Iran Sanctions: A Successful Episode

January 29, 2016 3:45 PM

Implementation of the Joint Comprehensive Plan of Action (JCPOA) lifting sanctions on Iran over its nuclear program began on January 16, 2016. Under the JCPOA, the United States, China, France, Russia, the United Kingdom, and Germany agreed to lift a variety of sanctions on Iran in return for steps to dismantle large parts of nuclear facilities and infrastructure. Confirmation by the International Atomic Energy Agency (IAEA) that Iran had taken these steps led to “Implementation Day” on January 16. For more detail on the terms of the JCPOA, see our earlier blogpost.

Years of economic pressure resulting from the sanctions on Iran led to the JCPOA agreement last year. The sanctions were imposed by the United States, the European Union and the United Nations in cooperation with India, China, Japan and Korea. The sanctions included not only a trade ban on oil but also financial measures such as freezing Iranian assets abroad and prohibiting transactions with Iranian banks. This post discusses the economic trends in Iran when the most onerous sanctions were imposed, which created the conditions for successful diplomacy.

Analysis published by the Peterson Institute for International Economics  suggests that economic sanctions are more likely to be successful when measures hit hard, when financial controls are a big part of the sanctions package, and when the package is enforced through international cooperation (Hufbauer et al. 2007). The Iranian case supports these lessons.

Deteriorating Economy

The impact of economic sanctions was most severe on Iran’s oil exports. Iran crude oil exports increased from $18 billion in 2001 to $81 billion in 2011 (see figure 1). However, in 2013 exports dropped to $38 billion, a decline of 54 percent. Similarly, Iran’s oil production gradually increased to 4.2 million barrels per day over a decade, but declined to 3.2 million barrels per day in 2013. The decline of oil exports was largely explained by US and EU economic sanctions. US Treasury Secretary Jacob Lew stated that economic sanctions have cost Iran over $160 billion in oil revenues since 2012. Because Europe is one of Iran’s largest trading partners, the EU’s energy embargo imposed in July 2012 severely hurt Iran’s oil exports: EU crude oil imports from Iran dramatically decreased from $21 billion in 2011 to $40 million in 2013.1

Figure 1 Iran's crude oil production and exports, 2001-14

Jung figure1

Note: Export data is based on HS 2709. Source: Oil export data from International Trade Centre; oil production data from US Energy Information Administration.

The sharp decline of oil earnings damaged Iran’s economy acutely in 2012 and 2013 (see table 1). According to World Bank statistics, Iran maintained average GDP growth of 5 percent up until 2011, measured in current dollars. In 2012 GDP plummeted by 7 percent and stayed negative in 2013. The Iranian rial collapsed by 51 percent in 2013, and inflation spiked by 35 percent. General government revenue, largely from oil, declined to 14 percent of GDP in 2012, compared to 26 percent in 2007.

Table 1 Iran's economic trends
  GDP (US$ billions) GDP growth (percent) Average exchange rate (rial per US dollar 2001=100) Inflation (CPI) Government revenue (percent of GDP)
2001 421 2 100 23 18
2002 129 8 394 27 21
2003 152 9 467 31 21
2004 181 4 491 36 22
2005 218 4 511 40 26
2006 258 6 523 45 26
2007 337 9 529 53 26
2008 391 1 538 66 23
2009 397 2 562 73 21
2010 464 7 585 82 22
2011 564 4 605 100 19
2012 583 -7 694 131 14
2013 380 -2 1,050 176 14
2014 416 4 1,479 203 15
2015 397 1 n.a. 234 14
CPI = Consumer Price Index; n.a. = not available
Source: IMF World Economic Outlook, October 2015, and World Bank's World Development Indicator database.

Sanctions Relief Under the JCPOA

Sanctions lifted under the JCPOA provided relief to Iran’s oil, banking, and shipping sectors. Resumption of trade with Europe and other partners will increase Iran’s oil revenue. The JCPOA will also allow the Iranian central bank and other entities to access $56 billion of assets currently frozen overseas, out of $115 billion total (see Katzman 2016). Strict US financial sanctions barring even non-US persons from financial and banking transactions with Iran will be lifted, but the ban on US citizens and entities carrying out such transactions remains. This relief will facilitate transactions with the Iranian central bank and designated individuals and entities, the transfer of Iranian funds, and the issuance of Iranian sovereign debt—all steps that will help Iran to reengage in global financial markets. The IMF estimates that sanction relief would boost Iran’s GDP growth to 4.4 percent in 2016 (see World Economic Outlook).

The JCPOA will facilitate sanctions relief related to Iran’s nuclear program, but the United States will continue sanctions related to terrorism, ballistic missiles development, and human rights. In those areas, US sanctions are much more extensive than those of other countries.

Note

1. Trade data from the International Trade Centre.

 

Comments

Aljaz Plevnik

Dear Jung
Imposing sanctions is not a propriete policy for dealing with a country. Firstly, sanctions always affected poor people most. Secondly, hardliners regain their power. And thirdly, regime starts cooperating more closely with other authoritarian regimes.
Sanctions only make the regime and his people more resilient. Because of the sanctions democracy and rule of law become a more distance ideal.

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