UNSHACKLING IRAN from Sanctions
Iran’s Strategy to Reduce the
Effects of Economic Sanctions Imposed by
In May 2018, President Trump abandoned the landmark Iran Nuclear Deal by saying, “The fact is, this was a horrible, one-sided deal that should have never, ever been made. It didn’t bring calm, it didn’t bring peace, and it never will. Trump’s supporters argued that Tehran had deceived international community and that it continued to destabilize the Middle East via its proxies in Lebanon, Syria, Yemen and other parts of the region. Then, in November 2018, the United States reinstated economic sanctions targeting both Iran and the countries that were trading with Iran. Washington wanted to apply maximum pressure on Iran to compel it to re-negotiate the deal but Tehran stood defiant. Other European parties to the deal like the UK, France and Germany opposed Trump’s stance and argued that Iran is complying with the deal. European countries also announced that they will establish a mechanism to protect their trading companies and trade with Iran. Despite opposition by other parties of JCPOA, the impact of the US economic sanctions against Iran has been substantial. The sanctions made Tehran more isolated and its economy was also badly affected. Its real GDP growth rate started dropping steeply.
Even before the sanctions were brought back, the Iranian economy, however, has been on decline. Amidst this precarious situation, Western firms and businesses started fleeing Iran so as to avoid jeopardizing their connections with US-led financial system and its huge market. On the other hand, some European and Asian countries continued to support Tehran, and refused to cooperate with the United States in this regard. Iran apparently intended to get rid of this sanctions regime with the hope that a post-Trump America will return to the deal.
Here, it is much significant to evaluate Iranian strategy to escape the geopolitical isolation that had hampered economic activities within and outside Iran.
First of all, rial was a major barrier for the Iranian economic activities in and beyond the country. Mostly, people avoided trade, business and other financial transactions in dollar. To overcome the worrying economic prospects, Iran decided to allow its trading partners to use their own currencies in bilateral trade and settle any imbalance at the end of a specific period. Iranian Foreign Minister Javad Zarif stated in New York on September 29, 2018, “Sell stuff in your own currency, buy stuff in other country’s currency and at the end of specific period, balance it out in non-dollar currency. It’s quite possible and may even be profitable.” Therefore, Tehran adopted the policy of offering incentives to its trade partners and those countries that were opponents of Washington’s policies, e.g. China and Russia.
China and Iran are big trade partners as Iran fulfils China’s oil needs, and China, in return, helps Iran with diplomatic, political, defence and economic means. Trading in Chinese yuan is an attractive opportunity for China to enhance bilateral trade and to promote its own currency. Likewise, Russia also faces US sanctions over the Ukraine issue and the use of chemical agents. Russia, too, is moving away from trading in US dollars. In the same vein, the president of European Commission Jean-Claude Juncker said that the EU may plan to increase the use of Euro to trade, particularly to buy oil and gas. For many months, European countries have been looking for an electronic money-transfer system that could not be blocked by the US treasury department. Moreover, the EU has been deliberating on having a Special Purpose Vehicle (SPV) to protect their economic freedom and to pursue legitimate business with Iran. Such system could possibly facilitate Iran for the payment of its foreign trade. In the past, during the multilateral sanctions, Iran had been managing oil exports of more than a million barrels a day. After the reinstatement of economic sanctions in 2018, Trump administration wanted to reduce Iranian oil exports to zero but Iran managed its oil exports at one million bpd. Due to Iranian incentive scheme, China, India, South Korea and European Union disliked US sanctions.
At that time, Iran followed a strategy of relying on front companies to do business with China, Iraq and UAE so as to lessen the effects of sanctions. The front companies are registered under obscure names. These companies buy goods and legally ship those to Afghanistan, Iraq and UAE and finally send those to Iran through water and land routes. Iran has been hiring such individuals and private companies owned by citizens of Iraq, Syria and UAE. As well as Iranian businessmen opened new companies with Chinese, Russian, Arab and other partners around the world. According to Wall Street Journal, Iran’s Islamic Revolutionary Guard Corps (IRGC) has opened 150 front companies in partnership with Georgian businessmen. For medicines, Foreign Investment Company of Iran, which has also made investments in Afghanistan, Oman, Brazil and Germany, facilitated the import of medicines into Iran. On the other hand, Iranian parliament considered legislation to increase imports of essential goods and to subsidize exports to mitigate the impact of sanctions. Although French and Indian companies are pulling out from the huge pledged investment projects, China has stepped in to earn benefits.
Another strategy of Iran has been of relying upon its neighbouring countries to circumvent sanctions. It has been, reportedly, purchasing dollars from Afghanistan, Iraq and Pakistan. Almost three million Iranians enter Iraq as religious pilgrims and visit Karbala and Najaf. A large number of essential goods are smuggled to Iran via UAE and Oman. But due to the US pressure, UAE and Oman cracked down and Iran turned towards Iraq. Due to incompetency of Iraqi authority, Iranians are allowed to bypass many rules and regulation because they have leverage in Shia groups and militias.
Similarly, Iranians use another tactic of couriers and porters. Iraqi Kurds bring money and food for their relatives in Iranian Kurdistan. It has become a profitable business for the Kurds on both sides of the Iran-Iraq border. In past, Afghan banks have been used to pay for the imports of Iran. Once the president of money exchangers union in Afghanistan had said that Iranian rials “come across in trucks,” then they are converted in to US dollars. From this practice, Afghan middlemen earned five to seven percent commission. The traders of both sides have multiple entry visas so that border police does not ask questions to them. Moreover, Eastern European countries like Belarus, Hungary and Romania, had been getting benefits during the previous sanctions but now they are unclear during the present sanction period.
The history of sanctions on Iran demonstrates that Iran has the ability to survive in difficult times like economic asphyxiation. They have a record to find a way to sell oil and also rely on their previous experience of sanctions. Although Iranians are forced to bear the brunt of economic sanctions, it may compound grievance of economic, political and social ailments. No doubt, sanctions have great effect on the social life and economic activities of Iran, but the country is working hard to maintain links with its trading partners. It is looking towards China, Russia and other eastern countries to forge new links to fill up the void left by lost Western investment. China’s role as the largest importer of Iranian oil may prove very critical in this regard.
The writer holds a PhD in Political Science.