Abstract

On November 5, 2018, the US completed its move to reinstate all economic sanctions against Iran that had been lifted under the 2015 Joint Comprehensive Plan of Action (JCPOA) commonly known as the “nuclear deal” [1]. With this step, the US administration seeks to compel the Iranian government to agree to negotiate a more restrictive nuclear deal, to amend its regional policy, and to curb its missile program [2]. The reinstated sanctions impose restrictions on specific sectors and individuals rather than on the wider Iranian economy, reflecting a general trend towards “targeted sanctions” [3, 4]. Indeed, ever since the 1990s, when a sanctions regime targeting all sectors of the Iraqi economy caused a devastating humanitarian crisis, policy makers have sought to minimize the costs borne by ordinary populations, focusing on key industries and individuals instead [3]. Experts, however, have challenged the assumption that such so-called “smart sanctions” are more humane as their economic ramifications often go far beyond the targeted sectors [3]. So how do sanctions affect ordinary Iranians?

Background

Iran has been subject to continuous US sanction regimes ever since Iranian students took 52 American citizens hostage in the US Embassy in Tehran in 1979. The latest round of sanctions goes back to the late 2000s when evidence of an Iranian nuclear weapons program appeared. In order to compel Iran to curb this program, the UN, the US and the EU imposed “smart sanctions” targeting high-ranking individuals and sectors vital to the Iranian regime, such as the energy, banking and defense industries. Additionally, the US successively extended so-called “secondary sanctions” aimed at third party actors, such as foreign banks or companies, trading with sanctioned persons or entities. Facing this increasingly restrictive regime, Iran finally agreed to negotiations which culminated in the 2015 Joint Comprehensive Plan of Action (JCPOA) signed by Iran, China, France, Germany, Russia, the UK and the US. Iran thereby pledged to end its nuclear program in exchange for the lifting of most sanctions. [5]

The success of the JCPOA was however short-lived. In May 2018, the US withdrew from the agreement, thus triggering a 90-day wind-down period after which a first set of US sanctions lifted under the JCPOA were reintroduced. These restrictions targeted Iran’s banking sector, its trade in precious metals as well as food and carpet exports to the US. After a second 90-day period, in November 2018, all remaining sanctions lifted under the JCPOA were reintroduced. This time, targets included the Iranian shipping, energy and oil sectors and once again the banking and financial services industry. Furthermore, new restrictions were imposed on a number of Iranian individuals. [6]

The impact of pre-JCPOA sanctions on Iranians

The pre-JCPOA US sanctions, which have now been reimposed, did not directly target humanitarian goods like food or medicine [5]. Nevertheless, their effects on ordinary Iranians were all but negligible. Perhaps most visibly, the spending power of Iranian households decreased dramatically during the sanctions period [7]. Restrictions imposed on the banking and shipping sectors made it more expensive to import even non-sanctioned consumer goods [3]. Consequently, prices rose and in 2013 alone Iran’s annual inflation reached 40 percent [8]. Furthermore, sanctions targeting the oil and gas industry, which represents a quarter of the Iranian economy, directly or indirectly affected many jobs [3]. Ordinary Iranians, then, increasingly struggled to make ends meet as both unemployment and prices for basic goods like milk, bread, vegetables, or rice skyrocketed simultaneously [8, 9, 10]. As a result, the number of families living below the poverty line almost doubled from 2012 to 2014 [9, 11]. The better-off middle class, in turn, saw their relative wealth dwindle as prices increased and their businesses went bankrupt due to the costs of imported supplies [9, 11].

