Trump's sanctions crackdown is going to cause Iran some serious economic pain

The Trump administration is tightening the economic noose around Iran. After it ditched President Obama's nuclear agreement last year, the White House reimposed sanctions on Iran. First, it cracked down on trade in minerals and precious minerals, as well as a lot of activity that flows through Iran's ports and major banks. Then it choked off Iran's oil exports specifically — but also granted waivers to eight major importers of Iranian oil.

Now the administration has announced those waivers are going away in May. After that, any country that buys Iranian oil will face sanctions and repercussions from America. The idea is to drive Iranian oil exports to zero, and cause the country enough strife that it returns to the bargaining table. Then, Trump claims, he can get a better deal than what Obama achieved.

It's hard to predict whether this will work. But one thing's for certain: Iran is in for a lot of economic pain.

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The first thing to understand is that, like a lot of developing or mid-tier countries that sit on big natural resource reserves, Iran's economy is not all that self-sufficient. It imports a great deal of food, energy, and advanced electronics and consumer goods, such as cars and other vehicles, pumps, refrigerators, engines, turbines and more.

Exactly how dependent Iran is on these imports is difficult to say. Iran claims that after importing almost half its food in 2013, it cut that amount to roughly 20 percent by 2017. But the general agreement among international observers is that Iran has to import a bunch of foods. Similarly, while Iran produces a ton of crude oil, it has to import a lot of the refined oil products — like gasoline — that citizens can actually burn to produce energy. The country's trying to become more self-sufficient in this area as well, but the project is ongoing. Obviously, if all those imports ever got cut off, Iran would be in tough shape.

This gets us to another key detail: Iran pays for its imports using U.S. dollars. Thanks to the aftermath of World War II and the Bretton Woods system, the world does the overwhelming bulk of its international trading in U.S. dollars. The traded good begins in the local currency of the producer, passes through a contract denominated in U.S. dollars, and then is eventually purchased in the local currency of whichever country imported it. Thus, Iran has to go out and get the dollars it needs to buy its imports. And the way it does that is by selling its oil to the rest of the world. In 2017, approximately 72 percent of Iran's exports were straight-up crude oil.

That gets us back to the sanctions. If they successfully cut off Iran's oil exports, then the dollars go away, and the ability to import other goods goes with them.

Iran's oil exports were already down by 60 percent as of February. And the country's economy, which enjoyed a surge after Obama's original deal eased many previous sanctions, was already projected to shrink by 3.6 percent in 2019. Now we can add the end of the waivers on top: Five of the eight countries receiving the waivers — China, India, South Korea, Japan, and Turkey — accounted for around 70 percent of Iran's oil sales in 2017. Assuming they take that business elsewhere, the squeeze on Iran will become much more severe.

The other sanctions will also matter. Among other things, they're basically aimed at cutting off Iran's ability to exchange its own currency for dollars. Not only does the Trump administration want to nix Iran's exports, it wants to nix the currency flows that would allow Iran to sell those exports regardless. Officially, humanitarian trade in things like food and energy and medicine is exempt from these financial and banking sanctions. But squashing all the other forms of trade also means there's essentially no point for a lot of foreign banks to do business with Iranian banks at all. Practically speaking, even the humanitarian trading will have a much harder time happening.

Iran is already feeling the effects of all this. Over the last year, inflation for all goods and services reportedly hit 47.5 percent in Iran. Inflation in food and drinks specifically was an even more punishing 73.2 percent. The same is happening for medicines. Basically, once Iran is no longer able to import enough of all those necessities, their supply drops relative to domestic demand. That makes the price of all those necessities jump in Iran's domestic currency, the rial. On top of that, things like food and energy are crucial inputs throughout the entire economy. Price spikes for them specifically tend to bleed into price spikes for everything. You can tell the sanctions are biting because the country is effectively importing inflation.

The black market exchange rate has also collapsed, with one U.S. dollar now going for 120,000 rials. Iran is trying to preserve the official exchange rate at 4.2 rials for every dollar, but that policy requires selling dollars to the rest of the world. And where is Iran going to get those dollars?

The country is not entirely out of options. America can only police so much of international trading, and Iran could always smuggle oil exports out through geographic neighbors. The Western powers that didn't want to ditch the original nuclear agreement are looking for ways to do business with Iran that bypass the dollar entirely. But it's an open question whether any of those efforts will bear fruit. As the world's biggest superpower, and one of its biggest economies, America's leverage here is enormous.

The more pressing question for Trump's sanctions may be whether this outcome is actually in the United States' best interest. As Trump's own ascension to the White House demonstrates, countries rarely respond to economic hardship by becoming more open to international cooperation. The president talks about Iran's rising inflation and civil unrest as if they're victories. But they could easily herald a country that is even more extreme, and less likely than ever to come to the bargaining table peacefully.