Download Analyzing the effects of international economic sanctions on Middle

MINISTRY FOR EDUCATION AND SCIENCE, RUSSIAN FEDERATION
FEDERAL STATW AUTONOMOUS ORGANIZATION OF HIGHER EDUCATION
«NOVOSIBIRSK NATIONAL RESEARCH STATE UNIVERSITY»
(NOVOSIBRSK STATE UNIVERSITY, NSU)
Faculty: Economics
Chair: Mathematic Methods in Economics
Department: Management
Master Educational program: Oil and gas Management
GRADUATE QUALIFICATION PAPER
MASTER'S DISSERTATION
Basil Ahmar Daknou
Paper title: Analyzing the effects of international economic sanctions on
Middle East oil and gas industry (case of Iran)
«Admitted to defense»
Scientific Supervisor,
The head of the chair:
Cand. Sci. (Econ.)
Mkrtchian G.M., Doctor of Sciences, Professor
Silkin V. Yu.
«……»………………20…г..
«……»………………20…г..
Date of defense: «……»………………20…г.
Novosibirsk, 2017
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Table of content
Abstract……………………………………………………………………………………3
Introduction ……………………………………………………........................................ 4
Chapter one: Oil and gas industry under the sanctions……………………………………8
1.1 The history of Iranian oil and gas industry development………………………..……8
1.1.1 Historical Background………………………………………………………….8
1.1.2 Nationalization, buy back, formation of national oil companies (NOC)…..….10
1.1.3 Confrontation with the western countries……………………………………..12
1.2 Iranian oil and gas industry under sanctions………………………………………….16
1.2.1 Sanctions and restrictive measures as the instrument of political and economic
pressure…..……………………………………………………………………….…16
1.2.2 Financial/Banking Sanctions…………………………………………………..17
1.2.3 Oil weapon as the instrument of countersanctions………………………….…19
1.3 Energy industry dynamics under sanctions (exploration, production, structure,
investments, export, pipeline routes projects)……………………………………………20
Chapter two: Impact of Past and Future Sanctions on the energy sector and
economy…………………………………………………………………………...……..30
2.1 Theoretical discussion of the success of sanctions Declared and real goals………....30
2.2 Literature review on how the economies are affected by the sanctions ……….…….35
2.2.1 Western view……………………………………………………………..….....35
2.2.2 Domestic view……………………………………………………………….....36
2.3 Different Methods and approaches used to assess the effects of sanctions…………..37
2.4 Methodology Research Methods and Statistical Framework………………………...43
Chapter Three: Future Scenarios and Implications for Energy sector……………...…….45
3.1 Possible scenarios of energy sector development……………………………………45
3.2 Sanctions and macroeconomics economic performance before and after sanctions….52
3.3 Results interpretation………………………………………………………………....56
Conclusion ………………. ……………………………………………………………...62
References…...………………………………………………………………………..….64
Appendix............................................................................................................................72
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Abstract
International economic sanctions have become increasingly important as
alternatives to military conflict since the end of the cold war. Sanctions against Iran were
mainly imposed on the energy sector as well as the financial sector due to the importance
of the energy sector of Iran since it mainly depends on oil and gas revenue in the state
budget income because of gas and oil production and reserves. Moreover, the imposed
restrictions on cooperation with Iran in foreign trade and financial services led to
investment decline and lower economic growth. The data that was used in my research was
from World Bank. This part of study is supposed to be done using an econometric model
in order to assess the influence of long periods of sanctions on Iranian economic
development. Therefore, time series regression is the appropriate method, which can be
used to examine a long time of period between 1979 and 2015. In the model, I use GDP as
a dependent variable with several independent variables such as oil production Mt, oil
export Mt, Iran Heavy price B$ and investment .
The paper is divided into three chapters; the first chapter is about oil and gas
industry under the sanctions. The second chapter will discuss the impact of past and future
sanctions on the energy sector and economy and the third chapter offers some suggestions
to different energy markets that Iran could explore in order to improve its energy sector.
Finally a conclusion, to answer the research question and some suggestions for further
research. The results of the research will show the impact of oil and financial Sanctions on
the growth of the Iranian GDP and illustrate the connection with the variables that were
affected the most by the sanctions.
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Introduction
International economic sanctions have become increasingly important as alternatives to
military conflict since the end of the cold war. This research work surveys various
approaches to the study of economic sanctions on the Middle Eastern oil and gas industry.
Sanctions and embargos is a very controversial topic nowadays due to the fact that some
people agreed that sanctions are a key factor to acquiesce countries and punish them for an
act that they committed. Conversely, others believe that sanctions are nothing more than
a useless tool that, more often than not, fails to fulfil its objective, whilst at the same time
making innocent people suffer. Several countries in the Middle East were under sanction
such as Iraq, Syria, Libya and Iran. The sanctions placed on Iran were mainly on the gas
and oil sectors. The main reason for this is because energy sanctions play a significant role
as far as Iran is concerned, as oil and gas revenues contribute to a huge part of the nation’s
income.
Fundamental problem:
During the XX century, some of the Middle Eastern countries such as Iran, Syria
and Iraq, lived under western unilateral or multilateral sanctions for a long time. Sanctions
and restrictive measures are usually used as the instrument of political and economic
pressure. Economic sanctions usually include trade sanctions, i.e., restrictions on imports
from or exports to the target country; investment sanctions, which include restrictions on
capital flows to the target or, in some cases, mandatory disinvestment. Usually sanctions
target the oil and gas sectors as they are deemed to be the most significant and sensitive
part of the national economy. Sanctions distort economic conditions, preventing economic
development. Reasons for sanction implementation differ from country to country and vary
from time to time, but this research will not focus on the reasons. The problem is how to
manage economic development under the sanctions.
This problem is important to solve in order to have a better understating on how a
country lives under the sanctions, how it can drive the economy to a productive better way.
Besides that, to have a better view on the most effected sectors moreover what alternative
decisions have to be made to make the economy prosper again. In addition, how the country
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should be prepared for investing and open economical especially after they start to remove
sanctions.
The goal of this study is to examine the effect of sanctions on GDP of the Middle
Eastern countries, looking closely at the case of Iran. Iran was under the American and
United Nation courtiers for a long period of time; this sanction began softly and started
to become more and more stifling to the Iranian economy where sanctions majorly
targeted the energy sector and financial sector.
As well as this, the paper objectives are:
1- To highlight the historical background about some countries that lived under
sanction for a period of time.
2 -To address some analysis and literature reviews about managing how to live
under economics sanctions.
3 -To examine the Iranian GDP between 1979 and 2015 and to have a better
understating as to how the Iranian government manages its resources.
4 - (What alternative market can Iran switch to decrease the effects of sanctions) to
discuss alternative markets that Iran could explore in the hope to decrease the effects of the
sanctions.
Hypothesis:
1. Assumed that the sanctions had a negative and harmful effect on the Iranian
economic growth.
2. Whether sanction imposers achieved their main objective which is get rid of the
Iranian regime, stop Iran from developing its nuclear reactor stations, take over the control
of the Iranian gas reserves and why utilizing such a tool.
Therefore, in this research I will try to test and see if the sanctions are effectively
working and if so how a country has to react in a way to attract new foreign investment to
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keep forward economic growth and to be more efficient in allocating their resources to find
new foreign investment. In my opinion, this paper might help any country that it is facing
sanction to manage its resources, since Iran was for more than thirty years under sanctions
however; the country keep going forward to reach their goals even thought there was a
huge pressure on the economy due the sanctions.
Some literature review mainly describes the sanctions in many different perspectives.
Thus, in total we looked through more than 80 reference that could help us to understand
the case of Iran in a deep way were the sources were not bias to one side. Hence, we
examine many reliable sources from the western countries such as World Bank, Center for
Strategic and International Studies, Oxford Institute for Energy Studies, U.S Energy
Information Administration Jstor and so on. As for the Iranian point of view, we reviewed
many Iranian books and websites such as NIOPDC, OPEC, Tehran University and Fares
Data.
Ferhat Çalışkan (2011) illustrates the main reasons of sanctions on Iran from American
point of view by using game theory methodology and the result of the paper was that
although sanctions did not reach their main goal but it’s better than doing nothing at least
it makes their goal more complex to achieve.
Another literature that was useful of our research by .Leander Leenders (2014) aims in his
work to clarify the internal and external difficulties that the European Union is facing
when posing sanctions in 47 different cases by using pragmatic perspective approach.
The result were that sanctions are an effective instrument of pressure for the European
Union.
As well, a paper that was done by Paul Velazquez in 2012 by using a comparative study
found out that Iran become more independent to develop its industries. Nevertheless,
sanctions damaged the Iranian economy but not all the period of sanctions.
Methods and Sources:
In order to identify the problem and see the consequence of the Iranian sanctions,
this paper will examine the case in three different parts. In the first part, I will observe a
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historical background on Iran sanctions including energy sector and financial sector. The
second part of the study is supposed to be done using an econometric model in order to
assess the influence of long period of sanctions on Iranian economic development.
Therefore, time series regression is the appropriate method that can use to examine a long
time of period between 1979 and 2015. In the model, I use GDP per capita as a dependent
variable with several independent variables such as production of oil in (Mt), oil export
(Mt), Iran heavy oil price per barrel and total investment in million dollars.
The results of the research will show the relation between the Gdp and the
independent variables in order illustrate the connection with variable that were mostly
affected by sanction. In the third part, there will be some suggestion and hypotheses on
how Iran can decrease the effect of sanctions by taking better decisions to supply other
countries with its goods and oil with an overview of my analysis with some suggestions to
have a better exaggerating on future studies similar to this one.
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Chapter one: The history of Iranian oil and gas industry
development
1.1 The history of Iranian oil and gas industry development
1.1.1 Historical Background:
The first big oil exploring in the Middle East was in Persia Iran in our olden days.
According to strikes oil the British company in 1901 a British oil company received a
license to start exploring and that company was led by the British man William Knox
D'Arcy who sent George Reynolds as explorer; he made his first exploration in 1908 in
Chiah Surkh .Exploration was going forward /continued until the Anglo-Persian oil
company was established. One must note that at the beginning, there was a big lack of
technology and skills and the extraction was in a simple way. According to Yergin (The
prize 1991) “. Each piece of equipment had to be shipped to Basra on the Persian Gulf,
transhipped three hundred miles up the Tigristo Baghdad, and then carried by man and
mule over the Mesopotamian plane and through the mountains”. Besides that, they also
faced some political problems with the tribe and local people asking for some shares
because they are foreign and they are practicing on their land according to Reynolds
“very keen on receiving a Substantial present from us, especially in the shape of some
shares of our Company.”
On 14 September 1960 in Baghdad, an organization was established to look over
the oil industry in order to increase revenue and keep prices stable. This organization was
called OPEC which stands for the organization of the petroleum exporting countries by
five members countries Iran ,Iraq ,Kuwait ,Saudi Arabia and Venezuela the headquarter of
this organization was in Geneva.
According to Ian Seymour in OPEC instrument of change the production of Iran in
1960 was 1.068 thousand barrels per day and by 1970, the production of Iran had risen to
3.829 thousand barrels per day knowing that Iran was the first producer of oil in the Middle
East. According to Iran shah "Iran must be restored to number one producer," he said.
“International oil portioning is nice in theory but unrealistic in practice."
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During the 70s, when the regime of Shah was dominant in Iran, the relationship
with America was the best for several reasons, one of which being that the USA was one
of the biggest markets of Iran. According to William J. Daugherty (2003) “the shah moved
closer and closer to the United States in a deepening relationship vital both to American
and world interests”. Not only that but the added fear of the Soviet Union from the Shah
made relations even better because the fear that the communists would reach Tehran but
all this support contrarily made Iran weaker. According to Ferhat (2011), “The Shah
manipulated the Cold War political environment and the fear of Communism in order to
get military and economic aid as well as political support. By providing support to the
Shah, the Kennedy administration‘s aim was to maintain stability in Iran with new reforms
and make it a stronghold against Soviet threats, but the Shah used these aids to suppress
Prime Minister Amini and to thwart his reforms,29,which in turn made Iran weaker and
less stable”.
The major battle of production in the Middle East made several changes to the oil
industry, bringing two big crises to the energy industry. The first crisis was in 1973, when
the OPEC countries decided to stop exporting oil to the United Stated of America and the
countries who were supporting Israel against Syria and Egypt, in an attempt to force Israel
to retreat (to make pressure on Israel to retreat) from Arabic land that they occupied in
1967. Therefore, OPEC countries made the prices of oil rise. This unexpected crisis had
many impacts on the world regarding taking decisions with the energy market and political
actions and some countries faced a worse economic situation as a result.
The second oil shock was after the revolution of Iran in 1979, which created chaos
in the Middle East after the shah. The oil production stopped, forcing the rest of the OPEC
members to work harder so as to increase the production to make up for the shortfall in
production, which was around 3.9 million barrel per day according to EIA (Energy
Information Administration).
Moreover, according to Bellfer Center for Science and International Affairs , during
the revolution of Iran, one particular event that took place led to a decline in Iran’s
economy; the kidnapping of hostages in 1979.
