Iran's Economy, the Impact of the Nuclear Deal, and Sanctions

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Iran's gross domestic product was $1.63 trillion in 2018 according to the International Monetary Fund. Its economy shrank by 3.5%.

Iran's economy had received a boost when the United States lifted sanctions in 2015. In February 2016, Iran began shipping oil to Europe for the first time in three years. It exported 4 million barrels to France, Spain, and Russia. Oil makes up 80% of Iran's exports. Its primary export markets are China, India, South Korea, Turkey, and Japan

But on May 8, 2018, President Donald Trump announced the United States would withdraw from the 2015 nuclear deal and reimpose sanctions. That severely hurt Iran's economy.

Iran has the world's fourth-largest oil reserves. But sanctions prevented it from capitalizing on that resource. As a result, Iran is only the world's seventh-largest oil producer, pumping 4.5 million barrels per day. In 2018, it exported 1.9 million barrels per day. Without sanctions, Iran had hoped to double that amount once it built up the necessary infrastructure. With the reinstatement of sanctions, exports are projected to plummet to 945,000 barrels per day.

In 2018, Iran's unemployment rate rose to 13.8%. Sanctions have caused its currency, the rial, to plummet. That's caused its inflation rate to skyrocket to 55% in 2018.

In 2018, Iran's GDP per capita was $20,069. That makes its standard of living higher than Mexico but lower than Russia. In 2017, 18.7% of its population lived in poverty, according to the CIA World Factbook.

Iran has a command economy. The government owns 60% of the economy through its state-controlled enterprises. 

But the economy had somewhat of a cushion.  High oil prices from 2008 to 2014 allowed Iran to amass $128 billion in foreign exchange reserves. Since that height in 2015, reserves have fallen to $108 billion by 2018.

2018 Sanctions

Trump imposed sanctions because he said Iran violated the nuclear deal. It wasn't making the following agreed-upon changes

  • More diligent inspections.
  • Make sunset clauses permanent. The deal allowed Iran to produce nuclear fuel after 2030.
  • Include Iran's ballistic missile program.
  • Remove any presence or influence in Lebanon.
  • Stop funding the Iranian Revolutionary Guard Corps, Hezbollah, and other terrorist groups. In 2016, Iran expanded its influence in Iraq and Syria. It increased cyberattacks in the West and Saudi Arabia.

Some experts say there is an underlying motive behind the sanctions. The Trump administration, Saudi Arabia, and Israel want to end the Iranian clerical regime. Saudi Arabia and Iran have long been on opposite sides of the Sunni-Shiite split.  

On May 10, 2018, the U.S. Treasury Department imposed new sanctions. It targeted Iranians it said were operating an illegal currency-exchange network in the United Arab Emirates. It also accused the Iranian central bank of helping funnel U.S. dollars to blacklisted military units. 

As a result, global oil prices rose to $80 a barrel. Investors believed Iran's oil supply will dwindle once sanctions are reimposed. The Hong Kong and Shanghai Banking Corporation said Trump's decision to reimpose trade sanctions on Iran raised the price of oil by $10 per barrel.

On August 6, 2018, the administration says it expected Iran’s oil buyers to begin winding down their oil purchases. Oil companies had until November 4 to cut 1 million barrels per day. But China, India, and many European countries won't cut their imports. The European Union pledged to create a payment channel to allow its companies to continue trading with Iran.

On November 2, the administration granted waivers to eight countries that had cut back on Iranian oil imports. They included South Korea, India, Japan, and China. It did not grant a waiver to the EU.

The United States also prohibited the sale of U.S. currency to Iran’s government and the purchase of Iran's sovereign debt. It sanctioned Iran's automotive sector and trade in gold and precious metals.

In May 2019, Iran announced it would suspend some of its commitments made under the deal. These include stockpiling uranium and heavy water.

In July 2019, Iran announced it would enrich uranium beyond the limits set in the nuclear deal. In June, Trump almost announced a military strike on Iran after the country shot down a U.S. drone.

2015 Nuclear Deal

On July 14, 2015, the United States, the EU, Russia, China, and Iran signed the Joint Commission Plan of Action. Iran agreed to limit its nuclear development program in return for the end of economic sanctions. The arms embargo would remain in place until 2020.

Specifically, Iran agreed to reduce its 12,000-kilogram stockpile of enriched uranium to 300 kilograms. It agreed to remove about two-thirds or 10,000 centrifuges that produce uranium. It would eliminate the core of the Arak plutonium reactor. Iran agreed to neither produce nor acquire highly enriched uranium or weapons-grade plutonium.  The U.N.'s International Atomic Energy Agency inspectors must have daily access to Iran's entire nuclear production supply chain. 

