Story Of The Week

The Return of US Sanctions on Iran

 

“There is no instance of a nation benefitting from prolonged warfare”

– Sun Tzu

In August 2018, The United States of America re-imposed sanctions on Iran that it lifted two years ago under the Obama administration. What does this mean for the Iranian economy? What impact will this have on the bilateral and multilateral trade partners of Iran like India? Should the US remove sanctions on Iran on “humanitarian” goods?

What are Economic Sanctions?

Economic sanctions are defined as withdrawal of trade and financial relations with a country in lieu of foreign and security policy purposes. It is analogous to levieing a penalty on the target country by creating economic pressure on them. A Sanction can be issued unilaterally by one single nation or multilaterally by a group of countries.

In the case of Iran, it was in 1979 when the first sanction was imposed by the US as a response to the attack on the US embassy in Tehran. From 1981 the US expanded the sanctions against Iran. The US also tightened restrictions against companies that provided equipment and expertise to the Iranian chemical and oil industry.

Iran’s Nuclear Deal

The six major powers: US, UK, Germany, China, Russia, and France reached a landmark agreement with Iran in July 2015. This agreement, also stated as the Joint Comprehensive Plan of Action (JCPOA) ensured restrictions on Iran’s nuclear program in return for a waiver from nuclear-related sanctions that grew up around its economy for over a decade.

jcpoa

Source: armscontrol.org

The deal limited the Iranian nuclear program so that the nuclear capacity would not be utilized to produce weapons. Under this deal, Iran removed two-thirds of its centrifuges, shipped out most of its enriched uranium and filled their plutonium production reactor with cement. Iran also accepted monitoring by the International Atomic Energy Agency (IAEA) which would check if Iran has complied with its terms regularly.

The United States also stopped enforcing secondary sanctions that targeted the oil sector, which allowed Iran to ramp up its oil exports to nearly the level it had been prior to sanctions. However, some other US sanctions remained even after the JCPOA took effect. They covered matters such as ballistic missile production, support for terrorist groups and human rights abuses.

Trump withdraws from the JCPOA

On May 8, 2018, President Trump announced withdrawal from the JCPOA. According to Trump the JCPOA was a one-sided deal did nothing to curb Iran’s regional behavior in the middle east and its support for the militant groups in Lebanon and Gaza. Trump’s decision to withdraw from the deal jeopardized the agreement under which Iran dismantled much of its nuclear program.

Other member countries of the agreement want to keep the deal alive without the US, as the JCPOA is the most efficient way of curbing nuclear weapon development capacity in Iran.

What does this mean for Iran?

The IMF projected 4% growth this year for Iran before the US withdrew from the agreement. The deal motivated European industrial giants like Airbus, Siemens, Renault etc to sign a series of contracts worth billions of dollars. However, with the US withdrawing from the JCPOA most of these names no longer want to continue business as they cannot subject their companies to the risk of secondary US sanctions. As per Mr. John Bolton the National Security Adviser to the US: “Companies would rather do business in the United States than in Iran, European businesses are terminating their activities in Iran to a very considerable extent”

Capture

Source: bbc.com

Factors apart from the sanctions are also hampering Iran’s economy. Corruption, mismanagement, poor infrastructure are other factors acknowledged as barriers to the industry. Also, relatively low oil prices have reduced the revenues made from export, oil was trading for much of 2016–2017 at around half the price it had been five years earlier.

However, despite saying that it would likely to withdraw if the US did the same, Iran is abiding by the agreement in the hope that EU will uphold investments.

How are other countries like India impacted?

“Trade with Iran and you won’t trade with the US”. The American administration has urged countries to completely stop importing crude oil from Iran, defying which might lead to secondary sanctions.

India is the second largest importer of oil from Iran after China. India is heavily reliant on Iran for the import of crude oil, with imports increasing by 34.4% in the previous fiscal year. The Indian government already facing the heat due to falling rupee and high fuel prices do not want to halt imports, as Iran offers oil at a discount to India.

Capture1.PNG

Source: bloomberg.com

India lifted about 658,000 barrel of oil per day (bpd) from Iran between April and August. However, due to the sanctions, it is projected that for September and October the daily average will drop to 370,000 bpd.

India needs to balance its relationship with the US and Iran for the interests of the refiners and the end consumers. Thus, for India negotiating a waiver from these restrictions is necessary to protect its wider exposure to the US financial systems.

The US to remove sanctions on humanitarian goods?

The International Court of Justice has ordered the US to ease sanctions on Iran, the judges ruled that the US must remove any impediments to the export of humanitarian goods, including food, medicines, agriculture commodities and aviation safety equipment. The court also said that the US should take no further steps in aggravating the dispute, implying refraining from further financial and energy sanctions on Iran.

The rulings of the International Court of Justice are binding; however, the court has no power to enforce the ruling.

What’s next in this economic warfare

141125164236-iran-nuclear-talks-flag-missile-super-169

Source: news.stanford.edu

The US demands that Iran must satisfy various requirements for any possible negotiation, which includes getting out of Syria and cutting off funding for Hezbollah. Iran responded that due to America’s hostile policy towards Iran there is no room for any dialogue between the two countries. With the US withdrawing from the Nuclear Deal, the repercussions might tempt Iran to revisit its nuclear ambitions.

References:

https://www.cfr.org/backgrounder/impact-iran-nuclear-agreement

https://economictimes.indiatimes.com/news/defence/indias-decision-on-buying-oil-from-iran-defence-system-from-russia-not-helpful-us/articleshow/66179321.cms

https://www.washingtoninstitute.org/policy-analysis/view/irans-response-to-sanctions-ignore-them

https://www.wsj.com/articles/u-n-court-orders-u-s-to-lift-iran-sanctions-on-humanitarian-goods-1538570665

https://www.theguardian.com/world/2018/may/08/iran-nuclear-deal-what-is-it-why-does-trump-want-to-scrap-it

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