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Sanctions Bite, Iran Scrambles
October 17, 2012 | 10:20am
Gary Clyde Hufbauer
The European Union imposed new sanctions on Iran’s financial, energy, trade, and transport sectors on October 15. What impact will these measures have on Iran’s economy?
Oil and gas account for close to 90 percent of Iran’s exports. Anything that interrupts the export of these commodities hits Iran hard. Oil shipments are already down by about 50 percent and Iran no longer has access to London’s shipping insurance market.
As of 2010, gas accounted for less than four percent of Iran’s export earnings, while petroleum accounted for 78 percent of earnings. But gas is one of Iran’s few remaining exports. The European ban, coupled with the abundance of natural gas in the world market, is another peg in the coffin of Iran’s economy.
The Iranian government is now reportedly taking desperate measures to deal with the crisis by applying drastically different exchange rates for purchasing imported goods. There are ten categories of goods linked with different exchange rates. For essential goods like medicine and basic foodstuffs, the exchange rate is 12,600 rials to the dollar. Non-essential goods, like consumer electronics and replacement car parts are priced according to the black market rate of 35,000 rials to the dollar.
The broad thrust of U.S. and E.U. sanctions alienates middle and upper middle classes who are importing many types of goods. The economy is basically reeling from these sanctions.
How do international sanctions interact with the Iranian financial crisis?
The panic that took hold in September- October 2012 was likely sparked by the realization that sanctions may continue indefinitely. Iran’s printing of additional rials probably contributed to the crisis.
Iran is short on reserves of foreign currency since its exports have been cut in half since last year. The government is also spending money on support for the Syrian regime. At the same time, it is trying to stave off the economic crisis impact on the Iranian people. It has drawn upon its foreign exchange reserves to make up the difference in export earnings to keep importing necessary goods.
But in September 2012, Tehran realized it would soon run out of foreign exchange. So the government cut back on imports in order to maintain funding for the security apparatus. As goods became scarcer and the rial’s value plummeted, people began to panic. Middle and upper class Iranians observed the leadership’s unwillingness to negotiate an agreement with the P5+1. They probably concluded that sanctions are not going to be lifted soon and that their holdings in rials will continue to lose value.
What additional measures can the U.S. or others take against Iran’s economy?
There is very little wiggle room now but there are a few more ways to squeeze Iran. Asian countries could further reduce their purchase of Iranian oil since the world supply is not tight. But the United States would have to exert a significant effort to convince China, India, South Korea and Japan to cut back further on their Iranian oil purchases. That effort, even if made, is not likely to reduce Asian imports of Iranian oil to a significant extent.
The United States could take additional actions against Iran’s financial sector. It could launch a cyber attack on Iran’s central bank to stop it from receiving or paying money electronically. This would be a drastic move likely to be construed as an act of war. The Pentagon has already stated that it considers cyber attacks constitute acts of war.
Alternatively, Western countries could warn that they intend to blacklist any tanker carrying Iranian oil. This would force Iranian tankers to ship oil only to secondary ports, making the tankers considerably less valuable. This move would not be regarded as an act of war on par with imposing a blockade of tankers.
Sanctions have been imposed on Cuba, North Korea and Zimbabwe for extended periods of time. In each case, the state played a more prominent role in the economy and everyday life, and became more powerful. How does Iran’s case differ?
Iran is a bigger country and has a more robust economy than Cuba, North Korea or Zimbabwe. It also has a valuable natural resource– oil. Although Iran is not a manufacturing power house, it is much more self-sufficient than those countries. Also, Iran’s borders are long and porous so there are more opportunities for smuggling goods in and out.
In those other cases, the leaders allegedly decimated the middle classes of their countries. The middle class either fled, was killed off or lost its assets.
But this is not the case in Iran. There is a sizeable group of middle and upper middle class families that have prospered for the last decade or longer. They are feeling the brunt of the sanctions, so their losses may make Iran more susceptible to economic deprivation.
