The Impact of Sanctions
February 6, 2013
During the past year, the United States, the European Union, and others have put into place the strongest sanctions yet against Iran. These measures restrict business with Iran’s energy, financial, and transport sectors and, in the case of the United States, penalize foreign companies and governments that support these sectors. Nevertheless, during this same period, Iran completed its fortified enrichment plant at Fordow, expanded the number of centrifuges installed at its Natanz enrichment plant, and increased the production rate of enriched uranium. Meanwhile, a series of meetings with Iranian officials failed to yield any progress. In addition, Iran has refused to explain specific evidence that it has tried to develop a nuclear weapon.
This raises the question whether any type of sanction can still be expected to curb Iran’s nuclear effort. U.S. officials claim that there is still time for sanctions to prevent Iran from emerging as a nuclear weapon power. As Iran’s timeline to nuclear weaponry dwindles, what, specifically, could be done?
The Wisconsin Project on Nuclear Arms Control hosted a roundtable discussion on October 25, 2012 that examined a number of sanctions measures that have been adopted in recent months, and the way in which these, and possible additional measures, might influence nuclear decision-making by Iran’s leaders. The panelists were Ilan Berman, Vice President of the American Foreign Policy Council; François Delmas, Political Counselor for strategic affairs at the French Embassy; Michael Howells, First Secretary for Middle East policy at the British Embassy; Kenneth Katzman*, Specialist in Middle East Affairs at the Congressional Research Service, Orde Kittrie, Professor of Law at Arizona State University and Senior Fellow at the Foundation for Defense of Democracies; and Michael Singh, Managing Director of the Washington Institute on Near East Policy.
There was broad consensus among the panelists that sanctions against Iran are having an increasing impact on the Iranian economy and that additional sanctions could increase this impact. The sanctions implemented so far are causing economic strain in Iran that will worsen over time, despite any effort by Iran to mitigate their impact. The panelists further concluded that additional sanctions must be pursued in order to hasten the unraveling of Iran’s economy, by further diminishing foreign exchange reserve and oil revenue. They also found that sanctions must be combined with other measures such as public diplomacy, a willingness to negotiate, and a credible threat of military action.
Following is the moderators’ summary of the discussion. The findings below and the summary above are a composite of the panelists’ individual views. No finding should be attributed to any single panelist, or be seen as a statement of policy of any government.
Sanctions that limit Iran’s oil sales are working but are fairly new; Iran has not felt their full impact.
The purpose of energy sanctions is to reduce the Iranian regime’s revenue in order to pressure the regime into giving up its nuclear program. Beginning in 2012, the United States and the European Union began seriously to restrict Iran’s ability to sell oil and other petrochemical products. Last July, Europe stopped imports of Iranian oil altogether, and put associated restrictions on its insurers and banks. New U.S. sanctions went further by authorizing penalties against foreign entities that continue to engage in oil and petrochemical transactions with Iran. The panelists agreed that the ripple effect of these sanctions, especially since July, has resulted in Iran’s now-plummeting oil sales: From over two million barrels per day in 2011, to under 1 million barrels per day by the end of last year. A number of countries in Asia have been forced to reduce or even suspend purchases of Iranian oil because they do not wish to run afoul of U.S. sanctions and/or they have had difficulty getting insurance coverage, and finding a means to deliver the oil and to pay for it.
The Iranian regime itself has begun to admit that sanctions are having an impact. Crude oil sales continue to drop and to cut the regime’s access to hard currency. The economic effects on Iran are likely to intensify in the future, even without the enactment of additional oil sanctions.
The present sanctions effort, which focuses on Iran’s energy sector, is having an economic impact; sanctions should try to achieve even greater reductions in oil revenue, although reducing it to zero is unrealistic. The new trend in sanctions is to limit overall trade.
