How Russia might use the Iran playbook to stave off economic collapse from sanctions

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

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.

Iran 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 service 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 “resistance 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.

“This is the risk of being really integrated into the world economy.”

He added: “We are seeing a de-financialisation of the Russian economy. A return of Russia to the 1991 and 1992 economic crisis is still possible.”

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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.

“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 foreign exchange reserves are significantly greater relative to the size of the economy than Iran’s reserves”, Mr Batmanghelidj told The Independent.

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“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, Iraq and Lebanon in Iran’s case, and eastern 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.