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U.S. imposes sanctions: Iranians penalized, EU blunts impact

Sheetal Sukhija - Wednesday 8th August, 2018

WASHINGTON, U.S. - On Tuesday, as the first tranche of U.S. economic sanctions on Iran kicked in, experts warned that crippling sanctions hit ordinary people the most, yet such pressures seldom topple regimes.  

However, as far as Iran is concerned - America’s withdrawal from the 2015 nuclear deal, followed by its imposition of tough sanctions, triggered the somewhat repressed anti-establishment emotions in Iranians.

In January this year, Iran’s clerical rulers witnessed the largest public display of discontent - for the first time since 2009.

Scores of enraged citizens hit the streets expressing discontent over high prices, unemployment, water shortages and the lack of optical reform.

At the time, Iran managed to quell the protests through a little reassurance and a lot of force and the violence that ensued killed dozens and left hundreds injured. 

Yet, the anti-government protests underlined the establishment’s vulnerability to popular anger fueled by economic hardship.

Win some, lose some

In the melee, the country’s moderate president, Hassan Rouhani - who won the re-election solely on the back of striking the landmark nuclear deal with world powers in 2015 - faced an even tougher task: Dealing with a poorly-performing economy.

Iran, under Rouhani’s administration, signed the 2015 Joint Comprehensive Plan of Action (JCPOA) with the five permanent members of the UN Security Council - China, France, Russia, Great Britain, United States and Germany and the European Union.

The agreement curtailed Iran’s nuclear program, pulling it back from atomic weapons capability in exchange for the end of many economic sanctions.

The U.S. offered Iran over $110 billion a year in sanctions relief and a return to the global economy in exchange for halting its drive for nuclear weapons.

The deal led to Iran limiting the size of its stockpile of enriched uranium - which is used to make reactor fuel, but also nuclear weapons - for 15 years and the number of centrifuges installed to enrich uranium for 10 years. 

Iran also agreed to modify a heavy water facility so it could not produce plutonium suitable for a bomb.

In return, sanctions imposed by the UN, U.S. and EU - that had crippled Iran's economy - were lifted.

Since the deal was signed in 2015, Iran’s economy improved.

The deal led to a rebound in oil revenues, Iran signed deals worth tens of billions of dollars for western aircraft and Rouhani managed to tame inflation.

Even though Rouhani was able to drive down inflation to just under 10 percent from well over 30 percent, boost oil production and stabilize growth - the wider economy remained stagnant. 

None of the improvements filtered down to the average Iranian.

The official unemployment rate rose above 12 percent and more than twice that figure for under-25s. 

Tourists could still not use credit cards in the country.

Iran’s major investments struggled to find project finance.

And fearing multi billion-dollar fines if the U.S.-Iranian truce broke down, large Western banks continued to refuse to do business with Iran.

Bowed not broken

Rouhani had initially reassured Iranians that Trump’s decision to withdraw from the deal would have no impact on Iran’s oil-reliant economy.

However, since May, when Trump officially withdrew the U.S. from the nuclear deal, Iran’s economy has been in free fall. 

The country’s official currency - Rial - rapidly depreciating against the dollar and lost about half of its value since May.

Businesses faced rising cost of imports and financial difficulties increased at local banks.

Meanwhile, the country continued to face other problems, including water shortages, power outages and plunging salaries set against the rising cost of living.

A day before the 90-day wind-down period set by the U.S. to provide companies and individuals conducting business with Iran was to end and the snapback sanctions were to be reimposed - Tehran unveiled emergency measures to stave off a currency collapse.

Iranian authorities announced that they had managed to beat the deadline in one key respect by completing the purchase of five new Turboprop passenger planes, built by ATR, a joint venture by Airbus and the Italian firm Leonardo.

The new planes will reportedly serve domestic routes.

Further, the Iranian Central Bank acknowledged the scale of the crisis it was facing and announced new currency measures. 

As per the plans agreed by the Iranian government over the weekend, a list of necessary supplies will be drawn up which will be eligible to attract favourable exchange rates for hard currencies.

The new currency measures also include lifting of currency controls imposed in the spring, reopening of private money exchange bureaus, with the implicit acceptance of a two-tier hard currency rate.

There will also be no limit on bringing currency or gold into the country and Iranians can return their hard currency to the economy, and will be allowed to open dollar accounts.

The measures strengthened the rial by 20 percent.

Yet, the sanctions continue to push the country into economic isolation. 

World Peace vs. Psychological Warfare

Without mincing words, Trump declared on Monday that the sanctions were being reimposed to cripple Iran’s economy.

Trump said, “The Iranian regime faces a choice. Either change its threatening, destabilizing behaviour and reintegrate with the global economy, or continue down a path of economic isolation. As we continue applying maximum economic pressure on the Iranian regime, I remain open to reaching a more comprehensive deal that addresses the full range of the regime’s malign activities, including its ballistic missile program and its support for terrorism.”

The U.S. President then signed an executive order that reimposed sanctions targeting the purchase or acquisition of U.S. banknotes by Iran's government, Iran's trade in gold and other precious metals, Graphite, aluminium, steel, coal and software used in industrial processes, Transactions related to the Iranian rial currency, Activities relating to Iran's issuance of sovereign debt and Iran's automotive sector.

On Tuesday, in a strong warning to trading partners, Trump announced, "The Iran sanctions have officially been cast. These are the most biting sanctions ever imposed, and in November they ratchet up to yet another level. Anyone doing business with Iran will NOT be doing business with the United States. I am asking for WORLD PEACE, nothing less!”

In response, Rouhani clarified that economic pressure alone would not force Tehran to the negotiating table.

He declared that there could be no talks as long as Washington was reneging on the deal and pointed out that Iran could hold talks, only if Washington proved its trustworthiness.

Rouhani said that Washington's call for new nuclear negotiations at the same time as it reimposes crippling sanctions "doesn't make sense" and is an attempt at "psychological warfare.”

He pointed out, “If you stab someone with a knife and then you say you want talks, then the first thing you have to do is remove the knife. We are always in favour of diplomacy and talks ... But talks need honesty. Trump’s call for direct talks is only for domestic consumption in America ahead of elections ... and to create chaos in Iran. They want to launch psychological warfare against the Iranian nation. Negotiations with sanctions doesn't make sense."

Adding, “America will regret imposing sanctions on Iran ... They’re already isolated in the world. They are imposing sanctions on Iranian children, patients and the nation. There will be pressure because of sanctions but we will overcome this with unity.”

Meanwhile, speaking out against the sanctions, the European Union reiterated its commitment to the agreement and vowed to protect firms doing "legitimate business" with Iran.

Claiming that the nuclear deal remained "crucial" to global security, foreign ministers of Germany, the U.K. and France released a joint statement, in which they unveiled a “blocking statute.”

The blocking statute is intended to protect European firms doing business with Iran despite the new U.S. sanctions.

Even though Iran is set to take months to recover from the crippling sanctions, the country will have to be prepared to face the second phase of the sanctions - which is set to hit the hardest.

In November, when the second 180-day deadline ends, the U.S. administration will impose the second phase of sanctions, targeting Iran's oil sector and central bank.

Analysts have warned that such a move could halt about half of Iran's exports of some two million barrels a day and Tehran is largely expected to turn to China and Russia, to keep its industry afloat.

While America has pressured allies to stop importing oil from Iran before the November deadline - it has offered some exemptions and top buyers of Iranian oil include China, India, Turkey and South Korea are likely to continue operations. 

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