News of progress in indirect talks between the United States and Iran in Vienna has raised anxiety among the nuclear deal’s opponents both in Washington and in Tehran. They fear that getting back to the Iran nuclear deal (Joint Comprehensive Plan of Action or JCPOA) too quickly is bad for their side and are therefore urging their respective governments to abandon the talks. Curiously, both sides base their arguments on the state of Iran’s economy.
U.S. hawks argue that former President Donald Trump’s maximum pressure campaign against Iran’s economy since 2018 is about to bear fruit. The economy is sinking as we speak and removing sanctions while “Iran is on its knees” is a waste of the so-called leverage Trump has gifted to his successor.
The conservatives in Iran believe the opposite, that the economy is on its way out of the recession and in future will be more resilient to sanctions. They argue that waiting would strengthen Iran’s hand and remove any doubt that Iran is talking to Washington, however indirectly, because it is buckling under sanctions.
So, is the economy sinking or pulling out of the recession? Fortunately, there is data to answer this question without falling on partisan talking points.
National income data published recently offer no support for the view of a sinking economy. If anything, they point to a weak economic recovery. The latest estimates of Iran’s GDP for the past fall quarter (September 21 to December 20, 2020) published by Iran’s Central Bank and the country’s Statistical Center show non-oil GDP grew by about 1 percent relative to the same quarter a year ago. A similar growth rate is observed for a comparison of the first three quarters. (The two agencies publish separate but closely related estimates of national accounts.)
Reports of rising oil exports from Iran in recent months — up to 800,000 barrels per day — suggest that Iran may have finished the fiscal year that ended on March 20, 2021, with a small gain. This is at least what the IMF has concluded. Its forecasts published in the World Economic Outlook for April puts Iran’s GDP growth for the fiscal year that just ended at 1.5 percent, followed by modest growth rates of 2.5 percent for 2021 and 2.1 percent in 2022.
Curiously, the evidence to argue that the economy is sinking comes from the same IMF report — that Iran’s foreign reserves fell from $122.5 billion in 2018 to $4 billion in 2020. An article in Newsweek, penned by Mark Dubowitz and Jacob Nigel of the Foundation for Defense of Democracies, notes this as evidence of the leverage that the Biden administration is throwing away by negotiating with Iran. Sen. Lindsey Graham, a top Republican opponent of the JCPOA, sees this as Biden's bailout of Iran. Jay Solomon of the Wall Street Journal tweeted this as evidence of “a stunning collapse of the country’s wealth.” Former Secretary of State Mike Pompeo opined that the IMF data proves wrong those who argued that Trump’s maximum pressure campaign would not work. The New York Post quotes him as saying: “of course it did — $123 billion of foreign exchange in 2018, $4 billion left for Iran. We took away 95 percent of the Iranian foreign exchange reserves in just two and a half years.”
If the IMF numbers were taken at face value, these JCPOA critics would be right and Iran would indeed be facing an imminent crisis. With less than a month’s worth of foreign reserves, a run on its currency would be inevitable, with galloping inflation and shortages of food, medicine, and other essential imports not far behind.
But none of these other things are happening, so the $4 billion number is not what it seems to be. For starters, why would IMF fail to notice the coming collapse and predict economic recovery instead?
As an article in Bourse and Bazaar explained, the $4 billion figure is an estimate of Iran reserves that the IMF reached assuming that sanctions had put 90 percent of the reserves out of Iran’s reach, a claim that the governor of Iran’s Central Bank, Abdolnasser Hemmati, rejected.
In 2018, when the JCPOA made greater transparency in Iran’s international transactions possible, the Central Bank put the total value of its foreign reserves at $122.5 billion. After Trump’s maximum pressure campaign, Iran lost access to some of these reserves, but no one knew exactly how much. The IMF assumed that only 10 percent of the reserves were available and adjusted their estimate to $12.4 billion for 2019. The 2020 number, which has excited quite a few people, adjusts this number down to $4 billion after subtracting Iran’s 2019 balance of payments deficit of $8.4 billion.
Serious observers of Iran’s economy would want to know how the news of the collapse of Iran’s reserves is affecting Iran’s free currency market. There, to their surprise, they would find that speculators have been pushing up the value of the rial instead of dumping it. Since October, Iran’s currency has gained 17 percent in the free market, trading this month at under 250,000 rials to the U.S. dollar compared to 300,000 rials in October.