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The first participation of foreign energy market in Iran was with a British company
in 1908. In 1935, the name of this company was Anglo-Iranian Oil Company (AIOC). The
name has was changed in 1945 into BP (British petroleum).
This company was the first foreign company that started exploring oil in the middle east.
At that time the oil industry of Iran was controlled by their British company and revenue
went to the company with a small share for the royal family and not for developing the
country.
Due to this, the events continued when the prime minster of Iran Mohammed
Mossadegh nationalized the oil industry in the countries and dismissed the British
technique regarding employees. As a result of this decision, a new economic crisis
appeared in the energy market. According to (Abrahamian, 2013) “Some historians,
including prominent Iranian scholar Ervand Abrahamian, have argued that control over oil
was the primary reason the United States and Great Britain plotted to overthrow Mossadegh
in the infamous coup of August 1953.”
1.1.2 Nationalization, buy back, formation of national oil companies (NOC):
National Iranian Oil Company was a result of a previous Anglo-Persian Company between
England and Iran until it was overthrown by Mohammad Mosaddegha an Iranian politician
who, in 1951 issued a new nationalization policy to take responsibly over all the employees
and assets of Anglo company. According to James Press (2004) “Initially it took over all
the employees and physical assets of Anglo-Iranian within Iran, with instructions to set
aside 25 percent of its profits to meet compensation claims by the British company”.
However, in 1953 it was totally controlled by the national Iranian oil company. In 1954 a
new alliance was formed under the name of IOP (Iranian Oil Participants) however this
alliance was as previous common alliances, where it was with big western oil companies
and shares were divided not only between them,but also the production; refining and export
was under their control and not
NIOC. According to James Press (2004), “British
Petroleum Company (BP) held 40 percent, Shell 14 percent, Chevron 8 percent, Exxon 8
percent, Gulf 8 percent, Mobil 8 percent, Texaco 8 percent, and Compagnie Française de
Pétroles 6 percent”. In 1956, a new law was passed in Iran to make a joint venture with
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foreign companies to discover new field areas that were not related to the IOP. The first
joint venture was with an Italian company Agip with fifty-fifty percent stake. The venture
was named Société Irano-Italienne des Pétroles (Sirip).
In 1958, another joint venture was made with Standard Oil Company of Indiana,
with NIOC to be called Iran Pan American Oil Company (Ipac).Thus, these two ventures
were the first successful joint ventures with national Iranian oil company in 1961. From
the 60s to the 70s, NIOC found that joint venture is an effective way to improve the energy
sector therefore more than six joint venture were signed. The golden age of NIOC
continued to grow more and more thus preventing the possibility of creating new contracts
with Asian, Eastern Europe and African countries. According to James Press (2004) “In
December 1966 the Iranian government, having discovered the existence of the aggregate
programmed quantity formula, forced IOP to increase production to give up 25 percent of
the area in which it had exploration rights, and to supply NIOC with 1.47 billion barrels of
crude oil for export over the following five years”. NIOC ambitions kept growing until
they began refining overseas.The first contract overseas was with Indiana Company with a
13 percent stake each in Madras India. The second contract was with new South African
refinery with 17.5 percent interest as reported in James press 2004.
After the Islamic revolution in Iran, an immediate decision was made to stop the
foreign participation in the country; by1980 the IOP ceased to exist. As well, all the joint
venture and service contracts were stopped and all these ventures were regrouped beneath
a new system called Iranian Offshore Oil Company of the Islamic Republic. Furthermore,
the South African refinery was forced to come to an end, but the Madras refinery continued.
Therefore, we can say that after the revolution there were dramatic changes even to the
extent of changing the field names;Cyrus field became Sorush, and Feridun became
Foroozan.
However, in 1987 a new regulation was issued stating that all foreign participation
was under this petroleum law. The law permitted the foreign companies to be under the
buyback system, where the foreign company provides financial investments for a
period.This came as a disadvantage to the foreign participation because they had to give
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up the rights to the state company in the end. In return, the foreign company took shares of
production profit price which was fixed. Therefore, the company risked the price volatility
of oil if it dropped below the contract rate according to Jay P. Pedersen (2004).
1.1.3 Confrontation with the western countries:
The wicked relationship between Iran and western countries started after the
Islamic revolution, more noticeably after the hostage crisis. The event started when some
part Islamic militia kidnapped many American citizens who worked in the American
embassy in Tehran in 1979. The first action was freezing Iranian assets in the bank worth
$12 billion as said by Carswell. However, these sanctions were lifted after two years in
1981 and the relations returned to its peaceful norm for a period of three years. In 1984, a
new flood of sanctions came to Iran because of supporting a part of bombing American
marines in Lebanon. Under this sanction, they put a restriction on loans. In 1987, president
Reagan signed a new sanction that stopped all the imports into Iran as stated by Richard N.
Haass. However, in 1995 Iran made some new rules to facilitate foreign investments in the
oil and gas sector, which gave the United State a new reason to increase the sanctions.
Therefore, in 1996 they launched a new kind of sanctions called (ILSA) Iran-Libya
Sanctions Act that banded investing in Iran more than 20 million dollars as Kenneth
Katzman mentioned. Again, between 1995 and 1996, a new conflict appeared between Iran
and USA but this time a third part was involved and made some resistance with the
European countries. According to Richard N. Haas (2008) as cited in Ferhat “Almost all of
the U.S. sanctions on Iran have been unilateral without the support of key state actors such
as Russia, China, Japan and the European Union”. However, in 1997 when president
Clinton was the president of the US he made an exception on the sanctions. According to
Ferhat (2004), “first project to exceed the threshold was allowed by the U.S. when
President Clinton waived ILSA sanctions on a $2 billion contract between Iran and a
consortium comprised of French Total SA, Russian Gazprom, and Malaysian Petronas”. In
1991 and 2000, some small changes appeared to the American sanctions, removing the ban
on medical equipment and food. Again, in 2000 According to Kenneth Katzman the United
States imposed a new sanction on Iran which was related to technology. This time, the
sanction was in regards to high technology WMD stating that any country or firm that sold
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them to Iran, the sanctions will follow it. In 2001 after the terrorist attack on USA, a new
sanction imposed a new sanction to fight international terrorism. As said by Ferhat (2004)
“Executive Order 13224 targeted the entities believed to be supporting international
terrorism, which was mostly referring to Al Qaeda activities. But this Executive Order also
turned out to be a sanction against Iran, and as time passed, it increasingly included Iranian
entities such as Qods Force, Bank Saderat (October 21, 2007), Qods Force senior officers,
Iranian Committee for the Reconstruction of Lebanon, Imam Khomeini Relief Committee
Lebanon Branch, (August 3, 2010)”
Beside the American sanctions, the United Nations joined the United States in
imposing sanctions on Iran to prevent Iran from reaching their nuclear ambition that might
threaten the world especially with its aggressive media speeches against the United States
and Israel. Therefore, they imposed a series of sanctions between 2004 and 2010; the UN
enacted seven resolutions related to Iran: Res. 1540, Res. 1696, Res. 1737, Res. 1747, Res.
1803, Res. 1835 and Res. 1929. Table 1 Explain the sanctions type and date imposing
according to UN Security between 2004 and 2010.
Table 1: United Nations sanctions on Iran with key provisions
Year
2004
RES.NU
1540
2006
1696
Key provisions
 Prevention of proliferation of nuclear, chemical and biological
weapons
 concerns about the threat of illicit trafficking in WMD related
materials
 commitments to cooperation within IAEA framework



2006
1737





2007
1747

Concerns about Iran’s nuclear program
Prevention of the transfer of any item or technology that could
contribute Iran’s enrichment activities and ballistic missile program
Threat of force under Article 41 of chapter 7
Deploring irans non-cooperation with IAEA
Prohibitions of the supply ,sale, or transfer of WM-related items
Freezing of funds to the persons or entities listed in the annex as
related with nuclear or ballistic missile programs
Prevention of the training of Iranian nationals in WMD-related areas
Threat of force under article 41 of chapter 7 of the UN
Restraint in the supply of battle tanks, armored combat vehicles
artillery systems, combat aircraft, attack helicopters, warships,
missiles to Iran.
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

2008
1803



No new commitments for financial assistance ,concessional loans
grants to the Iranian government
The list of commitments to be full filled by all states in case of
cooperation from Iran.
Vigilance over the Iranian banks especially bank Melli and bank
Saderat
Inspection of cargoes to and from Iran that are shipped by Iran Air
cargo and the Islamic Republic of Iran shipping.
Encouragement of the EU high representative of the common and
security policy to continue communication with Iran
2008
1835

Call upon Iran to comply with its obligation under UN resolutions
and IAEA requirements
2010
1929

Concerns about the construction of an enrichment facility of Qom
and Iran’s enrichment of uranium to 20%.
Vigilance over the transactions involving Iran banks including the
central bank of Iran
Travel bans on the people listed in Annex to the listed provided by
the previous resolution.
Vigilance of member states over their national business with Iran
Prohibition of member states financial institutions opening banking
accounts in ran
Establishment of a “Panel of Experts” to oversee the
implementations of the resolutions





Source: UN Security resolutions 1540,
http://www.un.org/documents/scres.htm
1696,
1737,
1747,
1803,
1835,
and
1929,
The sanction on Iran started in 1979 for several reasons according to Gary Samora
(2015). “American sanctions against Iran date back to the 1979 revolution and hostage
taking. But the international sanctions regime that today has isolated Iran began less than
10 years ago with the referral of Iran to the UN Security Council over its nuclear program.
Sanctions have been imposed for a variety of reasons, including proliferation of weapons
of mass destruction, support for terrorism, and violation of human rights”. Since President
Ford was sworn into presidency, the relationship with Iran was. As citied in Ferhat (2004)
“during the Ford administration, the United States‘ foreign policy toward Iran was shaped
by Kissinger and his assumption that the Shah of Iran was the most reliable partner in the
Gulf Region”. Moreover, Iran increased their budget and expenses on military weapons
after the first direct conflict with the United States in preparation for war in the near future.
Table 2 shows the army expenditures that they were imported betwenn 1973 to 1977 in
millions of dollar.
15
Table 2: Iranian arms expenditures and imports (1973-1977) Millions $
Year
Defense Expenditures
Arms Imports
1973
3,729
525
1974
6,303
1,000
1975
8,646
1,200
1976
9,521
2,100
1977
8,747
2,400
Source : Cited in Palmer, Guardians of the Gulf, 89
As well, the nationalization of the energy sector preventing the western companies
to work in Iran made the whole energy market in the world an instability and blurred at
that particular time because Iran was one of the major players in OPEC and the main
supplier of oil and gas in the whole world.
The United States imposed limited sanctions on Iran for 14 years, and these
sanctions were imposed by the United States alone has not dragged its allies to impose
sanctions or reduce economic or dealing Political with Iran. In spite of this, the UN Security
Council has passed three resolutions against Iran including a ban on Iran’s nuclear deal and
a restriction on the activities of some Iranian authorities’ funds. All of these decisions were
issued under chapter seven of the Charter of the United Nations, but not similarity in the
texts of these resolutions issued against Iraq. In spite of this, the United States and Israel
did not find that those penalties were sufficient enough in deterring Iran's nuclear activity
in 2003 since Iran’s government constantly threatened to attack Israel and United States
because of their action against Palestine. At the same time, Iran was financing some groups
with weapons and money (Hamas). These such groups were considered to be terrorists in
the eyes of the Western world. Therefore, the American government started to put several
kinds of sanctions on Iran to stop its behavior. The main reason of the sanctions was to
weaken their economy. The sanctions were mainly divided into two kinds: energy sanction
16
and financial sanction. This in turn made both aforementioned sections suffer, resulting in
a strained relationship between the two countries.
1.2 Iranian oil and gas industry under sanctions
1.2.1 Sanctions and restrictive measures as the instrument of political and economic
pressure:
Throughout the past sanctions or other restrictive measures existed as tools of
indirect actions. In other words, sanctions can replace direct military attacks. However, it
is difficult to say that sanctions are the solution for a diplomatic problem but at least it does
not have a huge amount of cost. Robert Carbaugh (2008) illustrates a definition to
sanctions as follows “Sanctions can be defined as using unilateral or multilateral diplomatic
or economic measures such as limiting financial relations or trade and cutting diplomatic
relations with the aim of a desired policy change in the target country”. However, when
setting sanctions many questions are raised and come into the mind of the economic
experts, such as how much time is required before they achieve their goal? Does preventing
a country from trading make it weaker and follow the imposer of the sanctions or does it
make them more independent? Who are the other potential partners that they might have?
Neta C. Crawford and Audie Klotz (1999) classifies sanctions into four models in
order to properly illustrate how they work. Firstly, high ruling people must suffer and lose
more than making profits; if the regime is independent from the sanctioning countries, the
sanctions will not reach their aim. Secondly, it have to peruse the people that decision
makers that they are behaving wrong so they stop there support to them. Thirdly,
sanctioning countries have to cut off the supply of resources. However, this might not work
if the country has enough resources and does not need to rely on the sanctioning country.
