Thread by @yarbatman

1. #Iran's industrialized economy is surprisingly resilient. The real test of sanctions harms is the impact on industrial output, not financial flows. Sanctions hit EU industrial exports, but Iran found other sources for key parts. Total industrial output is stable since 2012.

2. This helps explain why the initial recessionary impacts of sanctions wear off. Sanctions force a reconfiguration of supply chains, but eventually most firms figure out how to keep churning out most of their products via new suppliers (China) or re-export (via Turkey + UAE).

3. Iran has a big domestic market. Sure, it depends on exports to earn foreign currency, especially absent oil sales. But most of what is made is consumed domestically. And in the short-term inflationary pressures can actually encourage/force consumers to boost spending.

4. The sharp decline in industrial exports to Iran in 2018 is explained by the currency devaluation. The question will be whether exports to Iran rebound from China, UAE, and Turkey by the end of this year, now that the rial has stabilized but goods prices remain high.

5. The Trump administration says that their goal is to deprive Iran's government of revenue, but that's basically a way to sanitize the actually goal of driving up inflation, stoking unemployment, causing shortages—those are the real markers of the "economic war" being pursued.

6. The problem for Trump is that it's not historically clear that secondary sanctions are effective in causing economic devastation when the target gov is basically adept at economic management + when commercial actors are genuinely good at keeping things going with chewing gum.

7. I was pretty concerned late last year that the wheels would come off the bus if the devaluation of the rial combined with constrained trade to hit Iran's ability to keep its industrial output up. There are indications (like in the auto sector) that output has fallen in 2019.

8. But what is pretty remarkable is that we could be at the inflection point where industrial actors readjust and the economy keeps ticking along. At the very least, Trump has about a year left this term. There is little doubt Iran can make it through at least to the US election.

9. In the long-run, the erosion of Europe's role in Iran's industrial base would result in Iran falling (further) behind peer countries like Turkey and if total production doesn't rebound soon, you could start talking about a lost decade of industrial expansion.

10. But there is a huge difference between an Iranian assembly line getting mothballed and it producing at the same rate year after year. That—and not frozen assets or oil sales—is the fundamental difference between the success or failure of Trump's maximum pressure campaign.

11. Obama's sanctions worked because economic stagnation was politically inconsistent with the mandate of the newly elected Rouhani administration. But there are political factions in Iran (as in Russia + Turkey) that would justify stagnation for the sake of "resistance."

12. The flaw with the economic war Trump has pursued is that it is so far from creating an existential threat to Iran it will more likely just strengthen political actors who are less interested in economic growth and by extension global engagement. They won't feel the heat.

13. To put this into context, Italy's economy growth in per capita income over the last *two decades* is basically 0. Sure, Italians were better off than Iranians on average to start, but Iran is not even one decade into its "zero-growth" period.

14. Just like the economic readjustment seen in the trade data, the country's politics have a long way they can still evolve to account for the possibility of a prolonged period of unilateral US sanctions and the related impact on growth.

15. Policymakers in DC need to ask themselves, if the
"economic war" on Iran is only likely to achieve economic stagnation, and if economic stagnation encourages a more illiberal politics in a still stable regime, then isn't this a totally ill-conceived strategy?

16. Yes it is.

But the reason why no one has dealt with this question is that not a single relevant stakeholder in DC has an actual understanding of Iran's industrial base and its bearing on the country's economic resiliency.

The fog of an economic war.