The United States and Iran may be close to reaching an agreement to end their ongoing war. Such an agreement will be important for the world economy, which has been affected by the closure of the Strait of Hormuz. But the stakes may be even higher for Iran, which has been under tough US sanctions for months – and further sanctions for years.
What kind of sanctions relief can Iran expect? How has Iran managed its economy during the war amid US sanctions? And will the situation in the Strait of Hormuz return to the pre-war situation?
Those are just some of the questions that came up in my recent conversation with FP economics reporter Adam Tooze on the podcast we co-host, Those and Tooze. Below is an excerpt, edited for length and clarity. For the full conversation, search Those and Tooze wherever you get your podcasts. And look at Adam Small storage journal.
Cameron Abadi: What exactly is the economic agreement that can be made towards Iran (regarding its frozen assets around the world)? And how can that work in practice?
Adam Tooze: If you dig into this a little bit, what is at stake here is a group of (Iranian frozen) assets – claims that Iranians have, or the Iranian government, or Iranian suppliers, or Iranian banks have around the world that could reach up to $120, $130 billion, which could lose as much as a third of Iran’s GDP. And the important thing to understand is that most of them are not in the United States. They have been restricted and restricted due to the threat of second sanctions by the United States against anyone doing any business with Iran.
So, we think a large amount of money that is known by the name of Iran is in places as far away as, say, South Korea, but also in other areas of the Gulf, maybe 7 billion dollars in India, 12 billion dollars in Qatar. And all this is the result, basically, of unfinished business that has been frozen and accumulated in several frozen pots. Therefore, oil and gas sales that have never been fully completed. Or one incomprehensible set goes back to the military orders, which the Shah’s government placed with the United States, and, as it were, made high payments and which the Americans, of course, never provided. And so, there’s actually a huge amount of money that appears to be out there for the benefit of Iran that, if the Americans were to eliminate this network of threats – directly on their part and then indirectly – they would provide a huge flow of resources to Iran.
The most immediate thing, and this is confusing, is that the Americans seem to be giving permission to eliminate Iran’s oil, Iran’s oil exports—which, after all, was the main weapon of the high-pressure strategy adopted since the 2010s, which was to deprive Iran of its main source of foreign currency. This would not be a matter of accumulated resources, it would be a matter of selling oil, which Iran has in abundance for immediate cash. And it seems the Americans, of course, are interested in this, in part because they just want to have the world oil market unscathed, and the Trump administration is worried about going into the midterm elections with gasoline prices in the United States above $5 a gallon.
There is resistance inside Iran to any deal, which may contribute to the fact that a whole bunch of drones were launched towards America. There’s confusion on the part of America, and there’s also resistance on the part of the Israelis who just want to do the hard work and have a bunch of destruction work they want to finish, especially in Lebanon, which will be part of any kind of package deal, obviously – at least, Trump some days seems to suggest it is. So, it’s very confusing, but we’re really pushing the boundaries and the envelope of what’s possible here in a way that wouldn’t have been possible a few years ago.
CA: Iran has been operating under strict sanctions from the Trump administration, including the blockade of Iranian ports. How is Iran holding up under the economic crisis?
AT: I think one of the things that is important to fully consider in discussing this war is the level of violence, disruption, chaos, fear, destruction, loss that all of this brought to Iran. This is a war of choice on the part of Israel and the United States. Despite all the bragging and boasting on the part of Israel, broadly speaking, it is very unbalanced. The damage is greater on the Iranian side, not the other way around. Besides the fact that Israel and the United States decided to choose this fight at this particular time.
And it just disappears in the wash. Iran’s labor ministry says as many as 2 million people may have lost their jobs as a result of the war’s shock. That’s out of a labor force of about 30 million. Iran has very low labor force participation, at least in the formal sector, in part because of the exclusion of women. Trade unionists in Iran put the figure closer to 3 or 4 million, which would be about 10 percent of the workforce. So, this is a big shock to the economy.
The damage being done to Iran is enormous. This has not been widely reported, but Israel is systematically targeting Iran’s industrial infrastructure. And they make no bones about it, and when pushed, they’ll just explain that this is about influencing Iran’s military-industrial complex. Therefore, they have targeted Iran’s steel plants. They have targeted the petrochemical industry. They are trying to tear down the fabric and infrastructure of the Iranian economy as we know it, in an effort to weaken this existing enemy.
The Iranians themselves are currently putting the damage figure at around $270 billion, and that is huge. That’s about half of Iran’s GDP, if not more. And indeed, day by day, if you follow the right media, you can track the destruction of Israel. This is the kind of war that Russia has been waging in Ukraine, in eastern Ukraine, than we sincerely believe from the West. So, it’s a very, very uneven fight.
CA: The Iranian government has shut down the Internet throughout Iran during the war. What effect does that have on the modern economy? What would be the cost to Iran if it remained offline?
AT: So, apparently, this is the longest blackout in history, so 88 days straight. That is very surprising, because Iran is an online society. It is estimated that approximately 10 million Iranians rely on a variety of digitally enabled transactions, supply chain, and business operations. So, that’s about a third of the workforce if we add it up in those terms. That’s amazing to have that locked up.
There are, in fact, estimates by international consultants that say that a society with a high level of connectivity, which I think is a suitable description for Iran at this time, faces a daily loss due to power outages of 23 million dollars for every 10 million inhabitants. So, if you increase that number to 90 million inhabitants, you are talking about a daily loss to the Iranian economy in the order of $180 million. So, you add up over 88 days and you see the extent of the damage done here. It is an incredible disruption of basic services.
Apparently, there is a SIM card you can get from the Iranian authorities, which exempts you from this ban. It is true that you can buy a SIM which is, by Iranian standards, very expensive. And what this allows you to do is access an expanding array of different types of sites. But to get it, you have to register all your personal details with the authorities. And from the point of view of many in full-fledged online businesses – say, for example, in the crypto space – registering your business with the Iranian authorities during a war is not where they want to start. The Internet was once a zone with a degree of freedom. And one of the things that the authorities do is not only shut this down – not surprisingly, you might say, considering the wave of protests that they encountered shortly before the start of this war – but they have allowed this kind of limited access. So, right now, this disruption is just a big drag on modern life in Iran.
CA: There is a lot of diplomatic controversy over how the Strait of Hormuz can be reopened. There are already some proposals that Iran, instead of charging taxes in the ways that it has already tried to do by passing through the Strait of Hormuz, could instead charge different types of fees. How can we know if Iran still has control over this water which is the center of the world economy?
AT: I think this is a very good technical illustration of a larger and broader issue, which is that it is very difficult to imagine anything returning to normal anytime soon in this region. As soon as the Iranians feel the power that control over Hormuz gives them, which was the basis of the American strategy in the region since the Carter Doctrine of the late 70s – which is that this issue of control should not happen and that Iran should never be put in a position where it can even dream of having good control, or if it dreamed it was a very distant experience from the beginning of this war – we started badly. do we ever go back to normal? The answer is I don’t think we will in the foreseeable future.
And so, as you say, I mean, what would you do if you were Iranian? Of course, you’re going to go to the truce talks and say, “No, of course not. We’re not being taxed anymore, that would be highway robbery. It would be a fee, and it wouldn’t be a tax.”
And the amount of money involved, while important from Iran’s perspective, is less from the perspective of the tanker operators, because they are worth 100 times what Iran might be tempted to charge. And so, there will be some modus vivendi that work out. And it would be a shame on America’s part if this was simply represented as a tax.
