Latest Oil Sanctions Deal 'Fatal Blow' to Iran Economy

Although there have been Western-led financial sanctions against Iran for decades, newly tightened sanctions have closed certain loopholes and devastated the country’s economy.

al-monitor A huge banner is seen on a building at phase 15 and 16 of South Pars gas field development in the southern Iranian port town of Asaluyeh, July 19, 2010. Photo by ATTA KENARE/AFP/Getty Images.

Topics covered

mahmoud ahmadinejad, iranian oil, iranian economy, iranian economic sanctions, iranian cabinet, hassan rouhani

Oct 8, 2013

The Western embargo on Iranian oil has been ongoing since the early 1980s. There are many reasons behind this series of boycotts and embargoes on the most important economic resource for Iran. The first attempts to impose an embargo did not lead to the desired results, for Iran was able to circumvent them. However, the boycott that resulted from the nuclear issue has been the harshest, and it eventually led to the destabilization of the Iranian economy and created major obstacles for Iran in meeting the basic needs of its people and pursuing Iran’s expansionist policy in the Middle East.

Observers attribute the electoral victory of former President Mohammad Khatami to the aspirations of the Iranian people for democracy. Meanwhile, the victory of President Hassan Rouhani is attributed to the domestic economic crisis resulting from the boycott, the people’s restlessness over the poor administration of the country, and their aspirations to prosperity and peace, without foreign adventures and expensive weapons programs.

Observers have noted similarities between the current policy of economic pressure on Iran and the policy pursued by former US President Ronald Reagan in the 1980s against the former Soviet Union. At the time, Moscow was spending billions of dollars on weapons programs and providing all types of assistance to its allies in the socialist camp. This reduced the standard of living of the Russian people, burdened the state budget and subsequently led to the fall of the Soviet Union.

In this context, the question that arises is the following: Is the tightening of the oil boycott aimed at obtaining concessions regarding the nuclear issue, or does it go beyond this? If so, what is the future agenda that will require concessions and compromises from both sides? President Rouhani identified three priorities at the beginning of his term: the hydrocarbon sector, foreign policy and the domestic economy. He tasked his adviser for Supervision and Strategic Affairs, Mohammad Bagher Nobakht, and Finance Minister Ali Tayebnia with conducting a prompt and thorough study that accurately and factually describes the state of the Iranian economy.

The study found that, contrary to its claims, the government of former President Mahmoud Ahmadinejad not only failed to achieve any economic growth during 2010-2011 and 2011-2012, but that the economy declined during those two years by about 5.4%. According to the study, the inflation rate reached around 45%, and not 37% as claimed by Ahmadinejad's government. The study also found that the previous administrations had created 140,000 new jobs over eight years, and not 7 million as they had claimed.

Contrary to his predecessor’s announcement, the new Oil Minister Bijan Zanganeh said that oil production capacity had shrunk — not expanded — over the past eight years. Zanganeh promised to restore production capacity to its 2005 levels, i.e., about 4.2 million barrels per day. Zanganeh also pledged to restore the oil export contracts that Iran had lost because of the boycott. This, however, will be a difficult task, since the traditional buyers of Iranian oil have switched to other exporting countries.

Recent experience shows that oil blockades and boycotts not only deprive the producing state of the proceeds of petroleum, estimated at billions of dollars annually, but more seriously, they also hurt oil production capacity. This is because the country is unable to cooperate with oil companies or engineering services companies, so oil-producing fields are neglected and no new fields are developed.  

The US policy of blockade and boycotts of Iranian oil began with the occupation of the US Embassy in Tehran in 1979. Then, a new blockade was imposed after the attack on the Marine barracks in Beirut in 1983, when Iran was added to the list of countries that supported terrorism. These two embargoes included freezing all Iranian assets abroad, prevented the provision of US economic aid to Iran, and banned Iran from importing products of that have dual civilian and military use.

The US tightened sanctions on Iran in 1992, and decided to punish any person or company helping Tehran develop its armament program. In 1995, President Bill Clinton banned all trade and investment in Iran. In 2013, President Barack Obama tightened the sanctions on two important industrial sectors: automotive and petrochemical.

In 1996, sanctions on nuclear materials began. This law included sanctions on non-US companies that invest in Iran's energy sector. But European and Asian companies challenged this decision, arguing that they are only subject to the laws of their own countries, not those of the United States. Therefore, Iran was able to circumvent this law. But Washington decided to tighten sanctions and measures as part of this law, and in 2013, decided to impose new sanctions. The latter included not issuing US visas to executives at companies that violate the sanctions.

Yet the tightest sanctions on Iran are those imposed by the US Treasury Department, which banned any financial transactions with Iranian companies. The Treasury banned all Iranian banks from dealing with US banks. In 2011, Obama banned international oil companies from dealing with Iran's central bank, which collects funds from companies in exchange for Iranian oil.

Some countries — such as South Korea, India, Turkey, China, South Africa and most European states — decided to stop importing Iranian oil. The production shortage was compensated by Gulf oil-producing states and by increased US oil production.

The last round of oil and financial sanctions dealt a fatal blow to the Iranian economy, which lost most of its oil customers. In addition, it became difficult to charter tankers to transport Iranian oil, which hampered and disrupted shipping operations. More important, importing countries could purchase Iranian oil using US dollars, which led to a series of negotiations to find alternatives, as well as to delays in payment. In the end, Iran was forced to accept the Indian rupee in return for its oil.

In 2011 and 2012, European oil companies withdrew from projects aimed at developing Iranian oil fields, resulting in the delay of these projects and the cancellation of others. This also led to the reduction of the potential increase in production capacity, despite the subsequent contracts signed with Asian companies (Chinese, Indian and Malaysian) rather than European companies. The boycott also reduced Iran’s ability to import petroleum products.

In 2012, Iranian oil revenues hit their lowest level in three years, and the volume of exports shank to the lowest level in 26 years. According to the US Energy Information Administration (EIA), the volume of Iranian exports shrunk to 1.5 million barrels per day in 2012, compared with about 2.5 million barrels per day in 2011. Tehran was able to limit its financial losses due to the rise in prices (above $100 per barrel). The total oil income in 2012 reached about $69 billion, which is less than the oil revenues for 2010 and 2011.

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More from  Walid Khadduri