Careful What You Wish For

Sanctions targeting Iran's nuclear program will backfire. Punishing Tehran's human rights abuses is another story.

For the longest time, conventional wisdom held that economic sanctions on Iran were ineffective. But, once (1) the UN adopted Resolution 1929 in June 2010, prohibiting Iran from buying heavy weapons, toughening financial transactions with Iranian banks, increasing travel bans and supporting more cargo inspections, (2) the United States announced measures to fine companies that sold gasoline to Iran and entities that engaged in financial transactions with specified Iranian entities, and (3) the European Union adopted tougher initiatives than the UN, officials expressed “surprise” that sanctions were beginning to squeeze Tehran.

Then in October, the nuance of the message began to change. Sanctions were suddenly seen as having an adverse effect on ordinary Iranians. Most recently, on October 28, the Washington Post reported that although the EU had adopted tough restrictions on the sale of technology and equipment to Iran’s oil and gas industry, it had parted company with the United States and issued a directive permitting its companies to sell refined products to Tehran in order to avoid negative effects on the Iranian people; of course, if EU companies did so they could face U.S. fines.

Why, then, has conventional wisdom done such an about-face? What has made sanctions seem so successful? Will the EU’s break from the U.S. position render sanctions ineffective again? Is the economic hardship of Iranians largely sanction driven? Can today’s sanctions succeed in changing the regime’s policies?

Let’s face facts. Before 2008, sanctions on Iran were such a porous hodgepodge that they were an embarrassment for the United States. Iran could sell its oil and buy almost everything it needed from non-U.S. sources, and could even acquire most U.S. goods through third countries (principally the UAE) at a price that was only 5–10 percent higher than if those goods had been bought directly from the United States. Then, in November 2008, the Treasury revoked the U-Turn License of Iranian banks. The revocation of this license meant that U.S. banks could not make dollar transfers to Iranian financial institutions. Most importantly, this was followed in December 2009 by a record fine of $536 million on Credit Suisse for violating U.S. sanctions on Iran; essentially, either Credit Suisse paid the penalty or it was barred from operating in the U.S. market. This was followed in 2010 by a fine of $350 million on Lloyds Bank and $298 million on Barclays. These fines were the key to making sanctions “bite,” as Iranian banks were virtually cut off from the international financial system. Iran’s cost of trade skyrocketed, in my estimation by some 20–25 percent, in turn squeezing Iran’s foreign currency reserves.

The impact of these fines was more recently reinforced by UAE banks, which, under pressure from the U.S. Treasury, ended their role as a conduit of funds to Iran. This further squeezed Iran’s dwindling foreign-exchange reserves and sparked a dramatic drop in the value of the Iranian currency, falling by over 15 percent in a matter of two days.

Given the strong likelihood of crippling U.S. fines for any firm that sells gasoline to Iran, the EU’s “magnanimity” to let EU-based companies sell the fuel in order to “protect” the Iranian people is a totally empty gesture—no EU firm in its right mind would be willing to sell gasoline to Iran if it could mean incurring heavy U.S. fines. The business trade-off simply makes no sense whatsoever.

Is this new round of effective sanctions the primary cause of increasing hardship on ordinary Iranians? No. Iran’s economic failures are self-inflicted. The Iranian regime has failed its people. Iran’s economic performance since the Revolution of 1979 has been miserable. While its economic failure in the 1980s can in large part be attributed to the war with Iraq, performance over the last twenty years is the fault of the regime alone. Although sanctions have undoubtedly slowed the development of Iran’s oil and gas reserves (since the adoption of Iran and Libya Sanctions Act in 1996), the government has had ample resources, namely, easy money from oil, to achieve sustained and rapid economic growth. But instead of adopting sound policies to encourage private-sector growth, the government has squandered these resources to buy support through wasteful subsidies, to enrich regime insiders, to pursue military programs and grandiose foreign-policy adventures, all of which it could ill afford. Iranians have paid the price and will continue to do so as educated Iranians emigrate in record numbers for a better future elsewhere. Iran’s economy was in a miserable state long before sanctions began to “bite” in 2010. To attribute Iran’s economic failure to these measures is simply incorrect.