Quantifying Effects of Sanctions on Iran's Economy

Rouhani at WEF: not exactly the Taliban at TEDx (now that'd be something, wouldn't it?)

Political risk analysis is an interesting IPE-related field which gauges how political factors can disrupt foreign investment. For obvious reasons, Iran has been the modern exemplar of a high risk, high return destination. That is, if you can invest in the country in the first place. Obviously the United States has long prohibited all trade and investment with Iran, so the more interesting thing has always been how other countries react to pressure from the US to do the same. For instance, it was only in 2010-2012 that the EU imposed an embargo on Iranian oil and gas exports, stopped commercial money transfers with Iranian financial institutions, and prohibited investment in Iran's energy sector.

With the more moderate President Hassan Rouhani now in charge--he Tweets and attends the World Economic Forum to drum up foreign investment--Western countries have lifted some sanctions in an act of goodwill. Just when you thought Iran was rather different, here's its leader trying to drum up FDI like everyone else. To provide context, a few months prior to his WEF talk, the US and EU eased sanctions on Iran. In exchange for more scrutiny of its nuclear program, Iran gained a six-month partial reprieve on sanctions:

In November [2013], Iran's government agreed to give Western powers more scrutiny of the country's nuclear program for six months. In exchange, Western capitals eased some sanctions. The relief is limited to just a handful of industries—aircraft, car parts and petrochemicals, for example. And Western authorities are scrutinizing deals closely. Businesses exploring the Iranian market "do so at their own peril right now," U.S. President Barack Obama said last month, "because we will come down on them like a ton of bricks."

But that hasn't stopped companies from boosting their presence or sending in advance teams—essentially making exploratory visits in the hopes that sanctions may be lifted further and permanently.

I see, then, but what is the economic worth of sanctions applied against Iran? More importantly going forward, how will the detente with Western powers affect Iran's economic fortunes? One of the the world's largest political risk consultancies, IHS, puts dollar signs on these important figures:

1.5 percent growth forecast, $270 billion lost due to sanctions. Rapprochement with the West will help to stabilize Iran's economy. IHS forecasts Iran’s real GDP will rise by 1.5 percent in FY 2014/15, after two years of contraction. Signs of improved relations along with temporary and conditional sanctions relief have breathed life into the Iranian economy. The EU has suspended its ban on insurance coverage for Iranian oil shipments, $4.2 billion in oil revenues has been unblocked, and current restrictions on imports of crude will be held steady for the six countries still purchasing oil from Iran.”

 However, Iran is not out of the woods yet. External and fiscal balances will remain under pressure, inflation will continue to run at high double-digit rates and trade and current account balances have been cut sharply due to sanctions. IHS estimates that since 2011, Iran’s economy has shrunk by more than $270 billion due to sanctions. 

The IHS release also details optimistic, downside, and status quo scenarios that contextualize Iran's economic performance going forward mostly on the application of Western sanctions. Especially striking is the prediction that a total lifting of sanctions on Iran may result in 6-8% growth under the optimistic scenario. Whether you approve of them or not, there is little doubt that they have a significant bearing on Iran's economy.