Stimulus

07.14.14

Thank Obama for Iran’s Growing Economy

The White House eased pressure on Tehran to get a preliminary nuclear deal. But Iran’s economy has bounced back fast, undercutting Western leverage as the talks’ deadline looms.

As U.S. and allied negotiators try to hammer out a nuclear deal with Iran this week in Vienna, they will have less economic leverage on their Iranian counterparts than they had a year ago.

That is the conclusion of a new study from Roubini Global Economics and the Foundation for the Defense of Democracies, two groups that have analyzed Iran’s economy—and the international sanctions imposed on the country’s banks, oil exports and leading regime figures.

Their report concludes that in the last year as the United States and other Western countries have begun to ease some of the sanctions on Iran as an inducement to negotiate an end to the country’s nuclear weapons program, the Iranian economy has begun to recover.

The recovery of Iran’s economy is a good thing for the Iranian people, who suffered a currency in free-fall, staggering inflation and a contraction of the country’s Gross Domestic Product. But at the same time, the economic sanctions that President Obama has credited with forcing Iran to begin these negotiations have appeared to lose their bite, according to the study that is scheduled to be released Monday.

“In 2012 and early 2013 Iran’s economy was on its back. As a result of the administration’s decision to deescalate sanction pressure, the economy has gotten onto its knees and is slowly getting back on its feet,” Mark Dubowitz, an author of the report and the executive director of the Foundation for the Defense of Democracies, told The Daily Beast on Sunday. 

Dubowitz and analysts from the Roubini Group—the consultancy formed by the often-prescient, sometimes controversial economist Nouriel Roubini—concluded for example that Iran’s GDP in 2014 and 2015 is expected to grow at 2 percent. That’s only modest growth—but it’s a huge improvement over Iran’s economic performance in the 2012/2013 fiscal year, when GDP contracted by 6.6 percent.

Inflation is also beginning to go down. The first quarter of 2014 saw the rate of inflation dip below 20 percent, still a worrisome number, but less than half the rate of inflation for Iran in early 2013 when it was at 45 percent. 

By the end of 2012, 40,000 Iranian Rial was worth one dollar. As of June, it’s now 33,000 Rial to the dollar.

More than a year ago, President Obama began to slowly ease sanctions on Iran. At first, the Treasury Department eased the pace of designating front companies, banks and individuals the country used to work around existing sanctions to coincide with the June 2013 election of Hassan Rouhani. In November, the United States and its allies eased the pressure even more, allowing Tehran to trade some of its oil and export some of its precious metals.

President Obama’s top officials told Congress at the time that the sanctions relief on Iran would be limited. Secretary of State John Kerry, for example, said the economic relief offered Iran would be worth no more than $7 billion and that Iran’s concessions to allow more inspections of its nuclear facilities was worth whatever economic relief Iran would receive.

According to the new study, the value of Obama’s economic relief tallies $11 billion over the last six months. That figure accounts for $7 billion in additional earnings from petroleum products and other exports, plus access to $4.2 billion of Iran’s oil revenues parked in foreign banks that was effectively frozen under the prior sanctions regime.

“Iran’s economy was on its back. As a result of the administration’s decision to deescalate sanction pressure, the economy has gotten onto its knees and is slowly getting back on its feet.”

Dubowitz last year estimated the value of Obama's economic relief would be around $20 billion. He said Sunday that if anything, he underestimated the overall value of the economic relief provided to Iran. His study says the value of economic sanctions goes beyond the additional money Iran was permitted to access from its oil sales and the money released from global banks. “Since mid-2013, we have witnessed a de-escalation of sanctions pressure and improvement in international and domestic sentiment towards the Iranian economy,” it says. This “improved sentiment” created by the loosening of some sanctions encourages investors and other banks to risk doing business with Iran, the report says. Dubowitz said when all of these factors are considered, the overall value of the relaxed sanctions exceeded the $20 billion he initially predicted. 

The loosening pressure on Iran’s economy may help explain why most observers do not expect any breakthrough in talks this week in Vienna. Kerry arrived this weekend in Vienna to begin talks with Iranian foreign minister Javad Zarif. Negotiators are working to hammer out a final nuclear deal by July 20, the first deadline imposed in an interim agreement reached between Iran and six great powers in November.

A senior State Department official over the weekend told reporters in Vienna that while some progress in talks has been made, significant gaps remain. This official said, “Iran has not moved from their—from our perspective—unworkable and inadequate positions that would not in fact assure us that their program is exclusively peaceful.”

Ayatollah Ali Khamenei, the supreme leader of Iran, has also made clear that his country is still seeking a nuclear infrastructure far greater than what the West believes Iran should be able keep under the parameters of a final deal.

On July 7, in a speech Khamenei said his country’s experts forecast Iran would need uranium produced by the equivalent of more than 190,000 centrifuges in future years. Initially the United States has said it would allow far fewer centrifuges in a final deal.