Trump’s Economic War Is Working. How Much More Will Iranians Take?

Iran’s mullahs and generals may still be threatening all-out war with the U.S. But their economic advisors must be panicking.

The Iranian economy — strangled by U.S. sanctions that have killed a staggering 85 percent of the country’s oil exports since May 2018 — is plunging deeper into recession. This is the part of the Trump Administration’s conflict with Iran that the mainstream media underreports.

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They shouldn’t, though. Because it takes a lot of money to fund terrorism, conflict and insurgencies around the world while simultaneously starting a war with a superpower.

A new report from the venerable Institute of International Finance (IIF) says U.S. sanctions are pushing the Iranian economy into recession for a second year, spurring authorities to enforce risky austerity measures such as tax increases and cuts in subsidies.

IIF estimates that the Iranian economy will likely contract 7.2 percent for the 2019-2020 fiscal year, which ends in March. That’s even deeper than last year’s alarming contraction of 4.6 percent. As a result, IIF forecasts that Iran’s foreign reserves — the amount of foreign liquid assets a country can access — will fall to $73 billion by March, totaling nearly $40 billion in losses over two years.

With Iran’s currency, the rial, in a freefall, many Iranians have seen their life savings wiped away. U.S. sanctions have also dried up foreign investment and disrupted major business deals that were in the pipeline.

The IIF believes most of the economy’s contraction is due to the decline in crude oil exports. Iran saw its oil revenues surge after President Barack Obama’s 2015 nuclear pact ended international sanctions. As part of that deal, the Obama Administration also sent planes carrying $150 billion in cash to Iran that had been frozen in U.S. banks.

Since the Trump sanctions, Iran’s oil exports have crashed to a paltry 400,000 barrels per day (bpd) from a high of 2.8 million bpd during Obama’s presidency.

The sanctions do not allow U.S. companies to trade with Iran. Crucially, any international company that uses a U.S. company for transactions would also be in breach of the sanctions. Due to the nature of the global economy, it is virtually impossible to conduct trade without exposing money to the U.S. financial sector.

Last week, the U.S. sanctioned 17 Iranian metal producers and mining companies in response to Iran’s attack on U.S. troops in Iraq, which was retaliation for the U.S. killing of Iranian General Qasem Soleimani in a drone strike in Baghdad.

But the regime has weathered international sanctions before. Iran’s supreme leader vows Iran will not even talk about negotiating a new nuclear deal until the U.S. lifts all sanctions. Could Iran, despite tensions with the U.S. and civil unrest festering within, stave off more decline?

Not according to IIF. “We expect the contraction to deepen,” the report says. Iran’s economy has tanked even harder than many others would. Why?

“It’s a state-managed, state-run economy and that makes it very vulnerable,” says Steve Hanke, professor of applied economics at Johns Hopkins University and head of the troubled currencies project at the CATO Institute.

Hanke was being diplomatic. Put more bluntly, the Iranian economy is based on a failed socialist model borrowed from the old Soviet Union, and Iran’s theocratic kleptocracy carves up the good parts like a mafia organization. Experts also say Iranian authorities have shown exceptional incompetence in matters of economic affairs.

In November, to counteract lost revenue from collapsed oil exports, Iranian authorities hiked fuel prices by nearly 50 percent across petrol stations and pumps, claiming that it would use the money to help citizens in need of cash handouts.

This price increase led to an extended unrest with protestors believing that the billions of dollars the regime spends to keep its regional proxies afloat could be better used towards fixing the economic situation at home. In response, authorities implemented a violent crackdown that left an estimated 1,500 people dead.

In December, Iran’s president presented a draft state budget of about $39 billion to parliament, saying it was designed to resist U.S. sanctions by limiting dependence on oil exports. It plans to compensate for the lost oil export revenue by using state bonds and selling state properties.

According to Djavad Salehi-Isfahani, an economics professor at Virginia Tech specializing in the Iranian economy, it’s hard to gauge how much more patience the Iranian population has.

“Forty years ago, Iranians were willing to put up with hardships caused by U.S. sanctions,” he told National Public Radio. “Now they are protesting in the streets. To what extent the government can maintain public order in the face of this decline in living standards, I don’t know.”

About Alice Green


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