Will his New Sanctions on Iran Cost Obama the Presidency?

A sharp drop in the value of the Iranian currency as a result of new American sanctions may sound like good news to hawks in the US. But actually this development may signal ways in which Americans will also be harmed, and Obama may have put a second term in jeopardy, cutting off his nose to spite his face.

An amendment to the National Defense Authorization Act signed by President Obama this past weekend will seek to slap third party sanctions on countries and enterprises that deal with Iran’s central bank. It will go into effect this summer. In effect, the law says that if you buy Iranian petroleum, you cannot do business with American financial institutions. Since the United States is still over a fifth of the world economy, and most institutions with capital need to deal with it, the hope of Congress is that Iran will be left without customers.

The measure, pushed by the American Israel Public Affairs Committee on behalf of the government of Israeli Prime Minister Binyamin Netanyahu, might well be a trap for Obama. In an election year, he could not refuse to endorse new sanctions against Iran (the Republican candidates in Iowa are practically running on promising that if elected they will launch a war on Iran; and they are lambasting the president as weak on this issue).

But the new sanctions may well hurt Obama’s own election chances. Iran’s military exercises in the Persian Gulf, aimed at reminding the world that it can play the spoiler and stop one-sixth of the world’s petroleum from reaching the market, helped put Brent crude up to $108 a barrel, a spike helped along as well by news of a jump in Chinese manufacturing.

Those two factors, the likelihood of rising Asian demand for petroleum in 2012, and investor nervousness about how tensions with Iran will play out, will probably keep petroleum prices at historically high levels in 2012, and some analysts believe that there could be a return to the overheated pricing of 2008 before the crash.

It would be much better for the American economy if prices sank back down to the levels of only a few years ago, of $50 a barrel or less.

If the Congressional sanctions actually worked, and took Iran’s roughly 2.5 million barrels a day in exports off the world market, that would take out 80% of Iran’s export income and deeply hurt the regime. But it would also send world petroleum prices through the stratosphere, deeply harming Western economies already teetering on the edge.

Actually, I have to wonder whether the fall in the value of the Iranian currency might not even be good for the country. Nations with pricey primary commodities such as petroleum suffer an artificially hardened currency. In turn, that makes it expensive for outsiders to buy what they make, leading to stagnating industry. Softening the currency should help Iranian exports, a key element of the economy. Iran has had a crash program to expand its non-oil exports, with some success.

Obama cannot hope for decisive help from the only quarter able to offer it in the short term, Saudi Arabia. The Saudis were willing, in the late 1970s, to flood the petroleum markets with their excess capacity for political gain. But Riyadh now no longer wants inexpensive petroleum, because the king is using extra petroleum receipts to bribe the Saudi population into repudiating any “Arab Spring” inside the kingdom. The Saudi government has expanded subsidies so much, in a quest to mollify a formerly angry public, that it probably cannot afford them if prices fall too much. Hence, the Saudis cannot pull Obama’s bacon out of the fire, though they could try to blunt the force of the crisis by pumping an extra million barrels a day or so.

Moreover, the sanctions on those who deal with Iran’s central bank threaten profound harm to the economies of American allies. South Korea is deeply worried about their impact and will seek an exemption. South Korea imports roughly $11 billion a year of petroleum and other products from Iran and sells Iran $6 bn. worth of South Korean manufactures– automobiles, etc. If Seoul cannot buy Iranian petroleum (some 10 percent of its oil imports), that would hurt its economy. If it cannot receive payment from Iran for Hyundais and other exports, that would hurt its economy. In short, some $16 billion a year in trade is at stake for South Korea. That is about 5% of its external trade, a significant hit. And, energy is not like just any other import– it is foundational. In a world where petroleum supplies are already tight, it will not be easy or maybe even possible for all of Iran’s former customers (should they cut Iran off as the US Congress urges) to make up the shortfall from other sources.

In fact, the non-NATO world will likely find workarounds to thwart these new US sanctions sufficiently to allow the regime to survive, even if they do add to the cost of peteroleum and so harm US recovery. Venezuela opened a binational bank with Iran in 2009, which provides a back door for Iranian financial transfers in Latin America.

