Sanctions and Regime Policies Cause Growing Crisis in Iran

7/26/2019 Sanctions and Regime Policies Cause Growing Crisis in Iran

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A Growing Crisis 1

A Growing

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www.iranhumanrights.org


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Copyright 2013 by the InternationalCampaign for Human Rights in Iran

All rights reserved. No part of thisbook may be reproduced, stored ina retrieval system, or transmitted in

any form or by any means, includingmechanical, electric, photocopying, re-cording, or otherwise, without the prior

written permission of the InternationalCampaign for Human Rights in Iran.

A Growing Crisis: The Impact ofSanctions and Regime Policies onIranians Economic and Social Rights


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Executive Summary

Recommendations

Introduction

Irans Economic Malaisefrom 19792012

The Khomeini Period (19791989)

The Rafsanjani Period (19891997)

The Khatami Period (19972005)

The Ahmadinejad Period (2005Present)

Crippling Sanctions

Consequences for the Iranian Economy

Manufacturing, Blue Collar Workers,and the Urban Poor

The Professional Middle Class,Small Business Owners, and Bazaaris

Medicine and Healthcare

Conclusion


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ExecutiveSummary


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Despite the internaonal communitys stated intenonto direct sancons at the government of Iran for its

nuclear program, and the Iranian governments claimthat it is successfully instung a resistance economy,Western sancons and regime policies are combiningto bring about a severe deterioraon in the ability ofthe Iranian people to pursue their economic and socialrights. In fact, there is a growing crisis in Iran: Iranians,especially those from the lower and middle echelonsof society, are increasingly unable to maintain access

to such basic rights as a balanced diet, medicine,employment, educaon, and healthcare.

This study by the Internaonal Campaign for HumanRights in Iran details the costs borne by the Iranian


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people as a combined result of the internaonalsancons imposed on the Islamic Republic and the

economic policies instuted by the government ofIran. Drawing on a review of scholarly material and

journalisc accounts, as well as extensive interviewswith a cross-secon of Iranians, the study seeks to showthat sancons and regime policies are now prevenngmany Iranians from meeng their basic economic needs.

Prior to 2012, sancons were not a signicant

contributor to economic hardship in Iran. Throughoutthe 1979-2011 period, the eect of internaonalsancons against Iran was limited as sancons duringthis period were unilaterally imposed by the US, andother countries were able to ll the void in trade andbusiness transacons with Iran, even if at a slightlyhigher cost to the Islamic Republic.

Rather, harmful economic policies undertaken bysuccessive governments of the Islamic Republicduring this period far outweighed the impact ofany sancons in terms of economic costs to thecountry. Under the post-revoluonary leaderships ofAyatollah Khomeini (1979-1989), Hashemi Rafsanjani(1989-1997), Mohammad Khatami (1997-2005), and

Mahmoud Ahmadinejad (2005-present), economicpolicies producedand perpetuatedan Iranianeconomy marked by state-dominaon, oil-dependency,ineciency, and corrupon. The result was highunemployment, inaon, brain drain, and anemiceconomic growth rates. However, exceponally highoil prices during the last decade allowed the Iraniangovernment to compensate forand maskeconomic


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costs that were associated either with governmentpolicies or sancons, thereby migang the economic

harm to the Iranian populaon.

This changed signicantly with the implementaonof mullateral sancons in 2012, which targeted allsectors of the Iranian economy and took direct aimat Irans principle source of revenue, its oil sector.The comprehensive and stringent nature of thesesancons has aected all trade with the Islamic

Republic, rendering even the movement of goodsthat are explicitly exempt from sancons dicult.When combined with the dysfunconal economicpolicies of the Iranian governmentparcularly thoseenacted under the administraon of Ahmadinejad,which exacerbated inaon and unemployment in thecountry and le the import- and oil-dependent Iranianeconomy deeply vulnerable to the impact of the 2012sanconsthe economic costs of the sancons to theIranian populaon became severe. Moreover, connuedregime mismanagementwhich reects either willfulexacerbaon of the sancons eects for polical gain ormanagerial incompetencehas worsened the economicdicules of many in Iran; for example, the Iraniangovernments under-allocaon of resources for the

import of crical items such as medicines has produceda crisis for many Iranians.

Sancons and regime policies have thus combined todebilitang eect. Moving any goods into or out ofthe country has become prohibively expensive dueto substanally increased transacon and operangcosts arising from the sancons banking, nancial, and


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insurance prohibions. Crically, this includes foods,medicines, and other humanitarian itemseither

because the payment channels have been cut o asa result of the banking prohibions, or because rmshave become reluctant to do business with the IslamicRepublic for fear of running afoul of the sancons. As aresult, it has become dicult for the country to maintainthe requisite level of essenal imports, which includenot only foods and medicines, but the inputs and rawmaterials that Irans industries depend upon as well.

Meanwhile, the sancons have halved Irans oilrevenues. This has contributed signicantly to theprecipitous decline in the value of the rial. With itsforeign exchange earnings halved and unable to transferits oil earnings back to Iran, the Iranian governmenthas found it dicult to supply the requisite funds tosupport its currency. As a result, inaon has sharplyincreased, to at least 50 percent by some esmates,and higher in some sectors. The standard of living of allwage earners has plummeted and a rising number ofunemployed individuals and their families living in thecountrys urban centers are being pushed into povertyand malnutrion.

The decline in the naons manufacturing sector,and, with it, the condion of Irans roughly 15 millionworkers and their dependents, has been parcularlypronounced. The sancons have reduced access to andsubstanally raised the cost of the hard currency thatmanufacturers require for the purchase of indispensableinputs, raw materials, spare parts, machinery, andcapital goods. At the same me, by imposing restricons


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on and increasing nancial,transportaon, and

insurance costs, sanconshave increased operangcosts.

Since 2012, the numberof bankruptcies, layos,and plant closures hassubstanally increased.

The rapid depleon ofthe countrys foreigncurrency reserves willincreasingly choke o thecapital goods and inputsthat Irans industrial sectorrequires in order to sustain operaons. This will resultin the closure of more plants and operaons, and theimpoverishment of ever-larger segments of the workingpopulaon. Indeed, some two-thirds of the naonsmanufacturing units are on the verge of closure, andemployed workers are now being paid in an irregularand infrequent manner. Millions of Iranians from thelower and middle echelons of society are struggling tomeet the rising costs of rent and food; the growing ranks

of the unemployed now face dispossession and hunger.

The crisis in the countrys healthcare system hasbecome parcularly severe. Iran is crically dependenton imports in this sector: its stock of medical equipmentis almost enrely imported, and its pharmaceucalindustry depends on imports for 80 percent of the rawmaterials they ulize to manufacture their products.

These sanctionshave affected all

trade with the

Islamic Republic,rendering even the

movement of goodsexplicitly exempt

from sanctionsdifcult.p. 11


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Advanced drugs used to treat life-threatening diseases(which aict some six million Iranians) are all imported.

Yet due to the banking sancons and Irans expulsionfrom SWIFT, there are no viable channels to makepayments to Western suppliers.

The Iranian government has greatly exacerbated thesituaon by not allocang the requisite hard currencyto the medical sector. As a result, there are acuteshoralls in medicines and equipment, and long delays

in transporng medicine to Iran. The most vital drugs forcancer and other severe diseases are now unavailable.Shortages, and the devaluaon of the rial, haveproduced a 350 percent inaon rate in medical costs,making what is available increasingly out of reach formost Iranians.

The nutrional value and balance of the consumponbasket of the majority of Iranians has also plummeted.The naon is dependent on imports for about a quarterof its food requirements. With the plunge in the valueof the Iranian currency, the rise in the cost of imports,and the growing ranks of the unemployed, increasingnumbers of Iranians are no longer able to aord meat,poultry, fruits, vegetables, and dairy, relying instead on a

diet largely comprised of carbohydrates.

Signicant increases in the rate of poverty, hunger, andmalnutrion engender other negave repercussions,especially for women and children. The most perniciousof these are the withdrawal of children from schoolsand child labor, with the brunt of these pracces beingborne by young girls. Women are more likely to lose


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their jobs, and economic and social dislocaons maywell lead to increased domesc violence.

The Internaonal Campaign for Human Rights in Irancalls on all pares to reassess their policies in light ofthe economic harm being inicted upon the Iranianpeople. The government of Iran should end theneedless policies that only worsen the crisis in accessto medicines, foods, and other essenal imports. Theinternaonal community must recognize the growing

crisis in Iran and recalibrate the current sanconregime. Sancons were implemented to raise thecost to the government of Iran of its noncompliancewith UN Security Council resoluons on the countrysnuclear program. Yet the Iranian people, who bearno responsibility for the policies undertaken by thegovernment, have increasingly come to bear the costof the sancons. Accordingly, this study oers specicpolicy recommendaons to the Iranian government, theUS and EU governments, the UN, and relevant privatesector companies, aimed at instung a more eecvedomesc policy environment in Iran and a moreeecvely targeted sancons regime that imposes costson the Iranian government, not the Iranian people.


