Economic Sanctions Erode Iran’s Appetite to Escalate Conflict With US: Experts

Economic sanctions against Iran are having an effect, experts who spoke with The Epoch Times agreed. Yet views diverged on the nature of the impact and on how big of a role sanctions have played in the Islamic regime’s reluctance to escalate after the assassination of a top general.

Gen. Qassem Soleimani was killed in Baghdad on Jan. 3 by a missile fired from a U.S. drone. Secretary of State Mike Pompeo called the strike a preemptive move to keep Soleimani from executing an “imminent” attack on American assets.

In retaliation, Iranian leaders ordered ballistic missile strikes that on Jan. 8 hit two Iraqi bases housing U.S. troops, inflicting damage and non-life threatening injuries, but no deaths. On the same day, on high alert for signs of U.S. retaliation, Iran’s military shot down a Ukrainian passenger plane, shortly after it had taken off from Tehran’s Imam Khomeini International Airport, killing all 176 people on board.

An Iranian man holds a picture of a victim of the Ukrainian 752 flight crash during a demonstration in front of Tehran’s Amir Kabir University on Jan. 11, 2020. (STR/AFP via Getty Images)

Some reports suggested that Iran’s retaliatory strike, which had been communicated to Iraqi authorities in advance and resulted in no loss of life, was calibrated to avoid military escalation with a powerful adversary.

“What Tehran knew was that a direct attack on the American military would likely have turned the current battle of sanctions and proxies into a hot war between the two countries, one that Iran’s leadership doesn’t want,” Tho Bishop, political consultant and media coordinator for the Mises Institute, told The Epoch Times.

“The degree to which sanctions altered Iran’s military response to the killing of Qasem Soleimani is less obvious,” Bishop added.

Sam Bazzi, a Middle East analyst and founder of the Hezbollah Watch monitoring project, said sanctions were a factor tempering Iran’s response, but because the country still has slack in its economy to absorb them, American military deterrence was the key factor preventing escalation.

“The U.S. sanctions have not reached their maximum extent,” Bazzi told The Epoch Times. “Last year, Mark Dubowitz, the CEO of the Foundation for the Defense of Democracies (FDD), famously said: The sanctions needle now stands at around a 6. We need to get to 11.”

“As such, there is much more room to damage the Iranian economy while at the same time the incremental deployments of U.S. troops in the region prevent [Iranian Supreme Leader Ayatollah Ali] Khamenei from lashing out, as a U.S. counter-attack in an all-out war is expected to be devastating to an increasingly vulnerable regime,” he said.

“These factors have so far restrained Tehran from retaliating proportionately in the aftermath of the assassination,” he argued.

This undated Ministry of Defence handout shows the HMS Duncan, a Type 45 Destroyer, deployed to the Persian Gulf region as Iran threatened to disrupt shipping. (Ben Sutton/Ministry of Defence via AP)

Steve Hanke, Professor of Applied Economics at Johns Hopkins University, told The Epoch Times that Iran’s reluctance to mount a more forceful response is likely linked to hopes of gaining some relief from sanctions.

“By not reacting in an identifiable, visible way, it obviously mitigates the probability of getting additional sanctions put on them and maybe getting some relief from the sanctions in some way, either via Europe or China or Russia or some other non-U.S. entity,” Hanke said.

‘Making an Enormous Difference’

In a press conference announcing new sanctions on an Iranian general because he “oversaw the massacre of 148 helpless Iranians in the Mahshahr region,” U.S. Special Representative for Iran Brian Hook outlined the impact of the Trump administration’s “maximum pressure” campaign on the Iranian economy.

“The sanctions we have imposed are the toughest ever,” Hook said in remarks on Jan. 17. “They are making an enormous difference, and the Iranian people are rightly blaming their own government for 40 years of corruption, mismanagement, and kleptocracy.”

The Trump administration’s point man on Iran then said Tehran was facing “some of the worst protests” in its history, adding that Iran’s oil exports were down by more than 2 million barrels per day, slashing the country’s oil revenue by over 80 percent.

Brian Hook (R), U.S. Special Representative for Iran, speaks at a press conference at the State Department in Washington, on April 8, 2019. (Saul Loeb/AFP via Getty Images)

“This amounts to a loss of around $50 billion annually,” Hook said, adding that “President Rouhani admitted that Iran had lost $200 billion from U.S. sanctions since their re-imposition. Iran is also facing a banking crisis with roughly half of all bank loans in arrears.”

Hook said more than one in four young Iranians is jobless and inflation is at 40 percent.

“Today, the question that people are asking is whether the regime has the competence to avoid a banking disaster and hyperinflation. The economy—the Iranian economy this year could contract by as much as 14 percent,” Hook added.

International organizations like the International Monetary Fund (IMF) have noted Iran’s economic duress.

“Iran’s economy has entered a steep recession,” the IMF said in its most recent Economic Outlook for the Middle East. “Output in 2019 is expected to shrink by 9.5 percent as U.S. sanctions have continued to tighten.”

‘Death Spiral’

“The key thing,” Hanke said of Iran’s economy, “is that they’ve really been in a death spiral.”

Iran recently climbed to the third spot on the Cato Institute’s list of the World’s Most Miserable Countries, just behind Venezuela and Argentina.

“My modified Misery Index is the sum of the unemployment, inflation and bank lending rates, minus the percentage change in real GDP per capita,” explained Hanke, who developed the misery measure.

Still, while Iran’s economy appears stuck in a nosedive, Hanke said data suggests a lower level of inflation than official figures claim.

Stable black market exchange rates between the U.S. dollar and the Iranian rial, in conjunction with other high-frequency data that he said he monitors daily, are consistent with a 20 percent level of inflation, he argued. This would support Bazzi’s observation that Iran’s economy retains enough slack to blunt the impact of sanctions.

Hanke also said that the effect of sanctions is weakened as regimes typically find workarounds.

“The history of sanctions is always the same thing,” Hanke explained. “The targeted parties learn how to adapt, how to mitigate the effects of the sanctions.”

According to the United States Institute of Peace, Iran has used a number of tactics to get around the sanctions, including storing oil on its tanker fleet at sea, disguising ships, and turning off transponders to preventing tracking.

“If there is an art that we have perfected in Iran, and we can teach it to others for a price, it is the art of evading sanctions,” Iran’s foreign minister infamously said in December 2018 at the Doha Forum.

Between May 2 and Sept. 10, 2019, at least a dozen Iranian oil tankers delivered crude oil to China, Syria, and Turkey, the Institute noted.

Worse, unintended consequences of sanctions are possible, Hanke said, in that they can spark a “circling of the wagons” effect. This is where people rally around a regime they are otherwise fed up with and inclined to topple because sanctions can easily be portrayed as an attack against the people, not the regime’s leaders. He argued that Iran’s leaders have been effective in foisting that perception of the sanctions on the public.

Hanke said the roots of Iran’s economic vulnerability rests in its interventionist policies.

“The economy is a state-controlled, intervened economy. The best way to think about it is interventionism. It’s got a lot of socialism,” he said, adding, “it’s gotten worse and worse over time since the Revolution.”

He said it’s “inconceivable” that any major initiatives can take place without “the State’s fingers all over it” and that “this sets in motion the death spiral.”

“The question is, how fast does the spiral go? And that determines when they’re going to hit rock bottom,” he said.

“Sanctions just accelerate the spiral.”

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Author: Tom Ozimek

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