Why Economic Sanctions on Iran will Fail

Joint Chiefs of Staff chairman Adm. Mike Mullen said at Columbia U. that a military strike on Iran over its nuclear enrichment activities would be his ‘last option.’ He makes an excellent point, too often overlooked. In some instances the price of doing something is just about as high as the price of doing nothing. A US strike on Iran would risk throwing Iraq and Afghanistan into chao, with our troops in the midst of it.

The Obama administration is now moving tighten economic sanctions on Iran, as an alternative to a more direct approach. These measures include pressuring countries and firms not to buy Iranian petroleum and gas; pressuring them not to sell gasoline to Iran; and attempting to make it difficult for Iranian banks to interface with the world economic system.

While these measures could impose costs on Iran, these costs can easily be borne by the country, and more especially by the regime.

Moreover, it is unclear that Obama can even swing further sanctions on Iranian petroleum and gas. Such harsh measures are opposed by Brazil, Russia, India and China, the so-called BRIC bloc of nations that are emerging diplomatic and economic players outside the US-dominated G7 nations. At the BRIC summit in Brazil last week, a consensus emerged against strong new sanctions on Iran. Brazil is on the UN Security Council at the moment, and in May Lebanon will assume the rotating chair of that body. Given that Turkey also currently has a seat and is strongly opposed to new Iran sanctions, it may be difficult for Obama to get a significant new resolution.

Financial sanctions are not all that they are cracked up to be. Iran Oil & Gas reports that from March ’09 to March ’10, Iran swapped 450,000 tons of petroleum products. Some 90% of the swaps were with nations of the former Soviet Union (CIS), and 10% were with Iraq. Likely we are talking about Azerbaijan, Turkmenistan, Uzbekistan and Kazakhstan. This item is an example of how Iran can import refined gasoline (it has a temporary shortage of refineries) without needing to go through the international banking system. Even if some sort of official ban on trading with Iran could be arranged by the US with these CIS countries and Iraq, private traders and corrupt government officials would simply step into the resulting black market and make a pile. Smuggling oil products out of Iraq on trucks was a specialty of Jordan and Turkey in the 1990s, and that sort of black market would operate quite efficiently were Iran to be put under the sort of sanctions imposed on Saddam Hussein.

Few commodities are more easily transported and more fungible (easily exchanged for other goods or for cash) than gasoline, and the plan for a gasoline embargo on Iran (popular in Congress) is a pipe dream.

But we are hardly in a stage of black marketeering. Rather, direct deals are being done by major players, despite the withdrawal of some players, such as Lukoil, from exporting gasoline to Iran. Chinaoil just directly sold Iran 600,000 barrels of gasoline, and Sinopec, another Chinese oil giant, is preparing to resume direct gasoline sales to Iran. Soft gasoline demand in Asia because of the global economic downturn has left petroleum companies with high inventories that they are eager to offload anywhere they can, and Iran as a destination suits them fine.

Reuters reports, “As long as there is money to be made, and economic benefits to be taken advantage off, Iran will always find ready sellers of gasoline from the international market,” a trader said. “The politicians don’t understand markets…sanctions are cosmetic.”

And if direct sales became difficult, indirect ones would be substituted. And if that became difficult, smugglers would step in. A lot of Iraqis would get rich. And while paying extra to smuggle things in would hurt ordinary Iranians, the regime would use its oil profits to cushion the elites and keep them happy. (That cushioning is why very severe sanctions on Iraq never had a chance of shaking the Baathist regime).

The man said it all: ‘sanctions’ are purely cosmetic, designed to make it look as though US politicians had taken some dramatic and effective step. It is odd that the politicians in Washington, who are always loudly proclaiming their belief in the market, think its iron laws can be suspended by a simple vote on their parts.

And another development taken as a bellwether of increasingly effective sanctions turns out to have been a mirage. Malaysian Prime Minister Najib Razak clarified remarks he made last Thursday about creeping sanctions on Iran. He was misunderstood to have said that Petronas, the Malaysian petroleum company had suspended gasoline sales to Iran, but he never said any such thing and it never happened. He referred to a cancelled third-party spot oil deal that collapsed for purely economic reasons.

Moreover, Iran’s need to import gasoline is probably temporary. It has the wherewithal to build new refineries, and is doing so. Germany’s ABB Lummus has a a $512 million deal with the National Iranian Oil Company and a consortium in Iran to raise gasoline production at the Bandar Abbas refinery to about 3.5 million gallons a day from the present 1.3 million gallons.