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Recommendations


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To the governments of the United States and the

European Union:

1. Make clear and explicit statements regarding thepermissibility of exports of humanitarian goodsto Iran, including food, medicine, and medicalinputs and equipment.

2. Expedite licensing for all exports jused onhumanitarian grounds, especially food and

medical exports.

3. Explicitly exempt from banking sancons allhumanitarian transacons with Iran, so thatcompanies who export food, medicine, medical


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equipment, and other humanitarian goodsto Iran can receive payment by their Iranian

counterparts.

4. Select a European bank, trained, ociallyauthorized, and supervised by the USgovernments Oce of Foreign Assets Control(OFAC), to handle all humanitarian transaconswith Iran and/or allow an internaonal agencyto mediate medical and other humanitarian

transacons.

5. Explicitly exempt from sancons, expeditelicensing for, and exempt from bankingprohibions all exports pernent to themaintenance of civil society in Iran, includingthose relevant to safe and open access toinformaon such as digital hardware andsoware.

6. Create channels whereby Iranian educaonalcenters can make payments and gain accessto databases containing scholarly books andarcles.

To the United Naons:

1. Encourage the establishment of an independentmechanism to monitor the humanitarianeects of sancons, with parcular aenon toimports of necessary food and medicine items.


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2. Call on all member governments to explicitlyexempt from sanconsand provide expedited

export licenses forall humanitarian goods,including food, medicine, and medical inputs, aswell as any goods and services necessary for themaintenance of civil society in Iran.

To the government of Iran:

1. Allocate immediately all necessary funds for theimport of requisite medicine and medical inputsand equipment into the country.

2. Allocate to the healthcare sector its share of thesavings from the subsidies reform program.

3. Allocate hard currency at the lowest subsidizedrate to the Ministry of Health.

4. Re-allocate the funds currently used for luxuryitems to crically needed humanitarian goods,especially medicines and medical equipment.

5. Encourage Iranian banks to lend to thepharmaceucal industry and the manufacturingsector.

6. Facilitate and expedite licensing and customsprocedures for medicines and medical input andequipment.


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To private sector companies:

1. Companies relevant to the medical sector,including pharmaceucal companies, suppliersof raw material and inputs, and medicalequipment companies, should seek and applyfor all necessary licenses for medical exports toIran, and should facilitate and cooperate with alleorts to set up intermediary nancial bodies

that can process transacons and payments.

2. Technology rms should seek explicitexempons from sancons and apply forlicensing for all exports that assist Iraniancivil society in informaon sharing andcommunicaon, including hardware neededfor the recepon of satellite wireless servicein Iran, soware, social networking tools, andany other relevant and necessary informaoncommunicaon technologies.


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A Growing Crisis 21


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Introduction


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This study will examine the impact of increasinglystringent and comprehensive sancons on the ability of

Iranians from various walks of life, especially those fromthe lower and middle echelons of society, to pursuetheir economic and social rights to employment, food,shelter, healthcare, and educaon.

It will show that unl the imposion of American andEuropean Union sancons in 2012, the economic andadministrave policies of the Islamic Republic itself

were more instrumental than sancons in detracngfrom the capacity of Iranians to fulll their rights toadequate standards of living, parcularly the aainmentand sustenance of gainful employment. Moreover,during the decade preceding the imposion of the 2012


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sancons, the expanding stream of revenue accruingto the Iranian state due to rising oil prices enabled the

Islamic Republic to migate the consequences of itsown policies and tolerate the limited, though graduallyincreasing, costs that sancons were imposing on itseconomy.

However, as this study will argue, this fundamentallychanged with the imposion of the 2012 sancons,which targeted all sectors of the Iranian economy

and cut the Iranian governments revenue stream bymore than half. The Iranian governments connuedeconomic mismanagement, which reects either willfulexacerbaon of the sancons eects for polical gainor managerial incompetence, has only intensiedthe economic harm brought by the sancons to thepopulaon. Taken together, sancons have nowcombined with regime policies to produce a rapiddeterioraon in the socio-economic condions of theIranian people.

From 1979 to the mid-2000s, sancons against Iranwere essenally unilateral, imposed solely by the US.Although these sancons inicted costs on Iran, whichwere subsequently passed on to the Iranian people,

these costs were not overbearing, as non-Americancompanies were unwilling to sever their links to theIranian economy.

Aer 1996, with the passage of the Iran-Libya SanconsAct (ILSA), the US sought to iniate the process ofchoking o Irans most important source of hardcurrency and governmental revenue by imposing


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sancons on any enty that invested more than $20million per annum in Irans hydrocarbons sector. In

pracce, however, due to severe objecons fromAmericas European allies, full implementaon of ILSAremained elusive. The imposion of the rst round ofUN Security Council resoluons against Iran in 2006enabled the US to receive more cooperaon from itsEuropean partners and other allies in its endeavorto increase the transacon costs on the Iranianeconomy. But it was not unl 2012 and the imposion

of comprehensive, mullateral sancons that thiscooperaon reached its apogee, resulng not only in ageometric rise in the costs being imposed on Iran, butalso, for the rst me since Irans oil naonalizaonmovement in the early 1950s, an eecve embargo onTehrans primary revenue streamits oil exports.

The imposion of the 2012 sancons have nowcaused Irans oil revenues to be cut by more thanhalf,1and substanally increased its transacon and

1 In August 2012, Bob Einhorn, Special Advisor for Nonproliferaon and

Arms Control at the US Department of State, cing gures from the

Internaonal Energy Agency, stated that Irans crude oil exports in 2011 were

approximately 2.5 million barrels per day. They dropped to below 1.5 millionbarrels per day in June [2012]. See Part II: US Assesses New Sancons, Iran

Primer, August 1, 2012, hp://iranprimer.usip.org/blog/2012/aug/01/part-

ii-us-assesses-new-sancons. Thereaer, Irans oil exports connued their

plunge, falling to 860,000 barrels per day in September 2012. See Reuters:

EU Sancons Have Inadvertently Aicted Irans Liqueed Gas, Radiofarda,

October 31, 2012. While the gure rose to 1.08 million in November, it

plummeted to 834,000 million barrels per day in December 2012. See Irans

Oil Exports Will Plunge to Lowest Level in December, Voice of America (VOA)

Persian, December 6, 2012.


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operang costs by, among other things, making itvirtually impossible to transfer funds into and out of

the country. The resulng hard-currency crunch andrevenue shoralls have, in turn, signicantly decreasedthe value of the Iranian currency, greatly increased thecosts and diminished the amount of both essenal andnon-essenal imports (including medicine and medicalequipment), expedited the contracon of the alreadymoribund economy, reduced the tax base, furtherdepleted the governments revenues, and sharply

expanded the inaon and unemployment ratesboth of which were already in double digits. The costsassociated with the newly imposed round of sancons,therefore, are no longer limited, but increasinglydebilitang.

As a result of the 2012 sancons, Iran is now largelyunable to migate the worsening structural aws of itseconomy. Instead, internal economic, managerial, andbureaucrac aws have combined with sancons toimpose unprecedented levels of hardship on the livesof ordinary Iranians. The standard of living of all wageearners has plummeted substanally and an increasingnumber of unemployed individuals and blue-collarworkers (and their dependents) living in the countrys

urban centers, where 71 percent of the populaonresides, are being pushed into penury and malnutrion.

The internal and external drags on the Iranian economyare now so intertwined that assigning a specic weightto their respecve impact on the living standards ofIranians is dicult. However, it is clear that there hasbeen a signicant shi: Prior to the 2012 sancons, it


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was simple to demonstrate,both conceptually and

empirically, that domescIranian policies boregreater responsibility forthe economic sueringsof the Iranian people thansancons. This is no longerthe case.

So far as the economicwell-being of the Iranianpopulaon is concerned,comprehensive mullateralsancons could not havecome at a more vulnerablemoment. Imposed at a me when the ramicaonsof President Mahmoud Ahmadinejads economicmismanagement were increasingly manifesngthemselves, these sancons have greatly amplied thedefects of the Iranian economy, crippling the ability ofordinary Iranians to maintain adequate standards ofliving and unhindered access to such basic rights as abalanced diet, medicine, employment, educaon, andhealthcare.

Since its incepon in 1979, the Islamic Republic hasmanaged to register a respectable record in thepromoon of the countrys social development,substanally increasing the rates of educaon, literacy(especially in the ranks of women), and life expectancy.It has also succeeded in bringing about reducons ininfant mortality and has introduced modern amenies

The decline inthe nations

manufacturing

sector, and thecondition of Irans

workers and theirdependents has

been particularlypronounced.p. 12


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(such as educaonal instuons, paved roads,electricity, piped water, and television) to rural areas.

