Why have sanctions not persuaded Iran to forsake its nuclear enrichment policy?
There are a number of simple lessons.
First, for the target country. Sanctions on the exports of a country may be
less than effective if that country's main export is a commodity in global
demand. Simply put, others will buy Iran's oil if the US does not. Will Iran
get a much lower price for its oil? No.
Sanctions on the imports of a country from the sender (the United States [1])
will do little if the country can buy similar goods previously imported from
the sender (the US) from third countries
(Europe, Japan and China) or still from the sender but re-exported through
other countries (the United Arab Emirates) although at a somewhat higher price.
Possibly most important, sanctions to change a target's policy that the
majority of its citizens support are much less likely to succeed. Iranians
support the regime's nuclear program, but targeted sanctions to change Iran's
human rights abuses would be much more likely to succeed; possibly resulting in
regime change and a reversal of objectionable policies.
Sanctions on investments in Iran's energy sector, highly touted by a number of
observers, have not affected the regime as is widely believed. The regime has
not used oil revenues to put Iran on the path of rapid growth and development.
It has, instead, used the country's non-renewable resources to buy domestic
support in order to survive, through wasteful subsidies and to enrich senior
members of the establishment (intelligence services, Revolutionary Guards,
military, clerics and bureaucrats). For these purposes it has had sufficient
funds, especially in the last eight or so years, with high and rising oil
prices. Foreign investment and better technologies for its oil and gas sectors
would have paid off more into the future (and could now become important as the
regime struggles economically).
Second, for the sender. The US has sent mixed signals with policies that look
at times bizarre from an Iranian perspective. The US stated long ago that
Iranian oil was embargoed from coming into the US, yet Iranian refined products
were exempt for a number of years. The US turned a blind eye towards most
u-turn financial transactions for about 28 years. [2] The US has frozen
accounts of individuals by their name; does anyone really believe that members
of the Revolutionary Guards, intelligence services, and clerical and government
establishment open big foreign bank accounts in their own names? These are not
boy scouts. These powerful men in Iran have partners, fictitious names and
numbered accounts. Is it believable that the US with Saudi support could not
persuade the United Arab Emirates, Oman and Malaysia to cut their ties with
Iran? No.
The fact that is most inexplicable and puzzling is the issue of financial
sanctions. Let me explain. Financial sanctions have been arguably the most
effective of all sanctions. They have slowly cut off Iranian banks and
government institutions from the US financial sector, and in turn the global
financial sector. This has increased the cost of imports and reduced revenues
from exports, squeezing Iran for revenues. Yet with this confirmed success,
some US actions show a timidity that is inexplicable.
The US has only recently imposed heavy fines on banks that have continued to
deal with Iran but want to maintain their access in the US. The US Treasury is
fully cognizant that the central bank of Iran, Bank Markazzi, is circumventing
sanctions on Iranian commercial banks. Yet it has not sanctioned the Iranian
central bank.
When one looks at the sanctions on Iran, one gets the feeling that there is
something of a country club atmosphere. It is steady as you go and a little bit
at a time. If the US wants change in Tehran, then there has to be sufficient
pain on the establishment to change their policies or on the citizenry to rise
up and overthrow the regime. The US is just prolonging the agony, giving the
impression that it is not really serious. That it really likes the mullahs and
wants to reach a workable accommodation. Why?
At times, the US professes that it does not want to cause the Iranian people
more pain. If that is the case, then it is forgetting the most important way
that sanctions are supposed to do their work - to motivate a general uprising
against an unpopular regime and its policies. It is willing to watch Iranians
suffer, either by leaving their homeland in unprecedented numbers or by barely
surviving under the oppressive and economically bankrupt rule of the mullahs,
but it will not help them to put an end to their misery by supporting their
demonstrations for basic human rights.
What would be the choice of Iranians: to suffer a little bit more and end their
misery or continue down the same road for another 30 years?
What could the US do to put the regime under real pressure? Are their sanctions
and associated policies that could force the regime to change its oppressive
policies or be overthrown? The answer is yes, but it seems that either the US
does not have the political will to do so or, more likely, it is not as
concerned about the suffering of the Iranian people as it professes.
So what could work? First, financial sanctions on the Iranian central bank
could squeeze Iran further. This, the US could adopt unilaterally and threaten
countries that did not comply. Second, Iran's foreign exchange reserves are
being rapidly depleted given lower oil prices and capital flight. The regime is
worried. During the week of September 25, the Iranian currency lost about 20%
of its value against the US dollar as the demand for dollars was rising and the
central bank did not offer sufficient dollars to calm the market. A spark could
cause a total collapse of the Iranian riyal, an economic and political
catastrophe for the Tehran regime.
