Apr 14, 2019

Trump's maximum pressure campaign hammers Iranian economy

An Iraqi peddler holds in his hand banknotes of Iranian rials for exchange in the Iraqi capital Baghdad. Photo credit Ahmad Al-Rubaye/AFP/Getty Images

Iran's economy has been in free-fall since President Trump withdrew the U.S. from the Iran nuclear deal and reimposed strict sanctions on its government. And the administration's unprecedented move on Monday designating the Islamic Revolutionary Guard Corps (IRGC) as a foreign terrorist organization is expected to further damage its economy.

The impact: The International Monetary Fund forecast an even deeper recession for Iran in its World Economic Outlook, released Tuesday. The IMF said it now expects Iran's economy to contract by 6% this year, compared to October's prediction of a 3.6% drop.

  • The World Bank predicted in an April report that the Iranian economy would "contract sharply," and it expects GDP to shrink by 3.8% in 2019 on the back of U.S. sanctions.
  • Dozens of European businesses have pulled out of Iran in the wake of the U.S. escalating its pressure campaign. "If you're the general counsel of an Asian bank or a European bank, your world changed when that designation came out yesterday,” Sec. of State Mike Pompeo said of the IRGC move. (Trump's ambassador to Germany, Ric Grenell, has been especially aggressive in pushing European companies to cut ties with Iran.)
  • Iran's currency, the rial, lost more than 60% of its value compared to the U.S. dollar last year, and inflation surged fourfold to an estimated rate of more than 40% by the end of 2018. (In 2019, the Central Bank of Iran has stopped publishing inflation data, leading some analysts to believe that the rate has kept rising beyond 40%.)

The big picture: "Our sanctions have denied the regime many billions in revenue that it would otherwise spend on terrorism, missile proliferation, and proxies," said Brian Hook, who helms Iran policy at the State Department. "The positive effects are increasingly visible. We will continue to use all the tools at our disposal to press the regime to change its destructive policies."

Yes, but: Iran's leaders have shown no signs, so far, that they're willing to concede an inch to the Americans. Most analysts we've spoken to believe the regime can endure even greater stress than they've suffered to date, noting it outlasted long bouts of dire economic conditions since the early 1980s.

  • "While maximum pressure can cause maximum damage, Tehran's strategy has been to exercise maximum patience," said Behnam Ben Taleblu, a senior fellow at the Foundation for Defense of Democracies. "Iran is in dire straits, but they may not mind suffering a little longer if they think their suffering could soon be vindicated."
  • "This kind of recession developing countries can handle," said Djavad Salehi-Isfahani of the Brookings Institution. "In terms of economic collapse, that is not on the horizon. But increased poverty, lower income, higher unemployment? Yes, those things are probably going to happen in the next 12 months. ... My prediction is they will try to weather it."

What's next: The administration faces a major decision next month. After withdrawing from the nuclear deal, the Trump administration let eight countries keep buying Iranian oil without facing U.S. sanctions. On May 2, the administration will have to decide whether to keep those waivers in place.

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