In fact, there are ten such projects to expand existing refineries, which could allow Iran to nearly double its production of gasoline by 2012. In addition, Iran is investing nearly $40 billion in building 7 new refineries. So even a successful squeeze on Iran’s gasoline imports, if it could be implemented right away, would only have much effect for 2 years. But such a squeeze is unlikely to be successfully implemented in the first place.

Nor is Iran lacking for customers. A Swiss company just signed a deal worth $13 billion to import Iranian natural gas over the next 25 years. As for financial sanctions, so far Iran is evading them through banking partners in the United Arab Emirates, and Iran and Venezuela have two joint banks. These measures provide Iran with a back door, allowing it to mitigate the effects of financial sanctions.

Very few sanctions regimes have actually produced regime change or altered regime behavior. The US could not even accomplish this goal with regard to a small island 90 miles off its shores, Cuba. That an oil giant half way around the world with a population of 70 million that is as big as Spain, France and Germany can be effectively bludgeoned with sanctions is not very likely.

The US needs to engage in comprehensive security talks with Iran, in hopes of striking a grand bargain. Because as Admiral Mullen rightly says, there are no good military options here.

21 Responses

  1. Thank you Dr. Cole for raising this issue and keeping it current in our minds.

    Opposing Iran is stupid. How stupid? George W. Bush stupid, that’s how stupid.

    Our own Pentagon has just released a report detailing the leveling off of crude production as early as 2012 (peak oil) with severe hardships as early as 2015.

    2015 is the year the idiot Sarah Palin hopes to become president. Excuse me while I guffaw. ……. There now, I feel better.

    Iran has oil and gas. Allow me to restate that for the hard of hearing.

    IRAN HAS OIL AND GAS.

    What idiot nation wants to alienate Iran if they can set up a deal to acquire oil and gas while the rest of the world marches into the 18th century? Stupid nations maybe, but not the smart ones.

    Capice?

    • James Speaks:

      The problem for the US is, while the US has been squandering its treasure and alienating billions of people because of needless wars, China has been quietly buying up all the contracts for oil production around the world (including Alaska!) AND investing heavily in non-oil energy development and implementation.

      The US has known about global peak oil since the 1970s, yet has done exactly ZERO to prepare for it.

      Iran’s oil from now until the last drop is pumped is already sold to the highest bidder, China.

      Worse still, as the US has found out in Iraq, it is impossible to control oil by force when the locals don’t want that to happen. An interesting “feature” of oil production infrastructure is that it is insanely easy to destroy and very expensive (both time and money) to rebuild. Whenever the locals don’t want THEIR OIL stolen by an invader, it is very easy to destroy the oil production capability and then concentrate on killing the invader (using the techniques “invented” by the original US minutemen – Yes, the original minutemen were terrorists – read up on it). If the invaders try to protect the oil infrastructure, they need to use millions of soldiers, who also become great targets for the insurgents. Either way, lots of invaders get killed and the oil stays in the ground until the invaders are gone. The US has no way to control Iranian oil, it will have to out-bid others to buy it and China has a lot more wealth than the US.

      As I noted in a post yesterday, the US could stop this whole mess right now by treating Iran better than we treat our “friends” in Europe, but to do that, we would need to burn Isreal really bad and the US has a blind spot to doing that.

      In the end, I expect the US will shoot itself in the foot (with a shotgun) rather than burn Israel. As a result, by 2016 everyone in the US will deeply suffer economically because of our inability to act in our own best interest.

  2. I remember the arguments made prior to Desert Storm. Some were arguing for sanctions (I think Biden was in that group) But the opposing chant was “sanctions won’t work”, only a military attack on Iraq will work. Father Bush was purely on the attack side, and brought the nation along. We pummeled Iraq’s infrastructure from the air for forty days or so. Then, having forced Saddam out of Kuwait and decisively destroying his military and economic capability, we imposed eleven years of sanctions followed by an invasion.

    Your very well reasoned argument how sanctions won’t work is really the kind of fodder the neocons, Israel, and Nobel Peace Prize winner Obama, need to justify a military attack on Iran. Once “sanctions won’t work” becomes the common media and Beltway mantra, bombing Iran naturally rises to the only viable option – the last resort is the only resort. we can’t just do nothing .

    I doubt that 95% of Americans can factually finish this sentence: Iran is our arch enemy because…. (I know I can’t.) But our inherent enthusiasm for using military violence, when prospects for US casualties are low and the recipient of the violence has been suitably monsterized, will insure that no peace movement will break out of the coffee shops. Americans will go along quite reasonably. (We bombed Serbia for thirty days and the only big media story was the the shooting down of one American pilot.)

