Time to try something which works: the European Union policy on Iran

They do not work because the Iranian economy is resilient. According to Iran customs, the non-oil exports of Iran have reached 34.39 billion $ in 2012 which indicates an increase of 8.3 % in value compared to 2011 (and an increase of 52 % compared to 2010). So, even if oil exports have decreased by around 50 % in 2012, the trade balance of Iran has registered a surplus due to this surge of non-oil exports. Besides, this fact reflects the false claims that “Iran is being isolated from the rest of the world”. Indeed, a large part of these exports have reached regional markets like Iraq (the first market with 6 billion $ exports), Afghanistan, Central Asia, etc. From a geographic point of view, Iran is at the center of the Middle East – Central Asian markets. Some countries like Azerbaijan are completely land-locked and need to trade with Iran to have access to the external world. Moreover, the “cultural” environment of these markets is similar to Iran, which gives comparative advantages to Iranian companies. Moreover, the fall of the Iranian currency, the rial, against the dollar during the last two years (the dollar which was exchanged for 10 000 rials on the “free” market in 2010, has appreciated to around 30 000 rials at the beginning of 2013) has increased the competitiveness of Iranian products abroad. If a large part of these exports are from the petrochemical industry, the manufacturing industry accounts for 34 % of these exports. The Iranian private sector (which accounts for around 15 % of GDP) has demonstrated great abilities to survive through difficult times since the revolution. Besides, there has been an evolution of Iranian entrepreneurs thinking about Iran neighboring markets. 30 years ago, Iranian companies wanted to export in Europe, in Japan or in the US. Nowadays, a more pragmatic view concerning the most accessible markets has emerged. Last but not least, there is a national sense of urgency which is supporting Iranian non-oil exports. With the present decrease of foreign exchange oil revenues, non-oil exports are a vital strategy for the Iranian economy. The Iranian government has taken several measures to support the private sector competitiveness (1). These non-oil exports in regional markets give the ability to Iranian companies to go around the financial sanctions by using local banks, getting paid in cash or using local accounts to pay for imports. The common view among Iranian economists and officials is that there is a huge potential for future increases in non-oil exports in regional and other markets (Africa, South America).

The Iranian population is directly affected by the financial sanctions. The huge depreciation of the rial has partly led to an acceleration of inflation which reached officially 35 % in October 2012. Unemployment has increased and could be closed to at least 15 %. Inflation is not a new phenomenon for the Iranian society. Like in other countries like Turkey in the 80s and the 90s, the Iranian society has developed some social mechanisms to cope with high inflation. A lot of Iranians are speculating on consumer durables (cars, fridges, etc.), gold, dollars, and carpets to maintain their wealth. Iranians are using centuries old institutions like the saqâfi (money changers) to send money in or out of Iran. Family solidarity or religious networks are also helping to alleviate some of the social costs due to job losses.

The administration has also showed an ability to react rationally in front of these sanctions. The policies of decreasing energy subsidies in 2010 was designed to decrease the cost of a western embargo on gasoline imports. The execution of this policy of diminishing subsidies was a huge challenge for a country like Iran. Despite all its imperfections, this policy led to a decrease of energy consumption in Iran and a halt in gasoline imports. Another example of the ability of the administration to design the appropriate policies has been the implementation of a policy of foreign currencies rationing since the end of 2012 (it provides the importers of “essential goods” with dollars at a subsidized rate). This policy has maintained the flow of these “essential” imports (rice, steel, rice, etc.). According to Iranian customs, imports even increased in volume by 10 % in 2012.

Smuggling which could represent a third of Iranian official imports is also playing its part in the “resistance” of the Iranian economy. All reports are indicating an increasing reliance on smuggling networks in Iran (2).

The myth of societal protests in Iran against the nuclear program. This policy of sanctions has been designed with the hope that some social groups in Iran will bear such an economic cost that they will start lobbying for a change in Iranian nuclear policy. A recent report by the NIAC just shows that this is not happening: there is no alternative narrative to the official discourse on the nuclear issue in Iran (3). Besides, the authorities can blame these sanctions for the dire state of the economy. And why would Iranian businessmen contest this discourse because it what they are experiencing. If a European bank refuses to finance the exports of stones from an Iranian company because it is using a shipping company placed on the US blacklist (due to its participation in the nuclear program), why should this company blame its own government? They know exactly where the sanctions are coming from. And to think that these businessmen are going to lobby for change of course on the Iranian nuclear policy is to demonstrate a complete misunderstanding of the internal situation. The Iranian government has just started recently during the last 3 years to cooperate with the private sector in designing economic policies (subsidies, fiscal issues, international trade, exchange rates, etc.). It is not realistic to consider that these business groups will just address the nuclear issue with the authorities … More important, the nuclear issue has nationalistic, strategic dimensions. It concerns Iran status in the world, in the region, Iran relations with the west. It will be really difficult to find a lot of Iranian businessmen advocating for a complete rethink of Iran official policy on the nuclear issue …

The sanctions are weakening the civil society. The economic sanctions are relatively reinforcing the networks closed to the regime because they are controlling most of the smuggling routes. The companies belonging to the Pasdarans and the Foundations have their own banks and are then less affected than the private sector by the present economic difficulties. These sanctions by making it harder to study, to travel (with the ban by western companies on refueling Iran air planes), and creating economic misery for the Iranian middle-class are a huge strategic mistake for the West as the emergence of secular and modern middle-class in Iran should have important long term consequences (and could be a decisive factor in the case of the nuclear issue). In the internal political scene, these sanctions are obviously reinforcing the most radical political movements.

In conclusion, the usual answer to the argument about the inefficiency of sanctions is … “Not yet, but it will work in the future if there are more sanctions …” (‘I have said how much we want the sanctions to be beefed up, which are already efficient,’ François Hollande, 8 March 2013). What is the evidence which is supporting such thinking? This article just proves that despite economic difficulties, the Iranian economy is resisting and even is moving away from its oil dependency. Besides, there is absolutely no sign that the Iranian social groups affected by the sanctions are asking their government for a change of course on the nuclear issue. And, the mostly secular Iranian middle-class is bearing a large cost due to these sanctions. It is maybe the time for the European Union to craft a strategy which would be only concerned by the Iranian nuclear issue but would include other political, societal and economic considerations. The modernization and secularization of the Iranian society makes Iran a zone of stability in the region in front of Sunni extremist movements. This geopolitical fact should be at the core of a new European Union policy on Iran.

(1) Khajehpour. K., Marashi, R., Parsi, T. American Council, «Never give in and never give up, The Impact of Sanctions on Tehran’s nuclear Calculations», National Iranian American Council, March 2013, p. 19.
(2) Crisis Group, “Spider Web: The Making and Unmaking of Iran Sanctions”, Middle East Report N°138, 25 February 2013.
(3) Khajehpour. K., Marashi, R., Parsi, T. American Council, «Never give in and never give up, The Impact of Sanctions on Tehran’s nuclear Calculations », National Iranian American Council, March 2013.