RISKY
BUSINESS 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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