    • BECAUSE….the right wing of Israel, their neocon fellow travelers in the US, along with the current regime in Iran (in all fairness), will forever need some sort of “them” with which to consolidate and maintain their power.

      • And don’t forget that there’s also no love lost between Iran and the other Gulf Arab states. While everyone assumes it’s all about Israel (and that is a big part of it), Saudi Arabia and the other gulf states are also wary about what a nuclear Iran would mean for the balance of power in the region. So insofar as we’re tied to those countries economically, militarily and politically, we’re going to have problems with Iran.

    • this should be turned into an online competition or something …it might even get some people thinking…asking…

      Iran is our arch enemy because ……..it’s easy to spell.
      Iran is our arch enemy because……..we can’t find Nauru.
      Iran is our arch enemy because……..all the other crazy, gun totting, lunatics are on our side.

      I’m sure there are some good ones clever people ;)

    • Of course sanctions wont stop Iran’s nuclear weapons program nor will a military strike. Because Iran doesn’t have a nuclear weapons program! No more analysis is required. Are there really any WMD stooges left. How many times can America be fooled by the same neocon-AIPAC ruse.

  3. Is Iran really America’s ally in the Iraq and Afghanistan ‘adventures’? Beyond the rhetoric Iran seems like the only nation that is actually contributing to economic growth and stability while ‘hosting’ millions of refugees. Why not just recognize the alliance much the same way the alliance with the Soviet Union was officially recognized? Yes certain US factions will be ticked off, just like with the alliance with the Commies, too bad. Just have Obama show up in Tehran with a few Generals/Admirals in tow and everything will be fine, just like with Nixon in China. My guess is they also have real world experience in training police in that part of the world.

    So what’s the point of sanctions even if the sanctions are successful? The US needs a strong stable Iran to stabilize Iraq and Afghanistan. And I think that is the behind the scenes opinion at the Pentagon too. Which is why you don’t hear much negative about Iran from actual serving US military commanders.

  4. If the US is serious about never making a nuclear first strike (and I hope we are), why won’t the US government give such assurances to Iran and also offer to ensure that Iran will be protected by the US against ANY nuclear strike? If Iran were given such guarantees, they would have much less reason to pursue a nuclear military capability (assuming they are). Iran is surrounded on all sides by countries with a nuclear military capability that threaten them (US and Israel), so it’s not unreasonable that they would be defensive and feel the need to protect their national interest by having a nuclear weapon. This capability has obviously worked for the reclusive North Korean government in fending off their perceived aggressors, and being treated with more deference by international players than their otherwise threat would presume.

    Juan, does this make any sense militarily and politically to extend such an offer and see whether the Iranians are prepared to engage in more serious discussions?

  5. We tried military force against North Korea + China, Cuba, Vietnam, and other countries, with middling success in Korea, and with several epic failures such as the Bay of Pigs. (Epic Fail: link to kevinrobinson.files.wordpress.com) We tried embargoes and other sanctions on North Korea, Cuba, Vietnam, and other countries, with no benefits to the populations of any of them, and significant benefits to the rulers we were supposedly targeting. We gave them each a continuing propaganda victory, and cut off their peoples from contrary views and from contact with free societies.

    What makes anybody think that we will have a better outcome against Iran with either sanctions or military force? The epic failure of the US coup against the elected government of Mohammed Mossadeq, which put the oil companies’ friend, the Shah, back in power temporarily? Our previous sanctions? The embarrassing attempt to liberate the embassy hostages by force?

    Some say that continuing to do the same thing while expecting a different result is the definition of insanity. Well, then, what could we do differently? Here’s a thought.

    Let’s agree to drop sanctions and normalize relations on condition that Iran lets us build out broadband Internet to their poorest and most remote villages, at a cost to US taxpayers of a few billion dollars and no lives. We would have to negotiate what Iran could censor, such as pornography. Internet access would provide an immediate economic boost to the hinterland by allowing artists and craftspersons to sell online (as in Afghanistan, for example, where Overstock.com became the largest employer in the country shortly after the war). It would also give a huge boost to the development of civil society institutions. If we wanted to be really mean to the clerics, we could insist on deploying One Laptop Per Child education computers with Free Software in Farsi.

    (Disclosure: The writer is a co-author of How to Bypass Internet Censorship, available in Farsi and several other languages from FLOSSManuals.net and Sesawe.net.)

