What Fate Awaits the Iranian Economy?

The Iranian economy, which has faced high uncertainty and risk in commercial, economic, and political areas not only during the sanctions period but even in the post-JCPOA era, is now set to experience a new shock with the U.S. withdrawal from the JCPOA. The U.S. exit from the JCPOA - even assuming the European Union remains - will have significant consequences for the Iranian economy. Many European firms have extensive operations and significant investments in the U.S., and therefore will be threatened by the implementation of sanctions. If the current economic cooperation of international firms with Iran, especially in the banking sector, can be likened to crossing a minefield, then the number of these mines will increase, and the risk of explosion will rise. This situation will not only fuel capital flight from abroad but will also encourage domestic capital flight. Furthermore, the U.S. and even its Western allies have gained greater capability to harm the Iranian economy over the years due to their extensive experience with its weaknesses and vulnerabilities. Capital flight, depreciation of the rial against major currencies, reduced short-term investment, economic growth collapse, and decreased job creation will be the short-term consequences of the U.S. exit from the JCPOA. Therefore, if new sanctions are implemented, the fragility of the Iranian economy - despite being labeled resilient - will be greater than in previous years. This time, the sanctions will be more sophisticated. For this reason, Iran's external, single-product, inward-looking, dependent, and rent-seeking economy is highly vulnerable to international sanctions. With the reduction of technology imports and also raw materials and semi-finished goods for economic units, including the oil and automotive sectors and related industries, they will not be able to operate fully, and the opportunity for productivity increases will be lost. The banking sector is a necessary infrastructure for the transfer of liquidity, currency, and capital. Therefore, any economic activity - whether short-term or long-term investment, production, or distribution - is contingent upon this infrastructure. With the banking siege of Iran, this infrastructure will be disrupted. If the scenario of expanding sanctions is on the agenda of the Trump administration, it seems that the Iranian banking sector - which is already isolated - will be the first sector to face expanded sanctions, followed by sanctions on the oil export sector. In recent years, especially during the sanctions, investment, particularly in the oil industry, has sharply decreased. As a result, production capacity in this sector of the Iranian economy has not grown in line with regional and international competitors. With renewed sanctions on this sector, it is natural that Iran's crude oil export markets will be taken over by competitors, as current customers of Iran are reluctant to cooperate with a country that carries high risks. Thus, Iran's ability to utilize its foreign exchange reserves will decrease, and its current revenues from oil exports will also be threatened. Consequently, the flow of foreign exchange liquidity, which is akin to blood for the Iranian economy, will come to a halt. The shock resulting from the U.S. exit from the JCPOA will have various consequences in the short, medium, and long term. If sanctions are expanded in the long term, Iran's domestic production capacity will decline further than it currently is, and the Iranian economy will become increasingly import-dependent. The reduction of job opportunities will be a consequence of the importation of the Iranian economy. This will lead to greater externalization of the Iranian economy and its vulnerability to global economic shocks. The short, medium, and long-term consequences of the new sanctions include capital flight, depreciation of the rial against major currencies, reduced short-term investment, economic growth collapse, and decreased job creation as the short-term consequences of the U.S. exit from the JCPOA. The short-term consequences are dynamic and depend on the continuation of reduced activities of firms and economic units. In the medium term, however, with declining oil revenues, the government budget deficit will increase, and the external payments balance will also be more negative than before. These two factors, combined with others, will create a basis for the continued depreciation of the rial. Reduced investment and allocation of resources to current expenses will also be other consequences of the sanctions. If sanctions are expanded in the long term, Iran's domestic production capacity will decline further than it currently is, and the Iranian economy will become increasingly import-dependent. The reduction of job opportunities will be a consequence of the importation of the Iranian economy. This will lead to greater externalization of the Iranian economy and its vulnerability to global economic shocks.