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06.07.2015

IRAN: AN ATTEMPT TO BYPASS THE SANCTIONS

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Sergey Sargsyan
Deputy Head, Centre for the Political Studies, Noravank Foundation

In negotiations around Iran’s nuclear program that last over 10 years now, even preliminary concluded agreements made it possible to somewhat ease the sanctions against the country imposed by the USA, EU and UN. However, there is no mention about lifting those altogether. Even the partial relief is under a big question.

In April 2015, right after achieving a “breakthrough” during the negotiations in Lausanne, the spiritual leader of Iran Ayatollah Ali Khamenei clearly pointed out: “nothing is done yet and there’s still nothing binding between the two sides. I’m neither for nor against it… What's been done so far secures neither the main deal nor its contents … we always say that no deal is better than a bad deal.” Noting the peculiarity of the negotiations, in which “it’s all about the details”, he stated that first, “all sanctions should be removed just when the deal is reached”, and second, that “inspectors will not be allowed into military facilities under the pretext of nuclear supervision”1.

What has an important impact on the general course of the negotiations is how quickly the technical part of lifting the sanctions can be completed, and whether there might be a possibility for formally new, but in fact replacement sanctions.

Obviously, sanctions negatively impact the Iranian economy. The situation in oil and gas and automotive industries can be brought as an example, as those constitute the main part of the country’s industrial budget.

After the European Union joined the US sanctions against Iranian oil and gas industry, the Iranian oil exports decreased from 2.5 million barrels daily in 2011 down to 1.1 million barrels.

Before 2011 the automotive industry accounted for 10% of the country’s GDP and employed 1 million people. After the imports of equipment necessary for automotive industry were banned, the manufacturing of new automobiles in the country fell from 1.5 million to 800,000 annually.

However, it has to be noted that the effect of sanctions on Iran’s economy is not all that clear-cut. In 2014 Iran increased natural gas production by 16 billion m3, and boosted the steel and cement production volumes multiple times to reach 24 and 80 million tons per annum, respectively. Iran became the 17th largest economy of the world. Foreign direct investments reached $25 billion, while Tehran’s foreign debt burden is only $16 billion, or just 4% of the GDP. IMF estimates Iran’s GDP in 2014 at $406 billion, which is the second largest in the region after Saudi Arabia2.

In over three and one-half decades of sanctions against Iran it became clear that they do not have the expected impact on the country that has such an ideologized and consolidated society. This concerns not only the economy, but also Tehran’s policies, including the nuclear policy, acting out the chess game of which was intended for quite a long term prospect and the true scale and achievements of which are hard to assess, as much as what Iran is ready to concede for lifting the sanctions.

As economic sanctions continue to be an instrument of external political pressure and geopolitical competition in today’s world, it is worth to study more thoroughly Iran’s experience in facing and overcoming the sanctions. This experience, which is rather universal and has been accumulated since 1979 Islamic revolution, includes not only adapting to and countering the sanctions, but also creating an efficient, active and integral system of legal, “gray” and secret schemes to bypass them, thus allowing Iran to upkeep its economy and maintain political independence.

The fact that sanctions against the Islamic Republic were imposed gradually and for various reasons (human rights violations, non-transparent nuclear program, support to terrorism, etc.) allowed Iran adapting to them with minimal losses.

In its counter-policies Iran utilized all possible means; from disputing the imposing of sanctions per se, their specific content (for example denying specific long-term loans, non-compliance with already signed agreements, etc.) to conducting secret operations to acquire necessary products, technologies and services.

These attempts were often successful, even at the public and legal level. For example, in January 2015 EU general court removed 8 shipping companies from the list of 40 that were under EU sanctions (for allegedly contributing to nuclear proliferation)3.

In this context Iran has acted in many different ways: performed barter transactions, conducted swap deals (such as oil-for-goods deals), traded in gold, used national currency instead of dollars or euros, etc.

In early 2014 Tehran and Moscow made an agreement by which Russia pledged to act as a trade broker for 500,000 barrels of Iranian oil daily, by which the funds received from its re-export would be used to supply necessary goods to Iran (first of all wheat, certain equipment and construction materials)4.

At the initial phase, in June 2015 the supply of grain from Russia would constitute 1.3 million tons5. Later the list could expand to include oil/gas equipment, railway rolling stock, vehicles, agricultural machinery, civil aviation airplanes, etc.

