Teaching Comparative Government and Politics

Monday, November 12, 2018

Economics, trade, and politics

This analysis concentrates on economics, but the questions for CompGov students revolve around the effects of sanctions on Iranian government and politics. Will moderate or hard line forces be strengthened?

Can Iran survive sanctions?

New tough sanctions targeting Iran's oil sector, imposed by the United States, come into force on Monday [12 November].

The Iranian president, Hassan Rouhani, has responded robustly.

"There is no doubt that the United States will not achieve success with this new plot against Iran as they are retreating step by step."

Iran is heavily dependent on its exports of oil, and renewed sanctions, if effective, would hit the economy hard.

Iran has the fourth largest reserves of oil.

The EU has proposed supporting companies trading with Iran despite these new sanctions.

But will these companies risk being hit by secondary sanctions which would limit their own ability to trade with the US?

But other countries, including those of the European Union, believe Iran is holding to its part of the bargain on the nuclear deal and have made clear their intention not to follow America's lead.

Such is the dominance of the US in global trade, that even the announcement of the renewed sanctions has been enough to trigger a wave of international companies pulling their investments out of Iran, and its crude oil exports have been falling.

The latest US measures exclude any company that trades with Iran from doing business in the United States…

The US has made it clear it wants eventually to cut off Iran's oil trade entirely, but has allowed eight countries to maintain imports as a temporary concession to give them time to reduce imports. US allies such as Italy, India, Japan and South Korea are among the eight, the Associated Press reports…

In order to allow companies to trade with Iran and not face stiff US penalties, the EU plans to implement a payment mechanism - a Special Purpose Vehicle (SPV) - that will enable these companies to avoid the US financial system.

Like a bank, the SPV, would handle transactions between Iran and companies trading with it, avoiding direct payments into and out of Iran.

So when Iran exports oil to a country in the EU, the company from the receiving country would pay into the SPV.

Iran can then use the payment as credit to buy goods from other countries in the EU through the SPV…

The US had insisted on cutting exports to zero but that seems unlikely as it would increase the price of oil, says Scott Lucas, a professor of international politics at Birmingham University.

In addition to the countries allowed to continue buying Iranian oil, the backing of China, Iran's largest trading partner, may also prove critical…