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    Middle East
     Oct 5, 2010


IRAN VERSUS SANCTIONS, Part 1
A history of failure
By Hossein Askari

This is the first article in a three-part report.

In considering the effectiveness or otherwise of sanctions against Iran, it is valuable to look first at how sanctions of one or more counties against another are "supposed" to do their job and their imposition against Iran over the past 30 years. Then before questioning whether the United States and the United Nations should continue with sanctions, we consider why these have so far failed to change Tehran's nuclear enrichment policies.

What's behind sanctions?
Economic sanctions are imposed on a country in the hope of changing what are seen as its objectionable policies. Arguably, the most famous and successful case of sanctions since World War II were imposed on South Africa in the hope that it would

 

rescind apartheid and allow a democratic South Africa to emerge. Although the sanctions on South Africa were multilateral, some countries defied the United Nations resolutions; still sanctions were sufficiently tight to force the apartheid regime to collapse.

Unilateral economic sanctions are not as effective, simply because a sanctioned country can turn to other countries for what it needs, be it export markets, import needs, technology or capital. Still unilateral economic sanctions have proliferated in recent years.

The US has been the principal country to use its economic muscle to impose sanctions (normally referred to as the "sender") on countries (the "target") whose policies it has found to be objectionable. The US has seen economic sanctions as an instrument for achieving specific international objectives while avoiding military conflicts, eliminating loss of human life and minimizing its budgetary outlays.

By some estimates, the US currently has imposed some form of economic sanctions on over 60 countries. There are a number of possible reasons why the US is by far the preeminent sender of sanctions. First, as a superpower, the US has influence and thus tries to get countries and entities around the globe to support, or at least not frustrate, its political, economic, and military agendas.
Second, the US economy is so big - representing roughly 25% of global GDP - that US economic sanctions could have an impact on a target since it could represent a significant market for a country's exports, be the supplier of choice for a country's imports, be a major source of capital flows to support a country's investment program, and so on.

Third, the US can further affect the target by asserting pressures on others (third countries and on international and regional organizations) to support US policies.

Fourth, US politicians are vulnerable to domestic lobbying by special interest groups (for example, financial donors to campaigns and representatives of a large voting bloc) who have economic or political interests in sanctioning a country (for example, the Cuba lobby).

Fifth, while the US could resort to force in pursuing economic and political ends, it is politically preferable for politicians to use sanctions, inasmuch as military engagement requires funding, results in US casualties, and can escalate; and politicians can waive the flag and brag that they have been "tough" on those who pursue objectionable policies.

The policies that the US has found objectionable have included abuse of human rights; development of nuclear, biological, and chemical weapons; support of terrorism; unlawful military engagement; opposition to a variety of US policy initiatives; exchange rate and trade policies; and financial, copyright, and patent policies. By imposing some form of economic sanction on a country, the US sends a signal of its displeasure to the target country's leadership and hopes to set in motion forces to induce a change.

The US has used a wide range of sanction instruments in relation to target countries: an embargo on all, or specific, US exports; on all, or specific, imports into the US; on US capital flows; on operations of US corporations; freezing of the target country's financial and non-financial assets in the US; and bans on travel by US citizens and flights by US airlines to the target country.

At times, the US has lobbied multilateral (eg the World Bank), regional organizations (eg the Inter-American Development Bank) and friendly countries (eg those in the European Union) to withhold their normal policies and practices toward US-sanctioned countries. Also, the US has tried to extend its sanctions' reach by threatening sanctions on third countries (extra-territoriality) and on their companies if they do not follow the US lead and impose similar sanctions against a target country (for example, the Iran-Libya Sanction Act (ILSA) of 1996) and targeting their companies with fines if they want to maintain their access to US markets (eg Credit Suisse in 2009).

Economic sanctions are presumed to set in motion a change of events that will, in time, induce the target country to comply with US wishes. The standard expectation is that US economic sanctions will inflict a quick and heavy economic burden on the target country, making life intolerable for the citizenry. The leadership, seeing the general dissatisfaction and the threat to its survival, will change its policies to comply with US wishes; or if the leadership does not change its objectionable policies, it will be over-thrown and a more US-friendly regime will come to power.

Alternatively, economic sanctions may target the leader of a country or some of the target country's elite (for example, freezing their US assets or denying them life-saving medical treatment in the US), who in turn will change the country's policies or force the leadership to do so. Rarely, if ever, do economic sanctions follow such presumed paths or achieve their intended goal quickly. These are akin to fairy tales!

This is not surprising. Target countries are not all the same. Some are more vulnerable than others. The likelihood of significant economic pain on the target will in large part depend on the economic and financial characteristics of the target; US-target economic and financial relations; and global macroeconomic and financial conditions.

The important target characteristics include: gross domestic product (GDP); GDP per capita; growth rates of GDP and GDP per capita; exports as a percentage of GDP; imports as a percentage of GDP; structure of exports, imports, and GDP; size and structure of capital inflows and outflows; and membership in regional organizations (for example, the Association of Southeast Asian Nations or World Trade Organization).

Additionally, the relative political and economic importance on the global stage of the US and the target is a critical factor in affecting the policy of third countries and of regional and international organizations. Important US–target relations include the structure and relative importance of bilateral trade and capital flows. Last, but not least, the level of global economic activity and sectoral conditions, such as an oil shortage, will affect the success of economic sanctions.

In essence, countries that don't need the US and are courted by other countries are less vulnerable to US sanctions. These would be countries that are big, rich, and/or economically diversified, have exports that are in demand the world over, are part of a regional economic or security pact, or are cohesive, democratic and with popular governments in place.

