The Severity of Energy Sector Sanctions and Their Impact on Iran’s Trade: An Application of the Gravity Equation

There have been many studies on economic sanctions and the effectiveness of these sanctions. In these studies, the sanction variable treats as one or two dummy variables (binary), to indicate at most four levels (no sanctions-mild sanctions-severe sanctions-comprehensive sanctions). Studying the effectiveness of economic sanctions requires recognizing the extent and severity of sanctions in various sectors, so it is not possible to examine the effectiveness of sanctions and any review of economic sanctions independent of the severity and extent of sanctions. To this end, in this article, we present the severity of sanctions imposed on the energy sector to a variable between zero to five to provide a better indicator to understand the pressure of economic sanctions imposed on the energy sector of Iran. We examine the effectiveness of sanctions by entering the sanctions severity variable on Iran's foreign trade with five major trading partners, including Germany, China, India, United Arab Emirates, and Turkey, based on the gravity equation through an interactive dummy variable method. We tried to present all the sanctions imposed on Iran's energy sector, between 1992 and 2018. The results show a significant and negative effect of the intensity of energy sector sanctions on Iran's foreign trade. China and UAE have the lowest response to sanctions on Iran’s Energy sector. Also, the highest reduction of trade with Iran due to energy sector sanctions is dedicated to India and Germany.