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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 2 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 3 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. 4 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 5 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 6 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 7 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. 8 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." 9 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. 10 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 11 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 12 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 13 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. 14 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. 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