After the announcement of the alleged Iranian plot to assassinate the Saudi ambassador in Washington, D.C. (a case that, on the basis of what has been released so far, sounds as phony as a three dollar bill), President Obama pledged to tighten international sanctions further on Iran.
There is no doubt that US and international financial sanctions against Iran are hurting it in some ways, as AFP argues. The measures have scared off big oil and gas companies such as Shell and Total S.A. from making major investments in developing Iran’s petroleum and natural gas fields. Especially in the area of natural gas, a lot of sophisticated expertise and equipment is now needed, and Iran can’t do the work on its own. Shell, e.g., is a leader in liquified natural gas, which allows easy shipment of the fuel. Iran is having to barter its oil for goods because of the difficulty it faces in currency transfers, which in turn is creating cash flow problems for state agencies. AFP estimates that Iran needs $10 billion in foreign investments each year to maintain its economic progress, but is getting only $3 billion because of sanctions.
But at the end of the day, the sanctions mainly create opportunity costs for Iran, not real hardship. Iran’s economy could expand faster, its oil and gas fields could be developed more expertly, and it could have more prosperity if the sanctions were lifted. But the sanctions cannot overthrow the government or convince it to change course.
First of all, the sanctions are partial. They affect certain Iranian banks and other companies, and the ability of Iran’s banks to interface with other banks elsewhere in the world. But they do not forbid petroleum exports.
Since it can freely export its petroleum, Iran will likely make $100 billion from oil exports this year because of relatively high oil prices. That kind of income is a huge windfall for the central government (which reaps the profits), and acts as a cushion, allowing the regime to dole out favors to constituencies. Iran also will have $35 bn. or so in non-oil exports this year.
Given how thirsty rising powers in Asia are for energy, it is highly unlikely that the Obama administration can orchestrate a boycott of Iranian petroleum, as opposed to a boycott of Iranian banks. Nor would such an attempt likely succeed, since petroleum is easily smuggled.
Second, the US cannot get key countries to play ball in implementing the sanctions, which after all would often hurt Tehran’s trading partners as much or more than they hurt the ayatollahs. China and Iran will likely do $45 bn. in trade this year, up 50% from last year. There are plans to more than double that figure to $100 bn. in the short term.
Russia is helping Iran with mining and other ventures.
Turkey and Iran do $11 billion in licit trade a year, up from only $5 bn. just a few years ago. In addition, it is estimated that smuggling between the two countries amounts to $4 bn. a year, some of it such as to allow Iran to get around UN sanctions. While the US is going all out to pressure allies to get tougher on Iran, it is hard to see what leverage Washington has with Ankara in this regard. Turkey for its part is dedicated to expanding its trade with the Middle East.
Although India’s Central Bank kicked Iran off the South Asia bank exchange in response to US pressure, India has paid Iran for its substantial petroleum imports through a Turkish bank that interfaces with both countries, and India is now setting up relationship with Iran’s Central Bank. Were all that to become difficult, Iranians look to Russia as a country whose banks will play ball. India is an industrializing society in desperate need of petroleum, and the likelihood that India would comply with an American-led oil boycott against Iran strikes me as low.
Iran is also a key trading partner for Iraq, and the two countries did $10 bn. in trade last year.
As relations between the US and Pakistan have soured, some Pakistani officials have become bolder in urging Islamabad to buck US pressure, and to expand Pakistani trade and cooperation with Iran.
My guess is that one reason the Obama administration decided to peddle the shaky assassination story to the world is that it is just plausible enough to perhaps convince some of the countries doing business with Iran to cease doing so. Obama is in a race against time to prove that sanctions are biting and are causing Iran’s nuclear enrichment program to languish, since if he cannot reassure the Israelis on this score, they may very well attack unilaterally.
But sanctions alone just are unlikely to do the trick. An oil regime can cushion itself from the effects of the sanctions, as the one in Iraq in the 1990s did (it was the Iraqi people who suffered, including an estimated 500,000 deaths among Iraq children).
Obama came into office convinced that the negotiating table was the only plausible way to deal with Iran. He should go back to that.