The Iranian Sanctions Game: A Means or an End?
2012-11-22 By Richard Weitz
The sanctions on Iran are reflective of the overall challenge of using these tools to affect a pariah regime’s behavior. They are always indirect, and can lead to enhanced regime resistance rather than compliance with the hopes and wishes of the regimes inflicting the sanctions.
Sanctions are tools for pressure; not a guarantee of a desired outcome.
And Iranian actions in Lebanon and elsewhere have not demonstrated a willingness to comply with what the sanction levelers would consider to be civilized behavior.
The United Nations and its individual members have adopted a series of increasingly severe the sanctions on Iran for its nuclear activities.
One advantage of having the UN Security Council adopt sanctions against Iran is that member states can cite them to legitimize applying even harsher sanctions against Tehran.
Various governments, especially the United States and European Union, have supplemented the UN-mandated sanctions with their own national or multinational sanctions, with measures that often go far beyond those found in the sanctions. In constructing their supplementary sanctions, these governments worked closely with Washington to develop measures that most strongly leverage their unique commercial strengths vis-à-vis Iran.
Evidence exists that the sanctions have harmed the Iranian economy, which will weaken Iran’s military capacity in the long run.
In particular, thanks to the hard work of the U.S. Treasury and its partners, the sanctions have impeded Iranian access to the foreign banks and other financial institutions. More and more foreign businesses are ceasing to engage in commerce with Iran for fear of running afoul of international sanctions that would impede their access to more lucrative Western markets. Foreign governments such as India are having trouble paying for their purchases due to Iran’s exclusion from most international banking networks. Furthermore, others countries such as China are demanding hefty discounts for any future purchases.
Anthony H. Cordesman, Bradley Bosserman, Sam Khazai and Bryan Gold have issued their latest report on the effectiveness of the sanctions imposed on Iran as one of the “fields of competition” between Iran and its adversaries, especially the United States. This team at the Center for Strategic and International Studies (CSIS) has been analyzing how the United States has employed diplomacy, sanctions, arms control initiatives, and military moves to enhance U.S. deterrence in response to Iran’s increasing conventional and missile capabilities and improving nuclear weapons potential. The hope of the United States and its allies are that these actions will deter, contain, and weaken Iran enough that the country’s economic difficulties, diplomatic isolation, and other problems will eventually lead to a more moderate regime.
Noting the minimal effects of the sanctions until 2011, the report, entitled “U.S. And Iranian Strategic Competition: Sanctions, Energy, Arms Control, and Regime Change,”[ http://csis.org/files/publication/120124_Iran_Sanctions.pdf] focus its analysis on the last two years.
During this period, the United States and the European Union (EU) have adopted a wide range of supplementary sanctions to augment those adopted by the United Nations. The sanctions restrict contacts with Iranian entities directly involved with Iran’s nuclear program, but they also apply restrictions on Iranian financial, transportation, and energy institutions as well as the sale to Iran of sophisticated computer software or materials that could be used to design nuclear-related objects such as reactors.
Due to the embracing nature of the sanctions as well as the importance of the United States and the European Union in the global economy, their actions have forced many other countries to curtail their economic links with Iran as well. For example, the Iran Threat Reduction and Syria Human Rights Act of 2012 sanctioned foreign firms that do business with Iran’s energy sector. The EU’s supplementary sanctions have included inducing the Society for Worldwide Interbank Financial Telecommunication (SWIFT) to discontinue offering its communications services to sanctioned Iranian financial institutions.
In addition, on October 15, 2012, the EU extended the sanctions to include Iran’s financial industry and central bank, Iran’s shipping industry, and its oil and gas sector. They also restrict Iran’s importation graphite, steel, and other raw materials.
Furthermore the EU sanctions prohibit the provision of flagging and classification services to Iranian tankers and cargo vessels in the EU or by EU nationals, ban vessels owned by EU citizens or companies from transporting or storing oil, and forbid EU companies from providing shipbuilding technology and naval equipment to Iran.
The newly augmented international sanctions appear to have inflicted major damage on the Iranian economy, even beyond Iran’s financial, oil, transportation, and petrochemical sectors due to the limited diversity of Iran’s economy, which remains heavily dependent on oil exports.
The sanctions have decreased Iran’s foreign energy sales and revenue, discouraged foreign investment in Iran, and wreaked havoc with the national currency.
