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Jerusalem Center for Public Affairs
Strategic Alliances for a Secure, Connected, and Prosperous Region

The Iranian Economic Situation Continues to Worsen as U.S. Sanctions Loom

Filed under: Iran, U.S. Policy

The Iranian Economic Situation Continues to Worsen as U.S. Sanctions Loom
Sanctions are coming
An image from President Donald Trumps’ Twitter account, emulating a popular TV series, announced the forthcoming Iran sanctions.

Prior to the imposition of U.S. sanctions on Iran’s oil industry, the leaders of the regime in Tehran are making a broad PR effort – at home and abroad – to diminish the importance of these measures and emphasize that Iran managed in the past and will still be able to deal with them in the future. Iran is also trying to drive a wedge between the United States and the other partners in the nuclear deal.

On October 30, 2018, Iranian Foreign Minister Muhammad Javad Zarif announced that U.S. sanctions on his country would have serious effects upon the current world order. Previously, senior Iranian officials, led by President Hassan Rouhani, warned that if Iran cannot export oil once U.S. sanctions are restored, then no other country can do so either.

Nevertheless, several days before the appointed date for the restoration of the sanctions on Iran, President Rouhani and his first vice president, Eshaq Jahangiri, have repeatedly stressed that Iran has around $100 billion in reserves and stores of basic products “that are fuller than ever before,” and they are sure that the United States will fail in its attempt to totally prevent the export of oil from Iran.

In the meantime, dozens more international companies and banks are gradually ending their partnerships with Iran, and this is already taking its toll on the Iranian economy (see below). In July 2018, the Jerusalem Center for Public Affairs published a comprehensive research document on the companies and banks that have already stopped working with Iran1 after the first round of U.S. sanctions against Tehran. The imminent approach of the date of the imposition of a harsher, more serious round of sanctions is speeding up the process and chasing more companies and banks away. These enterprises are quickly halting all cooperation with Iran.

The Value of the Rial Is Expected to Fall Again, Dragging the Economic Situation Down with it

The rate of the Iranian rial is set to crash again with the resumption of U.S. sanctions, in spite of dozens of new plans that have been put into action by the central bank and the regime’s general financial system. Toward the end of September 2018, the Iranian rial hit an historic low (one U.S. dollar traded at the rate of 200,000 rials, five times more than the official rate, 20 times more compared to nine years ago, and 3,000 times more than in 1979, when the Islamic regime first came into power in Iran). However, Abdul Nasser Hamati, new governor of the central bank, and all the other government powers did whatever they could to prevent the continued fall of the rial. Though they managed to achieve a certain level of stability in its exchange rate for the dollar in October 2018, which was 140,000 rials to the U.S. dollar, as the date for the resumption of harsh U.S. sanctions approaches, the rate of the rial has begun to depreciate again. On the eve of sanctions (November 1), one U.S. dollar was exchanged for 152,000 rials.2 This additional drop in the value of the rial began in spite of an announcement by Tehran prosecutor Abbas Jafari Dolatabadi on October 23, 2018, that the Central Bank would pump $18.5 billion into the markets over the next six months to stabilize the rate of the rial.

As well as the expected fall in the value of the Iranian rial, a further rise in the prices of basic goods and essential services for Iranian citizens is also anticipated. To date, despite the rise in prices, the wages of millions of teachers and government clerks have not increased, and not even the security forces have received a pay raise yet. Iranian society is already suffering many hardships, and over the past few months it has witnessed demonstrations, strikes, and protests in many sectors as a result of the harsh economic situation. Ahmad Meydari, Iran’s deputy minister for employment and welfare, announced that between 18 and 35 percent of the Iranian people live under the poverty line. Until recently, between 14 to 18 percent of Iranians were considered to be living under the poverty line. According to Meydari, this worrying figure may increase because, he believes, there is no sign of economic improvement on the horizon.

Truck drivers’ strike
Truck drivers’ strike in Iran, November 2, 2018, the “fourth round of strikes by heavy truck drivers” this year, according to Iranian opposition.