Through its social development programs, parcularlyin rural areas, the Islamic Republic had also, at leastunl recently, succeeded in diminishing the overall rateof poverty in the naon, though not that of incomeinequality and unemployment.2

On the economic front, however, the Islamic Republichas perpetuated and exacerbated the structural

economic aws it inherited from the Shahs regime.The resulng instuonalizaon of a state-dominated,oil dependent, inecient, and uncompeve economy(beset by mismanagement, venality, inaon,3un-and under-employment, anemic growth, sub-parproducvity levels, insignicant rates of foreign directinvestment, and the producon of low-value-addedgoods4) had, even before the imposion of the mostrecent round of sancons, proved inimical to the ability

2 See Ervand Abrahamian, Why the Islamic Republic Has Survived, Middle

East Report, March 15, 2009. See also Djavad Salehi-Isfahani, The Revoluon

and the Rural Poor, Radical History Review, Fall 2009.

3 According to the Central Bank of Iran, except for two years, the rate ofinaon has perpetually been in double digits in Iran in the course of the

past 33 years. See Fereydoun Khavand, Condion of the Iranian Rial and the

Experience of Monetary Turkomanchai, Radiofarda,September 12, 2012.

4According to the stascs put out by the Department of Customs of the

Islamic Republic of Iran, each ton of imports to Iran last year was valued

at $1,634, while each ton of exports had an average value of $468. See

Fereydoun Khavand, Resistance Economy Or A Shot in the Dark, Radiofarda,

August 1, 2012.


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of Iranians, especially the youth who constute themajority of the populaon, to fulll their social and

economic rights to employment, housing, marriage, andfamily formaon.5Indeed, the persistent inability of theIslamic Republic to create the requisite condions forits youthful populaon to achieve gainful employmenthas stood in sharp contrast to its ability to increasethe naons literacy rates and educaonal levels. Infact, according to stascs put out by the regime itself,unemployment among youth with college and university

degrees tends to be higher than among those withlower levels of educaon.

Since 2005, when Mahmoud Ahmadinejad replacedSeyyed Mohammad Khatami as the president of theIslamic Republic of Iran, however, there has been apersistent and worsening decline in all of Irans macro-economic indicators. Correspondingly, the ability ofIranians, parcularly the young, to make ends meet hasgone from bad to worse. The policies that Iran enactedduring the presidency of Ahmadinejad paved the wayfor the transformaon of an already inauspiciouseconomic milieu into a dire one, which, with theaddion of the sancons, has now grown into aneconomic crisis.

This study will examine the impact of sancons onIrans economic performance from 1979 to 2012. It

5 Djavad Salehi-Isfahani, Growing Up in Iran: Tough Times for the

Revoluons Children, Brown Journal of World Aairs, Vol. XV, Issue I, Fall/

Winter 2008.


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will explain how andwhy, unl the imposion

of 2012 sancons, thestructural aws and policychoices of the IslamicRepublic overshadowedthe sancons in terms oftheir consequences forthe economic well-beingof the Iranian people.

It will also provide anin-depth examinaonof Ahmadinejadspolicies in the courseof the last seven-and-a-half years, detailing

how they exacerbated the structural aws of theIranian economy, expedited the decline in Iransmacro-economic indicators, and ulmately made thelivelihoods of average Iranians far more vulnerable toincreasingly comprehensive sancons. Thereaer, it willprovide anecdotal evidence on the impact of sanconsand government mismanagement on the rapidlydeteriorang socio-economic condions of averageIranians.

The study will show that while Iranian governmentpolicies produced a deeply dysfunconal economythat le the countrys signicant economic potenalunrealized, it was only with the imposion of the2012 sancons (and the Iranian governments policyresponse to them) that the Iranian people began tobe unable to pursue their basic economic and social

The Iraniangovernmentscontinued economic

mismanagementhas only intensiedthe economic harmbrought by the

sanctions to thepopulation.p. 24


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rights. The aim is not simply to analyze, but to put intocontext and humanize the manner in which Western

sancons and regime policies are combining to bringabout a severe decline in the living standard (includingaccess to adequate nutrion, employment, healthcareand medicaon, shelter, and educaon) of lower andmiddle class Iranians, parcularly those who residein the naons urban areas. The study also oerspolicy recommendaons to the Iranian governmentaimed at instung a more eecve domesc policy

environment, and to the internaonal community,aimed at achieving a sancons regime that moreeecvely targets the Iranian government and does notforce the Iranian people to bear the consequences ofregime policies for which they bear no responsibility.


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IransEconomicMalaise19792012


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This secon will assess the impact of sancons onIrans economic performance and the socio-economic

welfare of the Iranian people from the incepon ofthe Islamic Republic (which roughly coincides with theiniaon of the rst set of US sancons against Iran inNovember of 1979) to the imposion of American andEuropean Union sancons in 2012. It will argue thatdue to their unilateral and targeted nature, the costsof sancons against Iran before 2005 were limited andgenerally marginal. During these years, the policies and

pracces of the Iranian government itself played a farmore instrumental role in undermining the capacity ofIranians to promote their economic well-being.


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With slightly more than 1 percent of the globalpopulaon, Iran possesses at least 7 percent of the

worlds mineral wealth, 10 percent of its petroleumreserves, and 16 percent of the planets natural gasdeposits.6Iran possesses the second-largest knownnatural gas reserves and the third-largest petroleumdeposits in the world. The combinaon of its natural gasand petroleum deposits makes Iran the worlds largestreserve holder of hydrocarbons. According to the WorldBank, roughly 98 percent of Iranians between the ages

of 15 and 24 are literate.7According to the Central Bankof Iran, the number of individuals with post-secondarydegrees, which currently stands close to 9.5 million (outof a populaon of some 75 million), is increasing rapidly,with close to 3.5 million students presently enrolled inpost-secondary instuons of higher learning.

In light of its enormous wealth of human and naturalresources, entrepreneurial and youthful populaon,strategic locaon (apart from being the only countrythat connects the Caspian Basin to the Persian Gulf,Irans status as a neighbor to 15 land and sea countriesand its posion as a bridge between Europe, South Asia,the Caucasus, and Central Asia makes it an ideal north/

6Jahangir Amuzegar, Irans 20 Year Economic Perspecve: Promises and

Pialls, Middle East Policy, Volume 16, No. 3, September 2009.

7 Literacy Rate; Youth Total, Trading Economics, hp://www.

tradingeconomics.com/iran/literacy-rate-youth-total-percent-of-people-ages-

15-24-wb-data.html.


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south and east/west transitroute),8and relavely

advanced infrastructure,Iran isand has beenideally posioned to serveas a magnet for investmentsthat could accelerateits economic take-o,transform the country intoa locomove for regional

growth, and enhancesubstanally the socio-economic welfare of itspopulaon.

Regreably, however, thecountrys economic performance over the last 33 yearshas at best been sub-par. Irans GDP per capita reachedits pre-revoluonary level only in 2007.9Other indicatorsof macro-economic performance have been similarlyanemic, although the country has, since the revoluon,performed beer in terms of increasing the overalllevels of life expectancy, literacy, and educaon. In theeconomic realm, however, Iran has stagnated. Since1979, inaon and unemployment rates have almost

8 Ibid.

9 Hossein Askari, Irans Economic Policy Dilemma, Internaonal Journal,

Vol. 59, No. 3, Summer 2004. See also Hossein Askari, Irans Economic

Vulnerability: Self-Inicted, Not Sancon-Driven, isideIRAN.org, November

10, 2009, hp://www.insideiran.org/news/iran%E2%80%99s-economic-

vulnerability-self-inicted-not-sancon-driven/.

Sanctions havenow combined

with regime

policies toproduce a rapiddeterioration in

the socio-economic

conditions of theIranian people.p. 24


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never fallen to single digits,10while over-employment inthe bloated public sector has proved stubbornly resilient

and detracted from the naons capacity to increaseeconomic growth and job creaon in the private sector,the primary engine for economic development.11In themeanme, the naons business climate has consistentlyscored poorly in rankings by the World Bank, FreedomHouse (index on economic freedoms), and TransparencyInternaonal, while levels of foreign direct investmentthat the country has managed to aract, especially

outside of its oil and gas sector, have been miniscule.12In addion, according to the Internaonal MonetaryFund, at 150,000 emigrants per annum, Iran has one ofthe highest rates of brain drain in the world.

Prior to 2012, the primary causes behind such poorperformance could be traced back to the structureof the Iranian economy and the policies espousedby the regime. To illustrate the point, this study willreview and compare the impact of internally generatedimpediments (i.e. Iranian government policies) withexternal detriments (US, UN, and EU sancons) on the

10 Except for a few years of strict wage and price controls during the Iran-

Iraq War, [inaon] has steadily registered double-digits. Jahangir Amuzegar,Irans Economy in Turmoil, Internaonal Economic BullenCarnegie

Endowment for Internaonal Peace, March 18, 2010,

hp://carnegieendowment.org/2010/03/18/iran-s-economy-in-turmoil/3zgx.

11 Askari, Irans Economic Policy Dilemma, Internaonal Journal, 2004.

12 Amuzegar, Irans 20 Year Economic Perspecve: Promises and Pialls,

Middle East Policy. See also Askari, Irans Economic Policy Dilemma,

Internaonal Journal, 2004.


