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New Round Of U.S. Sanctions Hits Foreign Investment, Domestic Economy

In this Wednesday, Aug. 12, 2018 photo, an Iranian goldsmith counts gold coins in the sprawling Grand Bazaar, that has seen customers eagerly buying gold as a hedge against the falling Iranian rial, in Tehran, Iran.
In this Wednesday, Aug. 12, 2018 photo, an Iranian goldsmith counts gold coins in the sprawling Grand Bazaar, that has seen customers eagerly buying gold as a hedge against the falling Iranian rial, in Tehran, Iran.

Abdolnasser Hemmati, governor of the Central Bank of Iran (CBI), has claimed that the second round of U.S. sanctions against Iran's oil exports and international banking operations would be ineffective. Economic realities, however, paint a gloomier picture.

Considering the impact of the first round of sanctions that were reintroduced following the United States' withdrawal from the nuclear deal with Iran, the second round could further slow down Iran's economic growth and lend momentum to rising unemployment and poverty.

The second round, which starts in early November, targets the heart of Iran's economy by aiming to disrupt the flow of capital in hard currency.

There was an evident rise in foreign investment in Iran by Western companies in the year before the U.S. pull-out from the Joint Comprehensive Plan Of Action (JCPOA) in May. The 2015 nuclear deal seemed to have reduced political and economic risks involved in working with Tehran.

Renewed interest in the Iranian market was moving toward normalizing Iran's economy. Representatives of Western companies as well as foreign politicians visited Tehran and signed initial agreements about investing in Iran. At the same time, the entry of foreign capital into Iran was on the rise compared with the time when pre-JCPOA sanctions targeted Iran's economy.

However, Iranians complained that Europeans were in no hurry to start an economic cooperation with Iran. Their hesitation elicited criticism on the part of Iran's hardliners, most notably Supreme Leader Ayatollah Ali Khamenei.

European banks and risk-assessment institutions did not lower the risk index for Iran amid concerns that Tehran's intervention in the region could adversely affect its ties with Western countries.

With the election of U.S. President Donald Trump in 2016, an increase in the risk of political tension between Tehran and Washington became evident, fueling doubts among foreign companies working in Iran about their business prospects.

As a result, the interest in foreign investment in Iran began to diminish. The number of plans approved for foreign investment in Iran's industry, mining, and trade sectors in the first four months after the start of the Iranian new year in late March dropped to half the number during the same period the previous year, from $775.3 million to $349.1 million.

The rise in tensions between Tehran and Washington increased the extent of uncertainty about investment in Iran, and many foreign companies left the country. The drop in foreign investment further continued as Iranian and U.S. officials began a war of words in May.

At the same time, an increasing number of Iranian investors also left the country as the November 4 start of the second round of sanctions against Iran loomed. This coincided with a dramatic rise in the rate of exchange for the U.S. dollar from around 35,000 rials per dollar in March to more than 190,000 rials in September.

The drop in foreign investment initially affected the oil and petrochemical industries and then began to impact other sectors, finally reaching the micro level of small businesses and households.

A major drop in foreign investment means a drop in domestic gross product and a decline in production power, employment opportunities, and income for Iranian households. The result is likely to be a continuous rise in unemployment and poverty.

The International Monetary Fund (IMF) changed its previous forecast, announcing minus 1.47 percent economic growth for this year and a bleak minus 3.6 percent prospect for the next year. This is expected to bring down Iran's current per capita income of $5,221 to $4,052 within less than two years. Household savings are also expected to dwindle, making Iranians more vulnerable in the face of rising economic risks.