Iran’s Black Gold

Exports of Iranian crude oil jumped in January, raising concerns that the sanctions relief included in the interim nuclear agreement between Western countries and Tehran is giving a shot in the arm to the struggling Iranian economy that could weaken prospects for a comprehensive deal to derail Iranian nuclear weapons development.

Oil is the lifeblood of the Iranian economy, and Barack Obama’s administration and its allies have spent years trying to strangle its oil industry as a way of forcing Tehran to the negotiating table. The International Energy Agency’s monthly oil report estimated that Iranian oil exports spiked by about 100,000 barrels a day in January. That brought Iranian crude exports to just over 1.3 million barrels per day, worth almost $4 billion a month given the current price of oil.

Iran’s growing oil revenues come amid signs that the Iranian economy more generally seems to be recovering from the darkest days of rampant inflation and a plunging currency, suggesting that the economic stranglehold that U.S. diplomats say pushed Iran to the negotiating table may be waning. The International Monetary Fund said this week that "the pace of contraction in [Iranian] economic activity is slowing" — an assessment that hands a new weapon to opponents of the White House’s interim nuclear deal with Tehran, who have long argued that the agreement was giving Iran too much financial relief.

"We need to ask ourselves, what has this policy of appeasement produced so far in Iran? The answer is economic growth, rising oil exports, long-range missile tests, promises to send warships to U.S. waters, and declarations that Iran will never dismantle its nuclear infrastructure," Sen. Mark Kirk (R.-Ill.) told Foreign Policy. Kirk is the author of Senate legislation that would tighten sanctions on Iran if the current talks fail and one of the most outspoken critics of the Obama administration’s nuclear deal.

Crude exports are an important source of revenue for the Iranian government, but they had been slashed by years of oil sanctions organized by the United States and European countries. Before oil sanctions began in 2012, Iran exported about 2.5 million barrels per day, and exports fell as low as 760,000 barrels a day last fall.

Under the terms of the six-month interim agreement announced in November and finalized in January, Western countries relaxed efforts to continue squeezing Iranian oil exports. The partial relief, U.S. officials said, would still limit Iranian crude exports to about 1 million barrels of oil a day, but Iran is now clearly exporting significantly more than that.

The Iranian parliament passed a budget earlier this week proposed by President Hassan Rouhani based on revenue from 1.5 million barrels a day in exports. Tehran’s clerical government provides its citizens with generous social benefits as a way of maintaining some popular support.

State Department spokesperson Marie Harf said that U.S. officials are still reviewing the latest oil-export data, but reiterated that under the terms of the interim deal, Iran cannot increase its level of oil exports.

Since reaching an interim nuclear deal with Iran in November, critics have assailed the Obama administration for allegedly weakening the years-old economic sanctions, the one foreign-policy tool that seems to have worked on Iran. Administration officials have found themselves having to fend off claims that the deal is causing everything from improving inflation rates to overeager business deals.

President Barack Obama used a press conference with visiting French President François Hollande this week to warn that the United States would come down on sanctions violators "like a ton of bricks." The comment was a subtle dig at the private French trade delegation to Iran earlier this month that raised the ire of administration officials. More than 100 businesspeople went to Tehran to meet with officials and explore possible future opportunities. The group, the largest European delegation to visit Iran in 30 years, included French energy giant Total, carmaker Renault, and engineering firm Alstom.

The growing indications that Iran’s economy is recovering from the impact of sanctions have led congressional critics of the deal to warn that the United States and its allies are gradually losing leverage over Tehran.

"Since this negotiation has begun, do you agree that Iran’s inflation rate is way down, that their currency is way up, and that economic projections within the country are way up and that there are people from all over the world who are clamoring to do business with Iran?" Sen. Bob Corker (R.-Tenn.) asked Treasury Department sanctions chief David Cohen during a Senate Foreign Relations Committee hearing last week.

Cohen responded that Iran’s currency had stabilized as a result of Rouhani’s election, not the nuclear deal.

The IMF said Wednesday that the Iranian economy remains weak overall and in need of major reforms, but future prospects have been buoyed by the temporary nuclear deal struck in January that could pave the way for the lifting of sanctions. The IMF said the Iranian economy could begin to stabilize and even grow 1 to 2 percent in 2014-15 but remain "highly uncertain." The comments come after the IMF’s first trip back to the country since punishing international sanctions decimated the economy and drove down the value of Iran’s currency. The IMF is expected to finish a full report on the trip in late March.

Some economists caution that improved prospects won’t mean much if Iran can’t reach a permanent deal with the West that repeals the vast majority of the sanctions, which are still in place.

"If there is no agreement, I think the 1 or 2 percent will prove too optimistic for next year," said Iranian economist Djavad Salehi-Isfahani, a professor at Virginia Tech.

Still, the news is likely to stoke fears in Washington that the administration has given up too much in the interim deal.

Under the existing sanctions regime, revenues from Iranian oil exports are held in escrow accounts, which theoretically limits the amount of hard currency Tehran can receive. But Iran has managed to sidestep banking restrictions in the past, notably in deals with Turkey, and critics of the administration’s approach worry that greater oil exports will translate into a stronger Iranian economy.

"Iran is gaining important negotiating leverage, while the United States’ leverage is being diminished," Mark Dubowitz, the executive director of the Foundation for Defense of Democracies, told FP.

Dubowitz, a proponent of stronger sanctions against Iran, has for months warned that the partial sanctions relief included in the interim nuclear deal would offer large economic dividends to Iran. The White House says Iran would gain roughly $7 billion, but Dubowitz has said the true value of the relief is closer to $20 billion.

"That doesn’t bode well for a diplomatic solution" to Iranian nuclear weapons development, Dubowitz added.