By Naimat Kammal
The U.S.-Iranian rivalry is one of the most longstanding and complex in international relations today. This conflict has been analysed from an ideological, nuclear proliferation or regional proxy war perspective and for good reason. Washington has most persistently tried to change Iranian behavior through economic tools, such as sanctions, asset freezes, oil embargoes and systematic exclusion from the international financial system. And it is in the realm of economic endurance, adaptation and strategic repositioning that Tehran has responded.
The economic pressure on Iran by the USA dates back to the immediate aftermath of the Islamic Revolution of 1979 and the hostage crisis that ensued. The decision to freeze some $12 billion in Iranian sovereign assets in American financial institutions was a crisis measure and a basic step — the first use of the central tool of American policy toward Iran. The Algiers Accords of 1981 ended the hostage crisis, but failed to settle the economic issue..
In the early 2000s, economic pressure was given a new urgency when Iran’s nuclear program started to gain speed and the alarm of the multilateral community grew. Between 2006 and 2010, the UN Security Council passed a series of resolutions that targeted Iranian entities suspected of proliferation activities in a legitimate international framework that could be used to justify American and European unilateral measures. The Obama administration’s sanctions regime, which included sanctions against Iran’s central bank, access to the SWIFT financial messaging network and broad sanctions on Iranian oil exports, was the most comprehensive and coordinated economic sanctions campaign in the history of the competition. The results were remarkable: Iranian oil exports decreased significantly, the national currency devalued considerably, inflation skyrocketed and real GDP declined..
However in May 2018, the Trump administration’s unilateral withdrawal from the JCPOA and the subsequent implementation of its maximum pressure campaign reignited and greatly escalated economic pressure. Washington, which had rejected the multilateral framework, hoped that it would cut off Iran from the global financial system and from exporting oil altogether, in the hope that either a new and more comprehensive negotiation would take place or that the resulting economic crisis would be enough to destabilise Iran sufficiently to change its regional behaviour. At the peak of the campaign, Iranian oil exports dropped to an estimated 300,000 to 500,000 bpd, resulting in a catastrophic loss of income which led to inflation rates of more than 40%, a significant devaluation of the Iranian rial, and a decline in living standards disproportionately affecting the country’s middle and working classes.
The more general Iranian reaction to the continuing economic pressure has been expressed — at least in the official rhetoric — in terms of the resistance economy, a concept attributed to Supreme Leader Ayatollah Ali Khamenei which focuses on self-sufficiency, import substitution, non-oil exports and strengthening economic ties with countries that are prepared to resist U.S. pressure. In reality the resistance economy has not been a success. In some areas such as petrochemicals, agricultural exports and some parts of the domestic industry, Iran has made real progress. In spite of the harsh conditions, the knowledge economy has proven resilient, and Iranian engineers and scientists have exhibited remarkable indigenous technological development in various areas including aerospace, pharmaceuticals and many others. The resistance economy framework, however, has failed to address the structural weaknesses of the Iranian economy, which relies heavily on oil revenues, has a weak private sector, suffers from capital flight, and has poor infrastructure. In fact, they have grown worse due to the combined effect of sanctions and mismanagement at home.
Moreover the most important strategic impact of the economic competition has been Iran’s growing shift towards China and to a lesser extent towards Russia. The comprehensive cooperation agreement signed by Iran and China in 2021, which is expected to include investments in energy infrastructure, transportation, manufacturing and telecommunications, as well as preferential deals on Iranian crude, is the most formal statement of this change. The terms of the deal are not fully disclosed, but its strategic rationale is evident: Iran wants to tie itself into a new economic system, one that is based on Chinese capital, Chinese technology and Chinese trade routes, and is far less dependent on the financial power of the United States. It remains to be seen whether this ploy will work in the end, as China’s own involvement in the U.S. financial markets and its desire to keep Tehran’s relations with the Gulf Arab countries stable limit Beijing’s willingness to go to any length to protect Tehran from economic pressure..
The impact of the US–Iran economic rivalry is far-reaching, reaching beyond the bilateral relationship. The Strait of Hormuz is the most critical point of bilateral economic tension and global oil market stability, through which some twenty percent of the world’s oil trade flows. Iranian threats to shut down or disrupt traffic through the strait are credible, given the IRGC’s proven ability to harass ships at sea, and serve as a form of economic deterrence, warning American policymakers and their partners that the price of maximum pressure is not being paid by Iran. European governments have been sucked into the competition in a manner that has led to ongoing tensions with Washington. The extraterritorial application of American secondary sanctions (which make it legal for European companies to do business with Iran, but illegal for them to do business with American companies) has been a sore spot in Brussels, London and European capitals for a long time.
Systematically, the US–Iran rivalry has helped to raise doubts over the dollar’s dominance in the international economic system and the advantages of relying on the financial system dominated by the United States. In the Iranian situation, as other states become aware of the severity and extent of American economic coercion, the need to find other means of payment, bilateral currency schemes, and other financial systems that are not under The economic aspects of the US–Iranian competition, in the end, provide an illustration of the potential and constraints of economic statecraft as a tool of strategic competition. American sanctions have had real and significant impact on the Iranian economy and at times have even set the stage for real progress in diplomacy. But they have failed to deliver compliance, transformation or collapse as their most ambitious advocates have promised. Iran has survived, changed and adapted – and at great expense to its people – but not without altering its political system and its regional policy. In the interim, the heavy-handed application of financial leverage has created a number of externalities: conflicts with allies, opportunities for adversaries, and structural pressures on the international economic architecture that supports American power.
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