Unthinkable (21 page)

• Another series of U.S. laws and executive orders imposes secondary sanctions on third parties conducting business with Iran related to the Iranian hydrocarbons industry or its financial sector, buying Iranian petroleum products, providing sensitive technologies, transferring currency to Iran in payment for Iranian goods, or conducting financial transactions with Iran related to entities involved with Iran's nuclear program (and, in some cases, terrorism and human rights violations). Several of these regulations impose penalties on foreign entities that have commercial contact with designated Iranian individuals and entities connected to the Iranian nuclear program, support for terrorism, or human rights violations.
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• The European Union (EU) has imposed an embargo on Iranian oil purchases, frozen the assets of Iran's Central Bank, and restricted its trade and the provision of financial services, insurance and reinsurance, and technology to Iran.
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• Canada, Australia, Japan, South Korea, India, Switzerland, and other countries have adopted a range of lesser sanctions in addition to those imposed by the UN.

• The Society for Worldwide Interbank Financial Telecommunication (SWIFT), the international financial transaction web, has disconnected all of Iran's major banks—including its Central Bank—from its network, further attenuating Iran's financial ties to the global economy.
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THE MISSING CARROT.
As skillfully as the Obama administration has engineered the imposition of crippling sanctions on Iran, its handling of the Dual Track approach has not been flawless. While I disagree with many of the administration's critics on the left about Washington's sincerity or determination to pursue engagement with Tehran, I agree that what has been offered to the Iranians has been sorely lacking.

The administration's thinking appears to have been that it would offer Iran a genuine process of reconciliation, and as part of that process Iran would agree to give up or curb significantly its nuclear program. Meanwhile, the United States would dismantle its sanctions apparatus and the result would be normal economic and diplomatic relations between America and Iran that would, in and of themselves, be highly beneficial to Iran. Later, after the administration shifted to the sanctions track, the principal carrot became the lifting of sanctions—or even just the promise that no new sanctions would be imposed. In other words, the “carrot” was that we would stop beating them with the stick.

Since we don't know why Iran has not responded either to Obama's effort at engagement or to the impact of the sanctions, we cannot know for certain whether the absence of meaningful carrots beyond the offer of engagement was part of the problem. But there is reason to believe that it might have been. The Iranian economist Bijan Khajehpour warns that most Iranians believe that the sanctions are entirely punitive because they do not see any carrots—any incentives to change their behavior. He warns that this plays into the regime's narrative that the West just wants to hold Iran back.
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For his part, because Khamene'i fears and loathes the United States—and has repeatedly said that he sees engagement with the United States not as a benefit to Iran, but as a subversive ploy intended to undermine the Islamic Revolution—offering him specific incentives tied
to specific Iranian actions on the nuclear track might have worked better. For instance, Khamene'i might have been more comfortable agreeing to a specific limit on the Iranian program, such as halting enrichment beyond 5 percent, in return for a similarly specific offer from the other side, such as an international agreement to subsidize the construction of nuclear power plants in Iran.

We cannot know if a more concrete, tit-for-tat approach to compromise would have succeeded where the nebulous offer of “engagement” failed, but it could not have hurt and there is evidence to suggest that it might have worked. After Iran rejected the 2009 TRR deal in Vienna, Tehran floated a number of compromise positions that posed a more sequenced process in which Iran would receive incremental returns for making equivalent concessions, rather than the original proposal, which would have required Iran to ship all of the LEU up front. Thus, as well as the Obama administration has managed the carrot-and-stick, or Dual Track, policy so far, there is still room for improvement. A revised policy, especially one that featured more discrete and tangible benefits for Iran in response to specific concessions, might do better the next time.

Since engagement did not succeed and few other carrots were on offer, the ultimate verdict on the first four years of the Obama administration's Iran policy must rest on the impact of the sanctions on Iran. The evidence that sanctions are having a pronounced impact is extensive.
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As early as December 2010, Iran decided to cut the subsidies on fuel prices they provided the Iranian people, in part to deal with the economic pressure from the first rounds of sanctions. The decision caused prices to quadruple overnight. Iranians protested in the streets, forcing the regime to deploy its Law Enforcement Forces to keep order.
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The EU prohibition on purchasing Iranian oil—coupled with American and European efforts to convince China, India, Japan, South Korea, and other countries to reduce their own imports of Iranian oil—have had an even more profound
effect. Together, these efforts more than halved Iranian oil exports, falling from 2.3 million barrels per day on average in 2011, to just 1.1 million barrels per day on average in 2012.
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By early 2013, these cuts were costing Tehran $4–8 billion per month in lost oil revenues.
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By the fall of 2012, Iran's currency, the rial, had plunged to 35,000 to the dollar—a 300 percent drop from December 2011.
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In that same period, unemployment ballooned by 36 percent and prices rose 87–112 percent.
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By September 2012, inflation had reached 50 percent, and Iranians feared the situation would worsen. “Everyone from the butcher to the industrialist will say that beneath the surface they are months from economic collapse,” one Iranian told a
Time
magazine journalist at that time. Another confessed that while she believed that Iran should have nuclear weapons, it was not worth the hardships caused by the sanctions.
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Crime, corruption, and smuggling are about the only things thriving in Iran.
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Iran's economic difficulties produced a renewed debate among its leadership. Moderates and pragmatists, banished from the center of power but still with access to media outlets, renewed their calls to negotiate with the West over the nuclear program to get the sanctions lifted.
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Likewise, during the late summer of 2012, Iran converted some of its 19.75 percent enriched uranium to assemblies for the Tehran Research Reactor (making it difficult to use the same uranium for a weapon), which many in the West saw as an Iranian gesture of goodwill.
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Of far greater interest, however, were signs that even some of the regime's core supporters, the hardline elements, were beginning to entertain the notion that Tehran should make some compromises to ease the sanctions burden. In December 2012, Khamene'i's principal mouthpiece, the newspaper
Kayhan,
published a remarkable article titled “Worn-out Revolutionaries and the Conspiracy of the Poisoned Chalice.” The title alludes to Khomeini's speech at the end of the Iran-Iraq War in which he said that he would accept a cease-fire with Iraq even though it was more bitter to him than drinking a cup of poison. In the hardline version of history, it was Rafsanjani and other moderates who pushed Khomeini to do so. In this case, the
Kayhan
piece admitted that there were numerous
voices agitating for compromise with the West, although it mocked them as the “regretful, worn-out” revolutionaries, who have “always adopted a pragmatic, tolerant strategy and mild-mannered approach which is in pursuit of amicable relations with the enemies of the revolution.”
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Days later, Iran's foreign minister, Ali Akbar Salehi, also stated that both Iran and the international community “have reached a conclusion that they must exit the current stalemate.”
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These comments struck many outside observers as signs that key elements within the regime were now advocating a settlement of the nuclear issue to get the sanctions lifted.

