FREE

Sanctions against Iran

 

 

This year, the United States and its allies imposed on Iran some of the harshest sanctions in history, which resulted in a drop of over 45% of Iran’s oil exports. However, the success of the sanctions regime cannot be measured only quantitatively; the effectiveness of the sanctions applied to Iran should be assessed by analyzing also the intricate relationship between Iran’s oil and gas sector, its nuclear program, and the rivalry between its political factions. This article looks at how the new sanctions affect the different political factions within Iran, how they influence the domestic perceptions regarding the nuclear program and at some Iranian actions to counter these sanctions. It argues that the sanctions regime may be less effective due to three unforeseen factors: First, the regime in Tehran proved extremely adroit at dodging sanctions, redirecting its crude to other markets, and making the various private economic actors in Iran even more dependent on state networks. Second, the Iranian leadership used the sanctions regime to rally popular support around its nuclear program. Third, sanctions have politically strengthened the conservative factions within the Iranian leadership, and jeopardized the political position of

This year, the United States and its allies imposed on Iran some of the harshest sanctions in history, which resulted in a drop of over 45% of Iran’s oil exports. However, the success of the sanctions regime cannot be measured only quantitatively; the effectiveness of the sanctions applied to Iran should be assessed by analyzing also the intricate relationship between Iran’s oil and gas sector, its nuclear program, and the rivalry between its political factions. This article looks at how the new sanctions affect the different political factions within Iran, how they influence the domestic perceptions regarding the nuclear program and at some Iranian actions to counter these sanctions. It argues that the sanctions regime may be less effective due to three unforeseen factors: First, the regime in Tehran proved extremely adroit at dodging sanctions, redirecting its crude to other markets, and making the various private economic actors in Iran even more dependent on state networks. Second, the Iranian leadership used the sanctions regime to rally popular support around its nuclear program. Third, sanctions have politically strengthened the conservative factions within the Iranian leadership, and jeopardized the political position of the reformists and pragmatic conservatives. In its policy toward Iran, the West is currently caught between a rock and a hard place, a situation likely to continue at least until the 2013 Iranian presidential elections, when new interlocutors could emerge on the Iranian side.

The sanctions imposed on Iran on July 1, 2012 are still making headlines around the world, as tension around Tehran’s nuclear program is ratcheting up. The July sanctions, which complement the regime pushed forward by the United States, were the result of a January 23^rd 2012 decision by EU foreign ministers to ban new contracts to import Iranian crude and petroleum products and to end existing contracts (Platts, 2012). For the regime in Tehran, the July sanctions are not a novelty. The United States introduced sanctions against Iran in the aftermath of the 1979-1980 hostage crisis, when it seized billions of dollars of Iranian assets in the U.S. (Nader, 2012). Until the 1990s these measures had nothing to do with Iran’s nuclear ambitions (Reynolds and Wan, 2012). Unilateral sanctions undertaken by the U.S., such as the 1996 Iran-Libya Sanctions Act (later on known as the Iran Sanctions Act), targeted Iran’s oil sector. The Clinton administration prohibited U.S. investments over $20 million in Iran’s petroleum industry (Nader, 2012). In 1997, all trade and investment activities with Iran by American citizens and residents, irrespective of their location, were barred (U.S. Department of Treasury, 2012).

The December 2002 revelation of two secret nuclear facilities prompted a significant escalation of U.S. sanctions. Iran’s financial sector came under heavy fire as in 2005 the U.S. Department of Treasury froze assets and prohibited banking transactions of Iranian organizations and individuals assumed to be connected to the nuclear program (Reynolds and Wan, 2012). Moreover, the Treasury also managed to close an important loophole in the sanctions regime, revoking the authorization for “U-turn” transfers. This measure meant that U.S. depository institutions were no longer authorized to process transfers involving Iran that originate and end with non-Iranian foreign banks.

