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While President Barack Obama has hammered the point that the sole goal of the nuclear accord with Iran was to prevent it from building a bomb, many of America’s allies in the region are at least as concerned about a more immediate threat. They fear that an economic revival in Iran would allow it to build its military and boost its funding of proxy fighters who oppose Israel and key Arab nations such as Saudi Arabia.
Israel’s ambassador to the United States, Ron Dermer, raised that issue July 13, 2015, at a major gathering in Washington of Christians United for Israel, an evangelical group.
"That deal will not bring peace closer. It will bring war closer — making conventional war more likely today and the horrors of nuclear terrorism more likely tomorrow," Dermer said. He posted the speech on his Facebook page.
A short bit later, Dermer talked about the impact of unfreezing Iranian assets.
"The promise of phased sanctions relief looks more like a one-time jackpot for the Ayatollah regime," he said. "In a few months, this deal would give Iran $150 billion. Iran has a $300 (billion) to $400 billion economy. A $150 billion infusion of cash into Iran’s coffers is like $8 trillion flowing into the United States treasury."
Dermer did not say where he got his numbers or elaborate on his analogy. We asked the Embassy of Israel in Washington to clarify Dermer’s statement but did not hear back.
Absent hearing from the source, we assume that the underlying math runs as follows: $150 billion is half of $300 billion (the low end of Dermer’s estimate of Iran’s GDP). The U.S. economy is over $16 trillion ($18.1 billion in 2015), so half of that gives you the $8 trillion Dermer cited.
The reality of the deal's effect is much more complicated than Dermer's math lets on. And though there are issues with his numbers, the fundamental flaw is his logic.
He treats GDP, which is the sum of all goods and services generated by a nation’s economy, as if it were the same as the government’s bank account. This is sort of like saying your yearly income is the same as your checking account.
Most Americans would like that to be true, but it isn’t. The two are completely different, and so are GDP and national treasuries.
So even though it would be fair to note that Iran’s state-owned oil company accounts for a huge chunk of the country’s economy, Iran's access to that money is not like the U.S. treasury getting an infusion of $8 trillion. A government and its economy are not one and the same.
Dermer would have been on slightly firmer ground if he had said unfreezing Iran's assets would be like injecting $8 trillion into Iran's economy. But he didn't, and the analytic issues don't stop there.
There’s also a problem with the numbers Dermer used. There are different ways to estimate Iran’s GDP, but according to the World Bank, Iran’s economy is $415 billion. If we re-do Dermer’s math, that would mean the equivalent impact in the United States — regardless of Dermer’s troubled metaphor — would be about 30 percent lower than he said.
It’s also likely that Dermer inflated the size of Iran’s assets that were frozen under sanctions.
The U.S. Treasury Department estimates the value of Iran’s foreign currency reserves at $100 billion. An article in Foreign Policy magazine cited $120 billion. We don’t know where Dermer got $150 billion.
The Institute of International Finance, a trade association representing banks, insurance companies and other financial entities worldwide, ran its own numbers and settled on $100 billion.
Garbis Iradian is the association’s chief economist for Africa and the Middle East. Iradian told us that the money in those overseas accounts does belong to the government of Iran and about two-thirds of it comes from oil sales. Sanctions imposed in 2012 forbid the repatriation of those dollars to Iran.
If the deal goes into effect, there will be a delay of at least a few months before Iran’s accounts are unfrozen. First, the International Atomic Energy Agency must certify that Iran is doing what it promised. That certification is being called "Implementation Day," and when that happens, Iran will gain access to its foreign reserves.
Does that mean that all of the money will go back to Iran in a great rush? No one knows for sure.
Michael Malloy is a law professor at McGeorge School of Law in Sacramento and the author of The Structure of Economic Sanctions to be published next spring by Cambridge University Press. Malloy said the funds smooth the process when Iran needs to buy things on the international market. The hard currency is in place to transfer to the foreign seller.
"The Iranians will need those facilities," Malloy said. "Those account relationships will continue and a lot of that money will stay."
Iradian said that in theory, Iran could decide to bring all the money home, but he too suspects that is unlikely. While Tehran might tap $10 billion or even $20 billion, Iradian said the money is a hedge against shifts in the international market, especially the price of oil. (A quick term of art: A country’s current account is the balance between money going out for imports, and the money coming in from exports.)
"If oil prices drop below $50 a barrel, then the current account of the country will be negative," Iradian said. "How will they finance the gap? They will tap their official reserves."
Iradian described the Iranian central bank managers as prudent.
"The official reserve is a fall back position," he said. "It’s like you keeping money in your checking account in case you lose your job. For Iran, it has security for whenever it has difficulty meeting its foreign exchange needs."
Iradian has written that the lifting of sanctions, of which unfreezing Iranian bank accounts is a part, will provide a major boost to the Iranian economy.
Again, the effects on the economy are different from the money in Iran's treasury.
Dermer said that for an economy the size of Iran, unfreezing $150 billion of Iranian assets would be like pumping $8 trillion into the U.S. treasury. There are several problems with this claim. It exaggerates the value of Iran’s frozen assets, underestimates the size of the Iranian economy, and confuses the concepts of a country’s economy and the money in its treasury.
While Iran would gain access to foreign currency reserves worth about $100 billion, it is far from certain that the money would go directly into government spending. On the other hand, an amount of money on that scale would have a significant impact on the nation’s finances.
The numbers are off and the logic is flawed, but this statement has an element of accuracy. We rate it Mostly False.
Ron Dermer, Facebook post, July 13, 2015
Los Angeles Times, Iran trade-off: Deal could leave Iran without a nuclear bomb, but stronger, July 14, 2015
World Bank, Iran data
World Finance, Businesses pipe up as Iran and the US seal nuclear deal, July 15, 2015
U.S. Treasury Department, Testimony of Under Secretary Cohen before the Senate Banking Committee on Iran, Jan. 27, 2015
Al-Monitor, What will happen once Iran's assets are unfrozen?, May 26, 2015
Foreign Policy, Iran’s $300 Billion Shakedown, April 16, 2015
Interview, Garbis Iradian, chief economist, Africa-Middle East region, Institute of International Finance, July 16, 2015
Interview, Michael Malloy, professor of law, McGeorge School of Law, University of the Pacific, July 16, 2015
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