Just How Vulnerable Is Iran to Sanctions?

The West should encourage Iran's reintegration into the global economy. But if it cheats...

Last February, Iran’s Supreme Leader Ali Khamenei announced a set of broad economic policies to harden his country against future sanctions. Now that Iran has inked a deal to limit its nuclear program in exchange for sanctions relief, the country is gearing up for a major economic windfall. But make no mistake, Tehran’s re-connection to the global economy does not provide an inoculation against the imposition of current or future sanctions. Although the timing of sanctions relief and the mechanism to re-impose—or snap back—sanctions has been a point of contention throughout negotiations, fears that Iran’s return to economic normalcy will undercut the ability to re-impose sanctions after the Joint Comprehensive Plan of Action (JCPOA) is short-sighted logic, and fails to consider the evolution and innovativeness of U.S. sanctions as a foreign policy tool while over-emphasizing emerging alternatives to the global financial system that may never come to fruition.

There is no mistaking the impact international sanctions have had on Iran’s economy. According to Treasury Secretary Jack Lew, Iran’s economy is twenty-percent smaller than it would have been without sanctions. U.S. and international efforts cut Iran’s oil exports by sixty percent, which has cost Iran $160 billion in oil revenues since 2012. More still, Iran experienced two years of economic recession, marred by a forty-percent peak inflation rate, unemployment rates that have reached as high as ten percent, and a glut of non-performing loans. Under the new agreement, all UN sanctions and major portions of U.S. and EU sanctions, including the punishing restrictions on Iran’s financial, energy, transportation, insurance, and automotive industries, will be lifted simultaneously upon IAEA-verified implementation by Iran of its nuclear related measures. Other sanctions, however, specifically those that target Iran’s ballistic missile program and entities associated with nuclear proliferation, will remain in effect for eight years.

Although this phased-approach to sanctions relief under the JCPOA ensures that Iran does not receive benefits without first implementing its nuclear commitments, uncertainties remain. The agreement does not affect U.S. and EU non-nuclear sanctions, such as those that target human rights abuses, support for terrorism, and money laundering. One question is whether or not relief from nuclear-related sanctions will affect the usefulness of non-nuclear sanctions. Consider, for example, the Central Bank of Iran, which will be among the first to receive sanctions relief. Although no longer subject to EU or U.S. secondary sanctions, the Central Bank of Iran will remain designated under the USA PATRIOT Act for deficiencies with anti-money laundering and counter-terrorist financing policies—a designation that requires U.S. banks to conduct enhanced scrutiny to ensure Iran is not using foreign financial institutions to indirectly access U.S. markets. Conventional wisdom would hold that sanctions relief would undermine the ability to impose non-nuclear sanctions, like those related to terrorism. But, this logic is fails to consider a broader reality—sanctions do not guarantee change.

As Secretary Kerry explained in front of the Senate Foreign Relations Committee, sanctions did not stop Iran from advancing its uranium enrichment program. In fact, Iran’s number of centrifuges increased from a few hundred in 2006 to over 18,000 by 2014, and some of the largest increases occurred when Iran was under under the heaviest sanctions. In reality, it was the change in the balance of power in Iran’s political system, resulting in the election of president Hasan Rouhani, that brought Tehran to the negotiating table. This nuance is important: imposing coercive economic measures (i.e., sanctions) can weaken political will in the target country, but does not necessarily force change. To be sure, history is replete with examples. Some have attributed the U.S. anti-apartheid sanctions against South Africa, which forced the country to become more inward-looking, as a contributing factor in its decision to build seven nuclear weapons and invest in developing an advanced industrial military capacity. Comprehensive sanctions against Iraq in the 1990s helped Saddam Hussein shore-up political power by exploiting sanctions, and divert revenues from the oil-for-food program into weapons programs.

Thus, the effectiveness of non-nuclear sanctions depends less on the benefits of Iran’s forthcoming sanctions relief, and more on the political capital required to change Tehran’s attitudes towards its neighbors, humanitarian issues, and support for terrorism—ideas that are not likely to change in the near term. To be sure, though, the best defense is a good offense, and Tehran is not taking any chances. Ayatollah Khamenei and president Hassan Rouhani are setting about to toughen Iran against future shocks—calling for a  “resistance economy.” The strategy bets that economic fortification through greater investments in Iran’s oil and natural gas sectors, financial reforms, increasing domestic manufacturing, and developing regional and global strategic partnerships will insulate against future sanctions. Will this plan succeed?