After 2005, the international community has responded, albeit with some delay, to Washington’s calls for multilateral/multinational sanctions on Iran. In recent years, the United Nations Security Council has passed four rounds of sanctions blocking Iran’s access to sensitive nuclear technology and freezing financial assets of the people involved in Iran’s nuclear program. Over the last seven years, an increasing number of entities, like the EU, Canada, Japan, South Korea, and Australia, seconded the U.S. in restricting Iran’s access to their financial and banking systems. For these countries, the costs attached to trading with Iran run high, as on July 1, 2010, President Barack Obama signed into law the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA). Under this law, foreign financial institutions engaging in transactions with Iran prohibited in the U.S. can be denied access to the U.S. financial system (U.S. Treasury Department, 2010). To date, the sanctions regime runs the gamut from technology transfers bans to lack of access to lines of credit, or lack of insurance coverage for oil tankers.

The regime in Tehran is anything but monolithic, which means that sanctions affect each faction inside the leadership differently. As Alireza Nader shows in his work on political factions in Iran, the Iranian political system is shaped by the interactions between two camps: the conservative and principlist factions (which includes the Supreme Leader Ayatollah Ali Khamenei, President Mahmoud Ahmadinejad, and senior leaders of the Islamic Revolutionary Guard, also known as the Pasdaran), and the reformist and pragmatic conservative factions (which includes former Primer Minister and 2009 presidential candidate Mir Hossein Mousavi, former speaker of Iran’s Parliament, the Majlis, Mehdi Karroubi, and former president Mohammad Khatami.) The conservative and principlist factions favor a self-reliant political and economic system, and a strident foreign and national security policy. The reformists and pragmatic conservatives advocate a more open political and economic system, connected with the global economy, and a less confrontational foreign and national security policy.

In the aftermath of the 2009 elections, which turned violent as the government used force against various representatives of the Reform Movement who contested the results, Mousavi and Karroubi have been put under house arrest, in unknown locations. Even if some reformists lost their ability to shape Iran’s national security policy, the effect of sanctions on Iran’s political factions cannot be ignored. Pragmatic conservatives, such as Mohammed Baqer Qalibaf, the Mayor of Tehran, Ali Larijani, the former nuclear negotiator and current speaker of the Majlis, and Mohsen Rezaee, the former head of the Revolutionary Guards, occasionally challenge the traditional conservative faction and capitalize on the rift between Ayatollah Khamenei and Ahmadinejad. Larijani is a principlist on political and economic matters, and a pragmatist on the nuclear program (which is why he was removed from the position of top nuclear negotiator and replaced with Saeed Jalili). As Larijani may run in the 2013 presidential elections, Tehran’s stance on the nuclear program can change from its current hardline position.

The ‘Achilles’ Heel’ of the Sanctions Regime: New Markets, Front Companies, and Smuggling Networks

Sanctions may have disrupted Iran’s economy, but they are far from crippling it. On July 10, the U.S. Energy Information Administration (EIA) made public its forecasts on the impact the United States sanctions will have on Iran: ‘Iranian crude oil production to fall by 1 million barrels per day [Mbpd] by the end of this year from about 3.6 Mbpd at the end of 2011, and to fall by a further 0.2 Mbpd next year’ (Platts, 2012). In the last two months, Iran’s oil production has indeed dropped by 0.65 Mbpd compared to the end of 2011 (Financial Times, 2012). But in terms of exports, Iran is faring better than expected. Some analysts predicted that Iran’s exports will be between 0.87 and 0.98 Mbpd, down from 2.8 Mbpd in July 2011 (Rhodium Group, 2012). Recent figures, however, show that Iran managed to increase its exports to 1.1 Mbpd (Financial Times, 2012). This surprising finding shows that Ahmadinejad was not mistaken when saying that ‘We have oil and the world needs it.’ So, how does Iran manage to cancel out the effect of sanctions?