Finally, the country infrastructure is not about the elite ruler but also about politicians and
regular citizens. Therefore, sanctions can target this complex community and put the
country in an unstable condition. This may result in an uprising occurring at any time due
to anger and frustration amongst the country’s inhabitants.
An important point that has to be discussed is what are the negative outcomes facing
the country that is sanctioning other countries such as trade limitation regarding imports
17
and exports and so on. According to Hossein G. Askari (2003), the United States of
America is a country that used sanctions as a tool more than other countries and it can be
noticed in Afghanistan, Cuba, Iraq, Syria, Libya and Iran. This might rise a question
regarding the losses of trade that USA had because of the sanctions ; did it achieve its goals
or not.In table 3, it is clear that the United States of America recorded a fall in exports as a
result of the sanctions that they imposed between 1989 and 1998:
Table 3: Losses of U.S. exports because of sanctions (millions of U.S. dollars)
Year
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Average
Average since
Due to
comprehensive
sanctions
2.012
1.912
2.689
1.839
2.655
1.750
3.148
2.243
2.526
4.484
5.607
5.238
3.009
3.219
Due to Selective
Sanctions
4.328
5.276
20.469
14.099
11.704
14.784
8.649
10.392
11.460
9.116
12.491
10.278
11.087
12.344
Total
6.340
7.188
23.167
15.938
14.359
16.534
11.797
12.635
13.986
13.600
18.098
15.516
14.097
15.563
Source: Askari Economic Sanctions: Examining Their Philosophy and Efficiency
1.2.2 Financial/Banking Sanctions:
Financial sanctions were one of the tools that the Americans used against Iran to
stop their aggressive behaviours against Iran. After the hostage crisis, the US made a
decision to impose different kinds of financial sanctions such as cutting loans, prohibiting
transactions, imposing higher interest rates, and freezing funds. According to Robert
Carswell (1981) as cited in Ferhat “The United States had no difficulty freezing Iranian
financial assets because, on the one hand, the government used its state power to regulate
finance, and on the other, made the most of its leverage in the global transaction system in
which ―virtually all transactions in Eurodollars clear through New York”. Moreover
according to Carbaugh, using financial sanctions against a country is a more successful
18
tool for several reasons as they are related to future investments. Financial sanctions could
be more effective than trade sanctions because they target direct governmental
administration and banks; they affect the policy makers and will not harm the population
in the short termbecause the government is the key controller of money flows and
regulations in the financial market.
Since Iran started its ambition with nuclear program the US implemented the
financial sanction more and more and they were majorly targeting their banking sector, as
well as blocking property and assets held in the U.S., embargoes, ban on U.S. trade and
investment. According to Bellfer “Starting with the designation Of Bank Sepah in 2007,
the United States has sanctioned all of Iran’s major banks , cutting off their Connections to
the U.S. financial system and forcing foreign financial institutions to choose between doing
business with Iranian banks or with the United States”. Thus, we can see how the American
sanctions were a fierce tool that rendered the foreign company afraid of dealing with Iran
. That was a way to decrease their reserve of other currencies.
Another tool that the United States government used to siege the Iranian economy
is that all transactions needed to go through New York to different destinations without the
need of being an American citizen . According to Bellfer center, “Blocking “U-turn”
transactions. Until 2008, Iran could conduct transactions in U.S. dollars using a loophole
known as a “U-turn” transaction. The loophole allows two non-American banks to conduct
a transaction in dollars by clearing the transaction through New York; the transaction
makes a “U-turn” through the U.S. without the sender or recipient needing to be
American.”
Moreover, the European Union disconnected all the Iranian financial institutes from
financial services between Tehran and all European countries. Bellfer center states,” In
2012, the European Union ordered the Brussels-based financial messaging service,
SWIFT, to disconnect designated Iranian banks. Unplugging Iranian banks—an
unprecedented step—severed Iran’s connections to the world’s major banking centers,
forcing Tehran to seek alternative ways to move money internationally.” As a consequence,
Iran had more restrictions on moving money. Not only that but also the American
government issued a sanction against Iran that was released for the first time that Iran is a
country dealing with money laundering and it’s a traitor to the world’s financial economy,
19
leading lead this European country to freeze all Iranian money in banks and that was one
of main reasons why the Iranian currency fell. Bellfer states “In 2011, the U.S. designated
Iran as a jurisdiction of “primary money laundering concern” under Section 311 of the
USA PATRIOT Act. The Treasury Department “identified the entire Iranian financial
sector, including Iran’s Central Bank” as a danger to the worldwide financial system. It
was the first time any country’s central bank had been designated under Section 311. In
addition to this action, the European Union froze the Central Bank’s assets.” What’s more,
it was noticed that the Iranian total loans had decreased as a direct result of the sanctions.
1.2.3 Oil weapon as the instrument of countersanctions:
Oil is an important material that most countries rely on from day to day. This makes
the producer gain an advantage power to cut the supply on the consumer’s countries and it
was to be known use when producers go through times with political problems and conflict
to force some countries to back away from its decision to achieve its political ends.
According to El-katari and Fattouh (2012). “the 1973 embargo by the members of OAPEC
(less Iraq) against specific consumer countries involved first threats, then real cutbacks in
oil supplies, and was aimed at breaking down allied support for Israel during the 1973 war
between the latter and its Arab neighbors. The oil weapon at the time proved to be a hollow
weapon that was unable to achieve its goals, and was soon dismantled. Nevertheless, the
dramatic events surrounding the use of the oil weapon in 1973 have shaped consumer–
producer relations and energy security policies in the West ever since”. So as we can see
in this example how the oil weapon did not reach its goal in that case where it led to bad
relations with the supplier and consumers. However, this use of oil weapon made the price
of oil increase and created unpredictable events in the market.
In the case of Iran, sanctions make other countries afraid of a move that Iran can
use to cut the supply road of oil and gas in the Persian Gulf, although it was never used
until now. However, it is a possible option to cut the Hormuz route where a huge amount
of oil and gas goes out from this route .As cited in El-katari and Fattouh (2012). “The
Straits of Hormuz off the Iranian coastline constitute one of the world’s most important oil
shipping chokepoints. About 88 per cent of all the petroleum exported from the Persian
20
Gulf passes through the Straits of Hormuz – approximately 17 million barrels per day, or
20 per cent of the world’s oil supply – serving key customers in Japan, Europe, the USA,
and other Asian customers”. Therefore, we can see that the oil weapon exists but no one
can guarantee the consequences that might happen as a result of such an act.
1.3 Energy industry dynamics under sanctions (exploration, production,
structure, investments, export, pipeline routes projects):
During the Islamic revolution in 1979, the energy market was under Iranian
government control because they started to eliminate all the foreign companies in order to
make the Iranian people to benefit from their resources instead of the foreign companies
who plundered the people’s bounties with a low percentages going to the people. However,
the national Iranian oil company could not increase their production as in previous cases
due to a lack of high technology and a ban on development in their field.
The oil production of Iran fell by about 75% between 1979 and 1981 because of
sanctions that were imposed on the Iranian energy sector since the hostage crisis started as
well as the beginning of the Iraqi-Iranian war leading to huge physical damage in the
refinery. Figure 1 According to James press (2004) “The large Abadan refinery was badly
damaged by Iraqi attacks in 1980 and 1982. Iran's main crude oil export terminal at Kharg
Island was damaged repeatedly by Iraqi air attacks”. Thus, this was the first shock that the
Iranian energy sector faced which drove the production downwards.
Iran Oil production and Refinery capacities
8000
6000
4000
2000
-
Oil Production
Oil Refinery Capacities
Figure 1: Iran oil production and Refinery Capacities
Source: BP Statistical Review of World Energy 2015
21
During the end of the Iraqi Iranian war in 1988, the oil production of Iran was two
million barrels per day with export of 1.7 million barrels per day. Then in 1990 the oil
production had risen to 2. 3 million barrels per day but the refining difficulties remained
which forceed them to buy some products from abroad as was mentioned in James press
(2004) “refining capacity was still down, and NIOC had to import some petroleum products
from overseas refineries that processed Iranian crude”. Never the less, NIOC did not stop
its ambition to improve their energy sector and refining capacity hence they started two
new projects in Bandar Abbas and Arak. Therefore, NIOC declared the offer to foreign
companies; this contract was accepted by ETPM Entrêpose of France to rebuild the Kharg
oil export terminal. According to Jay P. Pedersen (2004), “Plans were made to construct
additional refinery capacity of 450,000 barrels per day, mostly at Bandar Abbas and Arak,
by the end of 1993”.Besides that Iran announced that they would join the Malaysia refinery
project in Kedah state as Knower that NIOC was the third largest tanker fleet with 5.5
million tons. As well, one of the biggest oil companies with human resources of employees
with a full benefits from the company. According to Jay P. Pedersen (2004), “The
Company owned 28 oil tankers and 32 other vessels and had on charter 35 oil tankers and
34 other vessels. NIOC was also one of the largest employers in Iran, where it was engaged
on a large scale in the provision of housing and medical care for its workers alongside more
conventional activities”. Nevertheless, in the early 90s they took a new decision to make a
new buy back. But this decision was not so attractive for international oil companies
because the offers were out of date and they came back to the period of the 70s until they
decided to make a they realize that they are out of date and they have to establish a new
one to attract the international oil companies. According to Stevens (2015) “In 1995 the
government, at last realizing that the existing terms were unrealistic, began attempts to
improve the terms.” While they began to change their terms, a new sanction was applied
on Iran, Stevens (2015), “The United States implemented the Iran and Libya Sanctions Act
(ILSA) in 1996. This was seen as weak and ineffective, incorporating a large number of
waivers and exceptions; IOC interest in the revised buy-back terms remained lukewarm”.
In 1999 the largest oil field was discovered during the sanctions time located in Azadegan
in the region of Khuzestan with estimated reserves of 70 billion barrels. According to Jay
P. Pedersen in 2001 Japan opened the negotiations to develop Azadean in argument to give
22
Iran a 3 billion$ loan to Iran. The host Japanese companies were Japex, Inpex, and Japan
National Oil Corp but in 2003 the negotiations failed because of the pressure that was made
from the United States Of America. As well, there was a talk about negotiations over
Azadean with France's TOTAL S.A. and Norway's Statoil but again the negotiations failed.
Nevertheless, in 2001 Iran had a good development in the energy sector due the
contract that they made with Eni the Italian company to develop Darkhvin field with an
output production of 160,000 barrels per day. As well, NIOC made a new discovery for
large offshore oilfield called Dasht-e Abadan. In the table 4 below, clarify the foreign
investment in Iran energy sector (1999–2006) with the field names, foreign company
participating, and the value of the contract with the estimation of output with barrels per
day. As well the total foreign investments with a total of 80 billion $ between (1999-2006)
and with a total production output 1.2 million barrels a day and 5 billion cup.fi a day
according to Katzman.
Table 4: Foreign investment in Iran energy sector (1999–2006)
Date
Feb 1999
Field
Daroud (Oil)
Apr 1999
Balal (Oil)
Nov 1999
Saroush and
Nowruz (Oil)
Anaran (Oil)
Apr 2000
July 2000
Mar 2001
June 2001
May 2002
Sep 2002
Oct 2002
Feb 2004
Oct 2004
June 2006
Total
Phase 4 and 5
south pars (Gas)
Caspian Sea Oil
exploration
Darkhovin (Oil)
Masjid el
sulayman (Oil)
Phase 9 and 10
south pars (Gas)
Phase 6 7 8 south
pars (Gas)
Azadegan (Oil)
Yadavaran (Oil)
deals include 30
year purchase of
gas
Gasmar block
(Oil)
Company
Total/ENI (France
,Italy)
Total/Bow valley
(France,Canada)
Royal Dutch Shell
Value
1 Billion $
Output goal
205,000 bpd
300 million $
40,000 bpd
800 Million $
190,000 bpd
?
?
1.9 Billion
2 Billion cu.fit/day
GVA Consulants
(Sweden)
ENI
Sheer Energy
(Canada)
LG (South Korea)
225 Million $
?
1 Billion $
80 Million $
160,000 bpd
25,000 bpd
Statoil (Norway)
2.65 Billion $
3 Billion cu.fit/day
Inpex (japan) 10%
stake
Sinopec/ONGC
(China,India)
200 Million $
stake of 10 %
70 Billion
260,000 bpd
Sinopec (China)
50 Million $
Norsk Hydro
(Norway)
ENI
1.6 Billion $
80 + Billion $
300,000 bpd
Oil:1.2 million bpd
Gas :5 Billion cu.fit day
23
Katzman, The Iran Sanctions Act(ISA),‖ 6
Production:
Iran used to be one of the biggest producers of oil and gas between 1970 and 1977
where production was pushing 6 million barrels per day at its highest. Figure 2 shows Iran
oil and gas infrastructure with the main onshore and offshore filed with their capacity
output. This production declined dramatically since the Islamic revolution began due to
several reasons such as Iraqi Iranian war, limited investment and sanctions. All these
reasons made the Iranian energy market decline and never reached its best record of
production of 6 million barrels/day.
