Sanctions Against Iran Are Overrated

Iranian officials are indirectly admitting that Western economic sanctions are wreaking harm on the Iranian economy, according to recent media reports. But these initial reports imply a degree of success—both economic and political—that sanctions are unlikely to achieve in the long run.

First, one should be suspicious that multiple Iranian officials, at around the same time, made similar admissions. Iran’s foreign minister confessed that “We cannot pretend the sanctions are not having an effect.” The deputy oil minister acknowledged that the decline in Iranian oil production from 2010 to 2011 was “due to lack of investment in oil field development.” In the most stark assessment, the governor of Iran’s central bank recently noted that the country must behave as if it were “under siege.” This last comment suggests possible motives behind such “owning up” by Iranian officials.

Economic warfare, like military attack, is often used to rally popular support around governments, especially weak regimes like Iran. Iran’s autocrats don’t mind eating humble pie and admitting that foreign conspirators are damaging their economy, so long as it increases their chances of surviving politically.

Frequent practitioners of economic warfare—especially the United States, which is the most aggressive user of such methods in the world—often confuse the economic effects of sanctions with the political. Sanctions are economic means that attempt to achieve political ends. Even if sanctions bite deeply on the target economy, they often have little or no effect in compelling it to bend to the sanctioning nations’ political will, especially if the goal is ambitious. For example, sanctions are not good at achieving regime change or the abandonment of a nuclear program—objectives that directly affect the security of the target nation or its ruling regime. In the case of Iran, economic pressure is designed to help achieve both of these lofty but unrealistic goals.

But in a celebrated case, didn’t international economic sanctions bring down the apartheid regime in South Africa? Sanctions were imposed and the regime fell, but correlation is not causality. Closer examination reveals that the regime weathered decades of sanctions before falling for largely internal reasons. The same can be said of the Soviet Union. In such systemic upheavals, internal factors almost always have more effect than external pressure. In fact, in many cases, the aforementioned “rally around the flag” effect of externally imposed sanctions contravenes internal centrifugal forces.

A more instructive case is the universal, comprehensive sanctions against Iraq after Saddam Hussein’s invasion of Kuwait. They were the most economically harsh international sanctions ever imposed, yet they failed to dislodge Saddam’s army from that small oil-producing nation. And this was a lesser goal than the later objective of regime change. This episode also illustrates how difficult it is—even when most of the world’s countries agree to sanctions—to enforce such measures. Governments have incentives to go along with their allies or the international community in imposing the sanctions. But then they look the other way while their corporations do business with the embargoed nation or even help the target country under the table. Evasion of sanctions is usually rampant because big money can be made selling to an embargoed nation that is willing to pay a premium to get banned goods. And evasion usually increases over time because both the target and the illicit exporters learn new ways of skirting restrictions. The same situation arises when importers buy illegal discounted goods from an embargoed nation.

Iran has advantages that Saddam’s Iraq did not have. Although there have been a few United Nations sanctions against Iran, most have been slapped on by the United States, with its European allies being dragged along for the ride. Russia and China have been unenthusiastic about sanctions and repeatedly resisted added UN measures. China is a major importer of Iranian oil. Both of these countries or their companies would likely be major evasion routes for Iran.

Although U.S. or EU extraterritorial sanctions against other nations’ banks doing business with the Iranian central bank could certainly crimp Iran’s oil sales, Iran has had decades to learn how to evade sanctions and will probably surmount even these financial restrictions, which tend to be more potent than trade embargoes.

Oil and natural gas are valuable commodities, and many countries would be willing to help the number-four nation in oil reserves and the number-two nation in natural gas reserves by operating under the table. Western sanctions can raise the cost of doing business for Iran but likely cannot choke off its oil exports. Iran could also evade, by land and sea routes, a ban on its imports of refined petroleum products.

Over time, restrictions on foreign investment in Iran’s oil fields have slowed Iranian production from 4 million barrels per day to 3.5 million barrels per day. But even if the West managed to restrict an even greater quantity of Iran’s oil exports, the world price would likely increase, thus bringing Iran more oil revenues. Despite sanctions, experts expect Iran’s oil revenues to increase by one-third in 2011.

Sanctions are often sold as a way to avoid armed hostilities; but many times, they raise the stakes and are therefore the back door to war—for example, in the case of Saddam’s Iraq in 1991 and Manuel Noriega’s Panama in 1989.