The president of the Statistical Center of Iran announced that inflation in the seventh month of the Persian calendar (which ended on October 23, 2018) reached a rate of 32.8 percent. At the same time, the costs of basic needs such as meat, fruit, and vegetables rose by at least 47 percent during that month. Many Iranian families sent videos to the television channels of the Iranian opposition abroad showing their empty refrigerators and that they had to manage with basic foods such as eggs. These families pointed out that the real rate of inflation was much higher than the official figures. President Hassan Rouhani confirmed at the end of October 2018 that there was a serious deterioration in the situation of families with a fixed income as the prices of products and services in Iran were rising in conjunction with the crazy increases in the rates of foreign currency against the Iranian rial.

The Iranian regime attaches little importance to the demonstrations mentioned above and has not held talks or had any contact with the representatives of the demonstrators and strikers. Furthermore, it continues to arrest the representatives and participants in the demonstrations and threatens them in various ways. Iran’s leaders even claim that the demonstrators are working on behalf of elements interested in shaking the Iranian regime and are essentially harming what they call “the national effort” to deal with the sanctions.

The regime’s harsh response to the demonstrators has led to frustration by many of the participants of the demonstrations, strikes, and protests, and the number of inmates incarcerated in the prisons has grown. At the same time as this domestic repression, Tehran has decided to try to take actions against the opponents of the regime abroad. Recently, Iran’s involvement in assassination attempts on opponents to its regime in France and Denmark was discovered. This discovery underscores Iran’s involvement in terror and the truth of the U.S. claim that in any agreement, Iran’s involvement in terror in the Middle East and Europe must be taken into account.

It seems that the mass demonstrations may break out again in the near term following the imposition of sanctions on the oil industry. In several major Iranian cities, demonstrations against the severity of the economic situation are still taking place. Truck drivers held another month of protests and strikes, but as a result of their serious family situations they were compelled to break their strike and go back to work. Tens of thousands of teachers went on strike for several days and did not appear in their classrooms. The regime arrested the leaders of the protest and even incarcerated Hashem Khastar, one of the most prominent activists of the teachers’ union, in a psychiatric hospital to make him appear to be insane. Thousands of pensioners from the banks throughout Iran arrived in Tehran at the end of October 2018, to protest against their low pension as the country’s economic situation worsens. The elderly demonstrators shouted slogans about the poverty line being about five to seven times higher than the value of their pensions. The demonstration took place opposite the main headquarters of the banks’ pension funds at the same time that First Vice President Eshagh Jahangiri announced that all of Iran’s pension funds would face serious challenges over the next few years and all of them may crash in the same way as many other pension funds in the country, which became bankrupt over the past two years, since 2016.

Salvation Will Not Come from Europe

The European Union, which is opposed to the cancellation of the nuclear deal, promised Iran in September 2018 that it would arrange a system of financial payments to bypass U.S. sanctions, even though a senior European diplomat admitted that this solution would not be put into practice for several months. Furthermore, the implementation and success of this system is by no means guaranteed because, according to an article in The Financial Times (October 29, 2018), not a single European country, including the three that are supporting the nuclear deal, is prepared to serve as the headquarters of this system out of fear of the U.S. sanctions.3

Due to concern that heavy U.S. sanctions could lead to a halt in the operations of Iran’s national telecommunications company and the country’s first cellular phone company, Hamrah-e Aval, the Iranian Revolutionary Guard has given up its shares in the development company Etemad-e Mobin. When the United States announced at the beginning of October 2018 that it would impose a series of harsh sanctions on several banks, companies, and large factories in Iran, which were directly or indirectly connected to the Basij organization (a volunteer division of the Revolutionary Guard), Iran became very concerned that the United States, through these new sanctions, would cause the Iranian media and cellular companies to freeze or cut off the country’s internet. In any case, based on this serious concern, the Revolutionary Guard made the surprising announcement that they were giving up their shares. A brief notice of renunciation from the Revolutionary Guard was publicized on October 24, 2018 without any explanation or details of the renunciation process, or to whom the shares, which are worth hundreds of billions of dollars, have been transferred.

