Who is Paying the Ultimate Price?

Understanding the Direct and Collateral Effects of the International Sanctions on Iran

Iran and the p5+1 met this week in Vienna to resume negotiations, bringing forward the talks on a comprehensive nuclear agreement, which is to be reached by 20 July 2014. While the general attention focuses on the political leverage and the outcome, commentators tend to overlook the complex impacts of sanctions especially on the Iranian political establishment and its decision to take a more conciliatory approach.

The election of the moderate Hassan Rouhani as the President of the Islamic Republic of Iran in June 2013 and the negotiation of an interim nuclear deal in November have raised many positive expectations on the future of Iran’s relations with the West, after three decades of deadlock. To explain this shift, many argue that sanctions have finally achieved their goal, and that the incremental multilateral pressure since 2010, as led by the Obama Administration, has provided the final push.

I will try to provide an overview of some of the direct and indirect consequences of the sanctions imposed, with focus on the last four years, to try to understand how they have affected Iran in terms of the people and its economy.

Assessing the real costs of sanctions is a difficult and, often, misleading duty.

This stems from many factors that include: the complexity and continuous evolution of the sanction regime in itself, the constant adaptation of the Iranian economy to new restrictions, and finally the difficulty of separating the direct impact of sanctions from the damage caused by internal mismanagement, ineffective policies, and structural problems.

While the long list of US, EU, and UN sanctions imposed on Iran never intended to cause harm to ordinary Iranians and they do not directly ban the import of humanitarian goods, sanctions have been harming Iranian society at its very core.

According to the World Bank, Iranian GDP contracted by 1.5 per cent in 2013 and 2.9 per cent in 2012, the first such decrease in more than two decades. Sanctions have affected the whole economy, and heavy industry in particular has registered huge losses. Considering that the Iranian economy still heavily relies on its oil exports, the increasingly strong pressure on the energy sector has played a major role in this decline.

In fact, despite some exemptions, because of the comprehensive US and EU oil embargo of the summer of 2012, oil export revenues decreased by 60 per cent in less than one year, for a loss of about 1m barrels a day in September and October 2012, compared to the same period in 2011.

Additionally, many international firms have withdrawn their business and investments from the country while others are hesitant to do business with Iran, even in sectors not directly affected by the embargo. This has brought a loss of potential investments estimated at almost US$60bn, which has only partially been compensated by new trade opportunities coming from Asia and Western Europe.

According to the International Energy Agency, even if sanctions were lifted immediately, it is unlikely that the oil industry would fully recover its previous production rate by 2020. This is the legacy of a series of restrictive measures, as the US Iranian Sanction Act of 1996 and the Comprehensive Iran Sanctions Accountability and Divestment Act of 2010 that imposed penalties on all foreign companies willing to invest in Iranian oil and gas infrastructures.

 

Interestingly, the impact of sanctions on the Iranian financial sector is negatively affecting the population in many, unexpected ways.

The exclusion of Iran from the global financial system and Society for Worldwide Interbank Financial Telecommunication, has forced Iranian companies to use the old system of hawala (money transfer), causing any transaction to become longer and more expensive. As a result of this restriction, Iranians have difficult access to commodities and major services, including food and medical treatment.

The pharmaceutical industry is reported to be struggling to import essential raw materials. Imports of advanced medicines and devices from US and European drug manufacturers decreased by 30 per cent in 2012. This has reportedly had a negative impact on the treatment of patients, especially those suffering from rare and chronic diseases. Officials in the health sector estimate that the rise in mortality rate should also be attributed to the shortage of medical supplies.

Agricultural commodities have also been affected, and prices for basic staples, like bread, milk and rice, have risen dramatically. In November 2013, inflation was reported to be 38.7 per cent higher than 12 months earlier. According to the IMF, unemployment for 2014 is projected to be 14.7 per cent, which would be one of the highest among North Africa and Middle East countries. As a result, now 40 per cent of Iranian families live under the poverty line. Moreover, international sanctions and the effects of inflation continue to affect the delivery of humanitarian assistance by increasing the operational costs for UN agencies and other organisations.

This unstable financial situation has led, in turn, to a great demand for foreign currency on the black market. This suggests that the rial will further depreciate and it has already lost about 80 per cent of its value against the dollar between March 2012 and March 2013, according to the World Bank.

The ultimate effects of sanctions are often not directly visible, but looking more closely at data and economic trends, we realize how deep and dangerous their collateral effects can be.

For instance, as sanctions squeezed Iran‘s ability to import refined gas, the government started an indigenous production. According to World Health Organisation, also because of low petroleum standards, Iran’s air quality has worsened and Iranian Health Ministry officials are reporting a rise in respiratory problems, heart disease and cancers related to pollution.

Another not obvious effect of the restrictive measures has been the increasing unreliability of civilian aircraft. The US has imposed a ban on the import of aircraft and the purchase of spare parts from European companies has become extremely difficult. The consequence of using old aircraft may also have led to the increase of airplane crashes.

These are only a few examples of how deeply sanctions can harm not only the economy but also citizens and society. Restrictive measures can have effects that go far beyond the initial intentions, sometimes triggering structural problems that can take years or decades to be fully addressed. Unfortunately, these tragic effects are often overlooked or ignored.

While Western powers consider sanctions to be an important tool of conflict prevention and the main instrument of coercive diplomacy, they should reflect carefully on how they pursue their policy goals and think critically about the extensive collateral effects.

This commentary is part of a broader research project by the author, which will result (by May 31) in a Working Paper on the effectiveness of the sanctions regime imposed on Iran since 1980.

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