Iran is similar to Cuba and Zimbabwe in its attempt to deal with sanctions. Countries pressed by sanctions tend to revert back to a command and control style of economic management, often rationing goods in a manner similar to the former Soviet Union. In this sort of system, money becomes less important. Instead, people with government connections and insider understanding of the system succeed. Rationing adds tremendous amounts of inefficiency into the economy and reduces overall output. But command and control systems consolidate power in the hands of the state.
The Iranian government is now reportedly assuming more control over the economy by placing items on lists linked to differing exchange rates. The government also permits certain individuals or companies to import the goods. There was not a high degree of freedom in Iran’s economy prior to this recent crisis but now it is moving towards a Cuba or Zimbabwe-style economy.
What will be the impact of international sanctions one year from now?
Sanctions have historically lost their efficacy over time because the targeted country scrambles to find alternative avenues to sell exports and buy imports. On the other hand, the countries imposing the sanctions will likely step up enforcement measures. In this case, the Iranians could step up their evasion tactics as the West ratchets up sanctions, resulting in an approximate standoff.
But a drastic change in the price of oil could be a game changer. If the price spikes for reasons unrelated to Tehran’s nuclear program, countries that are lukewarm about enforcing sanctions could buy additional Iranian oil. India and China would be important players but other importers could also change the dynamics of the situation. The spike would need to be sizeable though, perhaps a jump to $120 per barrel of oil from the current price of $90 (West Texas intermediate). On the other hand, Iran’s economy would suffer more in the event of a price drop to $60 or $70 per barrel.
Maintaining international focus and cooperation on the Iranian nuclear issue for another year or two may prove increasingly difficult, as it did in Iraq during the 1990s. We will likely hear stories about Iranian infants and elderly citizens in dire straits. The outpouring of sympathy could prompt a relaxation of sanctions to help those vulnerable parts of society. Iranian state media may manipulate this picture as well.
Gary Clyde Hufbauer is the Reginald Jones Senior Fellow at the Peterson Institute for International Economics.
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Escalating US-Iran Rivalry
October 17, 2012 | 9:59am
On October 10, the Center for Strategic and International Studies warned that sanctions and diplomatic isolation may not convince Iran to negotiate an agreement on its nuclear program. The United States and its allies may be facing years of “steadily escalating confrontation” over “sanctions, energy exports and arms control.” The following are excerpts from the executive summary, with a link to the full report at the end.
The Impact of Sanctions and the Iranian Reaction
The effects of the US and EU sanctions established in late 2011 and 2012 are already reducing Iranian energy exports and revenues, crippling foreign direct investment in Iran, and creating serious banking and trade problems. The Iranian Rial has become destabilized, and has steadily fallen to record lows as currency markets have reacted to the prospect of limited foreign trade, declining Iranian reserves, limits on Iran’s oil exports income, growing problems in working with Iran’ financial system, and growing detection efforts and penalties for violating sanctions…
Implications for US Policy
It is not clear whether the regime will react to these pressures by negotiating a meaningful agreement with the P5+1 and actually ending its nuclear program, or whether it will react by pursuing such programs regardless of their cost and/or lashing out at targets in the Gulf, other US targets, or US allies. As Chapters III and IV have discussed, the US must be ready for contingencies that could trigger a significant clash or conflict in the Gulf, where Israeli preventive strikes or US military action escalates to the point where the US might have to strike at Iran’s asymmetric or conventional forces in the Gulf and/or nuclear and missile programs.
While the US should pursue sanctions and diplomatic options, it must also begin to make hard long-term plans regarding the possibility that sanctions and diplomacy fail.