Oil-for-goods swaps are legal and in the past were used as economic deals. In particular, when Iraq was ruled by Saddam Hussein and was under international UN sanctions, the country joined the Oil-for-food program.

Iran’s well-developed network of small and medium business partners plays an important role in helping bypass the sanctions. For extra profits or other benefits (including political) they supply strategic products and the newest technologies to Iran.6

Usually they receive payments for their brokering services in amount of 15-20% of the trade deal value. Depending on the importance of the deal, the payment may go up to as much as 30 percent or higher.

These Indian, Singaporean, Japanese and Malaysian small firms do not care about a potential response from US and EU. In 2010 they helped fully cover the gap created by the refusal of European large shipping companies to carry out exports of the products of Iranian petrochemical industry, while in 2011 they replaced the European insurance companies that refused to ensure Iranian tankers.

Large volumes of such intermediary services offered are due to high profits. In December 2013 the American blacklist included 1107 small and medium-sized European companies that traded with Iran bypassing the US and EU sanctions. In addition, there were also 512 Turkish companies.7

It should be noted that any relief in sanctions, but not their full termination, would result in further expansion of this network. The European companies are ready to bypass the sanctions given the purchasing power of Iranian market sized 80 million. This is particularly true for French (especially with regard to the auto industry) and German corporations (especially in relation to mining industry).

After another round of negotiations on Iran’s nuclear program in 2013, Samsung and several European carmakers took advantage of sectoral reliefs announced by the USA and followed the example of Turkish and Chinese companies (governments of Turkey and China never fully supported the sanctions) to immediately restart operations in Iran.8 There is an impression that if negotiations with Tehran fail, it would be very hard to “chase” these companies out of Iran.

As far as the international finance transactions are concerned, the sanctions imposed by the USA and later joined by EU led the foreign currency reserves of Iran to be dominated by Chinese renminbi, Indian rupee, Russian ruble and gold.

If the ban on the use of international payments system SWIFT (imposed in 2012) persists, Iran may switch in September-October 2015 to the Chinese International Payment System (CIPS) or similar infrastructure, which will enable banks in different countries to conduct transactions with each other in renminbi instead of dollar.

Thus, sanctions imposed on Iran do not produce the critical effects on Iranian economy and especially policies that the initiators of the sanctions wanted to see, which is explained by a number of factors, including: consolidation of the Iranian society against the sanctions; the fact that most of the sanctions are not international (not UN approved), but rather, imposed at the initiative of the USA and EU; the modern world renders alternative, first of all economic opportunities to Iran; and a skillfully built system of legal and “gray” schemes to bypass the sanctions. Consequently, same as in the past, Tehran remains a difficult and tenacious negotiator in the context of its strategic interests related to the nuclear program and regional security.

1 Хаменеи: «Договоренности, которые были достигнуты в Лозанне, еще не гарантируют ядерную сделку». ИА ARMENIA Today, 9 апреля 2015г., http://www.armtoday.info/default.asp?Lang=_Ru&NewsID=127961

2 Иран: 36 лет независимости, 36 лет давления, 12 февраля 2015, http://www.iran.ru/news/analytics/96250/Iran_36_let_nezavisimosti_36_let_davleniya

3 Евросоюз вновь ввел санкции против третьего по величине банка Ирана и 32 судоходных компаний страны, ИА ARMENIA Today, 8.04.2015, http://www.armtoday.info/default.asp?Lang=_Ru&NewsID=127907

4 Санкции США против Ирана и иранский ответ. Фонд Стратегической Культуры, 13 февраля 2014г., http://www.fondsk.ru/news/2014/02/13/sankcii-usa-protiv-irana-i-iranskij-otvet-25713.html

5 Иран - Россия: нефть в обмен на товары, 8 июня 2015г., http://www.vestifinance.ru/articles/58399

6 «Рука Аллаха» против санкций Вашингтона, ИА издание «Столетие», 11 февраля 2014г., http://www.stoletie.ru/-geopolitika/ruka_allaha_protiv_sankcij_vashingtona_712.htm

7 Ibid.

8 «Иран: есть ли жизнь после санкций?», 4 июня 2015г., http://www.vestifinance.ru/articles/58260


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