To begin with, the ban on Iranian crude takes effect gradually. Many countries, especially emerging powers, are still allowed to import from Iran, provided they significantly reduce the amounts of their oil purchases from Iran. Several big oil consumers such as China, India, Japan, South Korea and many other countries both in Asia and in the EU have been granted waivers by the U.S. State Department (DOS) on sanctions against Iran (Platts, 2012). Therefore, they do not risk coming under the incidence of U.S. sanctions for doing business with Bank Markazi, Iran’s central bank. Moreover, Iran managed to circumvent the restrictions imposed on its financial sector by accepting payments in gold, foreign currency, or goods. For instance, more than a half of Iran’s oil exports to India are paid for by the state-run Hindustan Petroleum (HPCL) in rupees, rice, medicine, engineering supplies, and steel (Reuters, 2012; CS Monitor, 2012). Furthermore, the economic effects of sanctions are limited because both Iran and its customers have started to take bigger risks on crude shipping. After the EU banned the London-based Protection and Indemnity Association (P&I) from providing third-party liability and environmental liability insurance for the transport of Iranian oil, the Iranian government started shipping crude on its own tankers, backed by state insurance, as it does in the case of exports to China, its top customer (Oxford Analytica, 2012; LA Times, 2012). Japan’s increasing dependence on oil supplies, after having shut down or suspended many of its nuclear reactors, made the government in Tokyo sign multibillion-dollar insurance contracts with shipping companies, to compensate them in case of an accident (Platts, 2012). The Indian government followed suit, allowing state-run insurers to provide limited cover for Iranian oil shipments (Reuters, 2012). Without India, China, and Japan on board, Washington’s expectations regarding the effectiveness of the sanctions regime cannot be too high.

One of the biggest problems for the sanctions regime is the existence of front companies the regime in Tehran is relying on, especially for financial transactions. In the first half of July, the US Treasury identified four entities, Petro Suisse Intertrade, Hong Kong Intertrade, Noor Energy of Malaysia, and Petro Energy Intertrade of Dubai, as organizations that helped the National Iranian Oil Company (NIOC) evade oil sanctions (Reuters, 2012; BBC, 2012). Shortly afterwards, the Treasury also imposed penalties on China’s Bank of Kunlun and Iraq’s Elaf Islamic Bank for handling transactions for NIOC or its trading subsidiary Naftiran Intertrade Company (NICO) (U.S. Department of Treasury, 2012). When even front companies fail, Iran resorts to repainting, renaming, and reflagging its fleet of supertankers to avoid detection. This strategy entails the ‘swapping [of] Maltese and Cypriot flags for Tuvalu and Tanzanian ones’ (Reuters, 2012). The U.S. has so far identified 58 National Iranian Tanker Company (NITC) vessels, which it has added to its data-base with all ships owned by NITC. As it seems, so far, that Iran has managed to be one step ahead of Washington, the game of catch-up the U.S. has got involved into means that the regime in Tehran will be able to continue to evade sanctions.

Sanctions have had unintended consequences on the Iranian population in general, as Iran’s currency, the rial, has declined 40 to 55% on the dollar on the black market (WSJ, 2012). As prices are skyrocketing, Iranian citizens have turned to merchants who smuggle cheaper products from abroad. However, smuggling networks depend on the expertise and connections of former and current intelligence and security apparatus employees, many of them affiliated with the Pasdaran and traditional conservative circles. Therefore, even people who are apprehensive of the Pasdaran enable them to grow stronger, and gain a more pervasive presence in the fabric of Iranian society (Reynolds and Wan, 2012). The Pasdaran also uses charitable foundations (bonyads) to reinforce its power position within Iranian society. Bonyads, whose directors are appointed by Ayatollah Khamenei, Iran’s Supreme Leader, distribute benefits to the poor and to casualties of the Iran-Iraq war, thus having a better chance at winning hearts and minds than any Western entity.

