On May 15, two top officials in the Obama administration claimed U.S. sanctions are having a growing impact on the Iranian economy, the regime’s political calculations and Tehran’s foreign policy. The following are excerpts from the testimony of Under Secretary of the Treasury David S. Cohen and Undersecretary of State Wendy Sherman before the House Foreign Affairs Subcommittee.
Secretary of the Treasury David S. Cohen
Since my last appearance before this Committee, the scope, intensity, and impact of U.S. sanctions on Iran have expanded through the enactment of legislation, the adoption of executive orders, and the energetic implementation and enforcement of the entire sanctions framework. These efforts have heightened the economic pressure and imposed a very significant strain on the Iranian regime…
Petroleum Sector Impacts
U.S. and EU sanctions on Iran’s petroleum sector have been particularly powerful… Iran’s crude oil and condensate exports have dropped by roughly 1.3 million barrels per day, or some 50%, between the enactment of the NDAA and early 2013. The EU’s decision to ban the import of oil into Europe, effective in mid-2012, contributed in no small part to this fall. These lost sales cost Iran between $3 billion and $5 billion a month. Iran’s petrochemical exports have also been hit, decreasing by at least 7.6 percent in 2012 from the previous year…
Economic Impacts
As Iran finds it increasingly difficult to earn revenue from petroleum sales and to conduct international financial transactions, Iran’s economy has been severely weakened. Iran’s own economic mismanagement has only exacerbated these effects…
Treasury assesses that in 2012 Iran’s GDP fell by some 5 to 8 percent – the largest drop since 1988, the final year of the Iran-Iraq war, and the first contraction in twenty years. This decline has impacted the Government of Iran’s budget, causing it to run in 2012 its largest deficit in 14 years, which could amount to some 3 percent of GDP. We believe Iran’s GDP will continue to shrink in 2013 in the face of reduced government and consumer spending and declining oil exports, as well as the ramping up of additional sanctions. Iran’s economic contraction is manifest in its recent budget bill, which projects almost 40 percent less oil revenue than did the previous year’s budget law. To help make up the shortfall, Iran’s parliament is currently considering tax increases of some 38 percent. And in March, Iran’s Supreme Audit Court released figures showing that for the first nine months of the Iranian year only 53 percent of projected budget revenues had been realized.
We have also begun to see the impact of the bilateral trade restriction... This measure has limited Iran’s access to its foreign exchange reserves and impeded the Government of Iran’s ability to support the rial. Supported by our extensive outreach efforts, this powerful provision is rendering Iran’s reserves increasingly inaccessible.
Iran’s currency also has been hit hard. At the beginning of 2012, one U.S. dollar purchased 16,000 rials in the open market. As of April 30 of this year, one dollar was worth about 36,000 rials.The open market value of the rial has lost over two-thirds of its value in the last two years.
Faced with a rapidly depreciating rial, in September 2012 the Central Bank of Iran established a Currency Trading Center (CTC) to allocate foreign exchange for certain preferred imports at a preferential rate of about 24,000 rials to the dollar. Apparently faced with dwindling supplies of hard currency, just a few weeks ago the Central Bank of Iran substantially limited the list of imported goods that qualified for the CTC’s preferential rate.
Inflation, partly due to the volatility and depreciation of the rial, is another telling metric. As of April 20, 2013, the official Statistics Center of Iran twelve-month average inflation rate was approximately 30 percent, while the point-to-point inflation rate was nearly 39 percent. Independent analysis suggests the actual inflation rate is significantly higher.
These figures become increasingly stark when we compare Iran to its neighbors or similarly situated countries. Compared to groupings of countries in the Middle East and Africa, Iran’s stock of foreign capital, as measured by the Bank of International Settlements, is down 57 percent for the two-year period ending December 2012, representing a reduction in lending of some $9.5 billion. This figure contrasts with a 13 percent increase in BIS banks’ lending exposure to all developing countries. (See Chart 2, appended.) This shortage of capital is at least one reason why Iran’s automobile sector is now encountering significant difficulties, manufacturing at some 50 percent of nominal capacity and facing substantially reduced exports.
Claimed Impact on Humanitarian Trade
There have been some reports of shortages of some medicines in Iran, and that some banks may be reluctant to process payments for the export of pharmaceuticals and other humanitarian goods to Iran. At the same time, however, we have also been told by major pharmaceutical companies that they are able to deliver their products to Iran and receive payment.
Regardless of this discrepancy, we take this issue very seriously. President Obama has made clear that we have nothing but respect for the people of Iran. The goal of our sanctions on Iran is to expose and impede the Iranian government’s continued pursuit of its nuclear and ballistic missile programs, and to help persuade the Iranian leadership that its only viable choice is to come into compliance with its international obligations.