Iranian oil exports abruptly shrank after the EU imposed a ban on Iranian imports in July 2012, depriving Iran of a European market that had previously purchased almost one-fourth of its exports. Iran’s oil revenue shrank from $9.8 billion in July 2011 to $2.9 billion twelve months later. In September 2012, Iran’s oil production declined to its lowest level in more than two decades. The Iranian currency, the Rial, has also fallen to record lows, further impeding Iran’s foreign trade and leading to widespread inflationary pressures and occasional panic inside Iran.
Since the EU embargo was implemented on July 1, 2012, exports to China have fallen by 28%, India by 45%, Turkey by 71%. The recent increase in crude oil production in Iraq and Libya has also dampened Iran’s revenue. Meanwhile, Saudi Arabia is compensating countries that forego Iranian oil imports.
Foreign direct investment in Iran has also fallen.
Due to the difficult economic and political situation Iran is experiencing an annual exodus of 200.000 people, a major “brain-drain”. Foreign companies are also leaving Iran because the cost of doing business has become too expensive. Japan’s INPEX, which had agreed to develop Iran’s southern portion of its Azadegan oilfield, withdrew from the contract due to the new sanctions.
Despite the fact that Iran has the world’s second largest natural gas reserves and thus has approximately 16% of the world’s conventional proven gas reserves, it currently only produces 4.3% of the world’s natural gas and even has limited export capabilities. Its natural gas sector is completely under-developed and used mostly for domestic purposes.
The new sanction regime has caused limitations of Iran’s ability to exploit its reserves because it does not have the technical capability and the resources to develop new oil sources and fields.
Iran has tapped 75% of its known oil reserves, but due to technological constraints Iran cannot easily exploit new fields.
Although Chinese and other Asian companies have been trying to backfill for departing Western companies, most of these enterprises do not have the necessary technological know-how as to substitute for Western or Japanese companies. Iran currently loses 400.000-700.000 bbl/d due to the decline in mature oil fields and the lack of technology to prevent this decline.
The Enhanced Oil Recovery (EOR) technique which would be needed to prevent such a decline requires technological development, expertise, and investment. All three aspects are currently not available due to sanctions.
The sanctions have reduced Iran’s ability to decrease its high dependency and consumption of petroleum.
Iran has never had a refinery to produce sufficient petroleum to meet its high domestic consumer needs but has sought to improve its refining and production capabilities of petroleum. The sanctions have prevented Iran from importing the required technology and obtaining the necessary financial investment to do so.
Furthermore, numerous gas suppliers have pulled out of trading contracts with Iran, resulting in gas imports falling from 3.5 million barrels a day to roughly 900.000 bbl/d in 2010. To produce more gasoline, Iran has had to convert petrochemical plants to manufacture gasoline on a short-term basis, causing major environmental problems.
The effectiveness of sanctions has been amplified by Iran’s internal self-made economic and political problems.
The report’s authors believe that Supreme Leader Khamenei is using the deleterious impact of the sanctions to blame Iran’s economic and social problems on President Ahmadinejad, who in turn uses the sanctions to excuse his mismanagement of the economy.
After having ignored the sanctions for years, Iranian leaders have been denouncing them more vehemently and even threating self-defeating military actions, such as closing the Persian Gulf to oil shippers. At the same time, Iranian representatives have appeared more eager to resume nuclear negotiations to avert additional sanctions.
Most importantly, Iran’s nuclear program is proceeding more slowly than that of previous nuclear weapons states. The sanctions have likely made it more difficult for Iran to acquire the kinds of materials, technologies, and equipment they need to develop more advanced uranium centrifuges and other nuclear facilities, which has impeded, though not halted, their improving nuclear weapons potential. Raising the costs Tehran pays for its nuclear program also has discouraged other governments from pursuing similar activities.
The authors of the report acknowledge major uncertainties regarding the magnitude of these political and economic effects, how they are affecting Iran’s internal political dynamics, as well as whether the sanctions will moderate Iranian policy or contribute to an escalating confrontation between Iran and the United States and its EU and Gulf state allies.
The fundamental problem with the sanctions is that they have not prevented Iran from making substantial progress in strengthening its asymmetric warfare capabilities, missile programs, and especially in developing its nuclear technologies.
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