by Zachary Waller

Abstract

Since the lifting of sanctions in 2015, Iran has been working to re-enter the global economy. This paper takes a long-term view of the sanctions, asking what has historically motivated the West to take such coercive — or even punitive — action. It argues that the sanctions had a debilitating effect on crude oil production and the Iranian economy as a whole. Reversing this trend is a sizable challenge, as Iran must now compete with other oil producers to regain market share in a context of low oil prices. However, the paper concludes optimistically, arguing that production is on the upswing and European banks have incentives to support Iranian oil growth.

Key Words: Iran; Sanctions; Oil Embargo; United States; European Union; Nuclear Program; OPEC

On June 28, 2012, the United States of America imposed strict sanctions on the Islamic Republic of Iran for its nuclear program. Just a few days later, on July 1, 2012, the European Union joined the United States, putting an oil embargo in place against Iran. While the pair already had sanctions in place against Iran, the new round was intended to be particularly crippling, targeting strategic sectors of the Iranian economy. These new sanctions were designed to put Iran on the absolute fringe of the global economic system.

Fast forward to 2016 and we see enormous changes. After months of negotiations with Iran, the US and the EU agreed last year to lift most of their sanctions in exchange for serious curtailing and oversight of Iran’s nuclear program. Iran, once a pariah, is now slowly being welcomed back into the world economy.

While many are happy the sanctions have been lifted, important questions still remain. Iran, isolated for so long, now has to re-integrate itself into the global economy. While the country has been remarkably resilient in the face of crippling sanctions, things changed while Iran was sanctioned and the country lost out on much of the trade it had previously, particularly with regard to oil. Can Iran regain its spot as one of the world’s leading oil exporters?

In order to answer this question, I will start by examining the history of the situation—why sanctions were put in place, what they targeted, and why they were lifted. Next, I will move on to look at the effects of the sanctions. Lastly, I will examine how Iran has managed since sanctions were lifted and look toward the future.

History

Sanctions were first introduced against Iran in 1979 in the wake of the Iranian hostage crisis.[1] These sanctions, put in place by the United States, were expanded significantly over time and eventually became the policy of the United States’ European partners and the European Union. While sanctions against Iran were put in place for various reason (some of the chief reasons being the hostage crisis and Iran’s sponsorship of terrorism), in the past decade, sanctions imposed on Iran have primarily targeted the country’s nuclear program.

In 2005, the International Atomic Energy Agency (IAEA) released a report, accusing Iran of “many failures and breaches of its obligations to comply with its NPT Safeguards Agreement” and found a “history of concealment of Iran’s nuclear activities.”[2] The report went on to state that an “absence of confidence that Iran’s nuclear programme is exclusively for peaceful purposes [has] given rise to questions that are within the competence of the Security Council.”[3] It was following this report that the “United States spearheaded international efforts to financially isolate Tehran and block its oil exports to raise the cost of Iran’s efforts to develop a potential nuclear-weapons capability and to bring its government to the negotiating table.”[4]

In the winter of 2011, the United States and the European Union announced a new wave of sanctions against Iran – some of the harshest yet – to take effect the following summer.[5] While sanctions had heretofore been directed against various sectors of the economy, the new round of sanctions went right for the throat. The US decided to “target Iran’s central bank” and “subject any bank, company or government that does business with Iran’s central bank to U.S. sanctions.”[6] As a result of these new sanctions, people and companies had to “choose between doing business with Iran and doing business with the United States.”[7] As if that were not harsh enough, the European Union decided at the same time to impose an oil embargo against Iran (with some exceptions for pre-existing contracts).[8]

By forcing a choice between doing business with the United States and doing business with Iran, the United States put Iran in one of the toughest economic situations a country could be in. Seeing as the United States is one of the most important players in the world economic system, few chose to do business with Iran over the United States. Additionally, the sanctions effectively forced Iran out of the world financial system, as the world financial system is dominated by the United States. With world banks afraid to lose access to the United States or be sanctioned by the American government, Iran found it extremely difficult to both secure access to credit and send and receive money.

