Iran's Economy: Impact of Nuclear Deal and Sanctions

How the Iran Nuclear Deal Affects You

Woman in black chador in mosque in Shiraz, Iran. Photo: Chekyong/Getty Images

Iran's economy 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. Four million barrels were shipped to France, Spain, and Russia. (Source: "Iran's Crude Oil Starts Shipping to Europe," The Wall Street Journal, February 16, 2016.)

But that boost is being threatened. On October 13, 2017, the Trump administration announced it won't certify that Iran is complying with the nuclear deal.

That action gives Congress 60 days to decide whether to impose sanctions. The administration is opposed to sanctions, which could motivate Iran to restart its nuclear program. Instead, it will use the threat of sanctions get Iran to stop funding the Iranian Revolutionary Guard Corps, Hezbollah, and other terrorist groups. 

Economy Facts

Iran's gross domestic product was $1.455 trillion in 2016. That's the 19th largest in the world. Its economy grew 6.5 percent in 2016 thanks to the Iran nuclear deal. 

Iran is the world's sixth-largest oil producer, pumping three million barrels per day. It exports nearly half of that or 1.2 million barrels per day. It expected to double that amount after the nuclear deal lifted sanctions. Oil makes up 80 percent of Iran's exports. Its primary export markets are China, Turkey, India, Japan and South Korea.  (Source: "Iran Wants to Double Oil Exports," The Wall Street Journal July 7, 2015.)

Low oil prices cause further economic difficulties. Iran has 10.7 percent unemployment and 8.9 percent inflation. But the economy had somewhat of a cushion.  High oil prices from 2008-2014 allowed Iran to amass $135.5 billion in foreign exchange reserves.

Iran's GDP per capita was $18,100 per person in 2016.

That makes its standard of living higher than China but lower than Mexico. But 18.7 percent of the population lives in poverty, according to the CIA World Factbook.

Iran has a command economy. That's because the government owns 60 percent of the economy through its state-controlled enterprises. (Source: "With Sanctions Lifting, What's in Store for Iran's Economy?" Wharton School of Business, October 27, 2015.)

Nuclear Deal

On July 14, 2015, the United States, the European Union, Russia, China, and Iran signed a historic agreement. Iran agreed to limit its nuclear development program in return for the end of economic sanctions imposed by the United Nations in 2010. The arms embargo will remain in place for five years.

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

The agreement guarantees that, for 10 years, Iran would be a year away from producing a nuclear weapon.

That is much longer than its "breakout time" of two to three months before the agreement.

Sanctions

The UN lifted trade sanctions in December 2015. The UN's Atomic Energy Agency found no evidence that Iran was producing nuclear weapons. It ended its ten-year-long investigation. Iran will receive a windfall of $13 billion once the sanctions are eliminated. That equates to a 2.8 percent increase in per capita income.(Source: U.S. Set to Lift Sanctions on Iran," The Wall Street Journal, December 3, 2015.)

These trade sanctions created a recession. They caused Iran's economy to contract 6.6 percent in 2012, and 1.9 percent in 2013.  Its gross domestic product grew just 1.5 percent in 2014. (Source: "Iran's Peace Dividend," Global Finance, October 2015. "Parties in Iran Nuclear Deal to Meet," The Wall Street Journal, September 28, 2015.

 "GOP Leaders: Any Nuclear Deal With Iran Will Face Deep Opposition in Congress," The Wall Street Journal, July 12, 2015)

Pros and Cons

The agreement reduces 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 ten to twelve 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 bomb.

The agreement does 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. But it does make it easier to address those issues, knowing Iran is not a nuclear power. (Source: "Press Release on Nuclear Agreement," U.S. State Department, July 14, 2015.)

Critics in the U.S. Congress, Israel, and Saudi Arabia warned that the agreement allows Iran to build nuclear weapons after the ten-year moratorium. Removing sanctions gives Iran more economic power to fund terrorist organizations in Syria, Lebanon, and Yemen. (Source: "Iran, World Powers Reach Nuclear Deal," The Wall Street Journal July 14, 2015.)

Why Was a Deal Negotiated?

In 2017, Hassan Rouhani was elected to a second term as president. Voters like his policies of economic reform, moderation, and more engagement with the West. His goal is to take a leadership role in the developing world.  To prove his point, he brags that his cabinet has more American Ph.D. graduates than President Obama’s did. (Source: "Nuclear Deal Could Unleash Iran's Economy," Al Jazeera, April 27, 2015.)

The United States imposed sanctions on Iran in 1979 after it seized the U.S. Embassy in Tehran. The UN imposed crippling sanctions in 2010 to convince Iran it must fulfill its nonproliferation obligations under the Nuclear Non-Proliferation Treaty. Iran insists it is producing nuclear power for peaceful purposes, within its rights under the Treaty. (Source: "Iran Sanctions," U.S. Department of State.)

In 2006, the U.S. asked the United Nations Security Council to impose sanctions on Iran if it didn’t agree to suspend uranium enrichment. 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 UK wouldn't want to interrupt their oil imports.  Iran was wrong.

In 2007, Iran announced it would use euros for all foreign transactions, including oil. Iran also converted all dollar-denominated assets held in foreign countries to the euro.

Iran's Role in the Middle East

Iran supports disruption in Iraq, Syria, and anywhere else its fellow Shiites are fighting Sunni Muslims. Between 1980-88, 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, leading to the Iran-Contra Scandal in 1986 which implicated members of the Reagan administration in illegal activities.

The U.S. assisted the military activities of the Nicaraguan contra rebels during the prohibition on such aid (October 1984 to October 1986). 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 most senior advisers and some Cabinet members sitting on the National Security Council set up Oliver North and several other NSA employees as scapegoats to protect the Reagan administration in its final two years. 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.