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performance of the Iranian economy over the last 33years. For the sake of clarity, a simple classicaon

scheme, corresponding to the Khomeini (1979-1989),Rafsanjani (1989-1997), Khatami (1997-2005), andAhmadinejad (2005-present) periods, will be employed.


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TheKhomeini Period19791989


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During the me that Ayatollah Khomeini was ruling Iran,sancons against the Islamic Republic were essenallyunilateral, imposed solely by the US. Even at the heightof the hostage crisis, which ensued in the wake of theseizure of the American embassy in Tehran and theholding of its personnel hostage by Iranian studentsfor 444 days, American allies and partners refrainedfrom emulang the USs example of sanconing Iran.

To the contrary and to the chagrin of Washington, theygenerally lled the void that had been le by Americaswithdrawal from trade with the Islamic Republic.

Between 1979 and 1980, in response to the hostagecrisis, President Carter issued one proclamaon andthree execuve orders against Iran. Proclamaon 4702


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banned the import of Iranian oil into the US. ExecuveOrders 12170, 12205, and 12211, respecvely, froze all

assets owned by the government and the central bankof Iran in the US, prohibited American exports to Iran,and forbade the conduct of nancial transacons on thepart of American cizens with, as well as traveling to,Iran. All of the above restricons, however, except forthe freezing of Iranian assets in the US, were annulledby the US aer the release of American hostages in1981.13

In 1984 the Reagan administraon designated Iran astate sponsor of internaonal terrorism following thebombing of the US marine barracks in Lebanon, whichmade Iran ineligible for American nancial assistance(with the excepon of the provision of disaster relief).In 1986, the US Congress passed, and President Reagansigned, the US Arms Export Control Act, on the basis ofwhich the sale of American weapons and spare partsto Iran became illegal. In 1987, the president issuedExecuve Order 12613, banning the import of all Iranianproducts, including Iranian crude oil, into the US. Finally,in 1988, President Reagan ordered American directorsat internaonal lending instuons such as the IMF andthe World Bank, where Americas sway is quite strong,

to refrain from agreeing to the issuance of loans to Iran.14

13 Richard Sabani, Economic Sancons: Pressuring Irans Nuclear Program,

NTI, June 24, 2010. See also Suzanne Maloney, Sanconing Iran: If Only It

Were So Simple, Washington Quarterly, January 2010, p. 138.

14 Sabani, Economic Sancons: Pressuring Irans Nuclear Program, 2010.


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A Growing Crisis 41

Although these moves imposed costs on the Iranianeconomy, their impact was limited. Among the sancons

that the US imposed during the Khomeini period, thefreezing of Irans assets in the US, which amounted tosome $12 billion, caused the greatest harm to Iran, asthe Islamic Republic was in need of these funds to payfor the prosecuon of its war with Iraq. However, duringthis me Iran was sll able to sell its oil, the mainstayof its economy, to non-American buyers. Actually, evenaer being banned from imporng Iranian oil into the

US, American oil companies connued to purchaseoil from Iran for resale to non-American enes. Iran,meanwhile, was able to buy some of its requisiteAmerican weaponry and spare parts from Israel insteadof the US. Moreover, even the US itself, in violaon of itsown laws, sold weapons to Iran during the Iran-Contraepisode.15At the same me, Iran was able to connueto import US-made goods through Dubai at slightlyhigher prices and, wherever possible, switched to non-American (at the me mostly European, especiallyGerman) sources. Lastly, Iran did not seek to borrowmoney from internaonal lending instuons during theKhomeini period, rendering this American prohibioninconsequenal.16

15 See Trita Parsi, Treacherous Alliance: The Secret Dealings Israel, Iran, and

the United States,New Haven: Yale University Press, 2007.

16 See Hossein Askari, John J. Forrer, Hildy Teegen, and Jiawen Yang,

US Economic Sancons: Lessons From the Iranian Experience, Global

Management Working Paper Series,The George Washington University, July

2001.


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42

At the external level,during the 1980s the Iran-

Iraq war and reduconsin the price of oil had afar greater eect on theIranian economy thanAmerican sancons.Indeed, damages inictedon Iranian civilian andpetroleum infrastructure

by the Iraqi war machinein the 1980s ran intohundreds of billions ofdollars, and the fall in theprice of oil from close to$40 per barrel in 1981

to near $10 per barrel by 1986 hugely reduced Iransexport revenues. In contrast, the price that Iran wasmade to pay because of the American sancons wasapproximately $1 billion per annum.17

These costs, however, pale in comparison withthe internal burdens that were placed on theIranian economy during the Khomeini period. Thetransformaons that were unleashed between 1979

and 1989 in Iran resulted in the instuonalizaon ofexceedingly damaging economic and social structures.

While Ayatollah Khomeini and his associates inherited

17 Ibid. See also Hossein Askari, Irans Economic Policy Dilemma,

Internaonal Journal, Vol. 59, No. 3, Summer 2004, pp. 659, 660.

The standardof living hasplummeted and an

increasing numberof unemployedindividuals arebeing pushed

into penury andmalnutrition.p. 26


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A Growing Crisis 43

a largely oil-dependent economy with a relavelyinecient manufacturing sector from the Shahs

regime, the policies they implemented during therst decade of the revoluon laid the groundwork forthe entrenchment of a far more inecient and oil-dependent systemsaddled with a much larger andincompetent bureaucracy. This system has come toperpetuate consistently high rates of unemployment,inaon, and venality as well as anemic rates of growth,which have, in turn, been inimical to the economic

welfare of the Iranian people. At the same me, thepolicies implemented during the rst decade aer therevoluon to promote child bearing helped to unleash apopulaon explosion which, in the face of the countryspoor economic growth, has proved disastrous for theeconomic well-being of Iranian cizens, parcularly theyouth.

Largely swayed by developmental models thatemphasized the non-capitalist path to economicprogress, the framers of Irans post-revoluonaryconstuon enshrined the principle of state dominaonand control of the economy in Arcle 44 of their newconstuon. This arcle enjoins the state to controlall large-scale and mother industries, foreign trade,

major minerals, banking, insurance, power generaon,dams and large-scale irrigaon networks, radio andtelevision, post, telegraph, and telephone services,aviaon, shipping, roads, railroads, and the like. Theimplementaon of Arcle 44, along with the decisionto expropriate and naonalize the assets of thoseindustrialists who had been close to the Shahs regime,caused state and quasi-state organizaons to exert


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44

control over what is esmated to be 70 to 80 percentof the Iranian economy.18The bonyads, opaque, state-

controlled charitable organizaons formed fromexpropriated private assets during these years, came tocontrol as much as 30 percent of the Iranian economy,furthering the state dominaon of the economy.19

Irans unemployment problem, meanwhile, is in partthe result of its overwhelmingly young demographicprole. Between 1979 and 1989, the Islamic Republic

experienced a populaon explosion. During these years,the annual populaon growth rate hovered around fourpercent. This youth bulge has since served as an internaldrag on the advancement of the economic and socialrights of Iranians, 70 percent of whom are presentlyunder the age of 35. In large part because of theregimes pro-natal policies from 1979 to 1989,20roughly

18 See Jahangir Amuzegar, Irans 20 Year Economic Perspecve: Promises

and Pialls, 2009.

19 Hossein Askari, Irans Economic Policy Dilemma, 2004.

20 On the adopon and subsequent reversal of pro-natal policies in Iran

during the rst decade aer the revoluon, see Homa Hoodfar, Devices

and Desires: Populaon Policy and Gender Roles in the Islamic Republic,Middle East Report, September-October 1994. See also Homa Hoodfar and

Samad Assadpour, The Polics of Populaon Policy in the Islamic Republic

of Iran, Studies in Family Planning, Vol. 31, No. 1, March 2000. Ayatollah

Seyyed Ali Khamenei, the Supreme Leader of Iran, has recently lamented this

reversal, along with his own role in it, enjoining the government to start the

process of nullifying family planning. Fearing the consequences of a graying

populaon, the supreme leader has again called on the people to go forward,

be fruiul, and mulply. See Khamenei on Populaon Control: May God

and History Forgive Us,Al-Monitor, October 10, 2012. According to the


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A Growing Crisis 45

20 million babies were bornin Iran in the rst ten years

aer the revoluon.

Irans highly restricve laborlaws, enacted during theKhomeini years, also servedto undermine the ability ofIranians to fulll their rightto gainful employment.

Although intended toexpand workers rightsand job security, thelabor codes draconianprohibions against theeliminaon of redundanciesthrough lay-os only succeeded in exacerbangunemployment. Fearful of geng stuck with theiremployees, exisng businesses were confronted with anaddional disincenve against expansion, and would-be entrepreneurs were cauous about starng newbusinesses and hiring workers on a permanent basis. Tocircumvent the labor laws restricve prohibions, whichapplied only to permanent employees, most employerstook to hiring contract workers, who could be summarily

dismissed. The law thereby subsequently harmed bothjob creaon and security.

