A recent Government Accountability Office (GAO) study http://www.gao.gov/products/GAO-13-326 published this month (02/2013) points out that ” the combination of U.S. and international sanctions has adversely affected the Iranian economy and its future outlook. According to GAO’s analysis, the Iranian economy has consistently underperformed the economies of comparable peer countries across a number of key economic indicators since 2010, when recent sanctions were enacted. In contrast to its peers, Iran’s oil production, oil export revenues, and economic growth estimates have fallen, and its inflation has increased. For example, Iran’s oil export revenues fell by 18 percent from 2010 to 2012, while its peers’ oil export revenues increased by 50 percent. In addition, professional and International Monetary Fund forecasts of the Iranian economy were downgraded to reflect deterioration in Iran’s expected economic performance after the implementation of recent sanctions.”
But the study also found that “according to open sources, the government of Iran has tried to adapt to the sanctions through various means, including using alternative payment mechanisms such as barter agreements and changing its trading partners. However, these recent agreements have thus far not fully offset the reduced exports of oil to the European Union and others.”
Unfortunately, sanctions also have unintended consequences. Sanctions affect disproportionally the middle class, small business and the educated young Iranians who rely on the traditional banking and finance instruments to conduct their education and business affairs. On the other hand those with the best access to state resources, including the elite Revolutionary Guards (IRGC), have been best placed to circumvent the sanctions. According to recent reports http://www.reuters.com/article/2013/02/27/us-iran-nuclear-report-idUSBRE91Q0QL20130227 the Revolutionary Guards run smuggling networks via Iraq and Afghanistan and those become an integral part of the economy. According to an International Crisis Group report ” Iran has adapted its economy to sanctions, the introduction of another tier of exchange rates, the use of barter, front companies and the informal “hawala” system for financial transactions have all contributed to the rise of the informal or black economy, the ICG said.
“Crime rates and corruption have been rising; and smuggling is booming as clandestine networks replace commercial ones. Indeed, smuggling networks are becoming an integral part of the shadow economy that reportedly accounts for 21 percent of GDP.”
The black market economy will strengthen the Revolutionary Guards, harden their resolve and ability to conduct and finance terrorism and weaken Iran’s middle class, which supposedly should form the backbone of a future democratic society.
These are very worrisome developments and in my opinion we must rethink the sanction regime and reshape it from a meat cleave to a surgical scalpel.