Iran production dropped from 3.7 million barrels/day before 2011 to 2.7 million
barrel/day according to EIA although it was under four different kind of sanctions related
to oil and gas production. The graph bellow shows the main oil and gas field onshore and
offshore with their output before 2011 sanctions according to EIA.
Figure 2: Iran oil and Gas Infastructure
Source: EIA (energy information administration)
As for the main field of Iran, table 5 and figure 3 show in detail the names of the biggest
onshore and offshore for oil and gas with their production capacity
24
Fields Name
Thousands barrel /day
Thousandscubic meter/day
Onshore
Ahwaz (Asmari Formation)
700
110
Gachsaran
560
89
Marun
520
83
Bangestan
245
39
AghaJari
200
32
Karanj-Parsi
200
32
Rag-e-Safid
180
29
BibiHakimeh
130
21
Darquin
100
16
Pazanan
70
11
Offshore
Dorood
130
21
Salman
130
21
Abuzar
125
19.9
Sirri A&E
95
15.1
Soroush/Nowruz
60
9.5
Table 5: Iran oil and gas fields with their output production
Source: Saeid Mahjubi (2016) Post Sanction Situation of Oil & Gas Industry in
Hydrocarbon
Fields
50
Gas
Fields
21
Oil Field
29
Off
Shore
8
On Shore
21
Developed
12
Undeveloped
9
Developed
5
Undeveloped
3
On Shore
15
Developed
2
Undeveloped
13
Off Shore
6
Developed
0
IRAN. NIORDC
Figure 3: Total Hydrocarbon field’s structure
Source: Saeid Mahjubi (2016) Post Sanction Situation of Oil & Gas Industry in
IRAN.
Undevelope
d
6
25
The strongest economic sanction on Iran started in 2011 regarding its program on
nuclear power. As we know, Iran is a major producer of oil and gas and relies heavily on
the revenues generated from these resources. Therefore, the western sanctions targeted
their oil and gas industry in all sites such as selling, producing and transporting according
to Bellfer center “Iran holds 10% of the world’s crude reserves, and in 2008-9 oil revenue
Accounted for 65% of government income.” In the graph of Bellfer center, we can see how
the production decreases sharply from around 2.7 million barrels a day to less than 1.5
million barrels a day. Figure 4.
oil producation & Export Mt
250.0
sanctions
200.0
150.0
100.0
50.0
2011
2012
2013
oil producation Mt
2014
2015
oil export Mt
Figure 4 : The impact of oil exports after sanction
Source: international energy agency
In addition, the American sanction prevented the Iranian benefit from the profits of
their natural recourses unless it was for health care and this point was a debatable issue
with lots of countries due to the importance of this sector in condition that the purchase
should be from the countries that traded with it in energy resources. Bellfer stated,
“Revenue from sales of Iranian oil to those six buyers is locked up, in accordance with U.S.
sanctions law. Iran can use that revenue only to purchase humanitarian goods or to purchase
goods from the country to which the oil was sold. Iran has left much of that money—
totaling more than $100 billion—in this unique form of escrow.” Thus, we can see how the
26
American sanctions stifle the economy in a way that Iran cannot benefit at all from its gain
of oil and gas.
Besides that, the American and European put several sanctions on a very delicate
factor in all big trades between countries is transporting and shipping sector were they
prohibit insurance on big tankers. Bellfer states that, “Under U.S. and EU sanctions law,
companies are prohibited from providing insurance or reinsurance services to Iranian oil
companies or tankers, and the U.S. has identified and designated scores of Iranian ships.
Sanctions also restrict the provision of vessels or of services to Iran’s shipping or
shipbuilding industries.”
Not only that but also, American and European sanctions were targeting the oil and
gas industry in a way that meant they were unable to improve their production and could
not change their damaged parts, which would lead to a decrease in production over time.
Bellfer indicate, “American sanctions prohibit companies from selling to Iran equipment
used in oil and gas production. They also prohibit foreign firms from making substantial
investments in oil and gas fields, thereby limiting Iran’s ability to modernize its oil sector.
EU sanctions similarly prohibit the provision of oil and gas technology and equipment.
Japan and South Korea have implemented similar provisions.” Hence, this quote shows
how the sanctions were not only effecting the previous oil and gas equipment but also from
reform a new techniques for better production which will affect the Iranian production
industry. Even the sanctions were release therefore; it will need more time to recover from
the sanctions.
Moreover, another graph was issued by the Bellfer, which shows the countries who
used to buy Iranian oil and how the quantity decreased sharply after the sanctions of United
Nations and American sanctions with different percentages from a decrease of 25% up to
100 %. Table 6.
Table 6: before and after sanctions export with Iran in thousands barrel /day
Buyer
Average export before
Average export after
Percent change
sanction
sanction
2011
2014
European union
600
Negligible
-100%
China
550
410
-25%
Japan
325
190
-40%
27
India
320
190
-40%
South Korea
230
130
-40%
Turkey
200
120
-40%
South Africa
80
0
-100%
Malaysia
55
0
-100%
Sri Lanka
35
0
-100%
Taiwan
35
10
-70%
Singapore
20
0
-100%
Other
55
0
-100%
Total
2.505
1.075
-60%
Source: International energy agency
Before the last combined sanctions on Iran from the United States of America and
United Nations, there were several new projects in the pipeline in the hope of increasing
production. However, the sanctions had a negative effect on the energy market, causing
many western countries to withdraw from the project. Although Russia and China remained
interested, the lack of new technologies, expertise and investment made many projects stop
or delay although some of them are still working but not to as planned in the table 7 below.
Table 7: project under development in Iran
Project
Developer
Plateau output (000 b/d)
Est. Plateau year
Yadavaran phase 1
SINOPEC
85
2016
Yadavaran phase 2
Yadavaran phase 3
Azar phase 1
North Yaran
SINOPEC
SINOPEC
NIOC subsidiaries
Persian Energy
95
120
30
30
2019-20
Post 2020
2016
2016
South Yaran
North Azadegan phase 1
North Azadegan phase 2
South Azadegan phase1
South Azadegan phase2
NIOC subsidiaries
CNPC
CNPC
No developer
No developer
55
75
75
150
110
2018
2016-17
2019
NA
NA
Forouzan
NIOC subsidiaries
100
2017-18
South Pars Phase 1
PEDCO
35
2017-2018
Source: Facts Global Energy
28
According to EIA in 2013, Iran consumed around 244 million tons of oil equivalent
of primary energy. Gas and oil comprised a share of 98% of energy consumed, plus a very
low percentage of other source of energy such as hydropower, nuclear, coal, and non-hydro
renewables. Iran energy consumption had increased dramatically by 50% since 2004,
making it the second largest consumer in the Middle East were according to global fact
energy Iran meet its domestic consumption by itself. However, Iran made several
regulations to limit the waste of energy and to limit the demand growth of domestic market.
Thus, they increased the prices of domestic petroleum, gas and electricity since 2011
according to EIA. As well, we can see in the figure 5 of NIOPDC (National Iranian Oil
Products Distribution Company) the share of consumption of oil by each sector, where the
transportation sector is responsible for the highest consumption of oil: 52% followed by
electric power 18%, industrial 12%, residential 9%, agriculture 5% and commercial public
services 4%.
Nuclear
1%
Non-hydo renerable
1%
Iran Total Primary
Consumption 2013
Petroluem
37%
Natural gas
59%
Coal
1%
Hydropower
1%
Natural gas
Hydropower
Coal
Figure 5: Iran total primary consumption
Source: BP in 2013
Petroluem
Non-hydo renerable
Nuclear
29
Oil consumption by sector for Iran in 2009
Residential
9%
Industrial
12%
Transporation
52%
Electric Power
18%
Commercial& Public
Services
4%
Agriculture
5%
Residential
Industrial
Electric Power
Agriculture
Commercial& Public Services
Transporation
Figure 6: Iran oil consumption by sector in 2009
Source: NIOPDC 2009
To sum up, this chapter clears up some historical background about the Iranian oil
industry since the early production fields, participation of foreign companies and joining
OPEC. As well, it includes the main event that happened after the Islamic revolution in
1979 along with the oil price shocks and the reasons behind the unsteady relationship
between the West and Iran from the nationalizing of the energy sector and the hostage crisis
and so on. Beside that, the chapter describes the tools that the West used against Iran in
order to change its behaviour from putting pressure on the energy and financial sectors.
Likewise, how Iran can use its oil as a weapon to threaten the West. Furthermore, this
chapter illustrate the dynamic of the energy sector development and investment during the
sanction, moreover how sanctions reflection the economic growth of the country by
studying the main macroeconomic indicator.
30
Chapter two: Impact of Past and Future Sanctions on the energy sector and
economy.
2.1 Theoretical discussion of the success of sanctions Declared and real
goals:
Sanctions are an instrument that are used by a certain country to put pressure on
another country as a diplomatic way instead of a military action so as to weaken their
economand change their idea and usually. According to Robert Pape (1997) “to lower the
aggregate economic welfare of a target state by reducing international trade in order to
coerce the target government to change its political behavior”. As mentioned in Robert
Carbaugh (2008),the first useof sanctions goes back to 432 BC when Athenians sanctioned
the access to trade with Megara by closing the Athens harbor. Thus, the Megara lost the
battle with Peloponnesian War and this was one of the reason of losing the use of sanction.
Sanctions are a very controversial issue due the its declared and goal and what might
happen in reality as well as the fact that they might hurt those who are not even part of the
conflict. This part will discuss the sanctions as policy tools. Sanctions as diplomatic
pressure are according to Tara Maller (2009) “characterized by severing formal diplomatic
ties with a country or significantly downgrading ties from the normal level of diplomatic
activity for foreign policy purposes”. Through several literature reviews, we read most of
them agreed on some point and consideration should be taken under account in order to
have successful sanctions listed below
1- “Financial sanctions are more effective than trade sanctions” Ferhat Çalışkan (2011)
2-“Multilateral sanctions over single issues are more likely to succeed than unilateral
sanctions” Navin A. Bapat and T. Clifton Morgan (2009)
3- “Pre-sanction volume of trade and financial ties directly affect the success of the
sanctions” Carbaugh (2008)
4- The more the number of sanctions leads to more complexity in implantation. Simon
Chesterman and Beatrice Pouligny (2003)
5- “Domestic political institutions in the target country matter”. Nikolay Marinov (2005)
6- “The sanctioning country‘s economy must be larger than the sanctioned country”.
Charles A. Rarick (2007)
31
7- “Crisis economies under the sanctions develop close (or closer) linkages to the illegal
spheres of the world market”. Chesterman and Pouligny,
8- “Sanctions tend to be easier to introduce than lift” Richard N. Haas (1998)
9- “Sanctions can be bypassed by through re-export from third countries” Hossein G.
Askari (2003)
10- “If a target faces a resolute and credible sender, then compliance should be more likely,
since the expected costs of sanctions will be higher for the target state”. Adrian U-Jin Ang
and Dursun Peksen (2007)
11-sanctiong an important and big sector on a country can make a serious problem in the
global market.
As cited in Neuenkirch and Neumeier. (2014) “According to former UN Secretary‐
General Kofi Annan, sanctions “represent more than just verbal condemnation and less
than the use of armed force.” Some studies found that the sanction made by the USA by
itself is less effective than the one made by the United Nations. Since it has obliged many
countries to stop cooperating with the country under the sanction. A study made by
Neunkirchen and Neumeier under the name of The Impact of UN and US Economic
Sanctions on GDP Growth found that (2014) “We find, first, that sanctions imposed by the
UN have a statistically and economically significant influence on economic growth. On
average, the Imposition of UN sanctions decreases the target state’s real per capita GDP
growth rate by 2.3–3.5 percentage points (pp). These adverse effects last for a period of 10
years. Comprehensive UN economic sanctions, that is, embargoes affecting nearly alleconomic Activity, trigger a reduction in GDP growth by more than 5 pp. Second, the effect
of US sanctions is much smaller and less distinct. The imposition of US sanctions decreases
GDP growth in the target state over a period of 7 years and, on average, by 0.5–0.9 pp.”
However, sanction success and real goals is a very tricky debate because every party sees
the real goal of sanctions from their perspective. According to Shambaugh (1999) as cited
in Jones,L ans Portela,C. (2014) “For example, rightly notes that the real goal of Secondary
sanctions is not to coerce the firms being sanctioned but to deprive the state they would
have traded with or invested in of technology or economic benefits; but he still measures
success by the degree to which firms complied with sanctions”. Again, others argue that
32
there is no specific rule or standard to follow in order to evaluate the success of sanctions.
