In testimony last May before this Committee's Subcommittee on International Economic Policy and Trade, I said that comprehensive U.S. sanctions on Iran would reduce Iran's foreign exchange receipts by tens of millions of dollars a year. I was in a minority; many analysts argued that the sanctions would have no effect. Indeed, I was wrong. In fact, the U.S. sanctions have already reduced Iran's income by several hundreds of millions of dollars. The sanctions have been much more effective than anyone expected last spring.
How the Sanctions Have Hurt Iran
The sanctions have hurt Iran several ways:
Oil exports. Iran has had problems adjusting to the cut-off in sales to U.S.-owned oil firms. In the first three months after sanctions were imposed (May through July), Iran was not able to sell about 400,000 barrels a day. Plus on all its oil sales, Iran had to accept a lower price, said by Petroleum Intelligence Weekly and the Financial Times to be a discount of 30 to 80 cents per barrel. The events of those three months alone may have cost Iran over a hundred million dollars. Nor did the problems end after July. The Islamic Republic News Agency admitted in August that Iran was still not able to market 200,000 barrels a day that had presanctions been sold to U.S. firms. While Iran eventually found markets for all its oil, there is some evidence that Tehran continues to offer its oil at a small discount.
Oil field renovation and expansion. Businessmen selling to Iran tell me that the National Iranian Oil Company (NIOC) is having to pay tens of millions of dollars a year more to get parts for its U.S.-built equipment. NIOC, which does not have enough capital to maintain (much less expand) its output, is having to offer particularly attractive terms to induce foreign firms to invest in its fields -- terms that bring Iran tens of millions of dollars a year less than what it could have expected in the absence of the U.S. sanctions.
General imports. The sanctions appear to have caused Iran some problems doing business in U.S. dollars, that is, non-U.S. firms worry that sanctions may affect their ability to be paid in dollars. Businessmen and bankers dealing with Iran report to me that some Iranian firms have been going through middlemen, who charge a fee for their service. The extra cost is certainly in the tens of millions of dollars a year.
Business confidence. I said in May, "It is possible that comprehensive U.S. sanctions will trigger a run on the Iranian currency." Indeed the imposition of sanctions caused the Iranian currency to collapse, loosing a third its value in a week. Tehran responded by slapping on rigid controls. The controls caused the market to dry up. At the current artificial level, with only 3,000 rials to the dollar instead of 6,000, it is unattractive to export, and so non-oil exports have fallen to half their pre-sanctions level. That only makes the foreign exchange shortage worse, and compels Tehran to impose more and more controls in a spiral downwards into a distorted and inefficient economy.
Access to foreign capital. Foreign lenders, such as commercial bankers and government export credit agencies, are more cautious about lending to ban because of the sanctions. Tehran has decided that it cannot be sure of continued access to foreign capital markets, so it has put top priority on repaying its foreign debt as quickly as it can. As foreign exchange is used to repay debt, less is available for importing industrial equipment and materials, forcing factories to cut output. The need to tighten belts in order to repay debt may push the Iranian economy into a recession.
The Political Impact of the Sanctions
The Iranian budget is already under tight constraints. Given the difficulties of making adjustments elsewhere, spending on the military may well go down because of the effects of sanctions. Indeed, one of the unsung accomplishments of U.S. policy towards Iran is its success in forcing Iran to curtail its ambitious 1989 plan for acquiring a large-scale modern military. Iran planned to buy $10 billion in arms in 1989-94, primarily from the Soviet Union. The arms purchases had to be cut in half when Iran was locked out of world capital markets, thanks both to its own inappropriate economic practices and to the U.S. pressure not to make politically-motivated loans to Iran.
While comprehensive U.S. sanctions may reduce Iranian military spending some, there is no prospect that the Islamic Republic will fall because of sanctions. The fate of the Islamic Republic will be decided largely by internal factors. The U.S. does not have a major influence on Iranian domestic policy. Just as the U.S. cannot expect to shore up moderates, neither can Washington expect to directly bring about the Islamic Republic's downfall.
While the U.S. cannot cause the overthrow of the Islamic Republic, it can expect the clerical regime to fall apart. The Islamic Republic is in poor political, social, and economic shape. The current rulers in Tehran have made a mess of the economy, with per capita income about half of the pre-revolutionary level. Corruption is rampant, with a scandal this summer involving the diversion of $400 million. And the Islamic Republic has exacerbated social tensions, with the six million Afghans and Sunnis bitterly resenting Persian Shia chauvinism. It has alienated many of the devout and the senior clergy, who resent political interference in religious affairs. Tehran's rulers feel so nervous that five times in the last two years, they mobilized 200,000 troops to practice protecting public buildings against rioting mobs.
