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Economy

Increased American Sanctions and Iran’s Effective Response

Dec 03 , 2018
  • Wang Zezhuang

    Director, Center of Western Asian and North African Studies, Anhui University

President Donald Trump’s foray into Middle East affairs started with overthrowing the Joint Comprehensive Plan of Action (JCPOA) with Iran concluded during his predecessor Barack Obama’s term, and climaxed with the imposition of ‘ultimate sanctions’ over the Iranian energy, ship-building, transport, and finance sectors on 5 November. The Trump administration has now employed everything short of military means to contain and blockade Iran for the ultimate goal of regime change. Admittedly the protracted sanctions have produced a profound impact on the Iranian economy and people’s livelihood, and Trump has crowed about how ‘destructive’ they are for Iran. But I have seen with my own eyes that the Iranian government and society has not collapsed and Iran has become more and more experienced and effective in dealing with protracted American sanctions.

From Supreme Leader Ayatollah Ali Khamenei to lower levels of the Iranian government and even ordinary people, the whole country is familiar with the ‘hostile’ attitude and position of the US since 1979 and thus psychosocially well prepared to tide over the difficulties together. Ever since Trump’s vow during the campaign to withdraw the US from the Joint Comprehensive Plan of Action (JCPOA), Iran has never relaxed its vigilance in dealing with escalating American sanctions.

Economically, Iran readjusted its financial regulation by cracking down on underground foreign exchange transactions and attracting foreign exchange deposits with high interests. Import controls are imposed: the import of most consumer goods, farm produce, and sideline products is prohibited to prevent foreign exchange drains. Reserve gold is sold and high-yield treasury bonds and other financial products are issued. A single-exchange rate system was set up and secondary foreign exchange market created to stabilize the Iranian Rial and the domestic economy. Iran has also signed a series of currency swap agreements with neighboring countries like India, Turkey, Iraq, Afghanistan, and Syria to circumvent the America-controlled traditional international currency settlement system. On the other hand, Khamenei’s ‘economy of resistance’ policy in 2014 has been well implemented by the Rouhani government. More recently, the Iranian tax authority proposed to lower the corporate tax rate to 20% for companies to reduce production costs, promote economic growth, and development of non-petroleum and private sectors.

The Iranian government has opened the oil industry, the most important pillar of the Iranian economy to the whole society by way of stock offerings. The change to the traditional state ownership of the whole oil value chain may stimulate private capital to market Iranian oil to wherever it is wanted in the world.

In terms of social policy, given the sharp depreciation of the Iranian currency and increasing cost of living, the Iranian government is introducing a scheme to provide financial support for 20 million low-income people and an additional subsidy for the poorest 11 million. Rice, bread, and meat are procured and distributed to stabilize Iranian society.

In the political and security field, the Rouhani government reshuffled the cabinet in the latter half of 2018 to deal with upcoming sanctions, which was supported by Khamenei and the parliament. On 5 November when sanctions went into effect, the Iranian military conducted large-scale military exercises to enhance its air defense and anti-missile capabilities and the alert level of its forces.

Diplomatically, Iran has become more active. It has taken full use of the moral high ground gained in honest implementation of the JCPOA and the differences between the US and other world powers. As the US closed the SWIFT network to Iran, the EU proposed creating a special purpose vehicle in its place to go around American sanctions. Reportedly, agreement has been reached with Moscow to transport Iranian oil to Russia through Caspian Sea pipelines for the latter to refine and sell on the international market to secure oil revenue for Iran. China is also attempting a new financial transaction system for direct settlement between Renminbi and Rial.

This round of US sanctions involves diversified extreme measures but has produced a limited effect on the whole. Probably for this reason, while imposing the ‘ultimate sanctions’, the US published an exemption list (covering the Chinese mainland, India, Greece, Japan, Turkey, Chinese Taiwan, Italy, and Republic of Korea). In my view, the move indicated the recognition on the part of the American government that the desire for zero oil transactions for Iran could not be realized. It also represented a diplomatic gesture and a friendly signal to the eight on the exemption list, temporarily winning some good international opinion before next steps are taken against Iran. As these American routines are not strange for Tehran at all, it is quite expected that Iran will take more effective measures in response to any further escalation by the US.

 

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