That is why it has been the longstanding policy of the United States to allow the export to Iran of humanitarian items, such as food, medicine, and medical devices. Our sanctions broadly authorize the sale and export to Iran of nearly all types of food and medicines, as well as basic medical supplies. No special permission is required to sell these humanitarian goods to Iran. And foreign financial institutions can facilitate these permissible humanitarian transactions, as long as the transaction does not involve a U.S.-designated entity, such as a bank sanctioned for supporting Iran’s nuclear program.
To allay any concerns or misunderstandings, several months ago Treasury’s Office of Foreign Assets Control (OFAC) published detailed guidance clarifying our long-standing policies regarding humanitarian assistance and related exports to the Iranian people…
Despite our efforts to isolate and pressure Iran, we know there is far more to do.
As Secretary Lew has said, “We will exhaust all diplomatic and economic means we can.” What remains to be seen, he noted, is whether this will “change the mind of the regime so that it [is] ready to, in a diplomatic process, give up the pursuit of nuclear weapons. That is the goal.”
Undersecretary of State Wendy Sherman
Iran’s leaders want the world to think of their country as a legitimate power and a regional leader. Yet, the costly and destructive decisions the regime is making day after day undermine Iran as a credible player on the world stage. What’s more, Iran’s policies—from its nuclear weapons ambitions, to its destabilizing regional activities, to its abysmal record on human rights—create a range of challenges to the United States and every country committed to peace and stability.
The Obama Administration takes every single one of these challenges seriously. We know that our success depends on effective collaboration here in Washington and with our allies and partners around the world. We’re pursuing a number of avenues to deal with Iran: resolutions and other actions at the United Nations, the Human Rights Council, the IAEA, and other multilateral organizations… wide ranging sanctions… ensuring we have the appropriate force posture…leveraging bilateral relationships to raise a red flag when Iran seeks to open up a new Embassy … and engaging the Iranian people through virtual diplomacy. Every day, every bureau in the State Department has their eye on Iran. We’re making clear that Iran’s international legitimacy and the end to their isolation depends on the choice Iran’s leaders are facing right now: change course, or continue to pay the cost of intransigence…
We’ve put in place a dual-track policy of ratcheting up pressure in the form of sanctions and other measures while pursuing a diplomatic solution.
The sanctions have hit the Iranian economy hard. Iran’s crude exports have plummeted, costing Iran 3-5 billion dollars per month; the rial has depreciated more than 50% over the past 12 months; and official inflation is at 32.2 percent, although informal estimates are significantly higher. Even with the sanctions in place, we’re making sure that humanitarian trade continues so that the Iranian people aren’t facing terrible hardship.
At the same time, we and our P5+1 partners are pushing for a diplomatic solution…
We are clear eyed in our approach to the P5+1 talks and seek concrete results. After all, while the window for negotiation is still open, it will not remain so forever. We will give diplomacy every chance to succeed. But ultimately, the onus is on Iran.
Beyond Iran’s nuclear ambitions, we’re also concerned about the destabilizing influence Iran is casting across the entire Middle East and beyond. Support to the Asad regime—their closest ally—is sustaining the campaign of violence against the Syrian people. Their aid to terrorist organizations is threatening our ally Israel and innocent civilians worldwide.
That’s why we’re deepening our military partnerships across the region, particularly with Israel and the Gulf, to defend against attacks from the very groups supported by Iran’s leaders…
And of course, we are deeply concerned about the campaign of repression Iran’s rulers are waging against their own people. Abuse of those who speak out against their government, and harassment of their families. Students, lawyers, journalists, and bloggers facing endless intimidation, discrimination, and incarceration. Desperate and vital voices—whether in a town square or on a Twitter feed—stifled and punished.
Over nearly five thousand years, Persian civilization has given the world innovations in culture, art, medicine, and government. But today, that historic greatness has been set back. The limitless potential of Iran’s people has been stifled. As President Obama said in his Norwuz message, all nations would benefit from the talents and creativity of the Iranian people, especially its youth. Every day that Iran is isolated from the international community is a day we’re not working together, building together, sharing history and learning about one another. Today, the U.S. and Iranian national wrestling teams are facing off at Madison Square Garden in the sort of people-to-people exchange that can be important to building relationships with other countries and cultures. But sadly, this show of healthy competition and good sportsmanship is an exception…
We are closely watching the upcoming election. Four years ago, the Iranian people spoke out for human rights, basic dignity, and greater opportunity. The regime responded by shooting demonstrators in the streets and frightening families in their homes…
We take no sides in the election, but we know that the desires and aspirations of the Iranian people must start with free, fair, and transparent elections...