JCPOA's Uncertainty Exacerbates Iran's Worsening Economic Problems

The Joint Comprehensive Plan of Action (JCPOA) agreement between Iran and the P5+1 was, at the time, widely believed to be a turning point for the Iranian economy, but this has not borne out. Even though it is just one piece of a complex iranian economic situation, the JCPOA is so significant that uncertainty over the fate of the deal has curtailed potential progress. With the shale oil boom keeping the price of petroleum significantly below previous highs, and even minimum budgetary breakeven expectations, Iran’s leading industry is on unsteady ground. The French oil company Total signed a significant oil deal with Iran, but many other firms in the oil industry, and in other sectors, remain hesitant. Boeing and Airbus have committed to major deals, but despite this, Iran’s economic outlook has not improved as expected. Much was made of the stream of foreign trade delegations in Iran following the implementation of the JCPOA, but there has not been a rush to invest in Iran. Substantial geopolitical risks, in addition to pre-existing issues, remain unaddressed, in large part due to uncertainty over the fate of the JCPOA, which faces a considerable test next month.

In May, President Trump will decide whether he wishes to certify Iran’s compliance with the JCPOA under the Iran Nuclear Agreement Review Act, or to refuse to certify, and to withdraw the United States from the accord. He has attempted to be the “anti-Obama” whenever possible - at least rhetorically - but is often hamstrung by either a failure to act decisively, or by the various distractions and domestic and foreign political dilemmas. With pressure on Trump building as the Mueller investigation continues, he will feel increasingly cornered and is likely to lash out in some manner. This is just as likely to be in the form of an angry Twitter rant as in anything substantive, but leaving the Iran Deal remains a realistic possibility. Trump has demonstrated a stubborn persistence on several issues, and the relative ease of an executive decision means there are fewer barriers between him and nullifying the United States’ involvement in the JCPOA, as much for domestic appeasement as over legitimate grievances with the deal.

The Iranian economy has faced a series of hardships in recent years; many self-made. Iran’s ongoing economic mismanagement has led to significant protests - most recently this past winter when nationwide demonstrations rocked the country - but so far such events have lacked any momentum and do not present a serious threat to the government. On April 9th, the Iranian government took a bold - and perhaps desperate - step to halt the slide of the Iranian rial by setting a new “official” exchange rate with the American dollar. At the same time, the government also outlawed the use of any other (black market) rate. Following the 35% drop in value in a week, any further instability would be dangerous for a regime facing an already restive populace.

While alluring as a potentially large and lucrative market, Iran remains as risky, if not more so, than other developing countries. Much of this is due to the uncertainty as to what President Trump may do in May, but other domestic and regional issues, including the IRGC’s influence in important commercial sectors, and the ongoing conflict in Syria, are also important. For firms wishing to invest in Iran’s potentially lucrative modernization, the decision over the JCPOA’s fate will signal either a cautious yellow light, if the deal is upheld, or a steadier red light, if President Trump yet again refuses to certify the accord. Refusal to certify the deal for a third time makes not only American firms, but also European and Asian ones, much more wary of doing business in a country that exposes them to American censure. Congress would be likely to further sanction Iran, increasing barriers to trade and business. Further prolonged uncertainty over the fate of the deal and the implications for the Iranian economy and populace puts additional pressure on an already strained Iranian financial system.

Quantifying Sanctions?

As a news junkie, I spend a lot of time on Twitter and all of the relevant foreign policy news sites. On these sites there is a relatively healthy debate over the efficacy of sanctions against Iran, but the lack of geographic thinking in the discussion is disheartening. By 'geographic' I do not mean just the physical space itself, but rather a more complete holistic approach. 

Both sides vociferously argue that their opinion is valid, while listing a variety of reasons. Those in favor of sanctions point to the lack of diplomatic progress in negotiations as proof that more drastic measures are necessary, namely increased sanctions, with the potential of military action if Iran does not change its behavior. Those opposed to sanctions talk about how the sanctions are rather crudely implemented, restricting humanitarian goods like medicine. Others who are opposed to sanctions believe that the measures are not enough, and the lack of any significant concessions by Iran means that the West must react militarily to prevent Iran from obtaining a nuclear weapon (or the capability to build a nuclear weapon). I am not going to write about these arguments because the specifics details are not as interesting to me. I am much more interested in the big picture, which is why the lack of a comprehensive discussion of the entire situation is disturbing to me. 

It is certainly true that Iran's production of nuclear material has increased significantly since the various sanctions were implemented, but how can one measure the true impact of these sanctions? Do we look at the rapidly falling value of Iranian currency and the rampant inflation? Do we look at year by year or month by month comparisons of how much petroleum based products are exported by Iran? Do we look at the Iranian budget as an indicator of financial health? Do we look at the number of centrifuges used by Iran, or the quantity of enriched uranium which it has? 

Some will say that the increasing number of centrifuges which Iran is using indicates that sanctions are not having their desired effect. This is certainly possible, but what may be overlooked by this estimation is the possibility that Iran's rulers have placed an increased importance upon their nuclear program as a way to gain leverage with the West. From their actions, it seems as though the Iranians act rationally, couldn't this be an expression of their rationality? When one is put into a difficult situation isn't it natural to try and gain leverage in whatever way possible? 

Assuming some sort of interconnectivity between all things, claiming that sanctions are not having an effect on Iran is a ridiculous notion. Following this logic, won't there then be at least some impact on Iran's nuclear program? Iran does not exist in a vacuum, and its various governmental programs are similarly not isolated from every other part of the country's governmental apparatus.

Just because it is very difficult to quantify the impact of sanctions upon a program, this does not exclude the possibility of there being some sort of connection. The sanctions, while crude at best, clearly have had some sort of impact on Iran. While the effect of and the ability to measure sanctions on Iran's nuclear program is debatable, what is certain is that insufficient measurements using simplified methods will lead to simplistic, insufficient conclusions.