According to Preeg (1999) as cited in Jones,L ans Portela,C “convincingly argues that
sanctions are imposed for domestic political purposes, but still evaluates success in relation
to the concessions wrested from target states. Not only is there little agreement on how to
properly measure even this narrow conception of “success”, the fixation on target-related
goals has impeded full understanding of the place sanctions have in the (re)production of
domestic order in target and sender states and global order more broadly”. However,
everyone agrees that sanctions are effective if they are imposed by the multilateral
countries and especially from the United Nations are more effective and harmful rather
than the pioneer of number of sanction “United States of America”. According to George
Lopez (2007) “in this age of globalization, unilateral sanctions seldom succeed—
multilateral support and cooperation are essential to be success of sanctions. In fact, when
international (United Nations), regional (such as the European Union), and national
authorities coordinate their actions to effectively monitor and enforce sanctions, target
compliance increases significantly”. As well, sanctions are very difficult to be successful
when it comes to eliminating the increase of weapons arsenal and usually they fail in the
attempt to achieve this goal but succeed in other parts. Lopez (2007) “sanctions as a means
of punishment and isolation rarely succeed. This is especially true in complex cases such
as the control of weapons proliferation”. However many agree that negotiations are the key
of success to reach its goal of abolishing weapons, as we can see in Libya with Gadhafi in
2003 exploiting all of his nuclear and other programs and this was a result of good
negotiations. According to Lopez (2007) “many observers were surprised by
Myanmar Gaddafi's December 2003 decision to disclose and dismantle Libya's
nuclear, chemical, and biological weapons programs, this unprecedented decision was
essentially brought about by long-term negotiations with the United States and Great
Britain”. Not only this but it opened a new door for better relations and economic grow
with all the sides and we can see that as well in the last agreement between Iran and 5+1
countries that was a success after a big series of sanctions.
Highlighting significant results and achievements of sanctions, Adam Taylor
(2014) in his article mentioned 13 sanctions that they were successful in achieving their
goals. According to Taylor, back into 1959, the U.S.S.R. imposed economic sanctions on
33
Finland because of the unfavorable relations between the countries which led to the
resignation of the prime minster Karl-August Fagerholm after it cost the Finnish 1.1% of
GNP.
Furthermore, between 1961 and 1965, the United States imposed sanctions on Sri
Lanka because of expropriating some assets that belong to American, British oil company.
As a result, the government fell because of the sanctions, and it cost the country a loss of
0.6% of GNP as stated by Taylor.
Again in 1965 the United States imposed sanctions on India where they cancelled
the food and military aid as an instrument to force the Indian government to change its
agricultural policies. Thus, the next year Indira Gandhi government issued a new polices
and the American start again its aid to India and this was a successful sanction as was stated
in Taylor. Related to aids sanctions in 1992 the United States cut the aid of Malawi since
they had a bad human situation. As a result of the aforementioned sanction ,Malawi
improved its human rights policies the following year and a new government was put in
place.
In order to have a better understating of the success or failure of sanctions Pape
(1997) presents tables with the history of sanctions over the last decade that shows the
positive or negative influences of sanctions. However, in the table 8 below Pape shows the
claims made by Hufbauer, schott, and Elliot’s who claimed the success of sanctions with
the percentages those they affect the GNP of the country targeted. Nevertheless, Pape
shows that the effect of GNP is not related to the success of the sanctions even if it harms
the country and it was harsh on it and in the end the result was not conclusive; the table 9
below shows some examples of harsh sanctions failing to reach their reach their main
objective.
Table 8: Hfbauer,Schott and Elliots Claimed sanctions Sucesses
Year
Modest Issues
1933
1938
1956
1961
1963
1964
Coercer
Target
GNP loss to Target %
UK
US/UK
US/UK/France
US
US
France
USSR
Mexico
Egypt
Ceylon
Egypt
Tunisia
NEGLIGBLE
0.2
3.4
0.6
1.4
1.5
34
1965
US
Chile
1965
US
India
1968
US
Peru
1975
US Canada
South Korea
1976
US
Taiwan
1977
Canada
EC/Japan
1977
US
Brazil
1979
US
Iran
1979
Arab League
Canada
1982
US Netherlands
Suriname
1987
US
El Salvador
Political Destabilization
1951
US UK
Iran
1956
US
LAOS
1958
USSR
Finland
1960
US
Dominican republic
1962
US
Brazil
1963
US
South Vietnam
1965
UK UN
Rhodesia
1970
US
Chile
1972
UK US
Uganda
1977
US
Nicaragua
1982
South Africa
Lesotho
Disruption of military adventures excluding major wars
1921
League of Nations
Yugoslavia
1925
League of Nations
Greece
1948
US
Netherlands
1956
US
UK France
1982
UK
Argentina
Impairment of military potential including major wars
1914
UK
Germany
1939
Allies
Germany /Japan
Other major success
1948
India
Hyderabad
1967
Nigeria
Biafra
1973
Arab League
US Netherlands
1981
US
Poland
1989
India
Nepal
NEGLIGBLE
NEGLIGBLE
0.7
0.1
0.1
NEGLIGBLE
0.1
3.8
NEGLIGBLE
7.8
Nil
14.3
4.2
1.1
1.9
0.6
0.3
13
1.5
2.6
1
5.1
Nil
Nil
0.2
0.3
0.6
7.1
1.6
2
5.2
1.6
0.1
4.6
Source: Gary Clyde Hufbauer, Jeffery j Schott and Kimberly Ann Elliot, Economic
sanctions Reconsidered 2nd vol 1(Washington DC: Institute for international
economics 1990 tables 4.3-4.7, pp 84-90
Table 9: High punishment and sanctions outcome.
Year
1967
1951
1965
1982
1975
1987
Coercer
Nigeria
UK US
UK US
US Netherlands
US
US
Target
Biafra
Iran
Rhodesia
Suriname
Cambodia
PANAMA
GNP Loss
15.2
14.3
13
7.8
6.8
5.1
Outcome
Failure
Failure
Failure
Failure
Failure
Failure
35
1982
1989
South Africa
India
Lesotho
Nepal
5.1
4.6
Over determined
Success
Source: Robert A. Pape, ―Why Economic Sanctions Do Not Work,‖ International
Security 22, no. 2 (Autumn 1997): 93.
2.2Literature review on how the economies are affected by the sanctions
2.2.1 Western view:
According to the Western view, there are two main points of view - the first which
argues that sanctions were effective and they did harm the Iranian economy too much, and
the other point of view argues that sanctions did not stop the Iranian regime from
continuing life as normal.
Many studies have come to the conclusion that the sanctions affected the Iranian
GDP and prevented the economy from developing. Michael Lavi (2011) was one of the
researchers who argues that the sanctions harm the economy of Iran. He studied the foreign
direct investment as an instrument on the effectiveness of sanctions by comparing it with
other countries he says “Foreign direct investment (FDI) in Iran is only 7% of GDP; such
limited foreign direct investment is well below the average for developing countries today,
as the average for OPEC countries is 23%”. As well as this, he compared the oil production
of OPEC producers, where it shows that Iran became a law ranking of producing comparing
to 1979 due the American sanctions. He says; “Iran is the only OPEC country that has less
oil production in 2009 than in 1979. This can be contributed to the FDI drought that Iran
has been facing for over 30 years due to the U.S. sanctions as well as subsequent insular
and self-reliant policies”
Another study was made by: Matthias Neuenkirch, Florian Neumeier (2014) found
that American sanctions were not that effective as the united nation and if they did, a harm
to the economy it was a small after applying some Empirical Methodology in their research.
A study was made by Raul Caruso (2003) argues that sanctions has not a negative
impact on the country that sanctions is imposed but also the whole international trade by
using a penal gravity on 47 countries. “Extensive and comprehensive sanctions have a large
negative impact on bilateral trade”
36
Yitzhak Gal & Yair Minzili (2011) argues that the last sanctions on the Iranian
economy were good sanctions but they need time until results can become apparent “The
impact of the 2010 sanctions on Iran’s oil sector will take more time to be felt”. Moreover,
according to those writer the sanctions made china and japan to think more about the
depended of import oil from Iran “the pure economic risk of being dependent on oil imports
from Iran has already pushed countries like China and Japan to lower their dependence on
imports of oil from Iran, regardless of the international sanctions”.
2.2.2 Domestic view:
According to the Iranian point of view, it is clear from their speeches that they believe that
sanctions did not have much of an effect and they were still able to reach their demands
of primary energy. They have acknowledged that some periods were harsh on them but in
other years they were growing and reaching suitability in their oil and gas production.
According to Morteza Sabetghadam (2005) “Production of oil products over the 13-year
period from 1990-2003 increased at an average annual rate of 2.8%. For gasoline, which
has experienced the highest growth, the increase has been 7.2%; this still falls short of
meeting demand meaning that gasoline imports are rising”. Therefore, we can notice that
Iran's oil and gas industry was growing in a period of time when the United States of
America imposed a sanction against Iran and Libya in 1996 which was called Iran and
Libya Sanctions Act (ILSA).Thus, the American sanctions were not effective in stopping
Iran from developing its O&G industry.
However, prices of oil and gas were fixed as were the subsidies from the
government since the revolution until 2006, so the whole population and industry facilities
could benefit from it in order to keep the economic wheel going forward. According to
Morteza Sabetghadam (2005) “energy prices are generally far below the competitive global
market price.”
Hussein Abdullah Qader 2014 in his paper states that “The Impact of US Sanctions
on Iran”. Illustrate the sanctions make the Iranian economyfacing problems because of the
damage that happened to the oil sector in the sanctions of 2012 by the United States and
United Nations. As well, he mentioned that not only were the sanctions (was) the reason
of bad economic growth but also mismanagement of policies from certain governments.
37
Ilham Redzic (2012) in her paper argues that sanctions are not effective tools to
achieve its general goal even though it harms many parts of the country “economic
sanctions are Unsuccessful in achieving their goals”. However, the key success of sanctions
when its control all the trade of the sanctioned country. She mentioned, “Sanctions are
almost always successful when one country that imposes sanctions, controls all trade of
country that receives sanctions”.
Another explanation of the main effects of sanctions made by Bijan Khajehpour
(2013) in his paper “Iran’s economic suffering” illustrate the effects that happened because
of sanctions in oil sector financial sector and daily life of basic need. He said, “Imports
have become about 5 to 10% more expensive for the economy due to third country
sourcing, increased transportation and insurance costs etc.”
2.3 Different Methods and approaches used to assess the effects of
sanctions:
Leander Leenders (2004) presented a paper that studies the European sanction as
an effective tools of diplomatic pressure to reach its goals although it was not perfect.
“support the hypothesis that sanctions have been and are indeed still a relevant foreign
policy tool for the EU” .However, these European sanctions proved to be a worthy
instrument to solve several cases around the world. “The instrument of sanctions allowed
the EU to respond to various crises, and thus has proven its utility”.
Mohammad Reza Farzanegan (2011), the author examines the effects of oil revenue
shocks on the Iranian government spending. In the article they used the vector
autoregressive (VAR) model in order the examine the spending of the government using
six variables related to spending expenditures with a consideration, Iran Iraq war and
Iranian revolution by using dummy variables using observations from 1959-2008. The
result was that Iran’s expenditure was mostly retaliated to military “The results show that
only the government’s military spending responds positively and statistically significantly
to shocks in oil revenues (or oil prices). Other social spending of the Iranian government
does not show a significant response to oil shocks”.
38
Payam Abbaszadeh Abbas Maleki, Mohammad Alipour, Yaser Kanani Maman
(2013) in that papers the authors highlight the energy sector statues as well as some future
scenarios using a matrix approach as well as some suggestions to the Iranian energy policy
agenda.
Yitzhak Gal & Yair Minzili (2011) in their paper argue that the sanctions were
effective in harming the oil and financial sector of Iran but results will take time to be
shown.
Matthias Neuenkirch, Florian Neumeier (2014) in there paper “The Impact of UN
and US Economic Sanctions on GDP Growth” illustrates the dynamic effect of sanctions
that were imposed by the United Nations and America on the GDP. This investigation was
made by using Empirical Methodology to evaluate the economic performance the sample
include 68 countries faced sanctions between 1976 and 2012.
William Kaempfer and Anton Lowenberg (2007), they present a paper that includes
empirical literature of other studies in table 10.
Table 10: Empirical literature done by Kaempfer and Anton Lowenberg
Independent
variables
Political
instability of
target
Economic
weakness of
target
Cordial
pre-sanctions
ties
Cost of
sanctions
to target
Cost of
sanctions
to sender
Trade linkages
between
sender
and target
Multilateral
cooperation
among
senders
Third-party
assistance to
target
Hufbauer
et al.
(1990)
Lam
(1990
+
+
+
+
+
+
+
+
+
+
+
+
)
Dehejia
and
Wood
(1992)
van
Bergeijk
(1994)
DashtiGibson
et al.
(1997)
Bonetti
(1998)
Drury
(1998)
Hart
(2000)
+
+
+
+
-†
-
Nooruddin
(2002)
Jing et
al.
(2003)
+
+
-
Bolks and
Al-Sowayel
(2000)
-††
+
39
Ambitiousness
of
sanctions goal
Sender is
frequent
sanctioner
Size of sender
relative to
target
Trade versus
financial
sanctions∗
Duration of
sanctions
Democratic
versus
autocratic
target∗∗
-
-
-
-
+
+
Note: + indicates a statistically significant positive effect of the independent variable on sanctions success; − indicates a
statistically significant negative effect
of the independent variable on sanctions success.
∗+ means trade sanctions are more effective than financial sanctions; − means financial sanctions are more effective than trade
sanctions.
