi Ambassador Adel Al-Jubeir on American soil. The commanders of the IRGC have abused their political positions and newfound wealth to create a vast, multi-billion dollar financial mafia reaching into every sector of the Iranian economy, further stripping opportunities and rights of ordinary Iranians and solidifying the regime's grip on Iranian wealth and power. It is for these reasons that sanctions against the Iranian energy sector are especially effective.

Declining Oil Output& Oil Exports

The export of oil and gas accounts for approximately half of Iran’s government revenue and nearly 80% of Iran’s total exports. The price of oil therefore is a major determinant in the overall health of the Iranian economy and the strength of the Iranian regime. U.S. sanctions have made it even more difficult for Iran to “transact payments for oil sales,” while shipping companies “are also refusing to send tankers to Iranian oil terminals [and] insurers are reluctant to cover cargoes.”

This intimately relates to Iran’s overall decline in oil output and oil exports due to lack of foreign direct investment and mismanagement. In 1978, Iran produced over 5 million barrels per day (mbd) but since the 1979 Iranian Revolution, largely due to sanctions and limited investment, the country’s oil industry has been steadily declining.

In the mid-2000’s, Iranian oil production was down to 4.1 mdb and in 2011, production has fallen to about 3.8 mbd. By 2015, production is projected to fall to about 3.3 mbd.

Less oil production in Iran means that the Iranian regime will have less oil to export and less government revenue to fund its nuclear program and terrorism in the region.

Declining Gasoline Imports

U.S. sanctions have specifically targeted the sale of gasoline to Iran, since Iran has long lacked sufficient refining capacity to meet its own domestic gasoline needs. Since the enactment of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA), many suppliers have ceased their exports of gasoline and refined petroleum products to Iran. Observers have noted a decrease in gasoline deliveries from 3.5 million barrels per day before CISADA to about 900,000 barrels per day after its enactment.

As a result, Iran has been unable to import large quantities of gasoline, forcing it to expensively convertpetrochemical factories to refine oil. Experts believe this conversion costs at least 15 times more than the petrol made in refineries. The cost rises to approximately 40 times if “disruption of the petrochemical industry is also taken into account.” Furthermore, it has become difficult for Iran to buy chemical-based raw materials used in gasoline extraction and processing, further hindering production. Iran is also imposing energy price reforms to lower demand on gasoline, thereby increasing the available supply for export purposes.

In October 2010, Iran’s oil minister admitted that international sanctions caused the drastic fall in gas imports. Before CISADA, Iran imported approximately a third of gasoline needs but by September 2010, it imported only a fraction of that.

Natural Gas Developments

Iran has the world’s second largest proven reserves of natural gas yet ranks only as the 25th largest in terms of export. Sanctions have deprived Iran the requisite foreign investment and advanced technology to properly develop these resources. This is especially damaging for Iran because it shares the South Pars/North Field gas field, the largest in the world, with Qatar. So while Iran is unable to effectively exploit these natural gas deposits, Qatar has become the world’s leading liquefied natural gas exporter.

Subsidy Cuts

Feeling the impact of sanctions, the Iranian government was forced cut back on its extensive subsidy system as a means of limiting losses in government income and preserving Iran’s limited gasoline production for export.

In September 2010, Reuters reported that many Iranian households have faced electricity bills 1,000 percent higher than the previous month, the result of the government’s cutting of food and fuel subsidies. This dramatic increase was a byproduct of sanctions and the resulting plan to save $100 billion it currently pays in subsidies. Ahmadinejad has called the subsidy reforms, which aim to lower the price of essential goods, “the biggest economic plan in the past 50 years.”

As part of this subsidy overhaul, on December 19, 2010 the Iranian government reduced subsidies on gasoline and bread. The cost of bread immediately rose from 15 cents to 40 cents and the cost of gasoline from $1.60 to $2.60 per gallon, close to global prices. Only the lower and lower middle class have received cash payments of about $40 per month from the Iranian government to counteract the adverse effect of the subsidy cuts.