If negotiations fail, this means choosing between containment and preventive strikes. As other sections of this analysis show, both options present serious risks as well as advantages. It would seem that if the US does strike, it should be prepared to strike decisively against the full range of Iranian capabilities, be prepared for restrikes, and be prepared to provide a lasting military overwatch as long as Iran shows any sign of rebuilding its nuclear program. However, the analysis of these choices is sharply limited by the fact so much of the information required is highly classified…
The Uncertain Result: Giving Diplomacy Priority While Preserving Security
Sanctions and diplomacy are the best of a bad (or at least highly uncertain) set of options, but it is far from clear that they will stop Iran’s progress toward a nuclear weapons capability. Despite the lack of diplomatic progress, and the appearance that the Iranians are stalling for time, negotiations can still be successful. Negotiations can bring about long-term change in the US- Iranian relationship where military strikes or more sanctions cannot.
The risks become higher as time goes on and as and this aspect of US and Iranian competition turns into a “long game.” So far, Iran has backed away from military confrontation, but it is far less clear what will happen if sanctions result in a prolonged confrontation. Iran has at least as much to lose as any other Gulf state if it halts oil traffic through the Gulf. Iran also cannot hope to win any serious conventional conflict with the US and its Gulf allies, and will therefore attempt to use asymmetric means to confront the US...
Click here for the full report.
U.S. Welcomes E.U. Sanctions
October 16, 2012 | 10:38am
On October 15, White House Press Secretary Jay Carney said that “Iran is under more pressure than ever before” thanks to new E.U. sanctions on its financial, trade, energy and transport sectors. At a separate press briefing, U.S. State Department Spokesperson Victoria Nuland clarified that the United States “is not looking to hurt the Iranian people.” She said that the combination of sanctions and Tehran’s internal mismanagement have caused Iran’s economic crisis. The following are excerpts from their statements.
Press Gaggle by Press Secretary Jay Carney in Williamsburg, VA
MR. CARNEY: I wanted to say that the United States welcomes the adoption today by the European Union of significant new sanctions against the Iranian government in response to the Iranian government’s continued violation of its international obligations regarding its nuclear program.
This action, which includes additional sanctions in the financial, trade, energy and transport sectors, as well as additional designations on entities in the oil and gas industry, further strengthens international efforts to pressure and isolate the Iranian government for its continued refusal to comply with its international obligations and fully cooperate with the IAEA.
As you know, rallying the world to isolate Iran and increase the pressure on its leadership so that they stop pursuing a nuclear weapon has been a top priority for the President since the day he took office. Thanks to that leadership, Iran is under more pressure than ever before. The Iranian government is responsible for the state of Iran’s economy and the isolation of the country. Iran’s leaders have made conscious choices about how they manage their economy, how they prioritize their budget and how they respond to the concerns of their people. The regime has chosen to spend money to pursue nuclear activities in violation of its international obligations, to support Bashar al-Assad’s brutal regime, to enable terrorist acts around the world, and to undertake destabilizing activities around the region.
Iran knows the kind of concrete steps we are looking for to bring it back into full compliance with its international nuclear obligations, to address the proposal tabled by the P5-plus-1, and to cooperate fully and transparently with the International Atomic Energy Agency…
This action, which includes additional sanctions in the financial, trade, energy and transport sectors, as well as additional designations on entities in the oil and gas industry, further strengthens international efforts to pressure and isolate the Iranian government for its continued refusal to comply with its international obligations and fully cooperate with the IAEA.
As you know, rallying the world to isolate Iran and increase the pressure on its leadership so that they stop pursuing a nuclear weapon has been a top priority for the President since the day he took office. Thanks to that leadership, Iran is under more pressure than ever before. The Iranian government is responsible for the state of Iran’s economy and the isolation of the country. Iran’s leaders have made conscious choices about how they manage their economy, how they prioritize their budget and how they respond to the concerns of their people. The regime has chosen to spend money to pursue nuclear activities in violation of its international obligations, to support Bashar al-Assad’s brutal regime, to enable terrorist acts around the world, and to undertake destabilizing activities around the region.