Russia says it will refuse to cooperate with new sanctions.

And India, for instance, has found ways to pay Iran for its petroleum without dealing directly with an Iranian bank. It uses Halkbank in Turkey. There is talk of simply setting up new private banks in each other’s countries, which would not be under US sanction. There are admittedly drawbacks to the current ad hoc arrangements. Without the security of bank transactions, Indian exporters to Iran are reduced to dealing on a basis of trust with importers. And, Iran this fall was reluctant to accept payment in rupees held in Indian accounts because of a steep decline of the rupee against the dollar. (Iran may rethink this skittishness, given the similar decline in its own currency provoked by the new American sanctions). Still, India needs the petroleum it imports from Iran, and needs to sell its made goods to Iran, and it is likely that ways will be found to keep that trade going, whether the US Congress likes it or not.

For its part, China has been paying for Iranian petroleum with Euros, and if that becomes difficult they are considering just paying in Chinese yuan. China’s Sinopec petroleum company seems completely unafraid of US sanctions and is actually helping develop Iranian fields, something that was already sanctionable under US law. Iran now does $30 billion a year in trade with China, something that the US probably can do nothing about. China and Iran, it is true, have been having some tough negotiations on prices going forward, and China has been able to resort to Saudi Arabia, Libya and Iraq to make up the petroleum shortfall from Iran while the two countries are playing hard ball. But a) this tiff will probably be over by March; b) China is likely to continue to import a lot of petroleum from Iran and c) the world petroleum market is not so saturated that China can probably permanently reduce its reliance on Iranian sources. If it did, that would make it harder for other countries to do so.

In short, even Congress’s more severe sanctions and targeting of Iran’s Central Bank are likely to be ultimately ineffective in changing Iranian policy or undermining the regime. The international community will find work-arounds and close US allies like South Korea, facing major economic consequences, will lobby hard for exemptions. Obama, who was forced into this law and had opposed it, has every reason to grant the exemptions. In other instances, the NDAA will cause American will to be tested. It will take a lot of impudence to attempt to impose sanctions on Chinese banks for dealing with Iran, when Chinese finance is so important to propping up the US economy.

An Iran with its back against the wall will be a formidable adversary for the US and its allies in the Middle East. The 20,000 US personnel at the massive American embassy in Baghdad are vulnerable to reprisals by Iraqi militias allied with Iran. The American war effort in Afghanistan depends for success on Iranian good will. And, Iran can put up petroleum prices incessantly with just a little saber-rattling.

In signing the NDAA (which also allows the US military to arrest Americans anywhere in the world and to hold them indefinitely without trial), Obama has likely done harm to himself. Iranians will suffer some inconveniences and ordinary people may face real hardship in Iran. But the ayatollahs will still have their billions, and the regime will go on enriching uranium and supporting Syria and Hizbullah. The US, on the other hand, will suffer massive opportunity costs (i.e. it won’t do all kinds of things in the economy that it might have otherwise) from a policy of keeping petroleum prices artificially high by bothering Iran.

20 Responses

  1. Ron Paul’s positions on several issues are awful. But on some key issues like Iran and civil liberties he is so much better than Obama and Romney/Santorum/Gingrich/Perry. I might vote for someone who would abolish social security if I thought that was necessary to prevent a ruinous war. It shouldn’t be necessary, but where are the loud voices demanding both a sane foreign policy and a humane domestic policy?

  2. At times like this I recall Alfred North Witehead, the philosopher and mathematican, who comments that mankind is not totally dumb. Juan’s article describes actions very close to totally dumb.

    Glenn Greenwald’s latest column shows that the USA does not even pretend to support Democracy in the middle east. Thus the rhetoric justifying many of our actions falls away and shows the power play to favor those countries who support our policies, especially Israel, in the region. This is another case of being very close to totally dumb.

    Here is the link to Greenwald’s article.

    link to salon.com

    Morris Berman in his 2006 book with the appropriate title “Dark Ages America” notes that when empires are on the way down they choose leaders who hasten the collapse. That was sure true of W Bush. For the last couple of years Obama has done the same thing.