Given these realities, by announcing the enforcement of a number of existing
laws, the US Treasury could spark a panic: motivate Iranians, as well as
expatriates residing in the US and elsewhere to liquidate their assets and to
withdraw their money from Iran. Existing US laws include the payment of taxes
by all US citizens and permanent residents (holders of green cards) on all
foreign sources of income (including interest income and profits) and the
prohibition of investments in Iran (requiring a license from the US Treasury's
Office of Foreign Asset Control).
Specifically, the US Treasury could make an announcement that Iranian Americans
and permanent residents (estimated to number over two million) are honestly
unaware of these US laws and the Treasury would give individuals an amnesty
from prosecution and from loss of permanent resident status, say for six
months, if holdings are declared, taxes paid and funds repatriated.
Why would this hurt the regime in Tehran? Many Iranian Americans and permanent
residents in the US have quietly transferred money to Iran (giving dollars to
individuals in the US and receiving rials in Iran, a practice that is
facilitated through international trade with third countries). They have made
such transfers to make lucrative bank deposits in Iran; with three-year
interest rates in the range of 15% to 24% and an essentially stable exchange
rate (fluctuating in about a 20% band over the period), such deposits possibly
earn on average about 15% more in annual interest, even when converted back
into dollars, than could be earned on deposits in the US.
They have invested in real estate, which has boomed by more than 1,200% in
Tehran in the last 12 years. They have invested in the Tehran Stock Exchange,
where prices have surged but which is also a mighty bubble that could undo the
regime at any moment. They have invested in business and have worked in Iran.
Some have even fronted for the regime and received cash payments or real estate
in Iran for their services.
Some of these investments and transactions are illegal under US law and require
a license from the US Treasury. These individuals should have paid taxes on all
income and profits. Thousands of Iranian Americans and permanent residents find
themselves in this predicament.
A US announcement on the lines outlined above would cause a panic, not only in
the US community but also in Iran, because Iranians would fear the consequences
of a rush to sell, and subsequent fund outflows, on the value of assets in Iran
and on the exchange rate of the rial. Iranian Americans, permanent residents in
the US, Iranians residing in other countries and even Iranians in Iran would
sell and try to take their money out before everything crashed.
The rush to take money out of Iran would put a squeeze on Iran's foreign
exchange reserves. The regime, already sensitive about supporting the value of
the rial (for prestige, support of businessmen and the wealthy, and to keep a
lid on inflation), would have no choice but to pre-empt this by instituting
foreign exchange controls blocking the outflow of funds from Iran; the black
market exchange rate would become multiples of the official rate; import costs
for unsubsidized non-essentials would soar; and inflation would skyrocket.
More importantly, these rapid financial developments - collapse of asset prices
and currency controls - would turn ordinary citizens, and especially those with
vast assets, the wealthy, regime loyalists, and prominent bazaar merchants,
against the regime as their enormous wealth was decimated in terms of dollars.
The ensuing inflation, and it is already over 25%, would fuel dissatisfaction
among average citizens struggling for survival.
Some may question the workability of this approach on the grounds that the US
government does not know who has transferred money to, or invested in, Iran.
The US does not need this information to ignite panic among these individuals.
The Treasury could even play up one or two cases in the media to further ignite
a panic. This is how panics do their work. These are initiatives that the US
could adopt and would not need the backing of the UN.
At this stage, to get the backing of the Iranian people, these initiatives
should be targeted towards improving the regime's human rights record, not the
nuclear enrichment issue, which Iranians largely support. Iran's nuclear
program could be better addressed with a weakened regime, or with a new regime
in Tehran.
A number of human rights advocates and anti-regime activists have argued
against new sanctions, or any form of pressure, that might increase the burden
on ordinary Iranians. While their concerns are understandable, they should
recall the experience of South Africa.
Unfortunately, there's unlikely to be any gain without pain. But luckily in
this case, much of the burden would fall on the elite. It is they who have
money to take out of the country as the average Iranian has barely enough to
survive.
Is this the best course of action for the US?
Notes: 1. The
country imposing sanctions is normally referred to
as the "sender", the country whose policies it
finds to be objectionable the "target".
2. Until 2008, the US allowed Iran to sell oil to non-US entities for
dollars. When a foreign entity buys Iranian oil, it instructs a US bank to
issue funds to an Iranian bank. The fund transfers to Iranian banks were
achieved through what has been coined a "u-turn".
Part 3: More sanctions - or a change in course?
Hossein Askari is professor of international business and international
affairs at George Washington University.
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