Can Iran Withstand the Sanctions Pressure?

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Can Iran Withstand the Sanctions Pressure?

Anwar Altaqi – Esam Aziz

Can Iran overcome the weight of U.S. sanctions? To answer this question, we will have to look at forecasts related to Chinese and Indian demand for oil. If the two countries continue to import discounted Iranian oil while others stop, the sanctions regime may gradually become ineffective. This is especially so given that, if oil prices rise in line with market expectations, Iran’s discounts on barrels of oil and freight costs will become increasingly attractive.

We are not disputing that the new round of U.S. sanctions will damage Iran’s economy. There is no doubt that there will be a certain degree of damage. What we are trying to asses is the magnitude of this damage, hence its value in achieving the goal of the sanctions — reducing Tehran’s aggressive intervention around the world.  

At a time when it is grappling with several domestic economic challenges, the Iranian government will have to be careful in dealing with further cuts to its revenue. Of course, having survived a series of U.S. and E.U. oil embargoes in the last four decades, Iranian leaders may decide to weather this latest storm with strategic patience. Tehran may feel it can manage these sanctions while continuing to comply with the conditions of the nuclear deal, allowing the sanctions to erode gradually. This is the essence of Tehran’s strategy. 

Tehran’s decision to respect its obligations according to the JCPOA nuclear deal signed with the P5+1 helped the Iranians mitigate the bite of sanctions. China, Russia, and many European countries seemingly aim to support this approach, creating financial incentives that maintain Iranian compliance with the JCPOA (even if most European countries and companies are likely to comply with U.S. sanctions). These incentives are designed to help Iran’s economy survive the sanctions, partly by mitigating the decline in Iranian oil exports. It is crucially important to not allow those incentives, created to keep Iran within the JCPOA, to help Iran come out of the sanctions worse than it is now.

Another important factor in this game of patience is the price of oil in the global market. The more prices increase, the more countries will try somehow to sneak around the sanctions regime.

But the main factor working against Tehran is the condition of its own economy. The Iranian economy currently appears vulnerable to the new sanctions: the Central Back of Iran has been forced to devalue the rial much faster in recent months than it did from 2012-2015. The aftershocks of the currency devaluation and rapid inflation may exacerbate the sporadic unrest across the country that began last January — mostly due to Iranians’ economic grievances.

It is not clear yet to what extent the sanctions will succeed in blocking Iran’s oil exports. But if they do, Tehran may get more aggressive. Iranian leaders, including President Hassan Rouhani, have suggested that Iran will disrupt oil shipments from neighboring countries, targeting the Strait of Hormuz and/or Bab-el-Mandeb. Iran could also engage in cyber sabotage or attacks in the Middle East intended to create panic among oil traders, driving up global oil prices. Such operations would create widespread chaos and perhaps lead to the formation of a global political and military alliance against Iran.

In Washington, two scenarios were debated at length: tighten the sanctions as much as possible in the first phase of implementation, or leave them deliberately loose with the hope that they further weaken Iran’s economy. Each scenario has its own logic and appeal as well as shortcomings. In any case, the debate ended with adopting the first scenario, and now the United Staes is going as tough as possible on Tehran.

The Pentagon is not currently looking at plans to engage Iran militarily. In fact, it is systematically sending a message that there will be no war. This is obviously a positive position. Yet, if Tehran decides to disrupt oil production or export routes in the region, it should be prepared for war. This leaves Tehran with less traditional options, like cyber-attacks and terrorism. 

In this case, Iran’s military power would be hit hard by the United States. No one expects a different result for a military confrontation other than the collapse of Iran’s military. It would be impossible for Tehran to win a conventional military conflict, which no one in the world is seeking now. 

A gradual tightening of the sanctions could have given everyone, including the regime’s opponents inside Iran, ample time to build a sustainable movement against the regime. It could have also deepened the economic impact of the sanctions, encouraging the hotheads in the Islamic Revolutionary Guard Corps (IRGC) to commit blunders and spread cracks within the regime’s elite. 

Furthermore, one of the main parties that will benefit from tighter sanctions will certainly be the IRGC, a mafia-like organization that grows when markets tighten. As we mentioned in a previous Bulletin issue, Tehran will allow the sale and export of its crude in the stock exchange — i.e. to private persons or entities. This is a part of an effort to soften the bite of sanctions. Up to one million barrels per day will be devoted for sale through the exchange in a significant loosening of the end-to-end state control of Iran’s oil exports.

In other words, the effectiveness of Iran’s arsenal of tactics designed to mitigate the effect of sanctions is not yet clear. What is clear, however, is that the IRGC will thrive under the sanctions regime. This should not worry sanction supporters. If the popular base of the regime erodes under the weight of sanctions, and popular discontent paves the road to more opposition movements, the IRGC will be hanging up to dry.