An Economist’s Fix to the Iran Deal

Malta-flagged Iranian crude oil supertanker "Delvar" is seen anchored off Singapore March 1, 2012. Western trade sanctions against Iran are strangling its oil exports even before they go into effect, a U.S. advisory body has found, amid warnings that any shortages will only push up crude prices and strain a weak global economy. REUTERS/Tim Chong (SINGAPORE - Tags: ENERGY BUSINESS MARITIME TRANSPORT)

The new sanctions regime would give much less leeway for Iran to act like a rogue state.

The OIL Fund would not be another version of Iraq's failed Oil for Food Program started in 1996. The latter invited waste, corruption, and fraud by giving discretionary power to UN officials over how country's oil revenue was spent. Our proposal does nothing of the sort – it merely sets an initial ceiling on the amount of oil revenue that can be repatriated to Iran and enables the Security Council to increase or decrease it based on Iran's behavior. Likewise, ensuring that the Fund's balance is invested in a responsible and transparent manner is a straightforward exercise – one extreme, though probably unnecessary, solution would consist of delegating the task to the management of one of Norway's sovereign wealth funds.

Iran could increase its disposable oil income beyond the revenue neutral ceiling in three ways, all of which could be blocked by the UNSC resolution establishing the OIL Fund. First, Iran could try to smuggle oil outside of the UN mechanism. That could be deterred by setting prohibitively high penalties in the form of reduced repatriation rates, proportionate to the value of the smuggled oil. In addition, to incentivize detection, the United States or the UN could offer a substantial financial reward to whistleblowers, payable from the reserves of the OIL Fund – as well as guaranteed U.S. permanent residency for them and their families. Second, Iran could try to impose special levies on its oil companies. That pathway could also be blocked explicitly by the UNSC resolution. Third, Iran could sell its oil at artificially discounted prices and ask for a fraction of the discount back through a side contract. That pathway could also be blocked by making the OIL Fund the sole authorized entity to broker the sale of Iranian oil for export markets to the highest bidder. Commodity brokerage firms – whose fee schedules are generally transparent – would be contracted for that purpose through open competition and made accountable to the OIL Fund. That would also eliminate Iran's ability to provide in-kind support to its allies, such as Syria, in the form of free oil.

Of course, as a designated terrorist organization, Iran's Islamic Revolutionary Guard Corps (IRGC) would remain under U.S. sanctions. So would the Execution of Imam Khomeini's Order (EIKO), the economic conglomerate controlled by Iran's Supreme Leader with around $95bn in assets. EIKO originated mainly from the confiscation of real estate or extracting large payments from their politically disfavored private owners. Another sanctioned entity would be the Mostafazan Foundation, whose holdings are a result of the confiscation of the property of the royal family and its associates following the 1979 revolution. Finally, there is also the Astan-e Quds-e Razavi, the wealthiest Shia temple in the world, whose holdings mostly originate from control over land in Eastern Iran.

Applying sanctions to such entities would be essential to reduce their grip on Iran's economy and society. Earlier this year, Iran's Defense Minister announced that Iran's armed forces had been instructed by the Supreme Leader – also Iran's Commander-in-Chief – to start the process of divesting from the economy and selling commercial holdings "irrelevant" to their main function. The targeted sanctions and the international control of the state-dominated oil industry would strengthen incentives to accelerate that process.

It is true that future decisions to reduce or suspend payments- if Iran found itself in breach of Security Council's resolutions- could be blocked by Russia or China. In that case, the United States could always threaten Iran by leaving the JCPOA while voting to conserve the infrastructure of the OIL Fund. Alternatively, from the outset, any of the permanent members of UNSC may reject the U.S. proposal to establish the OIL Fund in exchange for the United States' return to the JCPOA – or they might waver later in its implementation and enforcement down the road. But that would effectively leave the responsibility for the future of the ‘Iran Deal' and Iran's actions on the shoulders of America's partners, not of the U.S. administration. The same is true of Iran's refusal to abide by the OIL Fund resolution – in that case it would be Iran, not the international community, who would bring down the JCPOA and who would be held responsible for it.

The new sanctions regime would give much less leeway for Iran to act like a rogue state. There is no need to negotiate with Iran's government directly and wait for it to comply with the U.S.-UN sanction swap. With bold U.S. leadership and determination to act, the international community can make that call for Iran and push the country towards a better, less belligerent future.

Reza Ansari is an Iranian economist based in Washington DC. You can follow him at @TheRezaAnsari.

Dalibor Rohac is a research fellow at the American Enterprise Institute. You can follow him at @DaliborRohac.

Image: Malta-flagged Iranian crude oil supertanker "Delvar" is seen anchored off Singapore March 1, 2012. Western trade sanctions against Iran are strangling its oil exports even before they go into effect, a U.S. advisory body has found, amid warnings that any shortages will only push up crude prices and strain a weak global economy. REUTERS/Tim Chong (SINGAPORE - Tags: ENERGY BUSINESS MARITIME TRANSPORT)

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