The agreement guaranteed that, for 10 years, Iran would be at least a year away from producing a nuclear weapon. That is much longer than its "breakout time" of two to three months before the agreement. According to the New York Times, the deal succeeded in getting 97% of Iran's nuclear material out of the country.

The agreement reduced Iran's ability to create a nuclear bomb. Despite the sanctions, Iran had increased its number of centrifuges from 164 to thousands. It had also accumulated enough fissile material for 10 to 12 nuclear bombs. Iran promised to reduce its centrifuges and the amount of bomb-grade nuclear material, making it less likely that it will create a weapon.

The agreement did not remove many other problems with Iran's behavior. These include its support of terrorism, its refusal to turn over four American hostages, its ballistic missiles, and its human rights violations. 

Critics in the U.S. Congress, Israel, and Saudi Arabia warned that the agreement allowed Iran to build nuclear weapons after the 10-year moratorium. Removing sanctions gave Iran more economic power to fund terrorist organizations in Syria, Lebanon, and Yemen. 

Some Iranians believe the deal conferred legitimacy on a regime that was losing popular support anyway. In 2017, Hassan Rouhani was elected to a second term as president. Voters liked his policies of economic reform, moderation, and more engagement with the West. His goal was to take a leadership role in the developing world. To prove his point, he bragged that his cabinet has more American Ph.D. graduates than President Obama’s did. 

In December 2015, the United States lifted trade sanctions. The U.N.'s Atomic Energy Agency found no evidence that Iran was producing nuclear weapons. It ended its 10-year-long investigation. As a result, Iran expected to receive a windfall of $13 billion. That equated to a 2.8% increase in per capita income.

2006 Sanctions

In 2006, the United States asked the United Nations Security Council to impose sanctions on Iran if it didn’t agree to suspend uranium enrichment. It said Iran violated its compliance with the Nuclear Non-Proliferation Treaty. Iran insisted it was producing nuclear power for peaceful purposes, within its rights under the Treaty.

Iran ignored repeated Security Council Resolutions. It believed that sanctions would never be approved by its allies in the Council, Russia, and China. It also thought France and the U.K. wouldn't want to interrupt their oil imports. Iran was wrong.

Between 2006 and 2010, the United Nations imposed four rounds of economic sanctions on Iran. The sanctions restricted financial transactions, imposed asset freezes and travel bans on Iranians, and banned arms sales. 

The United States also imposed sanctions on companies doing business with Iran. It also banned Iranian imports and froze all its central bank properties in the United States. 

These trade sanctions created a recession. They caused Iran's economy to contract 6.6% in 2012. It only grew 1.9% in 2013 and 1.5% in 2014.

1979 Sanctions

The United States first imposed sanctions on Iran on November 14, 1979. President Jimmy Carter responded to the November 4, 1979 hostage crisis. Iranian students took 66 Americans hostage at the U.S. Embassy in Tehran. Carter froze all Iranian assets that were under the jurisdiction of the United States.

In January 1984, the United States imposed additional sanctions in response to the bombing of the U.S. Marine base in Beirut. It had been carried out by Iran's client, Hezbollah. The United States designated Iran as a state sponsor of terrorism. The designation remains in place. It triggers restrictions on U.S. foreign assistance, a ban on arms transfers, and export controls for dual-use items.

Iran's Role in the Middle East

Iran supports disruption in Iraq, Syria, and anywhere else its fellow Shiites are fighting Sunni Muslims. Between 1980 and 1988, Iran fought a war with Iraq that led to clashes between the U.S. Navy and Iranian military forces between 1987 and 1988. The United States designated Iran as a state sponsor of terrorism for its activities in Lebanon. 

Iran-Contra Scandal

Through much of the 1980s, the United States financed the Nicaraguan “contras” rebellion against the Sandinista government by secretly selling arms to Iran. This led to the Iran-Contra Scandal in 1986, which implicated members of the Reagan administration in illegal activities.

From October 1984 to October 1986, the United States assisted the military activities of the Nicaraguan contra rebels during the prohibition on such aid. It financed this by selling U.S. arms to Iran in contravention of stated U.S. policy. That was also possibly in violation of arms-export controls.

In late November 1986, Reagan administration officials announced that some of the proceeds from the sale of U.S. arms to Iran were used to fund the Contras. The Iran/Contra Report of Independent Counsel found that some of Reagan’s advisers and Cabinet members sitting on the National Security Council were involved. They set up Oliver North and other National Security Agency employees as scapegoats to protect the Reagan administration. The report added that much of the best evidence of the cover-up was made in the last year of the Counsel’s investigation, too late for most prosecutions.