What are the implications of activating the snapback mechanism on the Iranian economy?

SadaNews - The Iranian nuclear file has entered a new critical phase after France, Germany, and Britain announced before the UN Security Council that they would activate the automatic return mechanism for sanctions, known as the "snapback mechanism", within 30 days unless a new agreement is reached with Tehran.

This move - which comes after a decade of freezing UN sanctions following the signing of the nuclear agreement in 2015 - quickly reignited concerns in the Iranian markets. The dollar surged to more than one million Iranian rials, and gold prices increased sharply, in a scene that reflects the sensitivity of the Iranian interior to any threat of renewed international pressures.

Back to pre-nuclear agreement conditions

Economist Isaac Saidian believes that activating the mechanism will effectively return Iran to the atmosphere before the nuclear agreement, when it was subjected to a series of UN sanctions between 2006 and 2010.

In his conversation with Al Jazeera Net, he states, "Six resolutions issued by the Security Council will be reinstated, the most important being those that imposed banking and financial sanctions, restrictions on maritime shipping, and a ban on investment in the oil and gas sectors". He adds that these measures were some of the heaviest burdens faced by Iran before the signing of the nuclear agreement.

Saidian continues, explaining, "The more dangerous aspect of the return of sanctions is the possibility of opening the door to placing Iran under Chapter Seven of the UN Charter", considering that this poses a significant strategic threat.

However, Saidian sees that the crisis is not limited to sanctions alone, as Iran has been suffering from a severe electricity and water crisis for months, which has directly affected industrial and agricultural production. He points out that industrial cities only receive electricity for limited hours each week, while farms and the poultry and heavy industries are facing difficulties in continuing operations.

This situation has prompted many investors - according to Saidian - to withdraw their funds abroad, accelerating the collapse of the rial. He adds, "With the activation of the mechanism, the size of the Iranian economy will shrink further. We will witness a new decline in GDP and an additional decrease in the value of the national currency."

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For his part, economist Payman Molavi indicates that the previous experience of UN sanctions, especially Resolution 1929 issued in 2010, was devastating to the Iranian economy.

He tells Al Jazeera Net that "Resolution 1929 prevented foreign investments in oil and gas, imposed extensive banking and insurance restrictions, and as a result, oil exports fell from 2.5 million barrels per day in 2011 to about 1.1 million barrels in 2013". He adds, "During that period, GDP shrank by an average of 1.5% annually, while inflation soared to 35%".

Molavi believes that Iran - despite successfully raising its oil exports to 1.7 million barrels per day recently through circumvention in the black market, especially towards China - faces a greater danger. He warns, saying, "Activating the mechanism could reduce exports to less than 500,000 barrels per day, meaning a loss of up to 70% of hard currency revenues".

He continues, explaining that lower oil revenues will increase the budget deficit, forcing the government to print more money and increase liquidity. He states, "Previous experiences have shown that shocks in exchange rates raise the prices of basic goods by up to 50%. This puts direct pressure on the livelihood of families".

Molavi expects that the Iranian stock market will see a decline of up to 30% in the first few months after activating the mechanism. He also predicts that investors will turn to gold and cryptocurrencies as safe havens. He adds that the banking system will be directly affected by the return of financial restrictions, as the costs of transfers will rise, and government assets abroad will be frozen, reducing Tehran's ability to import basic goods.

He confirms that previous experiences have shown that financial deficits are often compensated by printing money. He believes this will lead to further deterioration in the value of the rial and deepen inflation rates.

Difficult implications

Both Saidian and Molavi agree that the repercussions will not be solely economic; they will also include the social aspect. The expected decline in GDP - projected to drop by about a third as happened between 2012 and 2015 - will lead to rising rates of unemployment and poverty. The per capita GDP will fall to about $3,000 per year compared to $4,500 currently.

Molavi points out that Iran will likely turn to the parallel economy by selling oil on the black market or using cryptocurrencies. However, he emphasizes that these paths are costly and entail corruption risks. He adds that the military and technological restrictions that will return with the UN decisions will limit cooperation with partners such as China and Russia, and will curtail foreign direct investments.

Saidian summarizes the situation, stating, "If the mechanism is activated after 30 days, the Iranian economy will return to a state worse than it was before the nuclear agreement." He adds, "The crisis today is not just about sanctions, but coincides with an internal energy crisis and an escalating financial deficit."

As for Molavi, he sees that the next phase may repeat the scenario of 2012-2015, but under even more fragile internal conditions. He concludes, saying, "The Iranian economy is about to face the toughest test in more than a decade, and its repercussions will not stop at figures, but will directly impact citizens' daily lives."

Source: Al Jazeera