The gain in the rial is even more pronounced if we consider the fact that Iran’s inflation is much higher compared to its trading partners. Inflation has slowed since October, when it peaked at an annual rate of 85 percent, but it is still running at a 30 percent annual rate. Taking this inflation into account, Iran’s currency has gained one third in value in real terms since October.
The trends that Iranian conservatives are citing to argue that the worst is over for the economy, started well before the Vianna talks got underway. They believe that, if the talks fail, they will be back to building the resistance economy.
This is not to say that Iran will not bear any cost by walking away from the Vienna talks. Economic stagnation in Iran will continue because domestic resources are insufficient to cover beyond wear and tear of the capital stock. The pressure on Iran’s poor and the middle class will continue as would the pandemic.
A serious economic recovery to restore a decade of economic growth lost to sanctions would require ensuring access to the global economy. This should be Iran’s right, now that U.N. sanctions have been lifted. Iran’s leadership may be disunited on how to use the global economy — whether to reconnect to the West or move East — but it is united that, at this time, growing the economy is more important for the country than enriching uranium to 60 percent.
Djavad Salehi-Isfahani conducts research on the economics of the Middle East and is currently a professor of economics at Virginia Tech. He is a research affiliate of the Middle East Initiative at Harvard Kennedy School’s Belfer Center for Science and International Affairs. His co-authored book on How Sanctions Work is being published by Stanford University Press on February 6.
Ukraine would consider inviting Russian officials to a peace summit to discuss Kyiv’s proposal for a negotiated end to the war, according to Andriy Yermak, the Ukrainian president’s chief of staff.
“There can be a situation in which we together invite representatives of the Russian Federation, where they will be presented with the plan in case whoever is representing the aggressor country at that time will want to genuinely end this war and return to a just peace,” Yermak said over the weekend, noting that one more round of talks without Russia will first be held in Switzerland.
The comment represents a subtle shift in Ukrainian messaging about talks. Kyiv has long argued that it would never negotiate with Russian President Vladimir Putin, yet there is no reason to believe Putin will leave power any time soon. That realization — along with Ukraine’s increasingly perilous position on the battlefield — may have helped force Kyiv to reconsider its hard line on talking with the widely reviled Russian leader.
Zelensky hinted at a potential mediator for talks following a visit this week to Saudi Arabia. The leader “noted in particular Saudi Arabia’s strivings to help in restoring a just peace in Ukraine,” according to a statement from Ukrainian officials. “Saudi Arabia’s leadership can help find a just solution.”
Russia, for its part, has signaled that it is open to peace talks of some sort, though both Kyiv and Moscow insist that any negotiations would have to be conducted on their terms. The gaps between the negotiating positions of the two countries remain substantial, with each laying claim to roughly 18% of the territory that made up pre-2014 Ukraine.
Ukraine’s shift is a sign of just how dire the situation is becoming for its armed forces, which recently made a hasty retreat from Avdiivka, a small but strategically important town near Donetsk. After months of wrangling, the U.S. Congress has still not approved new military aid for Ukraine, and Kyiv now says its troops are having to ration ammunition as their stockpiles dwindle.
Zelensky said Sunday that he expects Russia to mount a new offensive as soon as late May. It’s unclear whether Ukrainian troops are prepared to stop such a move.
Even the Black Sea corridor — a narrow strip of the waterway through which Ukraine exports much of its grain — could be under threat. “I think the route will be closed...because to defend it, it's also about some ammunition, some air defense, and some other systems” that are now in short supply, said Zelensky.
As storm clouds gather, it’s time to push for peace talks before Russia regains the upper hand, argue Anatol Lieven and George Beebe of the Quincy Institute, which publishes Responsible Statecraft.
“Complete victory for Ukraine is now an obvious impossibility,” Lieven and Beebe wrote this week. “Any end to the fighting will therefore end in some form of compromise, and the longer we wait, the worse the terms of that compromise will be for Ukraine, and the greater the dangers will be for our countries and the world.”
