March 22, 2018
The Joint Comprehensive Plan of Action (JCPOA) promised economic recovery for Iran in the form of sanctions relief, and many expected it would boost the country’s prosperity and general economic outlook. However, despite the initial optimism and some positive trends following the implementation of JCPOA, broad economic improvements have not materialized. The challenges are both internal and external, including a concerted effort by the Trump Administration to thwart business with Iran.

The Trump administration’s policies have started a shadow economic war on the JCPOA through pressure placed on allies and international partners, especially financial institutions, with the purpose of preventing or slowing business with Iran and undermining sanctions relief benefits. While these efforts initially focused on Europe, the Trump administration also shifted its efforts to pressure US Asian allies as Iran looks east to potential markets there. 

The economic challenges Iran faces as a result of these policies are likely to backfire. In response, Iran is shifting its markets more towards China and Russia.  Economic pressure from the United States—aimed at causing regime change or gaining coercive leverage over Iran—is undermining Washington’s own interests in the Middle East and beyond.

First, if the US goal is regime change, as some in Washington may hope these pressures will accelerate, it seems very unlikely that the kind of economic pressure the United States is organizing can succeed. The Iranian regime has survived much harsher conditions over the past decades under sanctions, and there is little to suggest the regime won’t weather this as well.

Second, if the goal is to coerce Iran to agree to additional concessions, the deepening of economic relations with China and Russia will undermine the effectiveness US economic pressure policies. Stepped up investment by China and Russia in Iran means that the United States is likely to lose leverage in negotiations with Iran—the exact opposite of what the United States is trying to achieve.

The Myth of Regime Change

According to his oil minister, President Rouhani’s government has been having economic difficulties, particularly with the financial transactions and transferring of oil revenues to Iran. Iran’s economy is dominated by the energy sector, which accounts for about 14 percent of GDP, and thus not being able to transfer oil revenues in a timely manner creates serious economic challenges for the government.

Ongoing restricted access to the US dollar continues to plague the Iranian economy. The value of the Rial has dropped dramatically since 2016, and unexpectedly dropped about 14 percent of its value so far this year, and while there are many contributing factors, the restriction of access to US dollars is key. Although Rouhani’s government took immediate measures to address the plummeting Rial, the situation may not be sustainable if the United States continues to put pressure on Iran’s international trade.

These recent economic woes resulted in protests in December 2017 across Iran, which some analysts were quick to argue signaled increased opposition to the regime. However, recent surveys have revealed otherwise. While the survey data certainly points to economic concerns, coupled with the “perception of foreign interference” (connected to the JCPOA), as a major source of popular mobilization, only 15 percent felt that the solution was a domestic political change.

Although polling data should be taken with a grain of salt, the results indicate underlying general trends: 73 percent of respondents believed that foreign investment in Iran is lower than expected rate, and an even bigger majority (82 percent) of the respondents believed that this was due to uncertainty caused by the United States. These insights reveal that regime change is unlikely, as blame for economic woes is mainly placed not on the regime, but on the United States. 

The Shift Towards Russia and China

With continued pressure from the Trump administration to renegotiate the JCPOA, the uncertainty the United States is creating surrounding doing business in Iran is undermining the willingness  of Western companies to invest. A survey of multinational corporations on the economic implementation of JCPOA indicated that the main hurdles for foreign investment in Iran were mainly due to “external factors” (namely, uncertainty around US policies), rather than domestic economic conditions. Uncertainty about sanctions were named the “primary obstacle” to business in Iran. This is not an obstacle shared by China and Russia, who have forged ahead with major investments, and who remain two of Iran’s main trading partners for oil and non-oil products.

Apart from economic investments and partnerships, the shadow economic war carries large geopolitical risks for the United States. President Rouhani first signaled Iran’s interest in a strengthened relationship with Russia, particularly on issues of energy cooperation in March of 2017. More recent reports show increased energy cooperation between Iran and Russia with negotiations for investment in oil fields as reported by the National Iranian Oil Company. In addition, Iran, Russia, and Turkey are planning a trilateral summit in April 2018 on regional issues, including Syria, indicating increased geopolitical coordination among non-US allies. More Chinese and Russian investment in Iran could mean US plans and ambitions are likely to be undermined in the future.

Ultimately, Iran’s turn toward China and Russia leave the United States with less leverage for future negotiations on any issue, making it less and less likely for Iran to agree to cooperate with the United States or its allies. Thus, it is crucial to rethink these policies and come up with a more feasible plan. Otherwise, the United States will be left in a situation where the JCPOA is compromised, pathways for moving forward are blocked, and a peaceful alternative for the region slips away.


Mahsa Rouhi is a research fellow with the Belfer Center at Harvard Kennedy School of Government. You can follow her on Twitter @MahsaRouhi


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