    • If you want to see why the US is on this path, take a look at Morris Berman’s latest book, “Why America Failed”.

  3. There has never been a time since the fall of the pro-US dictator the Shah that the US has not wanted sanctons, as you note, on Israel’s behalf, and as punishment for policies seen as harmful to Israel that are popular and legitimate by local values.

    The question of the nuclear dispute is can the United States accept Iran being potentially as close to a nuclear weapon as Japan is today. Which is to say can Iran acquire legal nuclear weapons capabilities.

    From sanctions to sabotage to military attacks, no plausible US policy option would prevent Iran from advancing its nuclear program towards legal nuclear weapons capability. Most courses, including Obama’s sanctions and Obama’s and Republican threats to take the military measures that are supposedly on the table will predictably lead to more Iranian nuclear capabilities, not less.

    So will the US harm Iranians, the region and the US itself in a desire to maintain an illusion of omnipotence, the idea, false in this case, that there must be something the US can do to prevent an outcome Israel would not like?

    For Obama, it looks like the answer is yes.

    • It ain’t “the US” that’s doing all this stuff, it’s a small, self-selected, self-interested cadre of numbnuts. Including the only President We Currently Got, and his band of merry men and women.

      Time to review a bit of other-Imperial history?

      link to en.wikipedia.org
      link to en.wikipedia.org

      Wonder which of the cast of imperators ol’ BHO most closely corresponds to?

  4. One of the few things in this universe in infinite supply is impudence. I don’t expect us to come to our senses in time.

  5. The situation with Iran is trending badly, and there’s a lot of momentum to keep in on course to something that, when you look at long festering confrontations like this, rarely ends well.

    A modus vivendi with Iran makes excellent sense and would be doable, were it possible to work beneath the radar of the neocons/Lobby, which makes that barely possible (?). Getting into a fight with Iran wouldn’t just be shooting ourselves in the foot, as with Iraq. Nixon was able to slip away to China, but does anyone think that’s even conceivable for Obama?

    A degree of ongoing tension/conflict between Iran/Israel/US serves the domestic purposes of all three. The new round of US arms sales to KSA make sense to the extent they are used to maintain balance and stability with the rise of Iranian power.

    But then, things aren’t that simple.

    • Nixon was able to slip away to China, but does anyone think that’s even conceivable for Obama?

      Why not? Like Nixon, he’s “made his bones” and it would be tough for the hawks to peg him as “Soft on Terror.” He’s demonstrated a willingness to engage in peace talks with the Taliban, and has the New START accord to show that he’s pretty good at it. The Clinton administration carried out covert talks with the Iranian regime for years, hoping to reach some kind of detente, and look who happens to be Secretary of State.

      Another parallel to Nixon going to China: Iran is a competitor of significant power that is directly adjacent to a country where we have a major ongoing conflict (think Vietnam and the Soviet Union), and it is very much in America’s interest to placate them.

      I can definitely see a path to a negotiated resolution here. We’ll just have to see how it plays out.

      • It really does make a lot of sense, I agree.

        What makes it improbable, IMHO, is the power of the neocons/Lobby, whose presence in Washington has hardly been diminished, have hardly given up on their goals or worldview, and who would get wind of the groundwork being done and nip things in the bud. These guys are relentless.

        When secular rationalists approach a problem, they come up with and perhaps even execute a reasonable plan, then they go on to other things. If their plans don’t work or are disproven, they compromise or otherwise work things out. These ideologues, however, when stymied, go to prayer-meeting; compromise means agreeing to let the other guy cave-in. Let’s not even get into their penchant for “creating reality,” that Ron Siskin recounted in his book on the Bush 41 White House.

        Obama really is playing to the middle, essentially as a Eisenhower Republican, which isn’t a bad thing. But let’s face it, the guy is a Tool, and to a degree he should be—he isn’t our Daddy or King. He has his vision, but the momentum of the defense/NS bureaucracy, official and unofficial (the beltway, with all its Think Tanks), defines the mindset and worldview of the Elites who provide him with his options, and this is the core of the power of the neocons/Lobby.