In other diplomatic news related to the war in Ukraine:
— Hungary finally signed off on Sweden’s bid to join NATO after the Swedish prime minister met with Hungarian Prime Minister Viktor Orban in Budapest, according to Deutsche Welle. What did Orban get for all the foot dragging? Apparently just four Swedish fighter jets of the same model that it has been purchasing for years. The prime minister blamed his party for the slow-rolling, saying in a radio interview prior to the parliamentary vote that he had persuaded his partisans to drop their opposition to Sweden’s accession.
— French President Emmanuel Macron sent allies scrambling Tuesday when he floated the idea of sending NATO troops to Ukraine, according to the BBC. Leaders from Germany, the United Kingdom, Italy, Poland, and other NATO states quickly swatted down the idea that the alliance (or any individual members thereof) would consider joining the war directly. Russia said direct conflict with NATO would be an “inevitability” if the bloc sent troops into Ukraine.
— On Wednesday, Zelensky attended a summit in Albania aimed at bolstering Balkan support for Ukraine’s fight against Russia, according to AP News. The Ukrainian leader said all states in the region are “worthy” of becoming members of NATO and the European Union, which “have provided Europe with the longest and most reliable era of security and economic development.”
— Western officials were in talks with the Kremlin for a prisoner swap involving Russian dissident Alexei Navalny prior to his death in a Russian prison camp in February, though no formal offer had yet been made, according to Politico. This account contrasts with the one given by Navalny’s allies, who claimed that Putin had killed the opposition leader in order to sabotage discussions that were nearing a deal. Navalny’s sudden death has led to speculation about whether Russian officials may have assassinated him, though no proof has yet surfaced to back up this claim. There is, however, little doubt that the broader deterioration of the dissident’s health was related to the harsh conditions he was held under.
U.S. State Department news:
In a Tuesday press conference, State Department spokesperson Matthew Miller said the situation on the frontlines in Ukraine is “extremely serious.” “We have seen Ukrainian frontline troops who don’t have the ammo they need to repel Russian aggression. They’re still fighting bravely. They’re still fighting courageously,” Miller said. “They still have armor and weapons and ammunition they can use, but they’re having to ration it now because the United States Congress has failed to act.”
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Janet Yellen, United States Secretary of the Treasury. (Reuters)
On Tuesday, U.S. Treasury Secretary Janet Yellen strongly endorsed efforts to tap frozen Russian central bank assets in order to continue to fund Ukraine.
“There is a strong international law, economic and moral case for moving forward,” with giving the assets, which were frozen by international sanctions following Russia’s 2022 invasion of Ukraine, to Kyiv, she said to reporters before a G7 meeting in San Paulo.
Furthermore on Wednesday, White House national security communications adviser John Kirby urged the use of these assets to assist the Ukrainian military.
This adds momentum to increasing efforts on Capitol Hill to monetize the frozen assets to assist the beleaguered country, including through the “REPO Act,” a U.S. Senate bill which was criticized by Senator Rand Paul (R-Ky.) in a recent article here in Responsible Statecraft. As Paul pointed out, spending these assets would violate international law and norms by the outright seizure of sovereign Russian assets.
In the long term, this will do even more to undermine global faith in the U.S.-led and Western-centric international financial system. Doubts about the system and pressures to find an alternative are already heightened due to the freezing of Russian overseas financial holdings in the first place, as well as the frequent use of unilateral sanctions by the U.S. to impose its will and values on other countries.
The amount of money involved here is considerable. Over $300 billion in Russian assets was frozen, mostly held in European banks. For comparison, that’s about the same amount as the entirety of Western aid committed from all sources to Ukraine since the beginning of the war in 2022 — around $310 billion, including the recent $54 billion in 4-year assistance just approved by the EU.
Thus, converting all of the Russian assets to assistance for Ukraine could in theory fully finance a continuing war in Ukraine for years to come. As political support for open-ended Ukraine aid wanes in both the U.S. and Europe, large-scale use of this financing method also holds the promise of an administrative end-run around the political system.
But there are also considerable potential downsides, particularly in Europe. European financial institutions hold the overwhelming majority of frozen Russian assets, and any form of confiscation could be a major blow to confidence in these entities. In addition, European corporations have significant assets stranded in Russia which Moscow could seize in retaliation for the confiscation of its foreign assets.