In 2013, however, things began to look up slightly for Iran. Iranians elected Hassan Rouhani to replace the outgoing Mahmoud Ahmadinejad as President of Iran. Rouhani, who ran on a moderate platform, “stressed the need to find a way out of the impasse with the West on the nuclear issue and to end Iran’s diplomatic isolation” as part of his campaign.[9] Once elected, Rouhani, who himself earned his PhD at Glasgow Caledonian University in Scotland,[10] chose the Western-educated Mohammad Javad Zarif to be his foreign minister. Zarif, who holds a PhD from the University of Denver, completed his entire post-secondary education in the United States and speaks fluent English.[11] Also tapped for a cabinet position (as chief of staff) was Mohammad Nahavandian, who earned his PhD at the George Washington University and is a permanent resident of the United States.[12] With a team of Western-educated leaders – many of whom had significant experience in the United States – taking office, it seemed the time was right for Iran to make a move and come to an agreement to get sanctions lifted.

That happened on April 2, 2015. After months of negotiations, Iran, the United States, the United Kingdom, Russia, France, China, Germany, and the EU agreed on a comprehensive framework for a deal to lift the sanctions.[13] Following more negotiations, that deal was reached on July 14, 2015. Per the agreement, nuclear-program-related economic sanctions would be lifted in exchange for significant reductions in the amount of nuclear fuel Iran is allowed to produce and the amount of centrifuges the country is allowed to keep.[14] (Terrorism-related sanctions remain in place, as do the United States’ primary sanctions, which prohibit American businesses from doing business with Iran. However, the United States will no longer punish foreign entities who do business with Iran).

Effects

The main target of the most recent round of sanctions was the Iranian oil industry. By targeting the central bank, the United States was seeking to get largely at Iran’s oil industry, as the country uses the central bank “to facilitate its oil trade.”[15] The EU, in the meantime, sought to target the oil industry directly, via its embargo. So what effects did these sanctions have on Iran’s oil industry and economy as a whole?

 

Prior to this round of sanctions going into effect, Iran was exporting over 2.5 million barrels of crude per day. Just before the deal lifting the sanctions was reached, Iran was exporting just north of 1 million barrels per day, mostly to China, India, Japan, and South Korea[16] (Iran lost many of its European buyers, like Greece, Spain, and Italy, due to the sanctions).[17] That means other producers (largely Saudi Arabia) supplied the world market with the remaining 1.5 million barrels per day while Iran was under sanctions. This continues to create large problems for Iran, as it must work diligently to gain back market share in a world of low oil prices. Fortunately for Iran, it has some of the cheapest oil to produce in the world, just slightly more expensive than Saudi Arabia’s.[18]

 

The Iranian economy as a whole also suffered tremendously under the sanctions. Just before sanctions were lifted, Iran’s economic growth rate was at zero and Iran had $50 billion of foreign reserves frozen around the world.[19] Additionally, it is estimated the cost of trading with Iran increased 15% under sanctions and, with the sanctions lifted, Iran will save approximately $15 billion per year in cheaper trade.[20]

What the Future Holds

 

 Iran suffered a major setback due to its loss of oil market share under the most recent sanctions. In order to regain some of this market share, Iran has announced plans to increase production dramatically, planning to raise exports by almost 1 million barrels per day to 2.5 million within a year of the sanctions being lifted.[21] Iran has also refused to join a production freeze agreement between other leading oil producers, stating it will only consider doing so after its own production has reached 4.2 million barrels per day, the rate it was at before the latest sanctions were put in place.[22]

