US president Joe Biden made a revealing slip-up in a speech addressing Russia’s invasion of Ukraine last week. “Putin may circle Kyiv with tanks,” he said, “but he’ll never gain the hearts and souls of the Iranian people.” With this snafu, the president spotlighted an altogether different economic war still being fought by the US today; its decade-long sanctioning of Iran. Indeed, the sanctions that the US has announced it will be imposing on Russia’s central bank are formally the same as those it imposed on Iran in 2011.
With that context, it is helpful to understand Iran not only as a template for the US’s unprecedented economic attack on Russia, but as a warning against the deployment of sanctions as a counterproductive measure, which will dispossess millions of ordinary Russians, entrench the government’s power and escalate the conflict.
A cautionary tale.
Iran is the only country in living memory that has experienced such extra-territorial banking sanctions for a sustained period. In response to what the US said were its illicit nuclear activities, the US and its allies embargoed the country’s oil and cut off its bank – crucially its central bank – from global dollar trade in late 2011.
As is happening with Russia today, the first consequence of the US’s sanctions against Iran was the drop in value of its domestic currency, the rial – a crisis that was exacerbated by Iranians scrambling to trade their money for Tehran’s dwindling dollars reserves. As a result of this growing economic chaos, the personal savings of millions of people were wiped out and the country’s sizeable middle class shrunk to include only those with significant holdings in foreign currency or gold – or who had government connections that allowed them to access the limited amount of dollars.
With its economy in free fall, the Iranian government was forced to improvise and make quick decisions to contain the damage. A new elite of so-called black knights was rapidly empowered to sell Iranian oil on the black market, smuggle dollars into the country, or buy up rials illegally to keep its currency afloat. Largely unaccountable, they embezzled billions from the Iranian economy.
Unscrupulous private citizens also took advantage of the chaos. With the government forced to sell its scarce dollars at a subsidised rate to ensure the basic functioning of its economy, well-connected traders exploited the system for their own financial gain – over-invoicing their imports (luxury sports cars bought from Dubai, for example), then selling them on the black market value allowed them to turn a tidy profit. Similarly, smaller traders exploited fuel subsidies by selling relatively cheap Iranian petroleum in Turkey and Iraq.
Meanwhile, millions of ordinary Iranians bore the economic brunt of the sanctions. With inflation rising, the government effectively hung the poor out to dry, as it prioritised the protection of Iran’s core economic interests: food, energy and military procurement. This meant slashing welfare and violently suppressing the growing unrest in response to mass lay-offs and inflation-battered wages. Another particularly dire consequence of the sanctions was their role in preventing lifesaving drugs from reaching the country, despite there being special exemptions for medical supplies. During this period, rates of inequality, addiction and suicide – particularly public self-immolations – rose significantly – and, crucially, have never waned.
While the sanctions created serious challenges for the Iranian government, they also offered the political advantage of serving as a scapegoat for much of the public’s anger. “The only effect that these unilateral sanctions will have on the Iranian people is that they will deepen the hatred and enmity towards the West in the hearts of our people,” said Iran’s supreme leader Ayatollah Ali Khamenei in 2012.
The sanctions also provoked the militarisation of the Iranian state and resources, which were used in retaliation against the US. With the private sector hit by a credit crisis and foreign firms no longer doing business with Iran, the Islamic Revolutionary Guard Corps, a paramilitary that answers directly to the supreme leader, was able to win huge no-bid contracts in fields such as construction and telecoms. With no way to measure up to the economic might of the US, the Guards were also tasked with extending Iran’s paramilitary footprint in Iraq, Syria, Lebanon and Yemen. Iran also accelerated transfers of missile technology to the borders of Israel and Saudi Arabia, the US allies in the region.
In a revealing report on Tehran’s response to the sanctions, whose authors gained access to senior members of the government, one official explained how US economic war had militarised the Iranian state. “Why would we want to bring about an end to the sanctions?” asked one senior Iranian government official. “In the current situation, we can apply for any type of budget and any resources and the state allocates and approves all that we need. If there would be no economic war or no sanctions, then our resources would become limited.”
Russia is even more of a threat.
While the comparison between the two countries only goes so far, these same dynamics are likely to play out in Russia, which is also an authoritarian state with historical antipathy towards the US and an economy dominated by fossil fuel exports.
What’s more, it is possible that the sanctions against Russia could be even more counterproductive. Iran was less prepared than Russia for the sanctions and has less means at its disposal to fight back against them. Meanwhile, Russia, has been trying to sanction-proof its economy for years – at least since it was sanctioned over its annexation of Crimea in 2014. It has done this by converting a significant amount of its numbers into gold, running a current account surplus and having its own network of black knights on standby.
What’s more, Russia, unlike Iran, has the ability to deploy powerful countermeasures in the food and energy sectors. Russia is crucial for keeping central European homes heated, and has signaled that it would respond to sanctions by pushing European gas prices up to €2,000 per cubic metre – up to double their average price across the EU as of last year. If the sanctions bite and it chooses to escalate, Russia has the power to cut the gas supply to central Europe off entirely, selling it to China instead.
Perhaps even more significant, though less reported, is that Russia, along with Ukraine, constitutes almost a third of global wheat exports. Putin has centralised most of the country’s agricultural production and distribution around the oligarch Dmitry Mazepin, giving him control over a significant proportion of the global food supply in a warming world. “The ability to turn that tap on and off is a huge political, economic and humanitarian factor,” says Maximilian Hess, a fellow at the Foreign Policy Research Institute.
Iran, which had no comparable leverage with the west, still successfully ensured the commanding heights of its economy were protected against sanctions, thus avoiding its collapse. However, it has fared less well in striking back against the west. When it hit back against Israel for the extrajudicial killings of its nuclear scientists, its attacks were foiled in Thailand and Kenya and again bungled in India and Georgia. Russia, by contrast, is considerably more powerful and prepared to respond to war, be it military or economic.
Sanctions are an act of war.
Despite the US’s continued advocation for sanctions as a risk-free containment strategy, in reality, they are an act of war. While targeted sanctions against Russia may well succeed in achieving minor military victories in its war with Ukraine – for example, cutting off its access to Asian semiconductor supplies – draconian sanctions against its central bank are likely to further escalate tensions, and even motivate Russia to retaliate by putting up food and energy prices, thus exacerbating the cost of living crisis that is already underway in countries like the UK.
We also cannot rule out how the sanctions could change Russian military thinking in unpredictable ways. A sobering case might be worth considering. In 1941, the US froze Japan out of dollar markets to reduce Tokyo’s ability to prosecute its war in China. Historians have argued that this was the straw that broke the camel’s back and what led to Japan’s decision to strike Pearl Harbour. Similarly, sanctioning Russia over its invasion of Ukraine could trigger a cascade of escalatory measures that end in a hot war between nuclear powers.
Arron Merat was a correspondent in Tehran. He lives in London.