Internal Dissent

One of the most prominent effects of sanctions against Iran is the rise in internal dissent. Coupled with protests after the disputed 2009 Iranian presidential elections, internal dissent could be a strong factor in influencing the Iranian regime’s ambitions for a nuclear weapon.

The CRS report notes that international sanctions have indirectly caused turmoil in Iran’s political and economic system. In June 2011, public discussion focused on the possible impeachment of President Mahmoud Ahmadinejad for economic mismanagement.

The subsidy cuts were expected to “reignite unrest which flared after Ahmadinejad’s disputed re-election last year.” During July 2010, shopkeepers and traders in the Tehran bazaar (which is “at the heart of the Iranian economy”) were on strike for seven days due to the government’s attempt to increase their annual income tax by 70 percent. These strikes, Foreign Policy reported, are “a likely harbinger of further turmoil to come.” The article continued, “the inability of the government to extract taxes from the bazaaris is a symptom and symbol of President Mahmoud Ahmadinejad's own lack of authority among the greater public.”

Goldsmith bazaaris then went on strike in October 2010 after the Iranian government imposed a new 3 percent value added tax, causing “economic worries” among shopkeepers and merchants.

Iranian businessmen, traders and consumers, facing inflation, joblessness and mounting shortages, have felt the “increasing strain” that sanctions have put on the economy. Mojtaba Vahidi, a former top-level manager for two decades in Iran’s Ministries of Finance and Industry says that “the economic crisis we are witnessing today is a direct result of the sanctions—and Iranian officials who say otherwise are fooling themselves.”

Conclusion

Ahmadinejad claims sanctions will “definitively mark a new level of progress in [the Iranian] economy,” and Iranian finance minister Shamseddin Hosseini has said that “after these sanctions we are a much stronger country.” Such statements are pure propaganda. It is clear that sanctions have adversely affected Iran’s nuclear program and an Iranian economy already hobbled by government mismanagement. Inflation and the cost of goods have risen, the Iranian currency fluctuates dramatically, foreign investment is falling as time international corporations are divesting, oil output has fallen, and the government has imposed unpopular subsidy cuts. All of these are dramatically engendering internal dissent among the Iranian people, who are already dissatisfied with the corruption seen in the 2009 election.

Nonetheless, as the Iranian regime continues its drive for nuclear weapons capability, oppress its own citizens and sponsor terrorism in the region and abroad, it is essential that the international community and U.S. government continue to implement even more robust sanctions in order to alter the regime’s cost-benefit analysis.

UANI’s urges passage of the following pending sanctions legislation.

Pending Sanctions Legislation

The following is a summary of pending sanctions legislation:

• The Iran Transparency and Accountability Act of 2011 (ITAA) would require companies that avail themselves of the U.S. capital markets to disclose the business they conduct in Iran in their U.S. regulatory filings, thereby enabling the U.S. Government and American people to make informed decisions about the companies in which they invest.
• Central Bank Sanctions: In August 2011, more than 90 Senators urged the Obama administration to apply sanctions against Iran’s Central Bank. The Wall Street Journal reported that it would be “a move that would freeze out Iran from the global financial system and make it difficult for the country to clear billions of dollars of oil sales every month.”
• The Stop Iran’s Nuclear Weapons Program Act: This act “would definitively end the practice of American corporations conducting business with Iran through their foreign subsidiaries. A provision to this act, H.R. 6296, was introduced in April 2011 to “amend ISA and make sanctionable long term agreements that would involve large, upfront payments to Iran for purchases of oil over an extended period of time.”
• The Iran Human Rights and Democracy Promotion Act of 2011 (S 879 and H.R. 1714) would “make mandatory investigations of Iranian human rights abuses, sanction the sale to Iran of equipment that could be used to suppress demonstrations, reauthorize the Iran Freedom Support Act, and create a ‘special representative’ position at the Department of State to focus on highlighting Iran’s human rights abuses and coordinate U.S. and international responses.”
• The Iran Threat Reduction Act of 2011 would strengthen Iran sanction laws for the purpose of compelling Iran to abandon its pursuit of nuclear weapons and other threatening activities, by means of divestment, prevention of certain goods, services, and technologies to Iran, and denial of visas.