Are the Iranian Sanctions Working?

August 25, 2011

The United Nations Security Council (UNSC) has passed four resolutions since 2006 that progressively tightened restrictions on nuclear exports to Iran and placed additional controls on sales of weapons. These measures were in response to questions raised by the International Atomic Energy Agency about Iran's nuclear activities that seem to violate its obligations under the Nonproliferation Treaty. 

These multilateral sanctions add to a long history of US sanctions against the Islamic Republic, and to a more recent history of significant economic restrictions by diverse European and Asian countries.  In the last year, the European Union, Australia, Canada, Japan, and South Korea placed restrictions of varying severity on financial dealings with Iran, and particularly on investments in its energy sector.    Also in 2010, the US Congress passed legislation that would penalize foreign firms that invested in Iran's energy sector or contributed to its nuclear or military programs by denying them access to the US financial system.  

Are these sanctions achieving the goal of persuading Iran to negotiate an agreement that credibly and reliably stops its nuclear program short of a weapons capability?

Sanctions on Iran's energy sector have proved highly effective in discouraging much-needed investment in Iran's aging oil and gas infrastructure.  According to Iran's Oil Minister, Iran needs $40 billion of investment in its energy sector, and most experts think it will need far more.  Yet, since March 2010, 20 out of 41 firms previously engaged in Iran's energy sector have withdrawn, including all the Western companies with advanced technologies.  This leaves Iran facing the prospect of declining oil production and the certain failure of its offshore gas development plans.[1]

Iran's banks largely have lost access to international finance due to financial sanctions.  Between 2006 and 2010, the Treasury Department convinced 80 foreign banks to refuse to process transactions involving Iranian banks, including such giant institutions as: UBS (Switzerland), Commerzbank AG (Germany), HSB (Britain), and Deutsche Bank A.G. (Germany).  (US banks have been banned previously from doing business in Iran.)[2] As a result, Iran now experiences extreme difficulty processing significant transactions, especially oil transactions customarily conducted in Euros or dollars.  Indeed, there are reports that India, South Korea, and China all owe Iran billions for past oil sales, but cannot pay their debts due to banking complications.   The US would prefer that countries refrain from buying Iranian oil, but buying the oil without paying for it is even more satisfying. 

Sanctions also affect Iranian business. Restrictions on loans and credit lines, insurance, and shipping severely hamper the business dealings of both wealthy and middle-class Iranians.  Shortages of raw materials due to sanctions further impede the average Iranian's ability to run a profitable enterprise.[3]  Moreover, in December 2010, President Mahmoud Ahmadinejad reformed Iran's longstanding price subsidy program. To ease the transition for a population accustomed to paying virtually nothing for gasoline, the government is making cash payments to Iranian citizens and businesses.  Outlays are projected to total $45 billion in the next fiscal year and will represent a serious drain on the government's finances, adding to the vulnerability of the Iranian economy.  If the government is unable to meet its financial obligations, the regime runs the risk of serious political instability.

Effects of the sanctions on the nuclear program itself are harder to see.  Multiple reports suggest sanctions have retarded Iranian efforts to procure materials required for second-generation centrifuges, for example, an advance that could dramatically accelerate Iran's uranium enrichment capabilities.  Other reports say that Iran manages to bypass UN sanctions for most of its procurement needs.   A few months ago, Iranian officials revealed plans to triple 20 percent enrichment output by installing second-generation centrifuges at a new site at Fordow.  Whether and, if so, when these plans might come to fruition remains to be seen.

Sanctions on military items can claim a number of high-profile successes, such as Russia's cancellation of a contract to sell advanced air defense missiles to Tehran, but given the secretive nature of Iran's military complex it is hard to get reliable information on the status of illicit arms trade.  Iran most likely cooperates with North Korea to secure nuclear and military technology and equipment, and might have dealings with Pakistan as well.  Increased vigilance at re-export hubs, such as Dubai and the UAE, is making a difference in fighting smuggling, but illicit goods continue to enter Iran through Malaysia and Hong Kong, among others.

In short, sanctions on Iran are weakening the country's economy, hurting its prospects for economic growth by impeding the development of its oil and gas resources, and limiting its access to critical nuclear materials and military equipment.   The sanctions' economic effects will increase with time.  So far, however, they have not persuaded Iranian leaders to negotiate limits on the country's nuclear program. 

Sanctions alone cannot stop Iran's march to acquire the ability to build nuclear weapons, should it choose to do so.  What sanctions can accomplish is slowing the process while harming Iran's economy, potentially making the political costs to the regime unacceptable.   If combined with renewed, positive diplomacy that makes clear to Iranian leaders the benefits of ending their estrangement from the international community, the combination might permit the emergence of a new ruling coalition in Tehran, one prepared to negotiate an agreement that can assure that Iran's nuclear program is - as Iran has always said - intended solely for peaceful purposes.

[1] Government Accountability Office, Firms Reported in Open Sources as Having Commercial Activity in Iran's Oil, Gas, and Petrochemical Sectors (August 3, 2011): (http://www.gao.gov/new.items/d11855r.pdf).

[2] Kenneth Katzman, Iran Sanctions (Congressional Research Service, June 22, 2011): http://www.fas.org/sgp/crs/mideast/RS20871.pdf

[3] Farnaz Fassihi, "Iran's Economy Feels Sting of Sanctions," Wall Street Journal (October 12, 2010): http://online.wsj.com/article/SB10001424052748703735804575535920875779114.html.

Photo Credit: Tom Chambers, Flickr http://www.flickr.com/photos/snapshot/3705888592/sizes/z/in/photostream/