High oil prices mean sanctions against Iran likely to have little impact

Washington announced additional unilateral sanctions on Iran on Oct. 25.

Neither U.N. Security Council sanctions nor U.S. unilateral measures have yet succeeded in pressuring Iran to suspend nuclear enrichment. Nevertheless, sanctions remain the best of a poor range of options for Washington and Europe in confronting Tehran over its nuclear activities.

{mosads}The U.N. Security Council has to date passed three resolutions concerning the Iranian nuclear program:"

•It adopted resolution 1696 in July 2006 demanding that Iran suspend nuclear enrichment under Article 41 of the U.N. Charter, allowing for sanctions.

•Resolution 1737 last December embargoed trade or cooperation that might contribute to Iran’s nuclear or ballistic missile program, targeting Iran’s Atomic Energy Organization and Defense Industries Organization and companies and individuals involved with them.

•In March, resolution 1747 embargoed arms exports by Iran (not imports), restricted travel by individuals associated with the nuclear program, and extended the list of sanctioned institutions and persons to include Bank Sepah and senior commanders of the Islamic Revolutionary Guards Corps (IRGC).

U.S. sanctions.

Successive administrations have maintained unilateral sanctions against Iran:

•The Reagan administration, in the wake of the 1983 Beirut bombings and Iranian attacks on merchant shipping in the Gulf during the Iran-Iraq War, banned all imports from Iran, including oil, and all arms exports to Iran.

•The Clinton administration imposed a complete ban on trade and investment.

•In 1996, Congress passed the Iran-Libya Sanctions Act (ILSA), which penalized any company within U.S. jurisdiction that invested more than $20 million in Iran’s oil and gas sector. However, ILSA included a presidential waiver that has been invoked by every administration in the face of European hostility to ILSA’s extraterritoriality.

•Last month, the House of Representatives passed the Iran Counter-Proliferation Act, which removes the waiver and also subjects foreign subsidiaries of U.S. companies to ILSA sanctions. The law has yet to pass the U.S. Senate.

The Bush administration has sought to isolate Iran from the global financial system. In September 2006, the U.S. Treasury banned any transactions between the U.S. financial system and Iran’s Bank Saderat, and in January Bank Sepah was also blacklisted. This month, Washington designated the IRGC as an entity of proliferation concern, and its Qods Force as a supporter of terrorism, thus banning transactions between any ‘U.S. person’ and these entities, as well as freezing their U.S. assets.

EU measures.

The EU has yet to impose any sanctions other than those included in U.N. Security Council resolutions. However, London and Paris have expressed their support for the U.S.-led effort to impose further sanctions on Iran. While Germany has scaled back export credits, both it and Italy remain hesitant to impose additional EU sanctions given the large volume of their trade with Iran.

Economic impact.

While the U.N. sanctions are targeted specifically at Iran’s nuclear program, the unilateral U.S. sanctions are intended to squeeze Iran’s economy. The efforts of the U.S. Treasury Department have resulted in the withdrawal of as many as 40 international financial institutions from the Iranian market.

However, with oil prices at record levels there is little evidence that Iran’s economy is yet being significantly affected. The EU remains Iran’s biggest trading partner, with EU exports to Iran growing by 8 percent in 2006 and imports from Iran growing by nearly 26 percent, and the GDP growth rate increased from 4.4 percent to 5.8 percent between 2005 and 2006. Overall, despite gross economic mismanagement by President Mahmoud Ahmadinejad’s administration, the risk premium and increased costs of doing business with Iran seem to be offset so far by oil revenues and the willingness of non-Western firms to enter the market.

Iran has also taken steps to limit its exposure to the impact of unilateral U.S. sanctions. Tehran says it now receives 70 percent of its oil revenues in currencies other than the dollar and that Iranian banks have stopped issuing letters of credit in dollars, while the central bank is reducing the share of its foreign exchange holding in dollars, though the exact figure remains confidential.

Domestic political impact.

Neither U.S. nor U.N. sanctions have succeeded in compelling Iran to suspend its nuclear enrichment activities. Nonetheless, the cost of Iran’s continuing defiance has become a major issue in Iran’s domestic politics. The sanctions have opened up a fissure within the ruling establishment between those who, like Ahmadinejad, are confident that Iran has nothing to fear from sanctions and threats of military strikes, and more pragmatic figures, such as former President Ali Akbar Hashemi Rafsanjani, who bemoan Iran’s deteriorating relations with Europe and are concerned that the failure of sanctions could lead to a military strike.
Ahmadinejad has largely failed in his efforts to stifle debate over the nuclear program. This is clear from the scathing criticism that has been directed against him by pragmatists such as Hassan Rouhani, Iran’s former chief nuclear negotiator, who continues to serve as one of Supreme Leader Ali Khamenei’s representatives on the Supreme National Security Council (SNSC):

•These pragmatists lament the loss of the European pillar of Iran’s foreign policy, which was carefully rebuilt by the Khatami administration.

•They can point to the warming of relations between Washington and Paris as evidence of this failure in Iranian diplomacy.

•Tehran now finds itself increasingly dependent on Russia, which it mistrusts intensely, for both nuclear trade and diplomatic support.

•Reversing the U.N. sanctions, even if Iran were to accede to the Security Council’s demands, may take years, as in the case of Libya.

Larijani resignation.

The sudden resignation this month of Ali Larijani, Iran’s chief nuclear negotiator and secretary of the SNSC, was a result of his longstanding tensions with Ahmadinejad, against whom he ran for the presidency in 2005. The timing of his resignation seems connected to Russian President Vladimir Putin’s recent visit to Tehran, when he apparently made a proposal on the nuclear issue that was opposed by Ahmadinejad.

Khamenei’s decision to back Ahmadinejad and agree to Larijani’s resignation indicate his steadfast refusal to be pressured by sanctions and military threats into dropping his support for the president or making concessions on the nuclear program. Nonetheless, the fact that Larijani remains a part of the Iranian nuclear negotiating team and retains his place as one of Khamenei’s representatives on the SNSC indicates that Khamenei’s agreement was grudging. Indeed, criticism of Larijani’s resignation by Ali Akbar Velayati, Khamenei’s foreign policy adviser, as well as a number of conservative Majlis members, is a sign of gradually growing support for a pragmatic nuclear policy within the conservative establishment.

Outlook.

Few options remain open for Europe and the United States in confronting Iran, other than more sanctions against Tehran. However, there is little prospect that sanctions will have any significant economic effect while oil prices remain high, unless they target Iran’s oil and gas exports. While the sanctions have succeeded in fostering a debate within the Iranian elite over nuclear policy, it is unlikely that they will lead to concessions in the short term. Furthermore, Larijani’s resignation raises questions about Iran’s commitment to implementing the agreement signed with the IAEA in August, of which Larijani was the architect.

Oxford Analytica is an international consulting firm providing strategic analysis on world events for business and government leaders. See www.oxan.com.