Iranian daily Maghreb, both Ayatollah Khamenei and President Ahmadinejad

have emphasized the necessity of expanding the populaon of the country

to 120-200 million individuals. See Reacon of the Health Minister to the

Prohibion on the Sale of Contracepves, Maghreb, October 18, 2012.

These sanctionsamplied thedefects of the

Iranian economy,crippling the

ability of ordinaryIranians to maintain

adequate standardsof living.p. 27


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46

By way of parally compensang for its economicdeciencies, aracng public support, and dealing

with the exigencies of the Iran-Iraq war, the IslamicRepublic instuted a highly inecient universal subsidysystem during this period, covering all basic food itemsas well as kerosene, diesel, natural gas, and gasoline.Unl Ahmadinejad iniated his subsidy raonalizaonprogram in December 2010, these subsidies, parcularlythe ones on energy, consumed, depending on the yearand the price of oil, between 10 and 30 percent of

the naons annual GDP, a gure far more costly thanthe burdens imposed by sancons during this period.Moreover, the energy subsidies, which consumedby far the largest share of the allocaons devoted tothe program, primarily beneted the auent who,depending upon the year, were favored by a rao ofabout 12:1.21

On the more posive side, the rst decade of therevoluon also witnessed the laying of the foundaonsfor improving the social condions of Iranians,enabling them to further their rights to educaon andhealthcare. In spite of the sancons, infant mortality,life expectancy, access to healthcare, the numberof physicians and nurses per capita, clean water,

immunizaon, and access to educaon all registeredsignicant improvements. The greatest strides in literacyand educaon were made by women and youths, whilecondions in the countryside (where a large fraconof the devoted social base of the regime resides) were

21 Askari, Irans Economic Policy Dilemma, 2004, p. 662.


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A Growing Crisis 47

improved substanally. The rate of poverty, accordingto the World Bank, eventually dropped from 40 percent

to 20 percent.22Families from the tradional strata ofsociety, who had been reluctant to allow their daughtersto aend the Shahs secular schools, relented, and thestage was set for females to eventually replace malesas the more numerous entrants and graduates from thenaons expanding instuons of higher learning.

In sum, the essenal features of the economy of the

Islamic Republic, which were put into place and becameentrenched during the rst decade of the revoluon,were far more detrimental than sancons in detracngfrom the capacity of Iranians to aain their economicrights to gainful employment as well as aordablefood and shelter in the 1980s. This paern would bereplicated in the 1990s and 2000s, since the structure ofthe Iranian economy that took shape in the 1980s wasnot appreciably altered.

22 Ibid, pp. 656-657.


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48

TheRafsanjani Period19891997


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A Growing Crisis 49

With the excepon of the Iran-Iraq Arms Non-proliferaon Act, which was signed into law in October1992, the George H. W. Bush administraon (1988-1992)refrained from imposing addional sancons on theIslamic Republic of Iran. The act, which was sponsoredby Senators Al Gore and John McCain, provided forthe sanconing of individuals, countries, and enesthat assisted Iran in the development or acquision of

chemical, biological, and nuclear weapons.23

Americas unilateral sancons against Iran, however,


2010.


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50

expanded substanally during President Clintons rstterm in oce (1992-1996). Ironically, the impetus for

the intensicaon of US sancons against the IslamicRepublic was the decision on the part of President AkbarHashemi Rafsanjani to award a $1 billion contract to theAmerican oil company Conoco as a means of sending agoodwill signal to the US and iniang the process ofhealing the ri in US-Iran relaons, which had becomesevered due to the hostage crisis in 1979.

Rafsanjanis outreach to the US, in turn, was a part ofhis broader strategic vision to bring about realignmentsin Irans foreign and domesc policies and priories. Inthe aermath of the passing of the regimes charismacfounder in 1989, Rafsanjani felt that the long-termsurvival of the Islamic Republic could become imperiledif it did not succeed in bringing about an appreciableimprovement in the standard of living of the Iranianpeople, which by 1989 had on average plummetedto about a third of what they had been in 1979.24Hereasoned that the systems credibility and the peopleswillingness to endure raoning, shortages, and sacricesmight not long endure the death of Khomeini, whohad uniquely been able to combine the charismac,tradional, and popular sources of legimacy.

24 Hossein Askari, Irans Economic Vulnerability: Self-Inicted, Not Sancon-

Driven, isideIRAN.org, November 10, 2009, hp://www.insideiran.org/news/

iran%E2%80%99s-economic-vulnerability-self-inicted-not-sancon-driven/.

See also Jahangir Amuzegar, Irans Economy and the US Sancons, Middle

East Journal, Vol. 51, No. 2, Spring 1997.


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A Growing Crisis 51

To enhance the systems performance and legimacy,Rafsanjani felt that it was imperave to generate a

sustained expansion of the economy. His plannedreforms included: streamlining the bureaucracy,replacing inept ideological purists with pragmactechnocrats, de-naonalizing the economy, promongprivate enterprise, rebuilding the naons infrastructure,aracng foreign and expatriate investment, reversingthe brain drain, raonalizing the subsidies system,integrang Iran into the global economy, and removing

unnecessary restricons on peoples personal andsocial lives. In short, he sought a repudiaon of mostof the policies adopted during the rst decade of therevoluon, and the embrace of the so-called Chinesemodelsocio-economic liberalizaon, withoutmeaningful alteraons in the power structure.25

Rafsanjani recognized that the promoon of the Chinesemodel necessitated the jesoning of an aggressiveforeign policy. He therefore sought to overcome Tehransinternaonal isolaon by pursuing dtente with Iransneighbors, improving es with European countries,and seeking rapprochement with the US, which, hecalculated, as the worlds sole remaining superpowerat the me, could play an inordinately important role

in hindering or assisng Rafsanjani in implemenng hisvision.

25 Ervand Abrahamian,A History of Modern Iran, New York: Cambridge

University Press, 2008, pp. 182-195 and Said Amir Arjomand,Aer Khomeini,

New York: Oxford University Press, 2009, pp. 56-71.


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52

President Clinton,however, cing Irans

support for terrorism, itsopposion to the Arab-Israeli peace process, andits pursuit of weaponsof mass destrucon,issued Execuve Order12957 in March 1995.In addion to cancelling

the Conoco contract,this order prohibitedAmerican companiesfrom parcipang in oildevelopment projects inIran. Two months later, he

issued Execuve Order 12959, which imposed a blanketembargo on all American trade and investment in Iran.Thereaer, the US Congress passed, and PresidentClinton signed, the Iran-Libya Sancons Act (ILSA) in1996. This secondary boyco obliged the president, athis discreon (he could waive sancons if he deemedthem inimical to US naonal interests), to impose atleast two out of six sancons on foreign enes thatinvested more than $20 million per annum in the Iranian

oil and gas industries. Apart from undermining Iransoil and gas sector, ILSA sought to appease American oilcompanies by ensuring that the law would not put USrms at a disadvantage by simply paving the way fortheir competors from Europe and Asia to ll the void

The injection ofmassive amountsof money into the

economy withouta correspondingrise in productionhas given rise to

runaway ination.p. 82


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A Growing Crisis 53

le by the departure of the Americans.26

Yet unl the mid-2000s, this is precisely what happened.In the absence of the US oil majors, European,Malaysian, Chinese, and Indian companies were ableto win contracts for the development of the Iranian oiland gas industries. Thus, although President Clintonsexecuve orders and ILSA managed to increase theexternal burdens on the Iranian economy and dashedRafsanjanis aim of normalizing US-Iran relaons,

they did not prove to be overbearing. Faced with theopposion of its European partners, who were as yetnot ready to terminate protable business interaconswith Iran, the US backed down. American presidentsfrom Clinton to Obama did not apply ILSA (laterrenamed the Iran Sancons ActISAaer Ghaddawas parally rehabilitated in 2006) unl the expansionof the law in 2010. Instead of carrying out a ght inthe WTO with American allies over the extraterritorialnature of the law, US presidents opted to work directlywith their European and Asian partners, wherebythe US refrained from imposing ILSA in return for itspartners vigilance in not selling convenonal anddual use technologies to Iran. At the same me, unl2010, loopholes in the American sancons against the

Islamic Republic allowed the foreign subsidiaries andbranches of American companies, such as Halliburton,General Electric, and Coca-Cola, to engage in trade and


2010. See also Nikolay A. Kozhanov, US Economic Sancons Against Iran:

Undermined by External Factors, Middle East Policy, Vol. 18, No. 3, Fall 2011.


