Prepared Statement by Deputy Director for Intelligence, Central Intelligence Agency, John Gannon Before the Senate Banking Committee Hearing: The Status and Effectiveness of U.S. Sanctions on Iran

October 11, 1995
Thank you, Mr. Chairman. I am pleased to be able to meet with you this morning. I propose to make some brief general remarks, after which I would be glad to answer any questions you may have in the unclassified arena.

In my remarks, I will offer our assessment of both the shortterm and long-term impact of the sanctions implemented against Iran last May.

-- We have already seen some short-term effects-- including some disruption in the oil sector and an increase. in domestic prices.

-- Over the longer term, tightened sanctions are unlikely to have a major impact on the already deteriorating Iranian economy without strong international backing. And we believe this backing will be difficult to obtain.

-- Finally, I will offer our view that the current Iranian regime, despite its economic problems, has a much better-than-even chance of remaining in power over the next three years.

The Short-Term Economic Impact of Sanctions

I will first discuss the immediate effect of the sanctions. Despite dismissive public statements by senior Iranian officials, the sanctions have caused temporary economic and psychological blows to Tehran.

-- The ban has fueled domestic price increases and volatility in Tehran's foreign exchange market.

-- In late May, the Government imposed strict foreign exchange controls to prevent a further drop in the value of the rial--which fell by a third in the two weeks after the embargo was announced. The rial has since recovered to roughly pre-sanction levels.

-- The ban has also prompted some disruptions in the oil sector, including higher costs associated with lining up new buyers for Iranian oil.

-- The embargo has set Iranian officials scrambling to establish new contracts for the roughly 400,000 barrels per day of oil that US companies bought during the first four months of the year.

-- Tehran has opted to market more of its oil abroad rather than directly from its export terminals. This has resulted in somewhat higher transportation and storage costs.

-- Iran has increased spot oil sales to customers in Europe and South Africa. It is working to increase long-term contractual sales to both existing and new customers. Tehran is trying to conclude a deal with South Africa to store up to 15 million barrels of Iranian oil and sell its oil through a joint Iranian-South African company.

Longer-Term Impact

Over the longer term, the sanctions are likely to have little impact on Iran's weakening economy, which is driven primarily by oil exports.

-- Iran will maintain its oil sales because it uses

sophisticated marketing tactics and because its crude oil is of good quality.

-- The ban will not stop major new development projects or:prevent maintenance and repairs. At most, it will raise prices, disrupt individual Iranian businesses, and possibly delay some infrastructure projects.

-- Iran continues to have other trading options. As early as 1980, it was cultivating alternative suppliers to replace US equipment and has established ties with hundreds of foreign companies.

-- Even the strong growth in US exports to Iran in the early 1990s reflected only an Iranian preference for, not dependence on, US goods.

Sanctions Support from Other Countries

As you know, Mr. Chairman, the strong and sustained support of other countries is essential for sanctions to succeed. The long-term effect on Iran's economy will be minimal unless many more countries join the embargo or withhold significant loans. To date, there has been little international support.

-- A few countries do support the embargo--Israel, El Salvador, and Ivory Coast, for example. But these countries have limited economic dealings with Tehran.

Western governments--including many of our European allies--have voiced doubts about the potential impact of sanctions on Iranian behavior. They argue that engagement, not isolation, of Iran offers the best hope of moderating Tehran's behavior.

-- Those with significant credit exposure to Iran-- Germany, Japan, Italy--believe supporting sanctions would jeopardize Iranian debt payments.

-- They also are concerned that joining the ban would threaten their efforts to expand commercial opportunities for their firms.

We have seen a couple of recent exceptions to this trend.

-- Japan decided to delay the release of the second tranche--about $460 million--of a loan to finance building a hydroelectric project because of the new sanctions.

-- Paris has said it will not provide the French energy firm Total with official support for its involvement in Iran's Sirri offshore oil project-- the former Conoco deal.

-- Other countries have said they might change their policy if other major trading nations did so, or if they had more concrete information on Iran's support for terrorism, its active opposition to the Middle East Peace Process, its violation of human rights at home, and its pursuit of weapons of mass destruction.

Prospects for the Iranian Regime

As for the future of Iran's regime, we now give it a three-infour chance to stay in power over the next three years, despite the worsening economy.

-- Opposition to the government is weak, divided, and tainted by ties to Iraq--which, as you know, fought an eight year war with Iran.

-- Judging from past experience, the clergy will likely close ranks against any perceived threats to the regime. Government stability depends largely on the clergy's ability to present a united front in times of crisis. It has done this throughout the life of the Islamic Republic.

-- Moreover, unrest over economic conditions so far has been spontaneous and poorly coordinated. Protesters have focused more on specific grievances, such as water shortages and fuel prices, than on unseating the mullahs.

-- And finally, Iran's security forces characteristically employ lethal force to restore order, as they did in the northwestern Iranian city of Qazvin in August 1994 and in the southern Tehran suburbs of Eslamshahr and Akbarabad in April of this year.

The longer term outlook for regime leaders, of course, is much less certain.

-- We expect economic conditions to continue to deteriorate, independent of sanctions. Iran's economy will experience little or no growth and will suffer continued high inflation over the next several years. These problems will be compounded by the country's fast-growing population--which has increased by a staggering 70 percent in the past sixteen years.

-- Many observers expect that Iran will be forced to request another round of debt rescheduling next year. At that time, the bulk of its rescheduled payments will begin to come due.

-- As living conditions grow harder, public unrest, including demonstrations, will probably increase. This will make it more difficult for the regime to maintain stability.

In closing, let me say that we at the CIA are sensitive to your concerns--and those of Administration officials and Congress--on this issue. We will continue as a high priority to monitor and report on political and economic developments in Iran and on Tehran's ability to cope with US sanctions.