∗∗+ means sanctions are more effective against democratic targets than against autocratic targets.
†Only if international organizations are not involved in the sanctions.
††Only if the target is dependent on the sender for imports.
Source: the political economy of economic sanctions William Kaempfer and Anton
Lowenberg (2007)
Mohammad Reza Farzanegan, Mohammad Mohammadikhabbazan and Hossein
Sadeghi (2015), in the paper “Effect of Oil Sanctions on the Macroeconomic and
Household Welfare in Iran: New Evidence from a CGE Model”, the authors used CGE
Model Matrix (SAM) in order to examine the effect of oil sanction on the macroeconomic
and gdp of Iran for household and welfare. As a result, they found that economies and
households are affected vastly;“Macro-indicators that are negatively affected in order are
total import by 20%, total export by 16.5%, private by 3.9%, capital income by 3.8%, and
GDP by 2.2%. Other macro-indicators which positively change in order are net indirect tax
by 23.6%, real exchange rate by 13%, and labor income by 8.7%”. Thus, this paper shows
that these two models were a good way to observe the effect of sanctions on the
macroeconomy and there was a suggestion that these models can be applied on the Russian
sanction because of the Ukrainian conflict.
Robert Mason’s (2012) paper reviews Iran and Saudi Arabia “Oil policy, oil production,
pricing and security of supply and demand”.
40
Florian Neumeier’s (2014) paper describes the difference in effects of sanctions
that they were impose by USA and United Nations (UN) on the GDP. Michael Lavi (2011)
illustrates that the sanctions placed on Iran have created a global oil-pricing problem due
to decrease in quantity supplied. Motaghi (2000) pointed out that it is not only Iran that is
affected by these sanctions but also other countries. Ziaee Bigdeli (2012) uses a gravity
model with 30-partner trader between 1972–2006 and concluded that the international trade
flow has decreased by 0.089%.
Paul Stevens (2015) enlightens us on the historical background regarding the
energy sector during and before/before and during the sanction. Moreover, what are the
difficulties in attracting investors.
Paul Velazquez (2012) was using a comparative study in order to examine the effect
of sanctions on the Iranian economy he argued that the American sanctions hurt the Iranian
economy. Nevertheless, it was as well a decent in a way to make Iran more independent to
develop it self “It can also be argued that the sanctions were a blessing in disguise for Iran,
the Iranian clergy elites, and revolutionary conservatives as it forced Iran to rely on and
develop its own industrial capacities”. As well, he mentioned that sanctions were not
effective all the time; sanctions were harmful in some periods and had very little effect
during others “Iranian trade did suffer slightly in the 1990s due to the effect of sanctions,
but the overall effect of sanctions between 1994 and 2000 was loss of less 0.11% of Iranian
GDP”.
In a research paper that was made by Ilham Redzic (2012), he argues that sanctions
were not effective in achieving their goal “Complete success was found in less than 5% of
all cases studied. Bijan Khajehpour (2013) in the paper “Iran’s economic suffering” give a
description on the economic fact after the sanctions that was posed in 2012
Gary Hufbauer, Jeffrey Schott, and Kimberly Ann Elliot, in their paper, (Why
Economic Sanctions Do Not) argued after studying 115 sanction cases between 1914 and
1990, that forty of them (34 percent) were successful and yielded the desired end.
Another research was completed by Hussein Abdullah Qader (2014) in the paper
“The Impact of US Sanctions on Iran”. In this paper he used several methods to measure
41
the effects of sanctions and where these sanctions lead in the end in all perspectives;
political, population energy sector and so on. The methods were unobtrusive in order to
focus on analysis from facts as well the Hufbuer-schott-elliot approach (HSE approach)
.This method explains the idea that sanctions should be fast so the target country will not
find alternatives from running away from sanctions. To sum up, we organza all the
important literature reviews with their main result and the methodology were used in the
table 11.
Table 11: table summaries important literature reviews with results and methodology
Author
Year
Methodology
Country/University
Results
Leander Leenders
2004
Pragmatic
Belgium, Collage of Europe
department of EU
international relations and
diplomatic studies
Philipps University of
Marburg
Sanctions were an effective
tools for European union as an
instrument of pressure
perspective
Mohammad
Farzanegan
Reza 2011
Payam Abbaszadeh
Abbas Maleki ,
Mohammad Alipour ,
Yaser Kanani Maman
2013
vector
autoregressive
(VAR)
cross impact
matrix
Tehran, Iran
The results show that only the
government’s military spending
responds positively and
statistically significantly to shocks
in oil revenues
“Oil future scenarios which
developed by Iranian parliament,
have been analyzed”.
“4 scenarios that express different
modes of production and
consumption are developed”.
“Comprehensive analysis on the
geopolitical, geo-economic and
geo-cultural situation”.
Matthias Neuenkirch,
Florian Neumeier
2014
Empirical
Methodology
WILLIAM H.
KAEMPFER, ANTON
D. LOWENBERG
2007
Empirical
Literature
Universities of
Aachen ∙ Gießen ∙
Göttingen
Kassel ∙ Marburg ∙ Siegen
California State University
USA
“Recommendations to Iran’s
energy policy framework”.
Found that the United nation
sanctions are more effective on
the economic performance than
the American sanctions.
42
Mohammad Reza
Farzanegan,
Mohammad
Mohammadikhabbazan
and Hossein Sadeghi
Paul Velazquez
2015
CGE Model
Matrix
(SAM)
Tarbiat Moddaress
University,
Tahran
Economy and households are
affected vastly
Richer households lose more
than poorer ones
2012
comparative
study
University of California
at Los Angeles
Hussein Abdullah
Qader
2014
unobtrusive
method
HSE
approach
University of KurdistanHewler Erbil, Kurdistan
Region, Iraq
Raul Caruso
2003
panel gravity
Amsterdam conference.
Università Cattolica del
Sacro Cuore di Milano
Iran is more independent to
develop its industry.
Economy was harmed due the
sanctions but not all the period
Oil revenue sector was
affected because of the nuclear
program.
Mismanagement from
government policy
“extensive and comprehensive
sanctions have a large negative
impact
on bilateral trade, while this is
not the case for limited and
moderate sanctions”
“Unilateral extensive sanctions
have a large negative impact,
while
limited and moderate ones
induce a slight positive effect
on other G-7
countries aggregate bilateral
trade”
Therefore, table 11 show us the main literature reviews that could help us in examine our
hypotheses by studying other papers to know the methodologies that they had used in there
research in our to achieved there results.
43
2.4 Methodology Research Methods and Statistical Framework:
In order to have a better understanding on how the sanctions affect the Iranian
economy especially in fields that are related to oil and gas secret because of the huge
amount of revenues as well the financial sector that suffers from the limitation of
transferring money and freezing assets. Therefore, in order to understand that it is needed
to study a long period. Thus, time series is one econometric tools that consider under the
panel data type that can explain the dynamic changing between dependent and independent
variables. Each variable includes many observation that explain every period and usually
every period is defined with the values of Y1.Y2 Y3 and so on which every Y is a
explaining a period.
The first model of time series was found in 1920; by G.U Yule and J Walker
.however the model was not clear until 1970 when it was developed by G.Box and
G.jenkins where they explain the full model with all the estimations and diagnostics. Which
is the most conman one.
Time series is important because it help us understand the past behaviors and well
forecasting the future not only but also the current time.as well time series offer us many
options to deal with data such as measuring and also isolating some period. To make
decision based on previous statistical data. Times series data can be found into different
models such as autogressive (AR) models which is the simplest one as well the Moving
average (MA) models and the autoregressive moving average (ARMA)
In order to estimate the influence the effectiveness of sanctions on the economy of
Iran two linear series regression models were built to estimate the oil and financial sector.
The period analyzed in this research is 1979 – 2015. In these two models, economic
situation in the country is represented by gross domestic product in constant prices.
To build the model we examine many variables that plays an important role in the
Iranian economy such as inflation, total external debt, oil production, oil export,
unemployment, exchange rate, investment, oil prices, military expenditure, education
expenditure, government expenditure, inflation rate, labor force, population and taxation.
However, lack of data make our mission of examining the GDP a difficult mission because
44
not all the period data’s are available due to that Iran have a closed economy. Eventually,
we succeed in finding several variables that were significant to each other which could help
us in building the model. The variables were Iran oil production (Mt), export (Mt), Iran
heavy oil price per barrel and total investment.
To sum up, chapter two illustrated the sanctions as a tool to set pressure on other
countries and declare its real goals of success. In this chapter, we collected the main points
from different literature reviews that have to be include in order to have a successful
sanction based on historical sanction events since the world war one. Furthermore, this
chapter explores some literary reviews on how sanctions effect the economy based on the
western point of view as opposed to the domestic one from the countries that were under
sanction. Besides that, this chapter illustrates the methods and approaches that have been
used in previous studies to implement the effectiveness of any given sanction. At the end,
there is a description of the method and data that is going to be use in the next chapter in
order to measure the effectiveness of sanctions based on the econometric model.
45
Chapter Three: Future Scenarios and Implications for Energy sector:
3.1 Possible scenarios of energy sector development:
By looking at the energy sector of Iran before the last sanctions that were imposed
in 2011 by the American and United Nations. It was obvious that this sector was getting
harm due the limitation of the foreign direct investment and other sanctions related to oil
sector such as shipping insurance and so on. However, all these sanctions led to a decrease
in oil production and oil revenue and this impact cleared year after year. According to EIA
(2015) Iran oil and gas revenue in 2011/2012 was 118$ billion. Nevertheless, in 2012/2013
revenue dropped by 47% to 63$ billion, again between 2013/2014 a decrease of 10 % of
oil and gas revenue to be 56$ billion. Figure 7 below shows the decrease in production due
the sanction of U.S and European Union, limitation of the central bank and transportation
and insurance sanctions.
Figure 7: Iran crude oil export between 2011 and 2013
Source: EIA, Iran’s oil exports not expected to increase significantly despite recent negotiations, December
10, 2013, http://www.eia.gov/todayinenergy/detail.cfm?id=14111#
Nevertheless, in 2014 the gas sector of Iran saw a minor increase in production
resulting from the development of the south path by some local companies. According to
EIA “in 2014, Iran experienced higher production growth than usual because new phases
at the South Pars natural gas... Developed mostly by Iranian companies because most
international companies have pulled out”.
46
In the figure 8 below that was made by IMF in the direction of trade, statistics
show the top 10 export countries in 2000 and 2014. It can be clear that by the start of 2000
the policy trading of Iran started to switch from exporting its products and energy from
European country (western view) who used to be the leader in importing from Iran into
Asian countries especially china that its share was 9% in 2000 to turned into 41% in 2014.
On top of this, some new countries appeared with big shares such as China, India and
Turkey. In addition, some old partners remained but their share decreased. One such
example would be that of Japan, who saw a share ownership fall from 29% to 9%. Another
such example is that of Korea, with shares falling from 13% to 7%.
2000 Iran Oil Export Countries
France
6%
Netherlands
6%
Taiwan
5%
Greece
6%
Japan
29%
South Africa
7%
Singapore
7%
China
9%
Japan
korea
Italy
China
Singapore
korea
13%
Italy
12%
South Africa
Greece
Netherlands
France
Taiwan
2014 Iran Oil Export Countries
Syria
3%
India
17%
UAE
2%
Oman
1%
China
41%
Pakistan
3%
Korea
7%
Japan
9%
China
Saudi Arabia
Tukey
Japan
Tukey
15%
Korea
Saudi Arabia
2%
Pakistan
India
Syria
Oman
UAE
Figure 8: Iran oil export countries 2000 and 2014
Source: IMF Direction of Trade Statistics. Iran top 10 exporter in 2000 and top exporter in 2014
47
A study that was made by a work corporation between Iran and German to give a
scenarios for the energy of Iran for the next 25 years. The paper used several methods in
order to analyze and give reliable forecasts of the energy of Iran using the bottom-up
method with a big data usage by applying time series regression. According the research
in the paper Panjeshahi et al. (2009) “The bottom-up method produces reliable results in
long term scenario analysis as it relies on the fundamental factors, which are not subject
to short-term fluctuations”. This scenario was called Business as Usual BAU scenario,
where in those scenarios previous economical and energetic trends has been taken in
order to produce accurate forecasts, whilst paying particular attention to future policies.
As a result of the research, they found that due to the development of the biggest
gas field south path, Iran will achieve a high demand and production of natural gas as the
first level until 2030. According to Panjeshahi et al. (2009) “natural gas demand will have
the highest growth rate with 3.5 percent growth per year on average, reaching from 501
mboe in 2005 to 1,171 mboe in 2030”. Oil demand will be following after gas with a
growth demand of average growth of 1.2 %. in addition to this, some energy will
decrease such as kerosene by -4,6%. The table below shows in detail the total energy
demanded by every single type with BAU scenario 2005 -2030.