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54

investments in Iran.27

This is not to argue that ILSA and the execuve ordersissued by President Clinton did not exact costs on theIranian economy, which were subsequently passedon to the Iranian people. Shortly aer the imposionof President Clintons rst execuve order, the valueof American dollars sold on the Iranian black marketincreased from 2,500 rials for each dollar to 6,500rials.28Thereaer, the plunge in the value of the Iranian

currency, from which it never recovered, connued,causing large increases in the value of non-essenalconsumer imports and smuggled goods (which weretechnically ineligible for lower exchange rates reservedfor essenal items). The decline in the value of therial also prevented Rafsanjani from achieving a uniedcurrency exchange rate. The connuaon of mulpleexchange rates for the purpose of disnguishingbetween imports, in turn, provided ample opportuniesfor engaging in corrupt commercial transacons.Moreover, American oil companies that were, up to1995, buying Iranian crude, rening it, and subsequentlyselling it to non-American or American enes, hadto stop doing so aer President Clintons execuveorders. To compensate for the loss of its previous

27 Kenneth Katzman, Iran Sancons, paper presented to the Congressional

Research Service), July 20, 2011, p. 16, cited in Nikolay A. Kozhanov, US

Economic Sancons Against Iran: Undermined By External Factors, 2011,

footnote 6.

28 Suzanne Maloney, Sanconing Iran: If Only It Were So Simple,

Washington Quarterly, Vol. 33, No.1, January 2010, p. 140.


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A Growing Crisis 55

customers, Iran had tobear the costs of storing,

slightly discounng, andnding new buyers forthe oil that had beenpreviously bought byAmerican companies.29

More importantly, dueto increased American

sancons and pressureaer 1995, Irans short-term credit risk and leerof credit (LC) fees rose,causing the countrys costof capital to increase. Asa result, depending uponthe year, Iran was forced to endure addional borrowingcosts of between $29 and $164 million per annum.30Atthe same me, the mark-up of imports of US goodsthrough Dubai [was] esmated at 20 percent.31Thismark-up lasted unl the mid-2000s, when Americanand internaonal sancons against Iran began to gettougher. Because of US opposion, Iran was also forcedto pay increased debt rescheduling fees between

1993 and 1995. The Islamic Republic had purposefullyborrowed only miniscule amounts of money from

29 Askari, et al., 2001, p. 5.

30 Ibid, p. 8.

31 Ibid, p. 6.

Irans severelyweakened

industrial sector

and its dependenceon both petro-

dollars andimports, made it far

more vulnerable tonew sanctions.88


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56

abroad during the rst10 years of its existence.

With the end of thewar, the inauguraonof Rafsanjani, and theaempt to promotehitherto suppressedconsumerism, theregime relented, andborrowed roughly $30

billion in short-termloans between 1989 and1993. The bulk of thesefunds were spent onnancing consumer goods(instead of producve

investments).32American pressure, however, preventedIran from receiving favorable renancing andrescheduling agreements under the auspices of theParis Club (the group of creditor naons), compellingTehran to pay an addional $8-55 million per annum(depending on the year) for the rescheduling of itsshort-term loans.33Moreover, aer 1995, because ofUS sancons and Tehrans inability to access American-made and -patented liquefacon technology,34Iran

was eecvely prevented from transforming itself intoa major exporter of natural gas, despite having the

32 Askari, Irans Economic Policy Dilemma, 2004.

33 Ibid, p. 8.

34 Suzanne Maloney, 2010, p.140.

Ination andunemploymenthave become

severelyexacerbated, andaccess to healthcareand education has

been signicantlyharmed.p. 99


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A Growing Crisis 57

second-largest gas reserves in the world. In all, theintensicaon of American sancons on Iran under the

Clinton administraon is esmated to have cost theIslamic Republic about 1 percent of its annual GDP fromthe 1990s to the early 2000s.35

Nevertheless, as was the case during the Khomeini era,the primary causes behind Irans underperformanceduring the Rafsanjani period remained internal.Although the rate of average annual economic growth

accelerated during 1990-1995, this rate was unbalanceddue to borrowed external nancing, and plummetedto 3.8 percent between 1995 and 1997. 36Moreover,growth was inequitably distributed and the income gapwidened. With baby boomers beginning to enter the

job market, consistently high rates of unemploymentand inaon, which hit wage earners especiallyhard, connued unabated.37Although oil produconincreased and much of the damage inicted on thenaons infrastructure during the Iran-Iraq War wasrepaired, the country became more dependent onpetroleum, and the task of economic diversicaonremained unfullled.38

35 See Akbar E. Torbat, Impact of the US Trade and Financial Sancons OnIran, The World Economy, Vol.28, No. 3, March 2005.

36 Askari, Irans Economic Policy Dilemma, 2004, p. 655.

37 Ibid.

38 Hooshang Amirahmadi, An Evaluaon of Irans First Development Plan

and Challenges Facing the Second Plan, Iran Nameh, Vol. XIII, Nos. 1 & 2,

Winter 2005.


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58

Rafsanjanis privazaon plans were also not carriedout. Although the quality of some administrators

improved, governmental and quasi-governmentalbureaucracies remained intact, and even managedto expand their size and inuence. They connued toantagonize entrepreneurs, undermine privazaonplans, and detract from economic development and

job creaon. Subsidy raonalizaon and exchangerate unicaon were postponed, and needed foreigndirect investment (FDI) outside the oil and gas industry

remained miniscule.39Crucially, the RevoluonaryGuards, who had been kept in the barracks during theKhomeini period, were allowed, indeed encouraged,to enter the economic domain,40placing yet another(and even more formidable) hurdle to the promoonof eciency and the ability of Iranians to fulll theireconomic rights.

On the posive side, educaon, literacy, healthcare,and infrastructure expanded, the country became moreinterconnected, and some modern amenies (electricity,piped water, paved roads) were introduced to thecountryside. In retrospect, Rafsanjanis most signicantachievement was his decision to launch a substanalexpansion of the Islamic Azad University System,41which

39 See Jahangir Amuzegar, Irans Economy Under the Islamic Republic, 1997.

40 See Ali Ansari, The Revoluon Will Be Mercanlized, The Naonal

Interest, February 11, 2010, hp://naonalinterest.org/arcle/the-

revoluon-will-be-mercanlized-3332.

41 The Bale Over Islamic Azad University, Foreignpolicy.com, July 12,


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A Growing Crisis 59

now educates more than half of the naons collegestudents.

2010, hp://mideast.foreignpolicy.com/arcles/2010/07/12/the_bale_

over_islamic_azad_university.


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60

TheKhatami Period19972005


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A Growing Crisis 61

Neither the US nor any other country imposedaddional sancons on Iran during the presidency ofMohammad Khatami. In fact, responding to Khatamiscall for dialogue in 1998, along with his aemptsat promong the rule of law, greater pluralism,accountability at home, and moderaon of Iranspolicies abroad, the Clinton administraon provided Iranwith limited sancons relief. In 1999, the US ban on the

export of American medical products (conngent uponOFAC licensing), agricultural commodies, and certaincivilian aircra parts to Iran was lied,42and in 2000 the

42 See Nikolay A. Kazhanov, US Economic Sancons Against Iran Undermined

By External Factors, Middle East Policy, Volume 18, No. 3, Fall 2011.


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62

import of Iranian carpets, pistachios, and caviar into theUS was legalized. Although Iran did not immediately

reciprocate, limited interacons between the twocountries connued. These interacons reached theirapogee in the aermath of the terrorist aacks onthe US on September 11, 2001, during the nascentpresidency of George W. Bush, when the two countriescooperated in bringing about the ouster of the Taliban inAfghanistan.

Even aer President Bushs 2002 axis of evil speechand the discovery later that year that Iran had notdivulged the existence of its nuclear program to theIAEA for 18 years, no addional sancons were imposedon the Islamic Republic. The Khatami administraonmanaged to dely handle the nuclear revelaon bynegoang with European powers, and agreeing totemporarily suspend Irans uranium enrichment eortsas a condence-building gesture.

Khatamis moderate domesc and internaonalstance, along with Americas decision to refrain fromimposing ILSA, even enabled Iran to boost its oil andgas producon. The added producon expanded Iransaccess to hard currency and raised the revenues with

which to nance its expenditures. Between 1997 and2005, non-American oil majors, such as Total, Shell,Petronas, and Gazprom, invested hundreds of millionsof dollars in Irans hydrocarbons industry.43


2010.


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A Growing Crisis 63

Nevertheless, during

Khatamis presidency theUS succeeded in denyingIran a once-in-a-lifemeopportunity by eecvelyprevenng the landlockedCaspian Basin countriesfrom transporng theiroil and gas resources to

world markets throughpipelines transingIranian territoryeventhough Iran providedthe most geographicallylogical and economicallyecient means of doingso. The US also barred these countries from engaging inoil swaps with Tehran, thereby denying transit fees andconstrucon benets to Iran. Wring in 2004, HosseinAskari concluded, Irans discounted total economiclosses from delayed Caspian oil exploitaon could bein the range of $7-24 billion (assuming a $20 averageprice for a barrel of oil and depending on Irans shareof Caspian oil resources) and in the range of one billion

dollars annually for all other sancons related losses(largely reduced foreign direct investment, transit fees,and oil swaps).44

Nonetheless, Khatamis beer macro-economic

44Hossein Askari, Irans Economic Policy Dilemma, 2004, p. 660.