  6. “… Mike Mullen..said…that a military strike on Iran over its nuclear enrichment activities would be his ‘last option.’ He makes an excellent point, too often overlooked.”

    It’s not an excellent point, it’s a criminal statement. He violates the UN Charter and rips up international law by threatening, albeit in that creepy, pseudo peaceseeking language of US realpolitik, a member state.

    That should be your first and only point about threats and acts of illegitimate aggression that shred international law, Juan Cole.

  7. Gas is cheaper than water in Iran, thanks to ridiculous subsidies it can’t afford.

    Politically, it is extremely unpopular to reduce subsidies, so the US is doing Iran a great service in forcing domestic gas prices up.

    The Gas sanctions would be greatly beneficial to the people and government of Iran.

  8. Let IRI have its nuclear weapon or it’s “Japan Option”. If the sanctions are not going to work because the IRI will circument them then no worries about whether they are going to work or not.

    Why would IRI need to change it’s “behavior”? What kind of “behvior” needs changing in US and Israel’s view?

    Why would a grand bargain change IRI’s hostilities toward Israel? Iran does not need a security guarantee when the US has no choice but to live with a nuclear-armed Iran?

    IRI will never trust the US’s ‘security gurantee’ in a million year…good luck convincing the mullahs to give up on their real security guaranteed and accepting a bogus one…

  9. Re a gasoline embargo:
    Oil leaves Iran in petroleum tankers. There’s no way to know whether a tanker coming from int’l waters into Iran is empty or carrying gasoline, without blockade or seizure. That used to be considered an act of war, whether they are empty of gasoline or not. In this scenario we must also apply pressure against the seller of a refined global commodity, and the nation flagging the tanker. Juan’s right, gasoline won’t work, and the Iranians have probably taken options on tankers for storage.

    Re CJCS Mullen’s ‘last option’; military attack. Two scenarios there- blow up the enrichment facilities and related uranium feedstock and product, or blow up stuff that has no uranium around it.

    The first sort of attack is going to release the gaseous U-hexafloride working medium, radiologically poisoning a wide area, the watershed, soil, people and animals and sea. In effect, we would use their legal uranium as a ‘dirty bomb’ against their civilians. A radiological Dresden. Any metalic uranium not burned into toxic smoke will be lying around in valuable bits and chunks, easily collectable. Unless we accomplish all this with a nuclear strike, which only makes it worse.

    The second sort of attack, a 1992-2002 sort of collective punishment, presumes that we can isolate Republican Guard or other military assets and destroy them without killing large numbers of innocents. In this fantasy, Khameini, Amadinijad, and the mullocracy become so sad and poor that they stop making enriched uranium, or maybe are killed by their enraged people, who put someone practical charge like…Rafsanjani?

    As a practical matter, just bombing (and throw in some more sabotage) has the wrong psychology for national behavior mod. Did 9/11 make the US fold up and leave the Gulf? How has bombing the Israelis out of Palestine worked out? Did Bombing Saddam for ten+ years make him want to quit, or his people throw him out? Viet Nam? The London Blitz? The real Dresden? It makes folks that live there mad and stubborn.

    Legally, under the UN Charter, the one we helped write, attacking another country that is not threatening ours is illegal and criminal. I know, we’re special and get away with it sometimes, but it’s still a crime. Even if we tell them nice we’re going to bomb their country ahead of time. If nuclear enrichment is legal for Pakistan, Israel or India (and it is) it is also a peaceful option for Iran. I don’t like it, I don’t like the nuclear economy in general, but there it is.

    If we want to run this experiment less expensively, apply direct military pressure against a nuclear proliferator that is also selling missile delivery systems, we should do a deal with China, Japan and Russia to invade N. Korea. Pyonyang is already as isolated and poor as a country can be. Why is no one talking about doing that? Because even countries that really don’t like the NK’s ( Japan and S. Korea) see too much downside to a nearby war.

    Same goes for Iran. Look at the map, and find a single neighbor that would favor a US air strike. Not one. Maybe the Saudis, but not publically. And they are feeling defensive about that whole Saddam invasion and WMD thing, like the US and probably have closet nukes themselves.

    Now, run this analysis again, only have some other seemingly bullet-proof nuclear armed country try to punish Iran, scatter radioactive poison, or bomb them into giving up enrichment. How does that work out for them, and for us, in the long run? Can you multiply $5-10/gallon? Can you say ‘omigod, there’s a nuke power plant upwind from MY house!’ Because that kind of fear is built into our threat of attacking Iran.