The Security Fallout of the Sanctions Regime: Stepping Up the Nuclear Program, Achieving Virtual Nuclear Power Status¹, and Damage Control

So far, sanctions appear to have had little if any effect on Iran’s nuclear program. According to a report of the International Atomic Energy Agency (IAEA), in the first quarter of 2012, while Iran’s oil revenues were declining, the regime in Tehran more than doubled the number of installed centrifuges, from 1,064 to 2,140. Four Western governments (including the U.S. and Israel) recently reported that since the spring of 2011, Iran has been pursuing studies at the Parchin military base to determine a nuclear weapon’s explosive yield (Nuclear Threat Initiative, 2012). These developments support the argument that the sanctions regime has been a ‘blessing in disguise’ for hardliners in the Iranian leadership. The sanctions regime actually reinforces Tehran’s arguments for having a nuclear program. The total ban on transferring refining technology to Iran means that the rising internal demand for energy will not be met. As a result, the Iranian government plans to build enough nuclear power plants to generate 23,000 MWh of electricity by 2025. Although both political camps support Iran’s right to have a nuclear program, the reformists and the pragmatic conservatives seek to lessen the costs associated with Iran’s pursuit of nuclear capability, including increasing isolation from the international community (Nader, 2012). Ahmadinejad, on the other hand, thrives on the tensions around Iran’s nuclear program, since all the saber-rattling allows him to portray the international community, and the U.S. in particular, as bullies who want to encroach on Iran’s sovereignty. Hardliners have skillfully exploited nationalist sentiment in Iran to rally the general public around Tehran’s nuclear program.

Moreover, if the Iranian leadership learned anything from the Arab spring, it was probably that giving up its nuclear program was not an option in the present conditions. In the minds of the hardliners in Tehran, the Western-backed Libyan opposition managed to topple Muammar Gaddafi because the ‘Brother Leader’ committed the fatal mistake to renounce his nuclear weapons program. By contrast, North Korea kept its nuclear weapons and used them to extract a variety of benefits from the West, in particular from the US, such as food aid and technology transfers. Achieving the status of ‘virtual nuclear-weapons state,’ similar to that of Japan, would safeguard the Islamic Republic from regime change through invasion (Nader, 2012).

The sanctions regime does not have the bite its proponents were wishing for as the regime in Tehran possesses a far more sophisticated approach to security and national defense than most Western countries imagined. According to Fereydoon Abbasi, the head of Iran’s Atomic Energy Organization, Iran presented ‘false information sometimes in order to protect our nuclear position and our achievements, as there is no other choice but to mislead foreign intelligence. […]

Sometimes we present a weakness that we do not in fact really have, and sometimes we appear to have power without having it.’ These tactics resemble to a large extent the behavior displayed by Saddam Hussein in the decade preceding the 2003 Gulf War. A CIA self-analysis released on September 4, 2012 indicates that in the early 1990s Saddam adopted a ‘cheat and retreat’ policy of concealing WMD items and activities (Washington Post, 2012). The U.S. interpreted Saddam’s moves as evidence of Iraq’s denial and deception strategy and its intentions to acquire nuclear weapons. Washington and its allies remained in disbelief when Saddam decided to destroy its existing WMDs in 1995 and subsequently imposed a tough sanctions regime on Iraq. The CIA report admits that the U.S. failed to see the issue of Iraq’s WMDs through ‘an Iraqi prism.’ The Iraqis, just like the Iranians nowadays, wanted to protect ‘their reputation, their security, their overall technological capabilities.’ Reaching a compromise which allows the regime in Tehran to save face is therefore crucial for the peaceful resolution of the nuclear issue. The rejection by the permanent members of the UN Security Council plus Germany (P5+1) of Tehran’s requests to swap Iran’s stockpile of low-enriched uranium (LEU) in exchange for nuclear fuel on Iranian territory may have been a lost opportunity in this respect.

Furthermore, recent charges by Tehran that Siemens sabotaged various nuclear facilities in Iran point to a crucial aspect of nuclear technology transfers: damage control. Aladdin Boroujerdi, a prominent Iranian lawmaker, said the German technology company planted tiny explosives inside nuclear equipment acquired by Iran. Iranian experts discovered the explosives and removed them before they had detonated (New York Times, 2012). Even if no damage was actually done to Iran’s nuclear facilities, this incident suggests that supplying Iran with Western nuclear technology may provide those concerned with the proliferation risks posed by Tehran with an opportunity to surreptitiously monitor and even control the pace of nuclear development in Iran.