Table 12: Energy Demand BAU Scenario (2005-2030), Mboe
2005
Share%
2030
Share %
Growth %/year
Gasoline
110
11
164
10
1.62
Kerosene
50
5
15
1
-4.6
Gas oil
175
18
271
15
1.8
Fuel oil
104
8
140
7
1.2
Natural Gas
501
52
1.171
63
3.5
LPG
11
2
13
1
0.9
CNG
6
1
8
1
0.99
JET FUEL
10
1
20
1
Total Energy
970
100
1.779
100
demand
Source: Panjeshahi et al. (2009).Energy Scenarios for Iran
2.8
48
Iran was under sanction for a long period of time. This prevented its energy and
financial sectors from developing however, these sanctions were finally released after a
long negotiation that lasted for an entire year. Today, Iran is an open country for investment
after the implementation of the deal of JCPOA in January 2016 and these releases might
give Iran a new opportunity to develop its important revenue sector. According to David
Ramin Jalilvand (2017), “Many constraints on Iran’s energy sector have now gone as a
result of JCPOA implementation. There are no longer any restrictions on exports,
investments in the energy sector are possible again, and European IOCs are allowed back
into the country”. It can therefore be noted that Iranian oil production started to increase
again after the JCPOA agreement the agreement between the P5+1+EU and Iran on the
Joint Comprehensive Plan of Action as it was shown by MEES in the figure 9 below.
Figure 9: Iran oil production million b/d
Source: MEES (Marine-Estuarine Environmental Sciences)
The important agreements culminate to form a new history for the Iranian and International
Oil Companies with many new memorandum of understanding (MOU). However, no
connection lead to an increase in energy production. According to Jalilvand (2017), “The
JCPOA has not yet led to an expansion of capabilities in the Iranian energy sector”. Some
of these MOU companies Lukoil, Total, wintershall, OMV, PGNIG, Pergas, Shlumberger
and so on.in addition table 13 below explain in details the operating companies with their
partners as well the fields.
49
Table 13: Upstream Contracts Awarded, MOUs for Study, and Heads of Agreement (2016)
Operator
LUKOIL
Total
Wintershall
Partners
None
None
None
Field
Date
Type
Ab/ Mansouri
24 jan
Mou for study
South Azadegan 24 Mar
Mou for study
Four fields in 12 Apr
Mou for study
western iran
OMV
None
Zagros area
4 May
Mou for study
Zarubezhneft
None
Aban/Paydar
13 jul
Mou for study
Gharb
Persia O&G
None
North
Yaran 4 Oct
IPC
phase2
Persia O&G
None
Koupal EOR
4 Oct
IPC
Persia O&G
None
Maran EOR
4 Oct
OPC
Tatneft
None
Dehloran
8 Oct
Mou for study
PGNIG
None
Sumar
6 Nov
Mou for study
Total 50%
CNPC 30%,
South pars Phase 8 Nov
Heads
of
Petropars19.5% 11
Agreement
DNO
None
Changuleh
16 Nov
Mou for study
Pergas
None
Shadegan /rag-e 23 Nov
Mou for study
consortium
field
Schlumberger
None
Shadegan /rag-e 27 Nov
Mou for study
field
PTTEP
None
Changuleh
6 Dec
Mou for study
/Balal/Dalamperi
Shell
None
South azedagan 7 Dec
Mou for study
/Yadavaran /kish
Gas
Gazprom Neft None
Changuleh
13 Dec
Mou for study
/Cheshmeh
Klosh
Petronas
None
South azedagan/ 22 Dec
Cheshmeh
Cheshmeh Klosh
Klosh
Source: Energy Aspects: Middle East and Africa Quarterly, December issue, 2016
Nevertheless, this agreement was not welcome from everyone especially from the
people who feared this agreement is not for the benefit for the of Islamic Iranian beliefs.
However, Rohani works hard to convince the people that this is a good opportunity for the
Iranian people to take. According to Jalilvand (2017), “The Rohani administration is
challenged to show the Iranian people that the JCPOA is advantageous for the country”.
As well as this, more difficult problems have to be solved in order to attract the
international oil companies because of the difficult rules and laws of the (NIOC) national
50
Iranian oil company in permitting foreign companies participate in Iran whilst keeping the
whole thing in the control of the Iranian government. According to jailvand (2016) “The
IPC framework legislation, which found parliamentary approval in September 2016, the
Rohani government seeks to balance multiple interests. While pondering political and
economic opportunities and risks, Iran is trying to diversify its commitments”.
Later on, the national Iranian oil company issued several bid certificated that allow
foreign international oil companies that can work in oil and gas sector in Iran where most
of the companies were from Asian countries and some European. The table 14 below shows
the name and country of origin.
Table 14: IOCs certified to bid at Iran’s upcoming oil and natural gas tender
CNOOC (China)
CNPC (China)
CNPW (China)
DNO (Norway)
Eni (Italy)
Sinopec (China)
Inpex (Japan)
ITOCHU (Japan)
Plus Petrol (Argentina)
Lukoil (Russia)
Maersk (Denmark)
Mitsubishi (Japan)
OMV (Austria)
Gazprom (Russia)
Perenco (France/UK)
Pertamina (Indonesia)
PGNiG (Poland)
Daewoo (South Korea)
PTTEP (Thailand)
Schlumberger (Netherlands/US)
Shell (Netherlands/UK)
ONGC Videsh (India)
Total (France)
Wintershall (Germany)
Korea Gas Corporation (South Korea)
Source: NIOC: ‘List of Qualified Applicants National Iranian Oil Company, Tehran,
2016.
As we can notice from the table of bid certificates, China has many certificates in
comparison to the other countries due to the good support from China of Iran while the
sanctions were imposed. Therefore China gained trust from the Iranian government.
According to jailvand (2016) “During a visit to Beijing in April 2015, three months before
the JCPOA was agreed, Petroleum Minister Zanganeh declared that China ‘has been
greatly cooperating with the Islamic Republic under conditions of sanctions and we are
willing for that cooperation to continue when sanctions are removed”. Not only that but
also we can see some problems arising from the jaded relationship between Iran and the
United States of America even after the JCPOA agreement because of new changes that
appear in the White House following the election of president Trump who is against the
agreement of removing the sanctions on Iran which has strained the Iranian - American
relationship even further. Jailvand (2016) says, “With the Trump administration about to
51
take over in Washington, however, the future of Iran–US relations is unknown”.
Consequently, Iran is trying to diversify its bets with several countries especially to be
independent of the West in case of any conflict or disagreement that might happen in the
future that could once more have an adverse effect on the Iranian economy. Jailvand (2016)
stated, “Internationally, Tehran is hedging its bets. Aiming at the diversification of
engagements, Iran is trying to reduce potential damage in the event of new troubles in its
relations with the West”. Therefore, Iran is trying to focus on the asian countries that are
rapidly growing both economically and also in terms of their population, as these countries
will need to rely on Iran to sell them their sources of energy. According to Pirzadeh
Meysam et al. (2016) “In the process of increasingly demands of India and Pakistan and
their attempt to ensure their energy security, Iran energy can be viewed as a reliable
source”. Not only that but also China is the biggest market for Iran due to the huge growth
of this country as well as the craving of the energy to keep its industry booming the world.
As stated in Pirzadeh Meysam et al. (2016) “The geographical location and energy
resources of Iran is strategically important for china which is the second largest energy
consumer in the world and its energy consumption is also in increasing trends”. Thus, it
can be noted that the Iranians are trying to enter the Asian market instead of the European
one because of the pressure that the USA might use against European countries to prevent
them from relying on Iranian energy to find other alternatives which could potentially
threaten their energy market in the long run. As stated in Pirzadeh Meysam et al. (2016)
“Iran have such a capacity that is hard to be overlooked in the Europeans long-term plans
and energy supplying strategies”
However, having a deep view on the oil price worldwide, it can be noted that todays
prices are very low compared to what they used to be over the previous several years, which
means that the revenue from this sector to the GDP is low. Nevertheless, Iran is in a better
position than other oil-producing countries due to the small amount of production.
Moreover, free trade will be available to Iran after the removal of the sanctions and the
most important is the right to use their liquid cash that has been frozen for several years
because of the sanctions. According to Jailvand in (2016). “Compared with other oil
producers, Iran is in a somewhat better position to endure low oil prices due to: a smaller
share of oil revenue in the government budget and GDP, a positive non-oil trade balance,
52
and (growing) economic activity outside the energy sector, as well as access to billions of
(previously blocked) US dollars in international banks, as part of JCPOA implementation”.
On the other hand, Iran has one of the biggest reserves of gas in the world according to
EIA thus Iran is planning to develop this sector and spread different pipeline in Asia and
Europe to supply its gases. According to Simone tagliapietra (2014). The writer divided
the future of Iranian gas into two parts. First, the short-term outlook were Iran will work to
replace car work on oil to become CNG vehicle (gas) in order to reduce the oil consumption
domestically an add them to export. However, these plans are difficult to be applied when
the contract that was signed with Oman to supply them with 10 Bcm of gas per year starting
from 2017 with a 260 km subsea pipeline. “The current plan would consist in keeping about
30 % of the natural gas to export to Oman as Iranian natural gas to be processed into LNG
by Oman under a tolling agreement allowing it to market, for the very first time”. As for
the long term outlook according to Simone tagliapietra main goal is expand the volume of
gas exporter by having at least 15 project that has been discussed pipelines with Bahrain,
Kuwait, United Arab Emirates ,Syria ,Iraq, Pakistan ,India, Europe and 7 different LNG
projects. Nevertheless, Pakistan pipeline are the most realistic were 22Bcma year to be
transfer from Assluyeh Iran to Nawabshah Pakistan “Iran has already completed most of
the 1050 km leg from Assaluyeh to its border with Pakistan” but until now many problems
face the lunching the gas. Thus, it can be considered as long run project.
3.2 Sanctions and macroeconomics economic performance before and after
sanctions:
In order to give a thorough examination of a country’s performance, one must look
closely at their macroeconomic indicators, namely growth rates, inflation and
unemployment and so on. This paper will include GDP growth, growth of manufacturing
and mining, growth rate of construction, growth rate of services, inflation and
unemployment since 1979 to 2013 according to World Bank Middle East and North Africa
2015.
Iran is one of the main players of economic power in the Middle East before the
sanctions and even after the sanctions for several reasons such as the size and population
and the amount of resources in the country. However, the sanctions that were imposed on
53
Iran affected the Iranian GDP in different ways, but all of them were harmful. Nevertheless,
we have to differentiate that they were two main players imposing sanctions on Iran- the
US and United Nations. Moreover, we have to take into account the implications of the
sanctions and their resulting effects. According to Matthias Neuenkirch and Florian
Neumeier in (2015) they found that the sanctions that were imposed by the United Nations
had much more of an impact on the Iranian GDP. “We find that comprehensive
Uneconomic sanctions – that is, embargoes on nearly all economic activity between UN
member states and the sanctioned country – have the strongest influence; they trigger a
reduction in real GDP growth of more than 5 pp”. However, they did not deny that the
American sanctions also had an impact on IranianGDP, albeit much smaller, (but it is much
smaller) “the adverse effect of US sanctions on real GDP growth is much smaller and of
less duration than that of UN sanctions. The imposition of US sanctions decreases the target
state's GDP growth by 0.75–1 pp”. In the figure below it can be noticed how the American
sanctions that were imposed on Iran for the first time had a huge effect on Iran because of
the main targeting on oil sector with -76.3% in 1980 until these sanctions were removed
after the diplomatic solution in 1982 when the GDP rate of oil was 128%. Then the oil
GDP revenue was low because the long Iraqi- Iranian war and some sanctions imposed
again. However, from 2000 until 2008, Iran benefitted from the increasing prices of oil,
which in turn increased the standard of living, as well as providing better investment
prospects for outsiders. According to Nader Habibi (2008) “Iran has benefited from the
high price of oil since 2002; the last time Iran experienced a current account deficit was
1998. Since then, its annual current account surpluses have ranged between a meager $860
million in 2003 and a record $20.65 billion in 2006. Iran’s oil revenues rose to $81 billion
in 2007 and are projected to exceed $100 billion in 2008. These revenues have led to a
sharp increase in public spending”.
For the GDP we also noticed how the economy was harmed in 1980 in an incredible
way. Then it began to recover with encouraging results but it was not sustainable which
meant that the Iranian government understood the shook of the sanctions and started to
manage its economy whilst under sanction.
54
Inflation:
Having studied the above figure 10 that was taken from IMF, it is clear that in 1995 Iran
had the worst inflation rate during the sanctions period. Then the government tried to
manage it in a better way, which was a successful way during the Khatami government.
According to Hussein Abdullah Qader (2014), “While during Khatami government (19972005), there was efforts to manage inflation which decreased it from 20.1% in 1999 to
11.3% in 2001”.as well according to Qadar Ahmadinejad's government made some bad
decision leads to increase in the inflation again. He says, “Ahmadinejad's mismanagement
policies on the economic side and impact of economic sanctions on Iran inflations rate
increased after 2007”. In 2013 it is noticeable that the sanctions that were imposed by the
United States and United Nations had very negative effects on the Iranian economy.
55.00%
50.00%
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
Inflation ,Average consumer price
Sanctio
Khatami government
better Management
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Figure 10: Iran inflation, average consumer price 1990 to 2014.