The panelists found that the United States and its allies should seek even further reductions in Iran’s oil sales, and that one way to do that would be to make waivers and exceptions to U.S. sanctions more difficult to win. Two rounds of 180-day waivers have been issued by the United States, including to Iran’s main customers in Asia. While all of the countries granted waivers have reduced overall purchases from Iran – to varying degrees – several panelists found that further reductions should be required in order to win further exemption from sanctions. Still, there was broad consensus among the panelists that the aim of energy sanctions is not necessarily to reduce Iran’s oil exports to zero. One reason, according to a panelist, is because of Iran’s ability to evade sanctions by making clandestine shipments.
One panelist pointed out that a further reduction in imports by China, which is currently absorbing about half of Iran’s oil exports, would be important. The time to encourage such cuts is now, before Iran works out a way to mitigate the impact of sanctions or influence the price of oil. Other panelists suggested that the complex relationship between China and the United States argues for treading carefully. The question is how the United States could best encourage China to support the overall Iran sanctions effort. China does not want to be seen as the regional backstop to a pariah state. But neither does it want to be pushed around by the West. Unity on sanctions with China is valuable; it sends a message to Iran about the enduring cohesiveness within the P5+1 group of countries leading sanctions and negotiations. Losing Chinese support within P5+1 would have a strategic cost. Given these limitations, it might be wise to focus on oil import reductions by other countries as well as by China, so that China doesn’t feel singled out.
The panelists also agreed that the United States should remember the additional steps it can take directly: for example, it can deny government contracts to firms that continue to do business with Iran, and it can bar vessels owned by companies that are transporting Iranian oil from docking in the United States. The United States could use this sort of power to restrict Iranian trade even further. The panelists also noted that during the past twelve months, the European Union has done a great deal to isolate Iran economically, with sanctions on energy, shipping, and insurance. Last October, the European Union took a step farther and imposed general restrictions on trade. This is important because the European Union has more trade leverage today with Iran than does the United States, which has had a broad embargo for decades. Several panelists emphasized that the general trade sanctions were having an important impact and should be expanded.
Energy sanctions must concentrate on the amount of revenue Iran receives, not solely on the volume of sales.
Governments that impose sanctions must remember that it is important not only to limit the amount of oil and related goods that Iran exports, but to limit the amount of money Iran can make by doing so. This is a concern because Iran may be able to manipulate the price of oil, and may take steps to do so short of those seen as an outright casus belli.
For instance, Iran may attempt to impede shipping traffic in the Strait of Hormuz, rather than close the Strait entirely, as it has recently threatened to do. This could raise the global price of oil and make more valuable the limited quantity of oil Iran can sell in the face of sanctions. However, such a tactic could be offset if countries such as Iraq and Libya decide to increase output, which would minimize any upward pressure on prices.
Reducing Iran’s access to dollars and euros is crucial; doing so isolates the country from the world economy.
Estimates of Iran’s foreign exchange holdings vary widely; they were reported to be up to $105 billion early last year. The panelists agreed that the goal should be to reduce Iran’s foreign exchange reserves as rapidly as possible. As Iran runs low on foreign exchange, fewer imports will be possible and the regime will be unable to prop up the rial, which lost an estimated 80 percent of its value last year. The result could force Iran to engage in more barter transactions or, perhaps, draw downs on rupee or renminbi accounts.
Some panelists concluded that getting to this point would be the true test of whether any amount of economic hardship will prompt the regime to compromise. In the past, the United States has underestimated the degree of suffering rulers were willing impose on their populations, the example of Saddam Hussein being one of the most recent. Would the Iranian regime be similarly steadfast in its determination to acquire nuclear weapon capability no matter what the cost to its populace? If so, the lack of imports will have a humanitarian impact that could eventually divide the international community on the perceived benefit of further tightening sanctions.
Sanctions aimed at curbing Iran’s nuclear program have had some success, but could be tightened by better enforcement, and by singling out some countries for diplomatic pressure, public disapprobation, or punitive measures.
The panelists agreed that Iran’s inability to easily procure items directly useful in its nuclear and missile programs has inhibited the expansion of these programs as well as their quality. Also, international attempts at sabotage, as well as efforts to supply Iran with faulty equipment, have hindered the program. However, these measures have been in place for some time and Iran has found workarounds, or has managed to expand its existing, albeit antiquated, technology such as the P-1 (IR-1) centrifuge.
