Kenneth Katzman
Specialist in Middle Eastern Affairs
Increasingly strict sanctions on Iran—which target primarily Iran’s key energy sector as well as its ability to access the international financial system—have harmed Iran’s economy, but not to the point where key Iran leaders have been compelled to reach a compromise with the international community on Iran’s nuclear program. And, the strategic effects of sanctions might be abating as Iran adjusts to them economically and advertises the adverse humanitarian effects.
• Oil exports fund nearly half of Iran’s government expenditures, and Iran’s oil exports have declined to about 1.25 million barrels—a halving from the 2.5 million barrels per day Iran exported during 2011. The causes of the drop have been a European Union embargo on purchases of Iranian crude oil that took full effect on July 1, 2012, and decisions by several other Iranian oil customers to substantially reduce purchases of Iranian oil. To date, 20 of Iran’s oil customers have reduced Iranian oil imports sufficiently to achieve an exemption from U.S. sanctions under the FY2012 National Defense Authorization Act (P.L. 112-81).
• The loss of revenues from oil, coupled with the cut-off of Iran from the international banking system, has caused a collapse in the value of Iran’s currency, the rial. That collapse has increased inflation to over 50%, according to many experts. Iran’s economy shrank slightly from 2012-2013 and will likely shrink again during 2013. There have also been unintended consequences including a shortage of some advanced Western-made medicines.
• However, Iran has found ways to mitigate the economic and political effects of sanctions. Government-linked entities are creating front companies and making increased use of barter trade. Iranian traders are using informal banking exchange mechanisms and, benefitting from the fall in the value of Iran’s currency, sharply increasing non-oil exports such as agricultural goods, minerals, and industrial goods. Affluent Iranians are investing in hard assets such as real estate.
Although sanctions have not compelled Iran to change its position on its nuclear program, sanctions may be slowing Iran’s nuclear and missile programs by hampering Iran’s ability to obtain needed technology from foreign sources. However, Department of Defense and other assessments indicate that sanctions have not stopped Iran from developing some new weaponry indigenously. Iran is also judged not complying with U.N. requirements that it halt any weapons shipments outside its borders, particularly by providing arms to the embattled Assad government in Syria. And, sanctions do not appear to have altered Iran’s repression of dissent or its efforts to monitor public use of the Internet.
Some in Congress believe that economic pressure on Iran needs to increase. In the 112th Congress, the Iran Threat Reduction and Syria Human Rights Act of 2012 (P.L. 112-158) made sanctionable the shipping of Iranian crude oil, and it enhanced human rights-related provisions of previous Iran-related laws. A provision of the FY2013 National Defense Authorization Act (P.L. 112-239) sanctions transactions with several key sectors of Iran’s economy. A bill in the 113th Congress, H.R. 850, ordered to be reported out of the House Foreign Affairs Committee on May 22, 2013, would authorize, but not mandate, U.S. sanctions against nearly all trade with Iran and it would sanction banks that exchange Iran’s hard currency abroad. For a broader analysis of policy on Iran, see CRS Report RL32048, Iran: U.S. Concerns and Policy Responses, by Kenneth Katzman.
Date of Report: May 31, 2013
Number of Pages: 81
Order Number: RS20871
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