  10. How about Spengler suggesting a strike now rather then later. Could we be wrong on betting Iran won’t pursue nuclear weapons and then won’t use them? Do we want to take that gamble? Their rhetoric is cause for concern.

    • Are you suicidal?

      ANY attack on Iran will cause your life to deteriorate drastically, if not kill you.

      Why is it so hard for people to understand that attacking Iran will cause:

      - 25 to 40% of the world’s oil to disappear from the world market overnight because no insurance company will ensure any tanker in the ME and tanker owners will NOT move their ships without insurance. This is even before tankers start sinking.

      - Less oil production means HIGHER oil prices – basic supply and demand economics. If you are in the US, this means Walmart can not fuel their trucks and can not restock their stores (Walmarts have only a few days stock of most items) and when Walmart can not restock their stores, Americans start starving.

      - Iran will devastate Israel with conventional High Explosive weapons, of which Iran has lots – no need for a few nukes when lots of HE will do the same job and is much harder for anti-missile technology to counter.

      - At that point it is very possible that Israel will start throwing nukes, contaminating the whole northern hemisphere and if they throw enough, nuclear winter (at least global warming will be “fixed”).

      The outcome of attacking Iran will be terrible at best for Americans and could be extremely, awfully terrible.

      As far as Iran getting nukes, so be it. They will not use them because they are not suicidal (most humans like to live the good life, not kill themselves, even so-called “religious nuts).

      This is a power-play by Israel and it is long past time for the world to shut down Israel’s games.

      If you want to grab your AK47 and invade Iran on your own, go for it. As for me, I have zero desire or need to attack Iran .

  11. I was just suggesting it. Either way it’s damned if you do and damned if you don’t. If you do attack Iran, thousands of people may die. If we don’t, millions may die. I’m not saying we should, but I’m playing devil’s advocate.

    • “devil’s advocate?”

      More like death advocate.

      If we attack Ian many more than “… thousands of people may die.”

      As I pointed out above, the deaths could end up being in the many millions, if things go out of control in the worst way. You are advocating world war by advocating attacking Iran.

      Do you think Iran is just going to meekly cower in the corner after being attacked? Would you? The answer to both questions is a resounding NO.

      Iran will counter attack using every weapon and technique they have developed. Remember, Israel and the US have been threatening Iran for years (the US even attacked Iran already using Saddam as a surrogate), so Iran has had lots of time to develop some formidable weapons and the Iraq and Afghan wars have shown the world how to defeat the US and Israel. Both the US and Israel will suffer tremendously for being stupid enough to attack Iran.

      Of course, this totally ignores China. While China likes to do things in a very stealthy way, they are perfectly willing to use overt, brutal force if they have to. An attack on Iran which cuts off 10% of China’s oil could cause China to become very, very nasty to the US and Israel. China would have no problem nuking Israel and telling the US to just ignore the disappearance of Israel and unless the US wanted to lose a war with China, it would just look the other way. Yes, China can defeat the US, especially now that the US has severely depleted its military and is bankrupt. China has no desire to go to war with the US, but will not back down either. For those that understand Chinese culture, it is very obvious that China has been telling the US (in a coded way) to stop this nonsense. Note that China is “downwind” of Iran so any attack will not only cause China to lose its oil, but China’s people will also be collateral damage.

      Recently several simulations of an attack on Iran have taken place in the US and Israel. In all cases the situation goes very bad for the US and Israel and NONE of the simulations included China!

      If (big IF) Iran gets nuclear weapons that is NOT a problem, especially for any country more than 3000 km from Iran. It is definitely NOT a problem for the US. The only real problem for Israel is not that Iran would nuke them (they will NOT), but that Israel would no longer be able to threaten to nuke the Arabs and a significant part of the Israel population (which hold two passports) would just leave Israel for better, safer places. In other words, the bully would be cut down to size and would no longer be able to bully the world.

      Note that IF Iran really wants nuclear weapons, they have chosen the least efficient way to get them. It would have been far less expensive and a lot quicker to just buy loose nukes on the black market. As both Obama and nti.org have pointed out, there is lots of unaccounted for and barely guarded nuclear material around. After getting screwed by the French (paid for, legal material was never delivered) and Russia (paid for, legal material was never delivered), Iran wants to be self-sufficient in everything that effects their future and Iran is well aware of the peak oil process and wants to use all their oil for export rather than internal usage. Nuclear power helps solve both situations.

      Unless you want to have a miserable life, I strongly urge you to rethink your gleeful joy about attacking Iran. An attack on Iran could shorten you life to just a few more hours after the attack.

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