In addition to country characteristics shaping vulnerability to sanctions, the nature of the policy that the sender finds objectionable is also of paramount importance in determining the likelihood of success. Policies that are supported by the general citizenry but found objectionable (Iran's nuclear enrichment policy) by the sender are less vulnerable to sanctions. The reason is obvious. When the US wants to change a policy that is popular with the citizenry of the target, the citizenry will support the regime and will not rise up to change the policy or much less to overthrow the regime. This fact is mostly ignored when it comes to Iran (more on this in Part II).

Sanctions on Iran
US sanctions on Iran have gone through a number of changes over the last 20 to 30 years. They were imposed to change a number of policies, including opposition to the Middle East peace process, support for Hezbollah and Hamas, acquisition of nuclear and ballistic weapons, general support for international terrorism, and hostility toward the US. But the objectionable policy that has been at the center of it all for about the last 10 or so years has been Iran's secret, and now open, nuclear enrichment policies.

An examination of 30 years of sanctions demonstrates how ineffective they have been. In 1979, the United States froze Iranian financial assets but returned the frozen assets after the Algiers Accord in 1981, an agreement brokered by Algeria between Iran and the United States to solve the hostage crisis. The unresolved item was the foreign military sales assets (FMS). Washington had confiscated military equipment that Iran had paid for - some of it the United States used and some rotted in storage - and the US has been engaged in a tedious process at The Hague to compensate Iran on a line-by-line basis.

The United States banned the importing of Iranian crude into the United States, but allowed refined products to enter the country. Then there was a ban on importing refined products and of all non-oil products from Iran, so Iran sold all it had to sell to other countries, albeit in the case of non-oil exports at a slightly lower price. Iran hardly felt even a side blow.

In the mid-1980s, the United States embargoed all US exports to Iran. You surely wouldn't know it if you have been to Tehran, where most American goods are abundantly available, sometimes at a lower price than even in the US. Dubai is forever the fan of US sanctions policies because most imports from the United States go through Dubai, and their merchants take a 5% to 10% commission that has hurt Iran little; although since 2008 this has been more costly for Iran as the US Treasury has isolated Iranian banks, raising the cost of letters of credit (more on this below). More importantly, US sanctions have afforded Iran's intelligence services and the Islamic Revolutionary Guards Corps (IRGC) another source of revenue as they also take a cut of these transactions.

Under president Bill Clinton, the Iran Libya Sanctions Act (ILSA, now ISA after the removal of Libya) was enacted in 1996. This banned investment in Iran's energy sector and threatened third countries with sanctions, if they did not do the same. This slowed Iran's oil and gas development, which has also hurt the United States and its allies by causing higher oil prices. However, these sanctions have had a minimal short-term effect; Iran's leadership has hardly used oil revenues to advance and develop the country. What money they have earned has instead been squandered and a good chunk has been squirreled away in the foreign bank accounts of regime insiders.

Starting in 2007, the US government began to develop more targeted financial sanctions. The US Treasury reduced the access of Iranian banks to the international financial system. Over time and with further financial sanctions, this has increased Iran's cost of letters of credit and thus the price of imports by about 15-20% in 2010.

On November 6, 2008, the US Treasury further tightened restrictions on Iran by revoking its "u-turn license". Ever since the Islamic revolution in 1979, US administrations have allowed Iran to sell oil to non-US entities for dollars. Thus, when a foreign entity bought Iranian oil, it issued instructions to a US bank to issue funds to an Iranian bank (although tightened earlier for one bank). The fund transfers to Iranian banks were achieved through what has been coined a "u-turn".

The revocation of this license means that US banks cannot make such dollar transfers to Iranian financial institutions. Until recently, the US Treasury had been persuaded of the advantage of this financial u-turn license because it added to the demand for dollars and afforded the United States the benefits of seignorage (the costless issuing of paper money to buy something tangible).

In June 2010, the US Treasury announced new sanctions against Iran's nuclear and missile programs by targeting the IRGC as well as Iran's shipping and financial sectors.

Besides US unilateral sanctions, the US has been the main proponent of sanctions on Iran at the United Nations. At US urgings and heavy lobbying, the UN has adopted four rounds of sanctions on Iran.
  • Resolution 1737 (2006) called on states to block Iran's import and export of "sensitive nuclear material and equipment" and to freeze the financial assets of those involved in Iran's nuclear activities.
  • Resolution 1747 (2007) banned all arms exports to Iran and froze the assets and restricted the travel of people involved in Iran's nuclear program.
  • Resolution 1803 (2008) asked countries to scrutinize their activities with Iranian banks and urged countries to inspect cargoes to see if prohibited goods on board.
  • Resolution 1929 (2010) prohibited Iran from buying heavy weapons, toughened financial transactions with Iranian banks, froze assets, increased travel bans, and urged for more cargo inspections.

    US ambassador Susan Rice has hailed the latest round of UN sanctions as a demonstration of the UN "standing up" to Iran, while President Mahmud Ahmadinejad has likened it to a "used handkerchief" that belongs in the bin.

    On September 29, Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner announced the latest US measures against Iran; the move bars eight Iranians from entering the United States, blocks their US assets (although probably none of them have any US assets to their name) and prohibits Americans from doing business with them.

    After all this effort, have sanctions worked? Has Iran changed its objectionable policies?

    The answer is a resounding no.

    Part 2: The failure of sanctions against Iran.

    Hossein Askari is professor of international business and international affairs at George Washington University.

    (Copyright 2010 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

  • New Iran sanctions as war chorus rises (Oct 1, '10)

    Moscow prepares sanctions workaround (Jul 23, '10)

     

     
     



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