From restrictions on oil to banking transactions, US-led sanctions on Iran were designed to choke off the economic benefits of the country’s most crucial investments. But one result of these sanctions — the rapid depreciation of the Iranian rial – has increased exports for the country’s oil sector.
That raises a politically delicate question, especially as the Obama administration vows even more sanctions aimed at getting Tehran to stop its alleged nuclear weapons program. Are U.S. sanctions actually helping to stimulate some parts of Iran’s economy?
According to the U.S. Department of Treasury Office of Foreign Assets Control, the U.S. has imposed sanctions on Iranian-origin good and services, financial dealings, the Iranian petroleum industry as well as other transactions involving U.S. affiliates. The point of these sanctions is to cut off the economic benefits of these transactions with Iran, influencing severe pressure on the Iranian economy and therefore its government as well.
Or at least that’s how it’s supposed to work. In this case, currency depreciation might actually be working against U.S. policy.
This is where economists look to the numbers. According to data from the Central Bank of Iran, sanctions — coupled with other economic hindrances like mismanagement and corruption — have resulted in an 80 percent depreciation of the rial in the last year alone.
It is difficult to say how much of the depreciation stems directly from these sanctions, but the Iranian Minister of Economic Affairs, Seyyed Shamseddin Hosseini, publically acknowledged the impact as significant – “exerting the maximum level of pressure” — in an interview last May with CNN’s Fareed Zakaria. U.S. sanctions have only increased since then.
Iran’s massive level of inflation is estimated at 35 percent, compared with the U.S. inflation rate of roughly 1 percent, according to the U.S. Federal Reserve.
What does this all mean? There is a textbook relationship between currency depreciation and exports. A weaker currency is attractive to foreign buyers because it makes exported products cheaper for the recipient.
“Many central bankers around the world are trying to do the same to create exports in their own countries,” said Sen. Robert Corker, R- Tenn., at a hearing of the U.S. Senate Committee on Foreign Relations on May 22, concerning U.S. policy towards Iran.
The U.S. dollar/Iranian rial exchange rate is currently at 1 U.S. dollar to 12,269 Iranian rials, and rising according to the OTC Interbank Market.
The International Energy Agency released a report in March showing that oil shipments leaving Iran increased by 13 percent in February to 1.28 million barrels, from 1.13 million barrels a day in January.
Although exports are still at lower than historical levels, data shows that Iran’s rial is providing the country with a competitive advantage in the oil marketplace, which accounts for 82 percent of the country’s overall export revenues.
So the answer is yes, Iran is seeing some benefits from the sanction policies, and U.S. officials aren’t denying it.
“The depreciating rial does have the effect of making Iran’s exports somewhat more attractive,” said David S. Cohen, the U.S. Treasury Department’s Under Secretary for Terrorism and Financial Intelligence, in his testimony before the same Foreign Relations committee hearing this month.
However, Cohen argued that the Treasury’s enormous range of sanctions – in particular those focused on exports of petroleum – outstrip any benefits that Iran may be receiving from increased export activity.
“Our assessment is that the Iranian economy is not flourishing in any respect,” said Cohen, who pointed to the country’s declining gross domestic profit. Iran’s GDP has contracted somewhere between five and eight percent in the last year, according to the Department of Treasury, and is expected to shrink further.
“Their ability to transact internationally, to receive payment for exports, is substantially impaired because of the whole raft of financial sanctions that are in place,” Cohen told the committee. “Whatever collateral benefit there might be from the depreciating rial to the export of Iranian goods is more than offset by the sanctions we’ve put in place.”
But as recently as last month, Hosseini called the effects of such sanctions “exaggerated.”
“We have been the subject, the target of sanctions for the last 33 years,” Hosseini said in a separate interview last year. “…the economic strength of Iran is in such a way that [it] can withstand these sanctions and will not be the only economy to suffer.”
Hosseini pointed to a decrease in imports, especially in domestic products like furniture and home goods, due to the slow growth of Iran’s own indigenous industry. A reduction in imports, when coupled with increased exports, is one of the vital factors in the GDP equation that can lead to economic growth in the future.
