How Trump's terrorist designation of Iran's revolutionary guard impacts its economy

The President Donald Trump administration announced its plan this week to officially designate Iran’s military unit, the Islamic Revolutionary Guard Corps (IRGC), as a foreign terrorist organization (FTO), effective April 15.

The unprecedented move garnered swift reaction from critics as well as the Iranian government, which subsequently labeled the U.S. a terrorism supporter and Centcom, U.S. Central Command, a terrorist group.

By definition, terrorists are non-state actors — so this designation for a foreign government’s military is a major first on the international stage.

But with Iran’s economy already resembling that of a basket case, how much does this really change things?

“The economics are expected to be minimal because the IRGC is heavily sanctioned, and international companies have to be incredibly cautious engaging in business in Iran,” Sanam Vakil, a senior fellow at Chatham House and associate professor at Johns Hopkins School of Advanced International Studies, told CNBC via phone.

“And under the climate of sanctions already, Western companies have withdrawn so there is little impact there.”

Iran’s economy shrunk by 1.5% last year and is expected to contract by 3.6% this year, according to the International Monetary Fund, compared to 3.8% growth in 2017 before sanctions were re-imposed by the Trump administration after the U.S. withdrew from the Iranian nuclear deal in May 2018.
The IRGC’s role in the Iranian economy

Much like a conventional military agency, the IRGC, about 125,000 members strong, has ground forces, an air force, missiles, drone forces and naval units. But it’s also heavily present in Iran’s business sector. With the authority to engage in commercial activity in Iran, it controls an estimated 20% of the country’s overall economy, according to some experts.

"The symbolism is very important here. The Trump administration is upping the ante... because their policy as it stands today has yet to see any change in Iranian behavior." -Sanam Vakil, Associate professor, Johns Hopkins School of Advanced International Studies 

Formed in the wake of Iran’s 1979 revolution, the deeply ideological IRGC was designated by Washington as a specially designated global terrorist (SDGT) and sanctioned under the Countering America’s Adversaries Through Sanctions Act (CAATSA) in 2017.

Iran has been listed as a state sponsor of terror by the U.S. since 1984, and in 2007 its foreign operations wing, the Quds Force, was labeled an SDGT.

Many experts agree that the FTO label won’t significantly deepen the impact that previous designations have already had. Inflation and unemployment in Iran are skyrocketing, with the sanctions compounding an economy long made stagnant by decades of mismanagement and corruption.

Oil exports, central to Iran’s revenue, have dropped from around 2.5 million barrels a day before Trump’s sanctions to just over 1 million per day now.

“The symbolism, however, is very important here,” Vakil said. “The Trump administration is upping the ante in their maximum pressure campaign, because their policy as it stands today has yet to see any change in Iranian behavior.”

In the past few years, Iranian-backed proxy activity in the Middle East — including support for Houthi rebels in Yemen and for Bashar Assad’s forces in Syria — has only continued or increased.
So what’s new?

Still, the designation introduces some important changes.

The most significant angle about the FTO label, says Behnam Ben Taleblu, an Iran specialist and senior fellow at the Washington D.C.-based Foundation for Defense of Democracies, is law enforcement. He argues that the designation is more consequential than its critics say.

“An FTO designation of the IRGC further enlists law enforcement to compliment the Treasury and State Departments which have traditionally been in the sanctions business,” Ben Taleblu told CNBC via email.

It “enhances Washington’s ability to punish those who provide material support to the IRGC … Banks, businesses, and other financial institutions will have to tread even more carefully if they continue to transact with Iran.”

Indeed, the FTO label makes it a crime to knowingly provide material support to the IRGC. It also puts immigration restrictions on anyone who’s ever been linked to the IRGC, potentially blocking them from entering the U.S.
A potentially risky precedent

Putting the IRGC on the State Department’s FTO list is the latest in the administration’s campaign against Tehran, which aims to force it to the negotiating table to relinquish its ballistic missile program and support for proxy groups across the region.

But “it is an action heavy on messaging with few practical advantages,” Matthew Levitt, a counterterrorism and intelligence program director at the Washington Institute and former U.S. Treasury official, wrote in an analysis piece this week.

He and several other experts worry that the decision “could prompt other governments to follow suit and apply their own reciprocal designations to U.S. or other allied government agencies.”
Will it actually work?

“Rather than adjusting their policy and trying to find an off-ramp to create a space for negotiations with Iran, the Trump administration is doubling down in the hope that more pressure and more sanctions will force some sort of change in the regime,” Vakil said.

Whether this strategy will work is yet to be seen — for Ben Taleblu, it’s a clear and crucial message to the IRGC that if they want to rejoin the international marketplace and get off the terrorist list, “they must divest themselves of the capability and intent to carry out terrorism.”

Vakil disagrees. “The current pressure campaign will definitely not produce a change in behavior. Iran is also doubling down,” she said. “If the Trump administration wants results they need to create off-ramps from this zero-sum strategy, not more of the same.”

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