However, as always in Iran, nothing is that simple. First, it is not clear that the sanctions will cause the Iranian economy to “collapse,” whatever that may mean, or even that the stress that they can apply will be enough to force the regime to change. Mohammad Ali Shabani, an Iranian political analyst, summed up the situation as, “If you're talking about collapse, that is not happening.”
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Although inflation is bad, Tehran has so far avoided any balance-of-payments crisis. The loss of Western trading partners has opened the door to Chinese firms, such that Sino-Iranian trade has gone from just $3 billion in 2002 to more than $44 billion in 2011.
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In February 2013, the
New York Times
reported from Tehran, “The sanctions, while the source of constant complaint and morbid jokes, have not set off price riots or serious opposition to the Iranian government. In fact, the past year has not been all that bad.” The
Times
quoted Saeed Ranchian, a Tehran shopkeeper, who observed that given Iran's currency predicament, “you would expect people to buy less. But in Iran, when prices go up, people start buying more, fearing even higher prices . . . [the country's economy] has rules that no one understands.”
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Even at its current, greatly reduced level of sales, Iran was estimated to have made roughly $45 billion in oil revenues in 2012, still twice what it earned in 2000, and just shy of the $49 billion Iran needed to cover its latest government budget.
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Historically, Iran has gone long periods without exporting significant oil when it felt it necessary for national purposes. In 1979–81, Iranian oil exports fell by 80 percent as a result of the hostage crisis, the Iranian Revolution, and the Iran-Iraq War, but Tehran did not
shift course.
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Likewise, in 1951–53, when the Iranian government under Mohammad Mosaddeq fought the British over the nationalization of the Anglo-Iranian Oil Company (today's BP), Iran could not export any oil, yet did not change its policy until the government was overthrown.
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In 2012, when the oil sanctions began to take effect, Iran had at least $70 billion in hard currency reserves and the regime was making money by playing the currency market. In a way that only he could, Iranian president Mahmud Ahmadinejad claimed in October 2012, at the height of the panic over sanctions, that the Iranian people were better off economically than they had been when he came to office.
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While that claim may be hard to justify, it is certainly the case that many of Tehran's most powerful have not only survived, but in fact have thrived on the sanctions. Indeed, those lobbying the regime about the sanctions are more often pressing it to reform its economic policies than its nuclear policies.
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True experts on the Iranian economy have long urged caution about the impact of the sanctions. Bijan Khajehpour notes that even with oil exports having dropped to roughly 1 million barrels per day from sanctions, the per capita income Iran gets from crude is only down to about $750 per year, still above the historical average of the Islamic Republic.
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Djavad Salehi-Isfahani likewise warns that the structure of the Iranian economy—in which the regime controls nearly all foreign exchange—diminishes the impact of the devaluation of the rial. He notes that the government protects the cost of essential items, which matter most to lower-class Iranians, the principal supporters of the regime. Middle-class Iranians, who rely more on the black market for luxury goods and have savings that are getting diminished (or wiped out), are the ones getting hurt. That is not good for the regime, but neither is it disastrous. As Salehi-Isfahani has put it, “Does all this mean that Iran's economy is on the verge of collapse, as Israel's Finance Minster reportedly said? The answer is no, because most of the economy is shielded from this exchange rate, though not from the ill effects of the sanctions, which will continue to bite for a while. Would it cause sufficient economic pain that would push the Iranian government to make concessions in its nuclear standoff
with the West? The answer is not likely. The multiple exchange rate system, as inefficient as it is, will protect the people below the median income, to whom the Ahmadinejad government is most responsive.”
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My Brookings colleague Suzanne Maloney, one of the finest scholars of Iranian political economy, echoes these warnings in a conclusion worth quoting at some length:

With $70–100 billion in reserves, a diversified economy, and well-honed capabilities for smuggling, sanctions-busting, and insulating the regime from sanctions, Iran may well be able to ride out this pressure for the short-term and even beyond. The outcome is more likely to be the corrosion of the economy, rather than its outright collapse. Of course, what really matters is the psychological impact—both on the population and on the leadership. Panic is fueling the run on the black market, and if the sense that things are spinning out of control intensifies, all bets are off. And while the economic catastrophe and popular dissatisfaction add urgency for Tehran to find some accommodation on its nuclear ambitions, it seems unlikely that they would produce a dramatic or immediate about-face. The regime has every reason to fear economic pressure and the nascent backlash within society—but the deep mistrust of Washington's intentions and its conviction that its adversaries at home and abroad will exploit any concession as a sign of weakness almost surely outweighs any pragmatic impulses. They know that their repressive instruments are plenty capable of managing the home front.
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