Sanctions and Domestic Political Factions: Putting Gas on the Conservatives’ Fire

As discussed above, the conservative and principlist factions in Iran relish the effect the sanctions regime has on the general public. As Nader puts it, the theocratic regime has used ‘velayat-e faghih’ (the rule of the supreme jurisprudent) and revolutionary nationalism to maintain its authority over Iran over the past thirty years. The hostility displayed by the international community towards Iran allows the hardliners to ‘be a lion at home and a fox abroad,’ in the words of an old Persian proverb. Abroad, ‘Khamenei-the-fox’ put forward proposals on the nuclear program which were inadmissible to the international community, such as swapping LEU for nuclear fuel on Iran’s territory, to demonstrate that he was willing to negotiate. At home, ‘Khamenei-the-lion’ seized the opportunity provided by the tightening of sanctions to claim that he successfully defended Iran’s political integrity, and marginalize other political groups. In such times of crisis, Khamenei’s authorization of the use of force on protesters in the aftermath of the

2009 elections has been slowly swept under the carpet. The reformists and pragmatic conservatives cannot advocate a less hostile approach towards the West, as for the majority of the population the sanctions imposed by international community are the source of their economic plight. Any sign of engagement with the ‘aggressors’ can be interpreted as ‘selling out’ to foreign powers and severely punished.

Consequently, Western powers have fewer and fewer genuine interlocutors on the nuclear issue in Iran, at least until the 2013 presidential elections. In the aftermath of the successes and failures of the Arab Spring, the West is caught between a rock and a hard place. On the one hand, they cannot publicly accommodate the regime in Tehran since such a move would encourage other autocratic regimes to arm-twist the West into political engagements on their terms. Moreover, if the West decided to cut a deal with the conservatives, followed thereafter by a dramatic change in government, brought about through the efforts of grassroots forces, the West would be portrayed as propping up the autocrats and indirectly helping them repress the Iranian population. On the other hand, they cannot continue the current hostile rhetoric and sanctions regime, or even worse, launch a military intervention against Iran, as such measures only fuel the claims to legitimacy of the current leadership.

Where Do These Developments Leave the West?

Western hawks argue that the ineffectiveness of the sanctions regime calls for a military attack.

Israel’s Prime Minister Benjamin Netanyahu called upon the U.S. to establish a ‘red line’ for Iran, a proposal which U.S. President Barack Obama reportedly rejected (CNN, 2012). Susan Rice, the U.S. Ambassador to the UN, pointed out that ‘there is still time for pressure to work on Iran.’ As pointed out in this article, the sanctions regime entails many unintended consequences which can imperil short- and long-term Western interests, such as the recovery of the global economy, the marginalization of hardliners in Iran, and the reversal of Tehran’s nuclear program. In these conditions, cutting the Gordian knot may involve a few uncomfortable political decisions, which nonetheless, may pay off, especially if President Obama is re-elected. Easing the sanctions regime to allow for more interdependence and engagement, at least from upcoming November until June 2013, when presidential elections in Iran are due, may deprive the conservatives and principlists in Tehran of a very useful political weapon (the image of Western bullying) and give the reformists and pragmatic conservatives a chance to re-group and re-assert themselves on the Iranian political scene.

---

FOOTNOTES:

¹ Country maintaining a latent nuclear capability, that is a coutry that does not have a nuclear military program, but has the capacity to develop a nuclear weapon in a short amount of time, if it decides it is necessary. Kenneth Waltz used the term “breakout capability” (“the capacity to build and test one [a nuclear bomb] quickly”) to describe the virtual nuclear power status in his recent article on Iran: „Iran would not be the first country to acquire a sophisticated nuclear program without building an actual bomb. Japan, for instance, maintains a vast civilian nuclear infrastructure. Experts believe that it could produce a nuclear weapon on short notice” (Why Iran Should Get the Bomb, Foreign Affairs, July/August 2012 )