        Obama may manage to resist, or just delay the impact of this pressure, but he is what he is, and ultimately he does what he’s told. His actions have shown themselves to be a reflection of our democracy, responding to the real and manufactured wishes of the people as led by our Elites.

        I’m hoping/wishing/dreaming/hallucinating, he’ll find a backbone after getting by 2012, if he hasn’t totally sold out to the powers that be to get re-elected. Otherwise, he becomes just the next stanza in the ongoing song that Bush 41 sang to us, however much more crudely and stupidly, the difference being one of style.

  6. At times like this I recall Alfred North Witehead, the philosopher and mathematican, who comments that mankind is not totally dumb. Juan’s article describes actions very close to totally dumb.

    Glenn Greenwald’s latest column shows that the USA does not even pretend to support Democracy in the middle east. Thus the rhetoric justifying many of our actions falls away and shows the power play to favor those countries who support our policies, especially Israel, in the region. This is another case of being very close to totally dumb.

    Here is the link to Greenwald’s article.

  7. I think this bill is it for me. I would no longer support President Obama’s re-election. For my part I have removed myself from all of Democratic email list.

    This bill would only strengthen the conservatives in US and Iran. There are economic and social issues in Iran that manifested itself in the Green movement. With the upcoming election cycles in Iran, the economic issues could have a rallying cry for the green movement. Iranians don’t believe there is a real threat of Iranian government producing Nuclear weapons. They see this as excuse by US and Europe to overthrow the government. What most people don’t get is that, even though Iranians do have their issues with the current government, they know full well that any change that comes from outside specially through military confrontation, would be far worst than what they have now.

    Most likely, the Green movement and reformers would choose to completely sit out of the election. The last thing they want is to be identified with the whole sanction and military threats. Thanks to President Obama the conservatives got what they wanted in Iran and US.

    • You would sit out the ENTIRE ELECTION for one issue?! If this represents the “Democratic base”, it’s no wonder Dem politicians are pandering to the “undecideds” and Republicans instead.

      • Not one issue. This was the straw that broke the camel’s back.

        First the health care debacle, then the tax cut for the rich extended and soon most likely further cuts into the middle class benefits, then wall street bailout with no accountability on the people that made the mess, his administration’s complete failure in Israel-Palestine conflict………

        The question, what has he done other than fancy speeches?

  8. And for anyone who doesn’t get it, fails to understand (or now exults at) what goes on between “the US’s” ears, please to read the comments to the so-very-tweetish Yahoo! article “explaining” how to Deal With The Wogs, Iranian-bred, and illustrating so “penetratingly” and “explosively” how effective decades of The Narrative have been in excluding rational thought and decency from the common tongue of most Americans: link to news.yahoo.com

  9. Since the overturn of Ghaddafi in Lybia, mullahs in Iran are more determined to pursue their nuclear program. Khamanei has got his lesson so far: it is obvious that Ghaddafi armed with weapons of mass distruction wouldn’t have been attacked so easily by Western allies. I believe, it is the core point in Iranian Real Politik today towards the West to avoid happening such the situation.
    The momentum of military tensions between Iran and the US is accelerating due to this mentality among mullahs that the confrontation with the US is inevitable unless they gain a balance of power in the region. In case they were not to be allowed such the balance of power, they must be the one who takes the initiative of when and where to wage a war against the US.

  10. The second half of your post very effectively undermines the first half, as well as your final paragraph.

    Those sanctions are as full of holes as Swiss cheese. Oil in fungible on the world market. The actual effects of the price of the oil the U.S. imports, you’ve convinced me, is likely to be minimal.

  11. I think these Iran sanctions will cost Obama the election. And if Israel attacks Iran Obama loses and they know it. Think they are concerned that Obama is going to apply more pressure on the illegal settlement issue in the next four years. Israel and the I lobby will be in a better position if Romney wins. The dual loyalty I lobby in the Dem party does not care if Obama loses. Israel’s welfare no matter what Israel does is first on their list.

    Know that I will not be putting in the hundreds of free hours for OBama (and I had plenty of questions about him after watching him for two years in the Senate) and will absolutely not vote for him if there is an attack on Iran and will actively work against him. Just what the I lobby may want

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