Another major issue is that using assets to finance an ongoing conflict will forfeit their use as leverage in any peace settlement, and the rebuilding of Ukraine. The World Bank now estimates post-war rebuilding costs for Ukraine of nearly $500 billion. If the West can offer a compromise to Russia in which frozen assets are used to pay part of these costs, rather than demanding new Russian financing for massive reparations, this could be an important incentive for negotiations.
In contrast, monetizing the assets outside of a peace process could signal that the West intends to continue the conflict indefinitely.
In combination with aggressive new U.S. sanctions announced last week on Russia and on third party countries that continue to deal with Russia, the new push for confiscation of Russian assets is more evidence that the U.S. and EU intend to intensify the conflict with Moscow using administrative mechanisms that won’t rely on support from the political system or the people within them.
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Activist Layla Elabed speaks during an uncommitted vote election night gathering as Democrats and Republicans hold their Michigan presidential primary election, in Dearborn, Michigan, U.S. February 27, 2024. REUTERS/Rebecca Cook
A protest vote in Michigan against President Joe Biden’s handling of the war in Gaza dramatically exceeded expectations Tuesday, highlighting the possibility that his stance on the conflict could cost him the presidency in November.
More than 100,000 Michiganders voted “uncommitted” in yesterday’s presidential primary, earning 13.3% of the tally with most votes counted and blasting past organizers’ goal of 10,000 protest votes. Biden won the primary handily with 81% of the total tally.
The results suggest that Biden could lose Michigan in this year’s election if he continues to back Israel’s campaign to the hilt. In 2020, he won the state by 150,000 votes while polls predicted he would win by a much larger margin. This year, early polls show a slight lead for Trump in the battleground state, which he won in 2016 by fewer than 11,000 votes.
“The war on Gaza is a deep moral issue and the lack of attention and empathy for this perspective from the administration is breaking apart the fragile coalition we built to elect Joe Biden in 2020,” said Rep. Pramila Jayapal (D-Wash.), a progressive leader who has called for a ceasefire in Gaza, as votes came in last night.
Biden still has “a little bit of time to change this dynamic,” Jayapal told CNN, but “it has to be a dramatic policy and rhetorical shift from the president on this issue and a new strategy to rebuild a real partnership with progressives in multiple communities who are absolutely key to winning the election.”
Rep. Ro Khanna, a prominent Biden ally, told Semafor the vote is a “wake-up call” for the White House on Gaza.
The “uncommitted” option won outright in Dearborn, a Detroit suburb with a famously large Arab American population. The protest vote also gained notable traction in college towns, signaling Biden’s weakness among young voters across the country. “Uncommitted” received at least 8% of votes in every county in Michigan with more than 95% of votes tallied.
The uncommitted campaign drew backing from prominent Democrats in Michigan, including Rep. Rashida Tlaib (D-Mich.) and state Rep. Abraham Aiyash, who is the majority leader in the Michigan House. Former Reps. Andy Levin and Beto O’Rourke, who served as a representative from Texas, also lent their support to the effort.
“Our movement emerged victorious tonight and massively surpassed our expectations,” said Listen to Michigan, the organization behind the campaign, in a statement last night. “Tens of thousands of Michigan Democrats, many of whom [...] voted for Biden in 2020, are uncommitted to his re-election due to the war in Gaza.”
Biden did not make reference to the uncommitted movement in his victory speech, but reports indicate that his campaign is spooked by the effort. Prior to Tuesday’s vote, White House officials met with Arab and Muslim leaders in Michigan to try to assuage their concerns about the war, which has left about 30,000 Palestinians dead and many more injured. (More than 1,100 Israelis died during Hamas’s Oct. 7 attacks last year.)
The president argues that his support for Israel has made it possible for him to guide the direction of the war to the extent possible, though his critics note that, despite some symbolic and rhetorical moves, he has stopped far short of holding back U.S. weapons or supporting multilateral efforts to demand a ceasefire.
Campaigners now hope the “uncommitted” effort will spread to other states. Minnesota, which will hold its primaries next week, is an early target.
“If you think this will stop with Michigan you are either the president or paid to flatter him,” said Alex Sammon, a politics writer at Slate.
Meanwhile in the Republican primary, former President Donald Trump fended off a challenge from former South Carolina governor Nikki Haley. With 94% of votes in, Trump came away with 68% of the vote, while Haley scored around 27%.