How Russia might study Iran to stave off collapse from sanctions

How Russia might study Iran to stave off collapse from sanctions

Russia is facingan incoming economic storm after its invasion of Ukraine.

Learning lessons from how Iran has coped with global sanctions may be key, reports Ahmed Aboudouh Ahmed Aboudouh @AAboudouh | 1 day ago

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It was relatively quiet in Russi ’s financial markets when the Ukrainian were initially pummelled one after another. Then the hit came.

cities

The US, UK, EU, Japan and other governments announced strong economic sanctions that left Moscow scrambling to contain what will likely be a calamitous long-term impact on its economy.

Although it is too early to predict how bad the sanctions will prove for Russia

- and officials in Moscow have talked tough by claiming that Vladimir Putin “doesn’t care” about them - it is already clear the impact will be severe despite Kremlin bravado.

Already. just a little more than a week into the war, the rouble has plummeted, interest rates have been doubled to more than 20 per cent and

the stock exchange closed.

How the Russian economy copes could be key to ending the conflict. But if Moscow needs any pointers in how to live with long-lasting and wide-ranging sanctions, Iran could be the one country that could help.

Tran was first hit by UN sanctions in 2006 after failing to pause uranium

enrichment.

In 2012, Iran too was removed from the Swift banking

system - the servi

responsible for facilitating billions of dollars worth of transactions every day — had its energy sector targeted by UN and western-backed restrictions, and its central bank hit by wide-ranging sanctions for violations of curbs linked to its

nuclear programme.

In 2018, then President Donald Trump pulled the US out of the 2015 Iran

nuclear deal, also known as the Joint Comprehensive Plan of Action (JCPOA),

which is being renegotiated now by Iran and the major powers. Washington then imposed severe third-party sanctions targeting several sectors of the

Iranian economy, most crucially the oil and gas industries that Iran relies on,

to prop up its budget.

For more than a decade, Iran’s government commanded a restructuring of the

national economy in a bid to respond to the western sanctions as part of what it calls the “r istance economy” policies.

But the real response was bottom-up and came from citizens and small businesses trying to survive what was supposed to be a back-breaking economic war of attrition. In the end, the Iranian economy did not collapse.

Some of the measures placed on Russia are the equivalent of a nuclear financial war, including removing Russia largely from Swift.

This measure, in particular, prompted a bleak view about the future of the Russian economy as, unlike Iran, Russia’s deep economic connectivity with the world could prove a disadvantage.

“Russia is facing a full-on economic collapse in the long-term, and there is nothing Putin can do to stop it,” said Maximilian Hess, a fellow at the Foreign Policy Research Institute, a think tank.

“Thi:

the risk of being really integrated into the world econom

He added: “We are seeing a de-financialisation of the Russian economy. A

Anti-war protest against Russia

York City

Crucially, the sanctions have not, so far, at least, hit Russia’s energy exports, a missing vital link in the economic war.

This is not, however, the first wave of sanctions Russia has suffered in recent

years.

The Kremlin seems to have anticipated that the geopolitical showdown with the west over Ukraine, unfolding since Moscow’s annexation of Crimea in 2014, might quickly decline to the point of an all-out economic war.

To prepare, Russia has since gradually reduced its external debt. The central

bank has built an extensive portfolio of foreign investments abroad as part of a contingency plan to sustain the cash flow that the Russian economy would need to survive for a long time.

But miscalculation seems to be the common theme in Mr Putin’s moves.

Primarily, the Russian president did not foresee the extent of western unity and scope of economic retaliation in case of a Russian invasion of Ukraine.

And even the most optimistic experts suggest this would have dire consequences on the nation’s economic health. e

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Russia is facing a full-on economic collapse in the long-term, and there is nothing Putin can do to stop it Maximilian Hess, fellow at FPRI think tank “There is no doubt that the sanctions will cause a significant shock to the

Russian economy. If the Iran sanctions shocks of 2012 and 2018 are any guide,

Russia’s

economy could contract between 6 to 7 per cent,” said Esfandyar

Batmanghelidj, founder of the economic think tank Bourse & Bazaar and

fellow at the European Council on Foreign Relations.

Economists will monitor the Russian economy’s response to the initial

sanctions’

shock in the coming weeks and months. A Russian adjustment

similar to the one Iran has mastered still possible. After all, the two countries

share multiple economic similarities.

Both are major oil and gas exporters and rely heavily on the two sectors to

balance their sheets. The state is central to running the market and controls large swaths of investments and strategic assets.

Like Iran, “the key challenge for the [Russian] government will be to stabilise the currency markets and to minimise the fiscal deficit. Both measures are critical given the risks of skyrocketing inflation. On this front Russian forcign exchange reserves are significantly greater relative to the size of the economy than Iran’s reserves”, Mr Batmanghelidj told The Independent.

Iranians suffered the “Russia is also less dependent on energy exports as a proportion of total exports and total government revenue than Iran was before the imposition of western financial and energy sanctions in 2012. This suggests that Russia is

better positioned to manage the currency and fiscal crises.”

There is also the fact that economic integration goes both ways. While the set of sanctions used against Iran, including the oil embargo, did not hurt the US

or Europe, a similar package of sanctions on Russia may be detrimental to the

west and other major powers such as India and China. This makes compliance with a potential energy boycott on Russia unlikely. at least now.

On the geopolitical front, Iran and Russia have large military power, suffer from long-lasting anxiety about American military bases close to their sphere of influence and share borders with staunch allies to the west. They also share strategic modus operandi of waging wars in their neighbouring countries via proxies, Yemen, Syria, Irag and Lebanon in Iran’s case, and castern Ukraine’s Donetsk and Luhansk in Russia’s case.

Regime insecurity, both in Russia and Iran, is central to this effort. While

wide-ranging economic sanctions have, in some cases, been intended as a tool to stir domestic unrest, analysts believe Iran has proven economic warfare is not enough for regime change. But it will still cause major troubles for Mr Putin.

“Russia may be able to stave off economic collapse in the face of sanctions,

but sanctions will continue to cause acute economic hardship for millions of

people. This will continue to pose a political challenge for the Russian government,” Mr Batmanghelidj said.