The ongoing conflict between the United States and Iran in the Strait of Hormuz regarding maritime coercion is more and more viewed in terms of economic coercion. The fact that NI is going to create fiscal distress that, despite its prolonged nature, is ultimately going to lead to a situation where Iran is forced to make political compromise is the underlying assumption held by Washington. Tehran on the other hand seems to be of the opinion that it can endure the shock, re-uniform its networks of trade and survive the pressure. Although both readings are empirically grounded, empirical evidence indicates that reality is much more intricate, and less deterministic leaders, who are on the record, would like the public to believe.
The Iranian economy is structurally reliant on hydrocarbons but not in the simplified form which is usually assumed in policy formulations. Before the re-instatement of the strict U.S. sanctions in 2018, Iran was exporting about 2.5 million barrels of oil per day. With the resumption of sanctions, exports declined drastically, and various independent tracking estimates pegged the exports at less than one million barrels per day at some times. Traditionally, oil revenues have been a quarter-two-fifths of government revenue at various times, varying with oil price cycles and levels of exports, and external limitations on hydrocarbons is a direct limitation on fiscal capacity. Concurrently, the non-oil sector of Iranian economy has grown in relative terms, contributing now more than 60 per cent to GDP, yet it is incapable of producing stable sources of foreign currencies inflows as compared to the energy sector.
The coercive logic of the United States is an old set of assumptions: limiting exports is bound to fill the storage and cause the production to be cut, the upstream infrastructure to be damaged, and therefore a level of economic distress that will result in political concessions will be achieved. Part of this model has some historical precedents. In the years 2012 to 2015, the GDP of Iran shrank by about 6-7 percent over a period of time (IMF estimates) and inflation reached up to 35 percent per year (maximum pressure). The Iranian Riyal dropped by over 70 percent in 2018, to 2020. These numbers show that the sanctions and related factors can establish extremely macroeconomic expenses on Iran.
Nonetheless, the shrinking of the economy has never had any historical direct correlations in terms of politics. Iran has proved several times that it can adjust to the pressure and create new export outlets, take advantage of intermeddling states, export more petrochemicals, and utilize ship-to-ship transfers and floating storage solutions as ways to take the ban away. Independent maritime tracking data, even under the regimes of sanctions heavily imposed, has determined Iranian exports at various times between 400,000 and 900,000 barrels per day, demonstrating that containment is hardly ever perfect. This dynamic ability makes it difficult to precept on the notion that economic pressure per se may yield quick strategic turnaround.
The focus on storage constraints as the possible cause of production shutdowns currently present is a more tactical logical improvement of the previous sanctions reasoning. But even at this point the empirical image is not as certain as it would seem. Iran has a mix of onshore storage facilities and floating capacities in form of tankers and which can serve to act as temporary reserves. Although the estimates are varied, the common opinion among energy analysts is that these systems do not cause some sharp endings, but create some flexibility in the system. The availability of ships, routing changes, the absorption of domestic refining, and others are all partial buffers to sudden operational meltdown. Consequently, storage pressure is going to present itself in the form of a progressive restriction, as opposed to abrupt precipice.
At the domestic level, Iran definitely is undergoing a prolonged macroeconomic strain. Inflation has been within the 30 -45 per cent margin in the last few years and currency depreciation over the last 10 years has been found to be over 90 per cent against the U.S dollar. Unemployment among the youth is systemically high, with a range of estimates measuring it to be between 20-25 percent in many cases. These are signs of actual and mounting strain on family wellbeing as well as state ability. However, evidence-based research on comparative sanctions, both IMF-related as well as scholarly datasets, gives reason to believe that economic distress does not obviously correspond to change of regimes or direct policy surrender. Cases of coercive actions that manifest substantial political consequences in the absence of other occur rarely with the use of sustained sanctions, especially in those states, which have established security frameworks and adjustable daily economies.
Bilaterally, the consequences of a long-term pressure on Iran are far more than just bilateral relations. About 20 to 30 percent of the world seaborne oil trade is transited across the Strait of Hormuz and the region is therefore one of the most strategic in the world maritime chokepoints. Even minor disruptions have in the past caused temporary oil price surges of 10-25 per cent, based on market situations and inventory reserves. Such swings have a quick capacity to relay inflationary forces both in developed and developing economies, highlighting how systemic any process of escalation would be.
It is in such extensive geopolitical and economic frameworks that regional actors in the field of diplomacy gain relevance. The country of Pakistan in specific is in a structurally upright position. Being a long-time neighbor to Iran and at the same time, keeping up good strategic ties with the Gulf Arab countries, China, and having access to the western capitals, Islamabad is one of the very few regional actors which can cross-spectrum communicate. Its vulnerability to the volatility in global energy also lends credence to its interest in de-escalation, moments of slight price rise in global oil prices can cause significant strains in its import bill and its macroeconomic rectitude.
The strategy of Pakistan has always turned out to be one of non-intervention, negotiation, and stability in the region instead of joining the other blocs. Although South Asian countries have frequently been little represented on the central stage, such positioning indicates a realistic assessment that a continued unstable condition in the Strait of Hormuz or the adjacent area would have immediate repercussions on the economic and security conditions in South Asian nations. In this regard, Pakistan does not solely play the symbolic role of diplomacy, but has in place a structural role to play in the larger context of averting escalation cycles into a lasting one of confrontation.
And then, the present stalemate between Washington and Tehran shows the limitations of coercion as a foreign policy tool in and of itself. The US has already shown ability to cut down on the export volumes of Iran to a great extent and cause macroeconomic costs that can be quantified. Iran in turn has demonstrated many times over that it can adjust to highly restrictive situations without a collapse in the system. In between the two realities, there is a strategic ambiguity which economic pressure has the potential to degrade capacity, but it does not necessarily translate into political consequences.
Instead, any indication that there might be an exaggeration of the predictability of escalation dynamics is in any way positive. To Washington, the danger is believing that the cumulative pressure is bound to lead to strategic obedience. In the case of Tehran, the danger is in believing that perseverance is the only form of leverage. Under these circumstances, a diplomatic activity is not a compromise but stabilization. The regional players like Pakistan which utilize less vocal avenues of communication possibly bear more significant role than is commonly recognized in determining whether this standoff can be contained or turn into a larger crisis in the region.