Iran knows the kind of concrete steps we are looking for to bring it back into full compliance with its international nuclear obligations, to address the proposal tabled by the P5-plus-1, and to cooperate fully and transparently with the International Atomic Energy Agency…
Daily Press Briefing by U.S. State Department Spokesperson Victoria Nuland
MS. NULAND: Well, we saw those reports today, reports that everything from shoes and clothing to foreign-imported wallpaper, the Iranian regime is now trying to restrict in terms of the way their citizens use their foreign exchange. Again, from our perspective, this just speaks to the extreme economic mismanagement, the extreme political mismanagement of the Iranian regime and the fact that the Iranian people are now feeling the full effects of the bad decision that their government has made. And these sanctions are designed to continue to pressure the regime to make another choice. And from our perspective, the onus remains on the regime. The door is open, the table is set; they have to just make better choices if they truly care about their people.
QUESTION: So you think this has nothing to do ultimately with the sanctions themselves? You think that the fact that they have less foreign exchange to spend on shoes or whatever is in no way related to the sanctions?
MS. NULAND: Obviously it’s [the crisis] a function of both their own internal mismanagement, but also the fact that the sanctions are biting into their ability to export, other countries’ willingness to trade with them, et cetera. So it’s obviously having an economic impact, but so is their own internal mismanagement.
QUESTION: …Do you feel any responsibility or – for what presumably will eventually become hardship if it is not already hardship for ordinary people who can’t – can no longer get ordinary consumer goods?
MS. NULAND: Well, let’s start with reminding that under the sanctions policy – U.S. sanctions policy, international sanctions policy – we grant exceptions for medicine and for foodstuffs, and the United States still exports foodstuffs and medicine to Iran, and we don’t preclude or ask anybody else to stop those kinds of imports. So we are not looking to hurt the Iranian people.
Second, I will say what we have said all the way along: We do not have any beef with the Iranian people. We do have serious concerns about the choices that their government has made, and the Iranian people have to understand that the choices their government has made have consequences. In this case, they’re seeing it in the decision by the government not to allow them to import foreign shoes and clothes and wallpaper.
E.U. Imposes New Sanctions
October 15, 2012 | 11:33am
On October 15, the European Union targeted Iran’s nuclear program with new sanctions on its financial, energy, trade, and transport sectors. The E.U. Council condemned Tehran’s “continuing production of enriched uranium” and “flagrant violation of its international obligations.” European banks are now prohibited from dealing with Iranian banks, unless they receive permission to address humanitarian needs. The measures also ban the import of Iranian natural gas. E.U. foreign policy chief Catherine Ashton said “there is room for negotiations” between Iran and the P5+1 and that she hopes to “make progress [on the nuclear issue] very soon.” The following points are from the E.U. Council statement announcing new punitive measures.
1. "The Council reiterates its serious and deepening concerns over Iran's nuclear programme
and the urgent need for Iran to comply with all its international obligations, including full
implementation by Iran of UNSC and IAEA Board of Governors' Resolutions.
2. The Council condemns the continuing production of enriched uranium and expansion of
Iran's enrichment capacity, including at the Fordow site, and continued heavy-water
activities in breach of UNSC and IAEA Board of Governors' Resolutions, as reflected in the
most recent IAEA report. The Council notes with particular concern Iran's obstruction of
the IAEA work towards the clarification of all outstanding issues, including with respect to
the possible military dimension to Iran's nuclear programme. Therefore, the Council
welcomes the adoption with overwhelming majority by the IAEA Board of Governors of its
Resolution on 13 September 2012 deciding that Iran's cooperation was essential and urgent
in order to restore international confidence in the exclusively peaceful nature of Iran's
nuclear programme.
3. Iran is acting in flagrant violation of its international obligations and continues to refuse to
fully co-operate with the IAEA to address the concerns on its nuclear programme. In this
context, and in coherence with previous European Council and Council conclusions, the
Council has agreed additional restrictive measures in the financial, trade, energy and
transport sectors, as well as additional designations, notably of entities active in the oil and
gas industry. In particular, the Council has agreed to prohibit all transactions between
European and Iranian banks, unless authorised in advance under strict conditions with
exemptions for humanitarian needs. In addition, the Council has decided to strengthen the
restrictive measures against the Central Bank of Iran. Further export restrictions have been
imposed, notably for graphite, metals, software for industrial processes, as well as measures
relating to the ship building industry.