Additional Companies Leave; Trade Is Reduced

  • South Korean company Hyundai announced on October 29, 2018 that it had canceled its agreement with Iran to construct a new petrochemical complex there at a cost of $521 million after the United States withdrew from the nuclear deal. In its notice annulling the agreement, it explained its decision as being based on Iran not being able to pay the price given in the contract once U.S. sanctions have been reimposed.4
  • French car manufacturer Renault announced that the sale of its vehicles to Iran during September 2018 fell to zero. During the same month in 2017, Renault sold 10,932 vehicles to Iran. In August 2018, when the first round of U.S. sanctions on Iran came into force, Renault still sold 7,626 vehicles to Iran.5
  • Swedish company Volvo announced at the end of September 2018 that its truck assembly line in Iran had closed down as a result of U.S. sanctions and that it had even stopped exporting spare truck parts to Iran.6 Previously, the company announced the cancellation of a conference of its managers that was supposed to take place in Tehran.7 Volvo is considered to be one of the oldest companies in Iran, working there for decades.
  • The new government of Iraq, led by Adil Abdul-Mahdi, announced at the end of October 2018 that to protect Iraq’s national interests, it would not violate the U.S. sanctions. Five qualified sources in the Iraqi oil ministry confirmed to the Reuters news agency that Baghdad ordered the cessation of the export of oil from Kirkuk to Iranian refineries.8
  • Iran’s Oil Minister Bijan Namdar Zangeneh confirmed at the end of September 2018 that South Korea had stopped purchasing oil from Iran at the beginning of July. The minister added that many other countries had decreased their purchase of Iranian oil, but he did not mention their names.9 The Bloomberg news agency reported on October 25, 2018, that India would not be buying any oil from Iran, at least during November 2018.10
  • Two giant Chinese companies, CNPC and Sinopec, announced on October 24, 2018, that they would cease importing Iranian oil. This decision is supposed to come into force at the beginning of November 2018, even though China is the largest importer of Iranian oil.11 According to Reuters, before stopping buying Iranian oil, Sinopec decreased its business dealings with Iran by 50 percent.
  • The Reuters news agency also reported that the large Chinese bank Kunlun will cut its ties with Iran from the beginning of November 2018. The bank was the main channel for transferring funds between both countries in most of the transactions that have taken place until now.12
  • Hussein Pier Muezzin, member of the Iran-China chamber of commerce, announced on October 30, 2018, that China is not fulfilling its commitment to export vehicle spare parts and essential raw materials to Iran due to the problems that have arisen with the banking links between both countries. According to Muezzin, contrary to its official policy of maintaining the nuclear deal with Iran, China is not doing enough to further the links between Iran and China’s important Such actions indicate that China is working to sever the connections between its larger banks and Iran, and it wants the banking links between both countries to exist only between the less powerful banks of China and Iran.13
  • It should be noted that at present, Iran desperately needs spare parts. The Tasnim news agency, which is associated with Iran’s Revolutionary Guard, announced at the end of October 2018, that the price of spare parts of any kind of vehicle rose by between 100-300 percent during the most recent period.14
  • A senior management figure from the Taiwanese Mega bank confirmed to Reuters that the bank will cut ties with Iran from the beginning of November 2018.15
  • Malaysian Prime Minister Mahathir Bin Mohamad announced that his government will cut or significantly reduce its economic and commercial ties with Iran to safeguard Malaysia’s interests with the United States.16

At the same time, the number of American and European tourists visiting Iran over the past few months has fallen by half, despite the significant plunge of the Iranian rial, which has made travel expenses much cheaper for Western tourists. A senior director of the Iranian Heritage Foundation emphasized that western tourists are too afraid to visit Iran at the moment.

  • As we go to press, as the United States reimposes sanctions on Iran, it will permit eight countries to continue importing Iranian oil at reduced quantities to avoid upsetting global crude markets when the sanctions take effect. It is believed the eight are South Korea, Italy, Japan, India, Turkey, Iraq, UAE, and Egypt.17

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