The most pivotalfactor accountingfor the decline in

the value of therial has been the

sanctions.p. 102


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64

management, along with greater moderaon at homeand abroad, helped to marginally improve the standard

of living and cultural rights of the Iranian peoplethrough sustained economic growth, job creaon, andreducons of restricons on freedoms of expression andassociaon. Signicantly, it also helped to mildly remedythe structural defects of the Iranian economy. In hissecond term, Khatami managed to achieve a uniedexchange rate, implemented a relavely liberal FDI law,expedited the speed of privazaon, strengthened the

manufacturing base, marginally improved the qualityof bureaucrac administraon, reduced foreign debtto low and manageable levels, and created an oilstabilizaon fund (OSF) to insulate the country fromuctuaons in the price of oil and fund loans to theprivate sector as a means of diversifying the economyand promong entrepreneurship.45He even managedto parally reverse the brain drain, as skilled Iranianexpatriates gradually began to return. Some evenrepatriated a poron of their assets, although theirpreferred mode of investment was speculaon in realestate, rather than comming funds to the morecomplicated and cumbersome manufacturing sector.46

These policies produced an average economic growth

rate of 5.8 percent between 2000 and 2003. In spite

45 Ibid, p. 664.

46Internaonal Campaign for Human Rights in Iran interview with a

businessman, who invested in Iran during the Khatami period but withdrew

in the nascent phase of the Ahmadinejad administraon. The individual does

not wish to divulge his identy.


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A Growing Crisis 65

of the contracon of the oil sector between 2002 and2003, the naons rate of economic growth reached

6.8 and 6.5 percent for 2003-2004.47 Due to thepopulaon explosion, however, the unemploymentrate, parcularly among the young, connued toremain high, hovering around 16 percent between2000 and 2002, but declining to 15.7 because of therates of growth.48 This progress, however, was limitedand reversible, as overall the economy remainedoil-dependent, state-dominated, largely closed, and

uncompeve, with low value added and relavelyinsignicant non-hydrocarbon exports and low levels ofFDI owing to the non-oil sectors of the economy. Thenuclear issue, moreover, remained unresolved.

47 Hossein Askari, Irans Economic Policy Dilemma, 2004, p. 655.

48 Ibid, p. 657.


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66

TheAhmadinejadPeriod2005Present


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A Growing Crisis 67

Even before the imposion of the 2012 sancons,however, the sancons regime against Iran hadalready become less targeted and more mullateral,comprehensive, and costly. The enormous quanesof petro-dollars owing directly into the coersof the Iranian government because of rising oilprices, however, provided the regime with a cushionthat enabled it to tolerate both the addional

costs associated with sancons and the severemismanagement of the Iranian economy. The USsdecision to ghten sancons on Iran was prompted bythe Ahmadinejad administraons decision to restartIrans enrichment program in 2005 and his bellicoseuerances about Israel. Thereaer, IAEAs referralof the Iranian nuclear dossier to the United Naons


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68

Security Council (UNSC), Irans refusal to heed theCouncils demand that it halt its enrichment-related

and processing acvies, and the Councils passage ofseveral resoluons against Iran led to the emergence ofa paern.

This paern entailed the US adopng much toughersancons on its own to supplement the Security Councilsancons, and prodding its allies to further increase theeconomic isolaon of Iran and adopt more stringent

sancons of their own. For the most part, these eortspaid o, especially with the EU, Canada, Australia,Japan, South Korea, and the UAEthough not withRussia, China, and India. These more stringent andmullateral sancons increased the costs that sanconswere inicng on Iran, though they did not as yet aectIrans revenue streams.

A brief scruny of the nature and rising costs of the US,UN, and EU sancons on Iran between 2005 and 2011,along with greater details of Ahmadinejads far moredamaging domesc economic policies will now follow.

Irans nuclear dossier was referred to the UNSC inFebruary 2006, when the report of thenDirector

General of the UNs Internaonal Atomic Energy Agency(IAEA) Mohammad El-Baradei found Iran to be in non-compliance with its safeguard operaons and raisedconcerns about the potenal military dimensions ofIrans nuclear program. In March 2006, the presidentof the Security Council called upon Iran to suspendits enrichment acvies. Irans refusal to comply withthis demand resulted in the adopon of Resoluon


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1696 by the Security Council in July 2006. In addionto calling upon Iran to suspend its enrichment and

reprocessing acvies, the resoluon urged the countryto reconsider the construcon of a heavy water researchreactor. It also granted Iran a month to desist from itsobjeconable behavior or otherwise face the possibilityof economic and diplomac sancons.49

Having disregarded the demands of the Security Council,Iran was for the rst me confronted with a UNSC

sancons resoluon in December 2006. Resoluon1737 blocked the import or export of sensive nuclearmaterial and equipment and froze the nancial assetsof persons or enes supporng its proliferaonsensive nuclear acvies or the development nuclear-weapon delivery systems.50Addionally, the resoluoncalled upon Iran to suspend all of its enrichment andreprocessing acvies. Irans unwillingness to abide bythe Councils demands prompted the UNSC to adoptanother resoluon against the Islamic Republic inMarch 2007: apart from banning Irans arms exports,Resoluon 1747 placed travel restricons on and frozethe assets of more individuals suspected of beinginvolved in the countrys proliferaon acvies. 51

With the Islamic Republics connued deance of the


NTI-Monterey Instute of Internaonal Studies, 2010.

50 Ibid.

51 Ibid.


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UNSC, the Council adopted two addional resoluonsagainst Iran, Resoluon 1803, passed in March 2008,

and Resoluon 1929, adopted in June 2010. Resoluon1803 expanded prohibions of exports to Iran toinclude not just nuclear-specic material but alsodual-use technology. It also further expanded thelist of proscribed individuals and enes involved inIrans nuclear and missile programs. Signicantly, theresoluon provided for an expansion of monitoring ofIranian banks suspected of being involved in nancing

proliferaon acvies, and inspecon of cargo to andfrom Iran of aircra and vessels owned or operatedby Iran Air Cargo and Islamic Republic of Iran ShippingLine, provided reasonable grounds existed to believethat the aircra or vessel was transporng prohibitedgoods.52Resoluon 1929, meanwhile, once againexpanded the number of individuals and enesinvolved in Irans nuclear program that are subjectedto sancons. It also banned the export of heavy andcombat convenonal weapons to Iran and prohibitedthe country from engaging in any acvies relatedto ballisc missiles. The resoluon also call[ed] uponstates to prevent the provision of nancial services orinsurance to [Iran] if there [were] reasonable groundsto believe that such services could contribute to Irans

nuclear or missile programs.53

By deparng fromprecedent and granng states the right to monitorIrans shipping, nancial, and banking acvies, both

52 Quoted in ibid.

53 Ibid.


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resoluons provided the US and its partners with thebasis for imposing far more stringent prohibions

against Irans nancial and shipping sectors as wellas the provision of banking, nance, insurance, andshipping services to the Islamic Republictherebyincreasing Irans transacon costs.

Even before the adopon of these sancons, however,the US had already started to receive greatercooperaon from its allies and partners in imposing

addional costs on Tehran. In 2005, President GeorgeW. Bush issued Execuve Order 13382, to freeze theassets of proliferators of WMD and their supportersand isolate them nancially. Eight Iranian enes andexternal organizaons believed to be supporng IranianWMD programs were designated under the execuveorder and sanconed.54In 2006, the US adopted theIran Freedom Support Act, oering nancial assistanceto Iranian dissidents inside and outside the IslamicRepublic and to media outlets seeking to bring aboutthe peaceful transformaon and democrazaon of theIranian regime.55Also in 2006, the US passed the Iran,North Korea, and Syria Nonproliferaon Act, providingfor penales on enes and individuals for the transferto or acquision from since January 1, 1999 . . . of

equipment and technology controlled under mullateralcontrol lists.56Thereaer, in 2007, the US singled out

54 Ibid.

55 See Nicholas A. Kozhanov, 2011

56 Quoted in Richard Sabani, 2010.


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the Iranian Revoluonary Guard Corps, which hadcome to dominate an increasing proporon of the

Iranian economy, as a proliferator of weapons of massdestrucon.57

Most importantly in terms of inicng increasing costson the Iranian economy, in 2007, as quesons aboutIrans nuclear program grew, the Treasury Departmentunder George W. Bush deployed a new strategy:blacklisng Iranian banks one by one, forcing foreign

banks to decide whether to do business with Iran or thevastly larger US economy. . . . Treasury ocials traveledthe globe, carrying reams of nancial intelligence.They spoke the language of risks to bankers andgovernments, [Daniel] Glaser [Assistant Secretaryof Treasury for Terrorist Financing] said, seeking topersuade them to make Iran a nancial pariah.58Thisstrategy . . . prove[d] unexpectedly eecve in isolangIran and increasing the costs of doing business forIranian enes. The countrys former nuclear negoator,Hassan Rowhani . . . esmated [in December 2008]that these new nancial restricons [had] added costsranging from 10 to 30 percent to the cost of imports,59which were subsequently passed on to Iranianconsumers and industries.