The reservoir of support for the current rulers, fed by the waters of hatred for the Shah, have run dry. It is quite possible that the Islamic Revolution will not last into a second generation. European experts on Iran are pessimistic about its prospects. The respected Paris newspaper Le Monde asked (December 24, 1994) if the Tehran regime was entering its last months. The Islamic Republic survives simply because there is no credible alternative. Like the Shah's regime, it could collapse quickly if any such alternative emerged. Unfortunately, it could also survive another decade or more if there is no good alternative.
The National Council of Resistance, led by the People's Mojahedeen, like to portray itself as a serious threat to Tehran's continued rule. That is not the case. Nor should we have any illusions about the character of that group. It has an elaborate democratic facade, but there is every reason to think that real control is exercised by one man, Masud Rajavi, who lives in Iraq. The cult of adulation for Mr. Rajavi is disturbingly similar to that for Middle East dictators like Iraq's Saddam Hussein or Syria's Hafez Assad. The Mojahedeen have a track record of exaggeration and misreporting which breeds suspicion. That said, I do not understand why the U.S. government has so adamantly refused to talk to the Mojahedeen, because they can be a useful information source. If we want to really annoy Tehran, there is no better way than to have U.S. officials meet with the Mojahedeen.
Allied Attitudes towards Iran Many in Europe and Japan argue that the West should woo Iran because it is the strategic prize in the Persian Gulf region. This view is outdated: Iran is no longer a country with a key economic and geostrategic position:
Iran is not an oil superpower. Its oil fields are old, and its reserves are expensive to develop. Iran produces today less oil than it did in 1970, while production has soared in other pans of the world.
Iran is not a lucrative market. Iran's imports in 1994/95 were $12 billion, which was less than it imported in 1977. The simple fact is that Iran's economic importance has faded along with its oil wealth.
Iran does not have much influence with most of the world's Muslims. The differences between Shiites and Sunnis is an obvious limitation on Iran's ability to excite most Muslims. At least as important, the Islamic Republic of Iran is a failure; its experience does not inspire many others.
Many in Europe and Japan maintain that the West should support Iranian moderates in order to undercut the influence of Iranian radicals. This argument exaggerates the influence the West can have on domestic political developments in Iran. The argument also misreads the history of the last 15 years. The U.S. tried several times to support Iranian moderates. The Irancontra affair began as an effort to reinforce the moderates. The bitter lesson from that experience was that Iranian moderates bite the hand of friendship, specifically, they took the arms shipped from the U.S. and then took more Americans hostages in Lebanon, including a colonel whom they killed. The principal reason that unilateral U.S. sanctions against Iran appear attractive is the singular failure of efforts to promote moderation.
The allies have every right, of course, to disagree with the U.S. on policy towards Iran. However, it is worth remembering that the allies benefit as much as the U.S. from a stable and secure supply of oil from the Persian Gulf. It is the U.S. which bears the brunt of the burden of guaranteeing Persian Gulf security. Germany and Japan made only token military contribution towards Desert Storm, and it is not their ships, planes, and troops, that would be looked to keep the Straits of Hormuz open. Because Bonn and Tokyo are getting a free ride at U.S. expense, it would seem fitting that they should let Washington take the lead on deciding what are the threats to security in the Gulf and how to respond to them.
NOTES * The views expressed here are those of the author and do not reflect the official policy or position of the National Defense University, the Department of Defense, or the U.S. Government.
1 Dr. Clawson is a senior fellow at the Institute for National Strategic Studies of the National Defense University. From 1981 through 1992, he was a research economist for four years each at the International Monetary Fund, the World Bank, and the Foreign Policy Research Institute. He is the author of, among other writings, Iran's Strategic Intentions and Capabilities (NDU Press, 1994) and Iran's Challenge to the West: How, When, and Why (The Washington Institute for Near East Policy, 1993). He is currently senior editor of Middle East Quarterly. This testimony draws upon his recent study for the American Jewish Committee, Business as Usual? Western Policy Options Towards Iran and the article based on that forthcoming in Middle East Quarterly.