Some countries have been lax on sanctions enforcement. Several panelists suggested that it would be useful to highlight this behavior, either by using sanctions authorities that exist but that have not been implemented, or through diplomatic channels. The Chinese government, for example, has failed to crack down on proliferation-sensitive exports to Iran by private Chinese companies. Other countries, like Malaysia and Singapore, continue to act as transshipment points. Listing these latter countries in U.S. export control law as “destinations of diversion concern” would be a way to highlight this bad behavior. Concerns about antagonizing China were voiced by some panelists.
Sanctionable behavior in Iran is not limited to nuclear work; it includes terrorism and human rights.
Several panelists expressed concern that so much attention is now paid to the nuclear issue that some of the original reasons for imposing the U.S. embargo – Iran's flouting of human rights and its support of international terrorism – could be forgotten. The United States needs to be clear about what sanctions it is willing to relax if Iran compromises on its nuclear work. Conversely, the United States should be clear about those sanctions that would stay in place despite a nuclear deal. Several panelists noted that overlapping sanctions authorities would make lifting some sanctions difficult. Those that have been codified into law would, in some cases, require Congressional action in order to be lifted. Sanctions enacted by executive order would, in general, be easier for the Obama administration to lift.
Pursuing additional sanctions at the U.N. Security Council is no longer useful.
Attempting to obtain additional sanctions resolutions at the U.N. Security Council will not be worth the effort, according to most panelists. It would take months to agree to language for a new resolution, which Iran could interpret to mean that it has more time to pursue its nuclear work unhindered. More important, an attempt to get more U.N. sanctions would give an excuse to countries within the European Union that want to wait for the United Nations to act before taking additional steps themselves. This could undermine the European Union's ability to increase its sanctions. The panelists agreed that new sanctions should be pursued unilaterally or with likeminded countries on a case-by-case basis.
Sanctions are a tool, not a policy. They must be combined with other measures such as public diplomacy, a willingness to negotiate, and a credible threat of military action.
Several panelists stated that Iran does not now see the threat of military force as credible, which is undermining the effectiveness of sanctions. The Iranian regime has the sense, these panelists said, that simply withstanding sanctions now will allow it to attain nuclear weapons later, without ever suffering from military attack. These panelists called on the United States to establish red lines without delay. Other panelists stated that it was important at least to articulate clearly what the United States would consider “unacceptable zones of acquisition” in the nuclear domain.
Sanctions must also be combined with better public diplomacy, which could more effectively explain the purpose of sanctions to the Iranian public and explain the motive behind them. The United Kingdom, via BBC Persia, may be a better position than the United States to articulate an effective message to the Iranian people.
In addition, the “signaling” effect of sanctions has a value that should not be overlooked. There is a value in showing Iran that sanctions are an important issue for the United States and its partners, and there is a value in showing Israel that options short of war are being pursued actively and that the United States is taking the Iranian threat seriously.
It is important to convince the Iranian regime that attaining nuclear weapons will not mean an end to sanctions.
Iranian officials may believe that, once Iran acquires nuclear weapons, sanctions will be lifted, as was the case with India and Pakistan. The governments imposing sanctions must make clear to Iran that this would be a miscalculation. Iran must be told that nuclear weapons will only increase the number and severity of the sanctions that are or will be in place. The panelists suggested spelling out what additional sanctions would be implemented should Iran withdraw from the nuclear nonproliferation treaty or test a nuclear device. It is important not to incentivize a sprint toward nuclear weapons, a scenario in which Iran would hope to bear sanctions for the relatively short period of time it would take to amass a small arsenal. The governments imposing sanctions must express to both the regime and the populace that no matter how burdensome sanctions seem now, the burden will be greater if the regime crosses the nuclear threshold.
(*)Mr. Katzman participated in this discussion in his personal capacity as an Iran expert, and not as a representative of the Congressional Research Service, the Library of Congress, or the U.S. Congress.