Tensions between Iran and the West have received some airtime domestically in Armenia, but the topic is under more scrutiny in international circles. In order to deduce possible repercussions of the escalation of this new hostility on the Armenia-Iran economic relationship, a brief review of recent international relations is in order. Those familiar with the recent dynamics between the West and Iran can fast forward to the second part of this article.

Background: Recent Developments in Iran and Western Relations

Relations between the U.S. and Iran have been strained for decades. Their origins trace back to the 1979 hostage-taking of Americans during the Iranian Revolution (and, in fact, even further to the nationalization of Iran’s oil industry by then Prime Minister Mohammad Mosaddegh and the subsequent 1953 CIA-organized coup against him). In the mid-2000s, further pressure was brought to bear through sanctions via the UN Security Council Resolutions (UNSCR) that specifically pointed to Iran’s nuclear programs and their possible military application. Iran denied that any of its operations were targeting military applications and insisted that it was a matter of national sovereignty to develop civilian, energy-related nuclear capabilities. In any event, this wave of sanctions targeted suppliers of nuclear inputs and related equipment, as well as asset freezes abroad.

Sanctions were further tightened at the end of that decade with hurdles put on the international activities of Iranian financial institutions. Moreover, naval operations were made more cumbersome with further regulations. That round of UNSCR penalties was said to be motivated by Iran’s ballistic missile programs.

By 2013, the economic impact of these measures was becoming apparent: these concerted efforts had made it significantly harder for Iran to export its oil. As a result, proceeds from oil and gas exports halved between 2011 and 2013. Given the reliance of the economy and state budget on oil revenues, broader effects became visible. Diminished access to U.S. dollars via the banking system as well as from oil revenues led to the depreciation of the domestic currency rate on the black market from some 10,000 rials per 1 USD to 25,000 - a dramatic move by any standards and notwithstanding stable oil prices during that period. This fed into an inflation rate of 40 percent in 2013.

By 2015 though, tensions subsided. The Joint Comprehensive Plan of Action (JCPOA) agreement, also known as the Iran Deal, was reached between Iran and the five permanent members of the UN Security Council (plus Germany). Under the accord, Iran agreed to meaningfully scale back its nuclear activity and allow in international inspectors in return for the lifting of all nuclear-related economic sanctions that would free up tens of billions of dollars in oil revenues and frozen assets. Oil exports rebounded to pre-sanction levels and economic stress decreased.

Broad optimism, both domestically and in the international community, on prospects for the Iranian economy ensued. There were discussions on how to tap into this new developing market opportunity of 74 million (with a GDP/capita of 5600 USD compared to Armenia’s 4200 USD). The Islamic Republic, long being cut off from necessary investment in machinery to revitalize everything from its Boeing fleet to oil producing equipment and car production lines, seemed to offer much to look forward to. Oil prices at still elevated levels and above $100/barrel boosted Iranian purchasing power accordingly. The economy even weathered the 2014-2015 collapse in oil prices.

Nevertheless, the optimism proved to be fleeting. By 2016, U.S. Republican Party primaries revealed skepticism about the 2015 deal negotiated by the previous administration. The leading candidate, Donald J. Trump, was especially resolute. As a result, many European and American corporations became quite hesitant to commit themselves to investments and transactions with the Islamic Republic. Banks in particular were hesitant. After the recession of 2008-2009, they had come under heavy scrutiny and charged billions of dollars in fines. Understandably, they were most reluctant to go against political currents. And, of course, without banking channels, oil revenues were difficult to collect.

The incoming Trump administration expressed several grievances. Firstly, they viewed JCPOA as too lenient. Iran’s financial maneuverability had increased dramatically while restrictions on their ballistic missile program and nuclear activities were not strong enough. Iran could presumably just “wait it out” and freeze its operations as opposed to fully discharging them while JCPOA was in force (a 15 year duration). In addition, this new economic strength had ostensibly facilitated the spread of Iran’s influence across the Middle East in places like Syria, Lebanon, Yemen and Iraq, further upsetting the regional status quo and drawing alarm from traditional U.S. allies like Saudi Arabia and Israel. As a result, the White House withdrew from JCPOA in May 2018, re-imposed sanctions and pressured the EU and other allies to substantially decrease or eliminate oil imports from Iran. The depreciation pressure on the rial resumed and it has fallen 60 percent since. (While inflationary, this dynamic increased the competitiveness of Iranian non-oil exports, an effect the IMF had already drawn attention to during the first round of rial weakness in 2013).

Iran expressed disappointment and frustration. It had complied with the agreements reached and viewed U.S. actions as unwarranted, unfair and undermining goodwill in any potential future negotiations. The nation had made meaningful sacrifices only to face reneging counterparts and investment benefits that never materialized. Europeans tried to salvage what was possible from the deal and keep Iran adhering to previously made JCPOA commitments.

This state of events most recently escalated to the retaliatory, and somewhat theatrical, seizures of Iranian and British oil tankers.

Understanding Armenian-Iranian Relations – Any Prospects for Change?

Before moving forward, a few points on the current state of events and economic interactions are in order. Unfortunately, public data, statistical or otherwise, is limited, making detailed repercussions difficult to project.

Economic relations between any two nations can be divided into several channels. Firstly, there is the obvious flow of trade of goods and services (including tourism). Then, there is labor migration and concurrent transfer flows. Thirdly, there’s the investment flow across the border. Finally, there are banking credit and transactions.