More than increasing production dramatically, Iran will need to offer incentives to get buyers to switch to its oil. In order to lure buyers away from Saudi Arabia, Russia, and other producers, the country is likely to offer sweeteners such as “Oil-for-goods deals, crude-for-product swaps, deferred payment or pledges to make investments in foreign refineries.”[23] Some of the buyers Iran hopes to woo now that it can sell its oil on the world market are former buyers Greece, Spain, and Italy, as well Sri Lanka and South Africa.[24] Iran will also be looking to increase the amount of oil it sells to existing buyers. While some analysts have doubts as to whether or not Iran will be able to meet the production targets it has set out, the country is, so far, right on schedule. In August, 2016, Iran exported over 2.11 million barrels of oil per day[25] and the country expects to reach pre-sanction levels of production around the end of 2016 or beginning of 2017.[26] If Iran is able to keep this pace up, it should increase oil export revenues by over $10 billion from 2015.[27]

While the future is looking bright for the Iranian oil industry, there are still a few dark spots. The largest of these is the question of financial sanctions and American primary sanctions. Unfortunately for Iran, many banks and companies are unsure as to how to proceed with regard to doing business in and with the country. Banks in particular are worried, as they do not want to run afoul of American regulators. While sanctions have been lifted, many banks are proceeding with extreme caution due to the hefty fines levied against European banks by the US for bypassing sanctions on Iran, Cuba, and Sudan—$14 billion in total over the last 10 years.[28] Additionally, with primary sanctions remaining in place, American companies are unsure what to instruct their foreign subsidiaries to do with regard to Iran and European companies with American subsidiaries are unsure how they are affected.[29] However, a number of European banks, British and German banks in particular, are very eager to get to work with Iran and are pushing the US for clarity on what they can engage in now with regard to Iran.[30]

Conclusion

As can be seen from the above, the Iranian oil industry is making quite the comeback. Since sanctions were lifted, oil exports have more than doubled[31] and the country is getting closer to reaching pre-sanction levels of production. What is holding the country back is largely confusion related to the lifting of sanctions, particularly on the part of banks. In order for Iran to reach its potential, it needs to gain greater access to the world financial system, which will only happen once European banks are confident they will no longer be punished by the United States for doing business with Iran. Nevertheless, the country as a whole is slated to see large economic gains this year. If these problems can be cleared up and Iran adheres to the nuclear deal it signed to get the sanctions lifted, there is no reason the Iranian oil industry could not get back to its pre-sanctions place as one of the world’s leading oil exporters. In fact, it is already well on its way there.

Zachary Waller is an MIS candidate at the Elliott School of Foreign Affairs at the George Washington University (USA) and an MA candidate in the ENERPO program at the European University at Saint Petersburg (Russia). He previously served as Assistant Editor of the ENERPO Journal and earned his BA in Near Eastern Studies at Cornell University (USA). Zachary can be reached at zwaller@gwu.edu

 

[1] Zirulnick, A., 2011. Sanction Qaddafi? How 5 nations have reacted to sanctions. The Christian Science Monitor, [online] 24 February. Available at: <http://www.csmonitor.com/World/Global-Issues/2011/0224/Sanction-Qaddafi-How-5-nations-have-reacted-to-sanctions./Iran>.

[2] IAEA, 2005. Implementation of the NPT Safeguards Agreement in the Islamic Republic of Iran§. IAEA, [online] 15 November, pp. 2. Available at: <https://www.iaea.org/sites/default/files/gov2005-77.pdf>.

[3] IAEA, 2005. Implementation of the NPT Safeguards Agreement in the Islamic Republic of Iran§. IAEA, [online] 15 November, pp. 2. Available at: <https://www.iaea.org/sites/default/files/gov2005-77.pdf>.

[4] Laub, Z., 2015. International Sanctions on Iran. Council on Foreign Relations, [online] July 15. Available at: <http://www.cfr.org/iran/international-sanctions-iran/p20258>.

[5] Hargreaves, S., 2012. U.S. tightens oil sanctions on Iran. CNN, [online] 31 March. Available at: <http://money.cnn.com/2012/03/30/news/international/Iran-sanctions/>.

[6] Ibid.