4. The restrictive measures agreed today are aimed at affecting Iran's nuclear programme and
revenues of the Iranian regime used to fund the programme and are not aimed at the Iranian
people. The Iranian regime itself can act responsibly and bring these sanctions to an end. As
long as it does not do so, the Council remains determined to increase, in close coordination
with international partners, pressure on Iran in the context of the dual track approach.
5. The Council reaffirms the longstanding commitment of the European Union to work for a
diplomatic solution to the Iranian nuclear issue in accordance with the dual track approach.
6. The Council reaffirms that the objective of the EU remains to achieve a comprehensive,
negotiated, long-term settlement, which would build international confidence in the
exclusively peaceful nature of the Iranian nuclear programme, while respecting Iran's
legitimate rights to the peaceful uses of nuclear energy in conformity with the NPT, and
fully taking into account UN Security Council and IAEA Board of Governors' Resolutions.
The Council welcomes the determination for a diplomatic solution expressed by E3+3
Foreign Ministers on 27 September in New York and fully endorses the efforts led by the
High Representative on behalf of the E3+3 in this regard. E3+3 have made a credible and
substantial confidence building proposal for negotiations guided by the agreed principles of
reciprocity and a step by step approach. The Council urges Iran to engage constructively, by
focussing on reaching an agreement on concrete confidence building steps, negotiating
seriously and addressing the concerns of the international community."
Opiate Trafficking Through Iran
October 12, 2012 | 4:47pm
On October 11, the U.N. Office on Drugs and Crime released a report showing that Iran is the only Western/Central Asian country to make more heroin seizures every year since 2004. Over the last decade, Iran built extensive infrastructure on its 600 mile eastern border with Afghanistan and deployed additional security forces to stop trafficking. But the report concludes that smugglers are now abusing licit trade routes for opiate trafficking in the wider region. The following are key findings with a link to a full report at the end.
·Most drug seizures have taken place at the main hubs along the trade and transit trade routes in Central Asia and within Afghanistan, the Islamic Republic of Iran and Pakistan. This suggests that traffickers have been misusing these trade routes to smuggle opiates from Afghanistan to the global market.
Misuse of maritime transportation
In recent years, drug traffickers have become increasingly reliant on maritime transportation to smuggle opiates from Iranian and Pakistani seaports to the global market. By abusing trade routes from Afghanistan, traffickers can smuggle opiates to the Iranian seaports at Bandar Abbas and Chabahar, as well as to the Pakistani seaports at Gwadar, Karachi and Port Qasim.
Dry ports along transit routes
A number of years ago, the Islamic Republic of Iran effectively enhanced law enforcement efforts to combat heroin trafficking. Of all the heroin seizures made worldwide in 2009, 32 per cent were made in the Islamic Republic of Iran. The country thus made the largest number of opiate seizures of any country in the world. The Islamic Republic of Iran has also implemented extensive border protection measures along its border with Afghanistan. It has constructed a 688 km canal, a 477 km embankment and an 85 km wall, and installed 120 km of barbed wire. Most of the border protection was erected in the vicinity of Islam Qala and Zaranj. In spite of rigorous Iranian border controls, it is nevertheless difficult to monitor the entire 1,000 km border between the Islamic Republic of Iran and Afghanistan. It is still possible for traffickers to circumvent border controls in areas in the Afghan Nimroz province.
Click here for the full report.
The Islamists Are Coming
The Islamists Are Coming, edited by Robin Wright, surveys the rise of Islamist groups in the wake of the Arab Spring. Often lumped together, the more than 50 Islamist parties with millions of followers now constitute a whole new spectrum—separate from either militants or secular parties. They will shape the new order in the world’s most volatile region more than any other political bloc. Yet they have diverse goals and different constituencies. Sometimes they are even rivals.
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