Source: World Development Indicators, World Bank. Note: Latest data are from
2012. IMF estimates data of 2013-2015
By the looking on the figure above that was taken from IMF that in 1995 Iran had
the worst inflation rate during the sanctions period. Then the government tried to manage
it in a better way, which was a successful way in Khatami government. According to
Hussein Abdullah Qader (2014), “While during Khatami government (1997-2005), there
55
was efforts to manage inflation which decreased it from 20.1% in 1999 to 11.3% in
2001”.as well according to Qadar Ahmadinejad's government made some bad decision
leads to increase in the inflation again. He says, “Ahmadinejad's mismanagement policies
on the economic side and impact of economic sanctions on Iran inflations rate increased
after 2007”.in 2013 it is noticeable that the sanctions that were imposed by the United
States and United Nations had very negative effect on the Iranian economy.
Unemployment Rate:
It is possible to say that the sanctions as well had a negative effect on increasing
the unemployment rate due the decreasing of the economic cycle of import and export. The
figure 11 was taken from IMF explaining in numbers how during the sanctions the
unemployment rate was high over some periods. However, the Iranian government said
that the high unemployment rate was not because of sanctions but occurred instead as a
result of mismanagement from the government. According to Hussein Abdullah Qader
(2014) “the unemployment rate increased because of mismanagement policies of the
government and impact of economic sanction which targeted different sector of economy
which became unable to import goods and it led to the reduction of workers in different
sectors”.
Unemployment Rate
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
Unemployment Rate
Figure 11: Iran unemployment rate since 1990 to 2014
Source: Qader (2014) from World Economic Outlook Database. (1990-2012) Note: IMF
Staff estimates Data of 2013-2015.
56
3.3 Results interpretation:
Due to the difficulties in accessing all the information and data of Iran, the paper
was divided into two parts in order to interpret the result of the effectiveness of sanctions
on the Iranian economy especially in the energy and financial sectors. The first part will
explain the sanction’s in a graph with all main variables that get affect by the sanction with
a logical sequence. For the second part there will be a calculation and an applied
econometric model that explains a period of time between 1979 and 2015 using times series
regression.
In the first part, one can notice by looking at the graph that sanctions have had
different impacts on both the energy and financial sectors. If we go through the oil sector
it can be noted that the first thing to affect the Iranian energy sector was the decrease in
production. This point was explained in detail in the previous chapters where the oil
production fell down from the beginning of the revolution from 6 million barrel a day to
reach 1.5 million barrel a day after many fluctuation appears in the same range. Thus, the
decrease in oil production automatically led to a decrease in the income that Iran could
have with a bigger production and exports hence the GDP share of this sector fell as well.
Besides, the revenue will drop the taxes that come from the exports and production will
drop so a lower GDP can be explained. Consequently, a lower budget to the energy sector
will appear which will lead to less government investment in the sector in order to develop
the field as well the foreign investment because of the instability of the situation there and
the limitation of technology from the main developed countries in the energy sector. Not
only this, but also the sanctions that were imposed on the insurance and transportation of
the oil sector that makes dealing with Iran (is) a risky business.
For the financial sanctions, we noticed a decrease in the foreign assets of Iran due
to the freezing of liquid assets in the international banks as well as some Iranian properties
outside their borders. However, the sanctions that were imposed on the central bank of Iran
were some of the most harmful because of the banning of any transaction with American
US dollar which is the main basket and currency that is used with every country. Therefore,
trading became a more complex situation even if the trade is not directly with the
Americans. A decrease in the loans that Iran could borrow led to less investing and less
57
liquidity of foreign currency. As a result of low liquidity we noticed an increase in the
interest rate to encourage investors and people to deposit more cash into the Iranian banks.
According to Trading economic, the interest rate of Iran in 2014 reached 22% which is a
very large number that was offered in order to make people deposit more currency. Thus,
it can also be noted that the Iranian government had a lack of investment and development
due to the lack of financial liquidity so we can see how the financial sanctions played an
important role in decreasing the Iranian GDP and making the country suffer.
Sanction
Sanctions on Oil
&Gas sector
Sanctions on
Financial sector
Restriction on Oil Exports
Frozen assets in International
bank accounts
Oil Production
Limited loan to borrow
Budget Income
Investment
Interest rate,
Inflation
Investment
GDP
GDP
Figure 12: Main type of sanctions that they were imposed on Iran and how they affect the
economy.
As for the second part, In order to estimate the influence of sanctions on economy
of Iran two linear time series regression models were built. The period analyzed in this
research is 1979 – 2015. In these two models, economic situation in the country is
represented by gross domestic product in constant prices.
58
The model corresponds to oil and financial restrictions. Factors in this set up are as
follows: oil export (mln tonnes), oil production (mln tonnes), Iran Heavy price (Barrel$)
$) and Total investment. Because of sanctions, oil export of Iran was limited. The lack of
demand on Iranian oil effected its price. This also had negative impact on oil production.
So, the model is:
𝐺𝐷𝑃t = 𝑎0 + 𝑎1EXt + 𝑎2PDt + 𝑎3PRt + 𝑎4I+𝜀t , where t – period
Results
In the model factors are assumed to be weakly correlated, correlation coefficients
are either smaller than 0.6 or insignificant. Method of estimation is ordinary least squares
(OLS). For the model specification of the model, we got:
The model in general is significant according to Fisher test. All factors are also
significant. Coefficient of determination is rather high (about 93%). As far as coefficients
of the model are concerned, we see that all of them have positive influence on GDP, which
corresponds to basic economic notions. The influence of oil export and oil production is
almost the same. It means that oil industry plays important role in Iran economy. Therefore,
we can say that the sanctions had a positive result in affecting the energy sector of Iran and
that was in the decreasing of the export of Iran. As far as coefficients of the model are
concerned, Investment influence positively on GDP (procycle variable). We also see that
GDP grows but in fewer amount than investments, which corresponds to statistical
observations.
Calculation of OLS regression for the new model gave the following results:
Figure 13: Result of the calculation
59
Moreover, in order to have a better understating of the previous result thus in figures
below explain all the variables that they were includes in the equation. In the figure 13 the
graph illustrate the historical records of oil production and export in million tons in the
figure we can notice how sanctions effect in the oil production and oil export after the
hostage crises and first sanctions in 1979. To be followed by a small increasing in
production and export for a short time and then the eight years of Iraqi Iranian war drop
the oil industry again, then the country manage to have a increasing in production and
export till the early 2000 when western countries imposed new sanction because of the
nuclear power program. In 2010, Western countries and United Nations agreed to increase
the sanctions on the Iranian oil industry in order to make a big pressure especially after the
increasing of Uranium enrichment thus these sanctions hit the oil export in effective way.
Therefore, according to our calculations any increase of Gdp by one percent the oil
production increase due 12, 23 Mt as for oil export as well an increasing will appears due
11.5 Mt.
production and export Mt
oil producation Mt
2015
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
250.0
200.0
150.0
100.0
50.0
-
oil export Mt
Figure 13: Iran oil production and export in Mt 1979-2015.
Source: British petroleum bp 2015
Examine the real Gdp explain the sanctions even though it was increasing a little
bit. However, sanctions made the real Gdp drop in some periods. Figure 14 explain the
fluctuation.
60
Real GDP (Iranian rial*10^(-12))
2,500
2,000
1,500
1,000
500
2015
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
0
Real GDP (Iranian rial*10^(-12))
Figure 14: Iranian Real GDP *10^(-12)
Source: World Bank
As for the Iran heavy oil price the figure 15 can demonstration, the changes of world
oil prices and especially the Iranian heavy oil. Therefore , according to our calculation a
direct relation between Gdp and Iran heavy oil price were an increase of 1 percent of Gdp
is due the increase by oil prices by 6$ per barrel.
Iran Heavy price B$
120
100
80
60
40
20
2015
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
0
Iran Heavy price B$
Figure 15: Iran heavy oil price by barrel in American US dollars
Source: OPEC
As for the total investment of Iran figure 16 explain thus we noticed that, the first
sanctions did not stop Iran from the investment. However, the Iraq Iranian war had a
negative effect on the investment. Then investment in Iran start to grow to reach 180
61
Million $ to start to go decrease again after the financial sanction on Iran with freezing Iran
asset as well the main sanctions that they were imposed on the central bank with embargo
using the American US dollar in their traders and transactions.
investment $
200,000,000.00 USD
150,000,000.00 USD
100,000,000.00 USD
50,000,000.00 USD
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
0.00 USD
investment $
Figure 16: Iran Investment in American US dollar
Source: International Monetary Fund (IMF)
This chapter mainly includes the calculation and the implication of time series
regression from 1979 to 2015. Oil sanction part were illustrated in theoretical approach
plus the calculation with taking the gross domestic production as the main variable and
with several independent variables such as production of oil in (Mt), oil export (Mt) , Iran
heavy oil price per barrel and total investment in US $. Thus, as a result we found that
sanctions have a positive effect on the oil industry as well as on the Iranian economy. As
for the financial, we did indeed find positive effects of financial sanction but the ratio was
small in comparison with the oil sanctions, which corresponds to statistical observations.
In addition, the model provide us with high R2, which explains the result. Moreover we
explain all the variables we used by using figure to show the main events.
Not only that but we also observed the possible scenarios that the energy sector of
Iran could have due the development of the sector. As well as this, this chapter reviews the
possible new market that Iran can supply especially after the JCPOA agreement between
the P5+1+Eu, which could open new doors for the Iranian economy after a long wave of
sanctions.
62
Conclusion
I am confident enough to suggest that, following my research into this topic as well
as culminating multiple professional points-of-view, I have achieved my goal in
discovering the effects of the sanctions on Iranian GDP. In order to help me do so, I set out
a number of aims upon starting my research, as mentioned towards the beginning of this
paper; being able to first of all delve into the history of the country in question allowed me
to understand why the Iranian economy reacted in the way it did after the sanctions were
imposed. Furthermore, it has given me an insight into the trends of the country’s economy,
allowing me to forecast the potential economic effects of further sanctions, should they
occur in the near future. The literary reviews relating to life under sanction provided me
with a greater understanding of the human cost regarding such measures; whilst it is of
course important to look at the effects that these sanctions had on the economy, one must
not forget that, on a more personal level, they changed the day-to-day lives of millions of
civilians.
Having examined the Iranian GDP, it is evident that the sanctions are until now
(are) a debatable issue based on the results we have. After inspecting the real reason behind
the sanctions and what are result found after the sanctions with reaching its main goal from
stopping Iran from functioning normally in armoring some group in the Middle East as
well as stopping its nuclear programs. Sanctions did not stop Iran from its usual behaviour.
Put simply, they failed to change the Iranian regime. However, upon examining the energy
sector, we found that the sanctions affected the sector due to the limitation of technology,
exports and foreign direct investment thus production has dropped significantly over the
last decades. Nevertheless, Iran was trying during the last 10 years to switch its supply of
oil from western countries to Asian countries such as China and India. However, the gas
sector was not affected by the sanctions where production was allowed to increase and new
pipeline projects were launched with domestic companies. On top of this, we noticed that
sanctions that were imposed only by the United States (only) had less of an effect on the
Iranian GDP in comparison to those imposed with the support the United Nations
.Consequently, we examined that the biggest drop of oil production as well with the
63
problems of exporting after the European countries imposed limitation for insurance
company in transporting the Iranian oil.
As for financial sanctions, American sanctions limited the Iranians from accessing
their liquid assets that were outside Iran, forcing Iran to cope with the problem of a lack of
liquidity to make new investments. As a result of this, Iran had no option but to increase
their interest rates in order to get enough deposit for future investments. However, the last
wave of sanctions in 2012 was the strongest one because the sanctions were not only from
the American side, but also from the European countries and the United Nations. The
central bank was the target where sanctions banned the bank from any transactions or deals
with the American dollar.
However, according to our hypothesis and the result we got, it is evident that the
sanctions did not reach their main goal from stopping the Iranian regime armoring some
groups and increasing their military power and nuclear program. The main party who
suffered from the sanctions was the Iranian economy or even the Iranian people the due to
the limitation for medical treatment as well the currency inflation between the central bank
and black market which made importing the main necessities much more difficult without
any harm to the regime. Thus, it seems to me that the sanctions did not have the same affect
on Iran as was originally planned. Nevertheless, the Iranian government managed the
economy in a way that made all the governmental institutions work; in actual fact, the
military expenditure increased as well as the education and population. In 2014, both sides
made the well-known agreement JCPOA “The Joint Comprehensive Plan of Action” which
resulted in Iran being relieved from many sanctions that they had for a long period of time
on the condition that the nuclear agency will control their program in order not to have
nuclear weapons.
Throughout this project, I have studied and analyzed the effects of the sanctions on
both the economic and financial sectors. On reflection, it is safe to suggest that the results
of these sanctions were not as predicted; they failed to prevent Iran from acting out of the
economic norm, with some key sectors in the economy namely education, actually seeing
an increase in expenditure. Instead, the result of the continuous pressure of the sanctions
damaged the country as a whole, putting a strain on the lives of the innocent.
64
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