[7] Ibid.

[8] Borger, J., 2012. EU agrees Iran oil embargo. The Guardian, [online] 4 January. Available at: <https://www.theguardian.com/world/2012/jan/04/eu-iran-oil-embargo-ban>.

[9] Bakhash, S., 2013. Rouhani’s Surprising Election. Viewpoints, 28, pp. 1. Available at: <https://www.wilsoncenter.org/sites/default/files/rouhanis_surprising_election_0.pdf>.

[10] Galpin, R., 2013. From Glasgow student to president of Iran. BBC, [online] 2 August. Available at: <http://www.bbc.com/news/uk-scotland-23554836>.

[11] The Daily Star, 2013. Iran’s Rouhani reveals cabinet of technocrats. The Daily Star, [online] August 4. Available at: <http://www.dailystar.com.lb/News/Middle-East/2013/Aug-04/226206-irans-rowhani-takes-oath-after-vowing-to-ease-sanctions.ashx>.

[12] Ibid.

[13] Gordon, M., & Sanger, D., 2015. Iran Agrees to Detailed Nuclear Outline, First Step Toward a Wider Deal. The New York Times, [online] 2 April. Available at: <http://www.nytimes.com/2015/04/03/world/middleeast/iran-nuclear-talks.html>.

[14] Ibid.

[15] Hargreaves, S., 2012. U.S. tightens oil sanctions on Iran. CNN, [online] 31 March. Available at: <http://money.cnn.com/2012/03/30/news/international/Iran-sanctions/>.

[16] Paivar, A., 2016. What lifting Iran sanctions means for world markets. BBC, [online] 16 January. Available at: <http://www.bbc.com/news/business-35317159>.

[17] Raval, A., 2016. Commodities explained: Iran’s return to the global oil market. Financial Times, [online] 21 January.

[18] Faucon, B., Kantchev, G., & Said, S., 2016. OPEC Officials: May Discuss Oil Freeze at June Meeting. The Wall Street Journal, [online] 21 April. Available at: <http://www.wsj.com/articles/opec-secretary-general-says-cartel-may-discuss-oil-freeze-at-june-meeting-1461234875>.

[19] Paivar, A., 2016. What lifting Iran sanctions means for world markets. BBC, [online] 16 January. Available at: <http://www.bbc.com/news/business-35317159>.

[20] Ibid.

[21] Ibid.

[22] Faucon, B., Kantchev, G., & Said, S., 2016. OPEC Officials: May Discuss Oil Freeze at June Meeting. The Wall Street Journal, [online] 21 April. Available at: <http://www.wsj.com/articles/opec-secretary-general-says-cartel-may-discuss-oil-freeze-at-june-meeting-1461234875>.

[23] Raval, A., 2016. Commodities explained: Iran’s return to the global oil market. Financial Times, [online] 21 January.

[24] Ibid.

[25] Geiger, J., 2016. Iran Bumps Up Crude Exports To Highest Level In Five Years. Oil Price.com, [online] 16 September. Available at: <http://oilprice.com/Latest-Energy-News/World-News/Iran-Bumps-Up-Crude-Exports-To-Highest-Level-In-Five-Years.html>.

[26] Calcuttawala, Z., 2016. Inside OPEC: What Does Each Member Want? OilPrice.com, [online] 26 September. Available at: <http://oilprice.com/Energy/Crude-Oil/Inside-OPEC-What-Does-Each-Member-Want.html>.

[27] Paivar, A., 2016. What lifting Iran sanctions means for world markets. BBC, [online] 16 January. Available at: <http://www.bbc.com/news/business-35317159>.

[28] Ibid.

[29] Ibid.

[30] Ibid.

[31] Tan, F. & Tsukimori, O., 2016. Iran crude exports hit five-year high near pre-sanctions levels: source. Reuters, [online] 16 September. Available at: < http://www.reuters.com/article/us-iran-oil-exports-idUSKCN11M0XL>.