A particularly tragic consequence of the pre-JCPOA sanctions regime were shortages of medical equipment and drugs. The Iranian health care system largely relies on imported Western medicine and medical devices. Restrictions imposed on the banking sector, however, meant that these medical supplies had to be purchased through costly and unreliable currency transfers while many foreign banks and companies avoided dealing with Iran altogether out of fear of inadvertently falling under US secondary sanctions [12, 13]. Producing drugs locally, in turn, was difficult too, due to restrictions targeting the import of key raw material [13]. The combination of these factors with pre-existing domestic inefficiencies disrupted vital supplies, which affected notably cancer and diabetes patients but also organ transplantations [12, 13]. Oftentimes, Iranians were forced to rely on less effective non-Western drugs with more severe side effects [9, 13].

Another corollary of the sanctions regime was the growth of the shadow economy. Due to restrictions, imported goods ranging from foreign-made make-up and electronics to drugs became rare on the regular Iranian market [14]. In parallel, many middle-class businesses were forced to close down as imported supplies and equipment were no longer available or too expensive [11]. Smuggling, off-the-record deals, and other forms of sanctions-busting thus became the easiest and sometimes only way to import foreign products, meaning that large parts of the formerly regular economy moved to the black market [14, 15]. Indeed, by 2015 illicit activities had risen to represent something around 25-36% of the Iranian GDP [14]. As ordinary Iranians often had no choice but to buy for example medicine from the black market, those controlling these illicit activities profited from selling overpriced, smuggled goods to desperate clients [14, 16]. In the words of two Iranian analysts, a “mafia-like class [thus appeared] that funneled wealth to the top or transferred it overseas, and deployed all its political and military capital to protect it” [16]. One actor often mentioned in this context is the Revolutionary Guards, an elite armed force created in 1979 to ensure the security of the clerical establishment [8]. The Guards have since become a powerful, conservative stakeholder within the Iranian regime and a business empire of sorts [8]. Controlling Iran’s borders, they have extensively participated in and earned from smuggling activities, leading observers to consider them a key beneficiary of sanctions [11, 14].

The Iranian middle class has been the main victim of all these developments [11]. While the upper class can afford to buy imported goods at exorbitant black market rates, the poorest obtain at least basic protection in the form of government aid [17]. Some elements of the elite, in turn, have even increased their wealth under sanctions by selling smuggled goods [14]. The Iranian middle class, however, is too well-off for government aid and too poor to live with black market prices. Consequently, middle class families have seen the wealth they accumulated over years through regular business activities dwindle, entering a daily struggle to make ends meet [10].

The impact of new sanctions

While it is still too early to judge the impact of the recently reintroduced sanctions, there is little reason to suspect that their effects will be different. Indeed, following the US withdrawal from the nuclear deal, the International Monetary Fund discarded previous forecasts of an annual 4 percent growth of the Iranian economy, predicting economic contractions for 2018 and 2019 instead [18]. Prices and unemployment have also been rising since the announcement of new sanctions as foreign companies started to move out of Iran and banks cut down their dealings with the country [18]. Once again, prices of basic goods have been directly affected by these developments [19]. For example, fruit and vegetable prices increased by 50 percent from January to August 2018, while items such as clothing, milk or rice have become two to three times more expensive [20, 21]. This is so despite the fact that humanitarian goods are exempt from restrictions, because sanctions ban banks from transacting with Iran, which affects all imported goods as well as domestic industries relying on imported equipment [14, 21].

Conclusion

US sanctions imposed on Iran prior to the JCPOA have had significant adverse effects on the living conditions of middle-class Iranians and the recent re-imposition of those same restrictions is likely to do the same. Naturally, this does not mean that all economic problems in Iran are foreign-made. The Iranian regime, too, contributed its share to the economic struggles of ordinary Iranians: the recent price inflation has been aggravated by Iran’s ill-conceived monetary policy, which caused a devaluation of the rial; changes to the state welfare system have increasingly excluded the lower middle class from protection; and deeply rooted corruption has contributed to the rise of the shadow economy [7, 21, 22]. Nevertheless, it is important to note that in the case of Iran at least, so-called “targeted” sanctions have imposed substantive costs on ordinary people in an indiscriminate fashion.

Anna Clara ARNDT

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References

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