57 Ibid.

58 Arshad Mohammed, Justya Pawlak, and Warren Strobel, Special Report:

Inside the Wests Economic War with Iran, Reuters, December 28, 2012.

59 Suzanne Maloney, Sanconing Iran: If Only It Were So Simple,

Washington Quarterly, January 2010, p. 139.


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Starng in 2007, the internaonal isolaon andsubsequent costs imposed upon the Islamic Republic

increased further as the EU began to go beyond UNsancons and impose addional sancons of its own.On the basis of Common Posions 2007/140 and2007/246, the EU prohibited individuals associated withIrans nuclear program from traveling in the EU, bannedall nuclear and missile trade with and all convenonalweapons export to Iran, froze the accounts of allindividuals and enes associated with Irans missile

and nuclear programs, and prohibited the extension ofgrants, nancial assistance, and concessional loans toIran.60

In 2008, the EU added more Iranian individuals andenes to the list of those who were to be prohibitedfrom traveling in the EU and whose assets were to befrozen. Moreover, Common Posion 2008/652 urgedcauon upon EU members in facilitang trade withIran through nancial support and requested that theycarefully monitor the interacons of European nancialinstuons with suspicious Iranian banks.61

Irans transacon costs increased substanally in thesummer of 2010 when, aer the passage of UNSC

Resoluon 1929, both the US and the EU, as well asthe coalion of the willing (Canada, Australia, Japan,South Korea, and Norway), supplemented the UN

60 See Sabani, 2010.

61 Ibid.


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resoluon by adopngmore stringent sancons

of their own. Resoluon1929s reference to thepotenal conneconbetween Irans revenuesderived from its energysector and the fundingof Irans proliferaon-sensive nuclear

acvies62promptedboth the US Congress andthe European Commissionto act. Shortly thereaer,the passage of theComprehensive Iran

Sancons Accountability and Divestment Act (CISADA)closed the loopholes of the Iran-Libya Sancons Actand added a number of extraterritorial sancons toit. The law directs the president to impose sanconson any person (meaning any individual, organizaon,or instuon) that makes an investment of $20million or more in Irans petroleum industry. Similarly,the legislaon requires that the president sanconany person that provides Iran with goods, services,

technology, or informaon with a fair market value of$1 million or more for the maintenance or expansionof Irans producon of rened products. In addion,the [law] would apply US sancons to any individual ororganizaon that exports more than $1 million worth

62 Quoted in Kozhanov, 2011.

Small and medium-sized companies,particularly those

in the private sectorthat are bereftof connections tocenters of power,

have been hardesthit.p. 111


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of gasoline [(at the me Iran was imporng 40 percentof its rened petroleum)] to Iran, or provides $1 million

worth of goods or services that could contribute toIrans ability to import gasoline.63In the meanme,a week aer the UN vote, the EU announced itsown sancons: restricons on banking, insurance,and shipping; visa bans and asset freezes of IslamicRevoluonary Guard; and measures to ban investmentin the oil and gas sectors as well as transfers of relatedtechnology.64

Although in the aggregate these measures substanallyincreased Irans transacon costs, which were passedon to Iranian cizens, the rise in the price of oil, as wellas the ability of the central bank of Iran to take over theacvies that had hitherto been conducted by Iranscommercial banks, sll allowed the Islamic Republic totolerate and migate the impact of sancons.

However, there can be no doubt that the precondionsfor the connuing decline in purchasing power andstandard of living presently aicng the overwhelmingmajority of the Iranian populaon were set in moonby the economic, foreign, and nuclear policies enactedduring Ahmadinejads presidency.65Moreover, at least

63 Sabani, 2010.

64Meghan L. OSullivan, Iran and the Great Sancons Debate, Washington

Quarterly, October 2010.

65 In the words Ali Mazrouie, a reformist member and the Deputy Head

of the Commission on Planning and Budget in the 6thMajlis (2000-2004),


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during the rst six-and-a-half years of his presidency,Ahmadinejad was able to carry out these policies with

the backing of Irans Supreme Leader, Ayatollah SeyyedAli Khamenei.

Paradoxically, when Ahmadinejad and those aliatedwith him in the ruling establishment began to displaygreater exibility in their willingness to resolve thenuclear issue (in order to bring about the lessening ofsancons and improve their prospects of holding on

to the presidency aer Ahmadinejads tenure in oceended in 2013), they were reined in by Irans SupremeLeader, who has the nal say on all foreign and domescpolicies.66Nevertheless, in addion to exacerbang theworst structural aws in Irans polical economy, thepolicies and postures adopted during the Ahmadinejadpresidency67also contributed to the imposion of, and

Since coming to power, the [Ahmadinejad] government has undermined the

planning and decision making apparatus. It has never believed and connues

to denigrate the value of experse, causing the countrys economy to be

placed on the wrong track. Plus, the governments incorrect foreign policies

themselves have brought on the sancons. See Reasons Behind Price Rises

in Iran: Sancons or the Governments Economic Policies, Radiofarda,July

27, 2012.

66See David E. Sanger, Steven Erlanger, and Robert F. Worth, Tehran Rejects

Nuclear Accord, Ocials Report, New York Times, October 29, 2009.

67 In foreign policy, the presidents repeated public expressions of skepcism

about the veracity of the Holocaust as well as his frequent exhortaons that

Israel must be wiped o the pages of me, along with Irans decision, in

contravenon of the repeated demands of the Internaonal Atomic Energy

Agency (IAEA) and the United Naons Security Council, to expand rather than

halt its enrichment acvies, have been instrumental in the imposion of


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made the country much more vulnerable to, what hasbeen variously referred to as the most far-reaching and

punive sancons in history. 68

Ironically, Ahmadinejad was elected to his rst termin oce in 2005 by campaigning on a plaorm thatstressed the need to return the revoluon to its rootsthrough the promoon of policies designed to enhancesocial jusce and bring about decent standards ofliving for all. Ahmadinejad argued that he had stood for

oce in order to return the revoluon to its true path:improvement of the plight of the dispossessed and theunderprivileged. Instead of promong inclusive growthand social jusce, he argued, the revoluon had resultedin the maximizaon of wealth and power in the handsof the well connected few. He promised to combatpoverty and bring about the eradicaon of entrenchedinequality through the creaon of gainful employment,promoon of transparency, obliteraon of corrupon,

more comprehensive sancons against the Islamic Republic.

68 See the transcript of the Third 2012 Presidenal Debate BetweenPresident Barack Obama and Former Governor Mi Romney, hp://

abcnews.go.com/Polics/OTUS/presidenal-debate-full-transcript/

story?id=17538888#.UI8c82CGYfI, as well as the transcript of the 2012 Vice

Presidenal debate between Vice President Joe Biden and Rep. Paul Ryan,

hp://www.npr.org/2012/10/11/162754053/transcript-biden-ryan-vice-

presidenal-debate. See also Muhammad Sahimi and Eskandar Sadeghi-

Boroujerdi, The Unfolding Human Catastrophe in Iran: Sancons Imposed on

Irans Banks and Financial Instuons Could Lead to a Humanitarian Crisis,

Aljazeera, October 28, 2012.


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and expansion of equity.69His most famous campaignslogan touted the necessity of giving all Iranian cizens

a stake in the countrys oil wealth by helping to put thenaons oil earnings on their dining tables.70

In reality, the converse has happened. PresidentAhmadinejad has pursued the achievement of hispopulist objecves through ill-conceived, ad hoc scaland monetary policies. These policies have fueledgalloping inaon and stagnaon, raised the number of

bankruptcies and layos, and produced unprecedentedlevels of unemployment, along with heighteningdisparies in wealth and income. They have also madethe country more dependent on oil income and imports,while expanding and consolidang the control andownership of the government and the security andcoercive apparatus, especially the Iranian RevoluonaryGuard Corps (IRGC), over the Iranian economy.71Indeed,

69 According to Transparency Internaonal, the level of corrupon in Iran

has increased during the presidency of Ahmadinejad. Irans corrupon

ranking declined by 13 steps in 2012 to reach 133/174. In 2005, Iran ranked

88/158. See Transparency Internaonals Corrupon Percepons Index 2012,

hp://www.transparency.org/cpi2012/results, and 2005, hp://archive.

transparency.org/policy_research/surveys_indices/cpi/2005.

70 See Djavad Salehi-Isfahani, Poor Policy, Not Sancons, Weakens Irans

Economy, Interview with the Council on Foreign relaons, March 26, 2009,

hp://www.cfr.org/iran/poor-policy-not-sancons-weakens-irans-economy/

p18937.

71 The IRGC has since expanded and consolidated its hold over the Iranian

economy, parcularly during the presidency of Mahmoud Ahmadinejad, by

establishing commercial monopolies and garnering up to $25 bi

Documents

Sanctions and Regime Policies Cause Growing Crisis in Iran