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    Middle East
     May 11, 2006
How Iran will win a sanctions war
By Jephraim P Gundzik

Over the past two months US President George W Bush and officials of his administration have repeatedly asserted that diplomacy is crucial to resolving the Iran nuclear issue. But rather than focusing on relations between Washington and Tehran, this diplomacy has been fixated on gaining international support for US-led economic sanctions against Iran.

With Russia and China unwilling to play along, economic sanctions against Iran will be imposed by a small group of key US

allies without the United Nations' imprimatur. These sanctions will prove much more damaging to those countries applying them than to Iran.

The Bush administration's standard operating procedure for dealing with "axis of evil" members has remained remarkably consistent - no direct diplomatic contact. Washington made no attempt to engage Baghdad diplomatically before its invasion of Iraq and has repeatedly rebuffed direct contacts with North Korea.

Similarly, the Bush administration has dismissed Tehran's recent diplomatic overtures as disruptive. Washington is single-mindedly devoted to corralling and coercing other countries into supporting its efforts to isolate and unseat unfriendly regimes.

Though this strategy worked to unseat Iraq's Saddam Hussein, it has been a military disaster that will produce another regime ill-disposed toward Washington. The diplomacy of the Bush administration has accelerated Pyongyang's nuclear-weapons program and set US relations back about 20 years. As in Iraq and North Korea, the application of US diplomacy to Iran will create the opposite of its intended goal.

Washington's recent efforts to halt Tehran's nuclear-energy program have centered on drafting a Chapter 7 UN resolution citing Iran as "a threat to international peace and security" and ordering the country to stop its uranium-enrichment work. Such a resolution, backed by the force of international law, would give Tehran a short period to comply. If it failed to do so, Washington could seek UN support for economic sanctions or military action to enforce compliance.

Among the UN Security Council members with veto power, only France and the United Kingdom, along with the United States, support a Chapter 7 resolution ordering Iran to halt its nuclear-enrichment program. Such a resolution would be shot down by both Russia and China, because the US tried to use a Chapter 7 resolution to justify the invasion of Iraq. In addition, neither Russia nor China agrees that Iran is a threat to international peace and security. Finally, both Moscow and Beijing agree that a Chapter 7 resolution condemning Tehran could encourage an Iranian oil embargo, triggering an energy crisis.

So unless by some miracle Moscow and Beijing turn around, a Chapter 7 UN resolution ordering Tehran to halt its nuclear program is extremely unlikely. This will force Washington to drum up support for concerted action against Tehran outside the UN context. Because only the US and Britain appear to support military action against Iran, Washington will likely seek consensus on economic sanctions first.

The sanctions game
In addition to France and Britain, Germany and Japan may be persuadable. Germany supported the failed Chapter 7 resolution condemning Iran, while Japan is Washington's closest ally in Asia. As well, France, Britain, Germany and Japan all have significant oil-import-related financial relations with Iran. According to well-developed thinking in Washington, these countries could use their financial relations with Iran to bring increasing pressure on the regime in Tehran through targeted, non-oil financial sanctions.

These sanctions include freezing the foreign assets of Iranian officials, closing export credit lines, closing Iranian government bank accounts, and freezing Iranian government assets. None of these financial sanctions target Iran's physical oil exports, however. Technically, Iran would still be allowed to export its oil to France, Britain, Germany and Japan. The only problem is that Iran would be loath to export oil to customers in countries where its assets are frozen, because revenue from oil sales could be frozen too.

Whether economic sanctions against Tehran are imposed within or outside the UN, such sanctions would inevitably lead to a reduction in Iran's oil exports. The only question is how sharply oil exports would be cut. In addition to France, Britain Germany and Japan, China also imports a significant amount of oil from Iran. With vast energy-related investments and investment contracts in Iran, China is very unlikely to apply any sanctions on Tehran. On the contrary, China may seize the opportunity delivered by surplus Iranian oil to cement much larger long-term oil-import contracts with Iran.

Sanctions losers
In addition to a secure oil-export market in China, Iran would reap the benefit of much higher international oil prices produced by US-engineered economic sanctions. A 50% reduction in Iran's daily oil exports would reduce global oil supply by about 1.3 million barrels per day, or about 1.5%. With global oil supplies well below demand, as evidenced by oil-price action over the past three years, a further reduction in global oil supplies by 1.5% could easily drive international oil prices above US$100 per barrel, a 40% increase from current levels. Tehran could nearly recoup all of the revenue lost from reduced oil exports to Europe and Japan through much higher oil prices.

Sanctions might slow economic growth in Iran, but they would lead to collapsing economic growth in many countries, including those imposing sanctions. This would prove particularly problematic for the Bush administration, which faces crucial mid-term elections in November. President Bush's public approval rating is already below 35%. Rapidly slowing US economic growth, induced by sanctions on Iran and an energy crisis, would further erode the president's popular support and support for his Republican Party. This could lead to a spectacular defeat for the Republicans in November.

Interestingly, British Prime Minister Tony Blair and his Labour Party enjoy about the same low level of public approval as Bush and his Republican Party. With the Blair government already very shaky, rapid economic decline in Britain would almost certainly lead to Blair's political demise and possibly that of the Labour government. Political instability in France, Germany and Japan might not be as great as in the US and Britain, but their economies would also suffer greatly from skyrocketing oil prices and inflation.

In addition to winning in the short term, Iran would also win the sanctions war over the long term. While much weaker global economic growth would lead to falling global oil demand, international oil prices are unlikely to fall below $35 per barrel. Extreme global geopolitical instability will ensure that the growth of global oil production remains restrained. The inevitable global economic recovery will drive oil prices back up.

Meanwhile, Bush will have become a lame duck and Blair will have resigned. Economic expediency will have forced France, Germany and Japan to abandon their Iran sanctions. But in Iran, President Mahmud Ahmadinejad will still enjoy strong domestic and regional support.

Jephraim P Gundzik is president of Condor Advisers, Inc. Condor Advisers has provided investment risk analysis to individuals and institutions globally since 1995. Please see condoradvisers.com for more information.

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The US's geopolitical nightmare (May 8, '06)

Iran impasse: Make gas, not bombs (May 8, '06)

Beyond the bluster: Iran at a crossroads (May 5, '06)


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