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    Middle East
     Oct 6, 2010

US shuns the obvious
By Hossein Askari

This is the second article in a three-part report.
Part 1: A history of failure

Why have sanctions not persuaded Iran to forsake its nuclear enrichment policy? There are a number of simple lessons.

First, for the target country. Sanctions on the exports of a country may be less than effective if that country's main export is a commodity in global demand. Simply put, others will buy Iran's oil if the US does not. Will Iran get a much lower price for its oil? No.
Sanctions on the imports of a country from the sender (the United States [1]) will do little if the country can buy similar goods previously imported from the sender (the US) from third countries


(Europe, Japan and China) or still from the sender but re-exported through other countries (the United Arab Emirates) although at a somewhat higher price.

Possibly most important, sanctions to change a target's policy that the majority of its citizens support are much less likely to succeed. Iranians support the regime's nuclear program, but targeted sanctions to change Iran's human rights abuses would be much more likely to succeed; possibly resulting in regime change and a reversal of objectionable policies.

Sanctions on investments in Iran's energy sector, highly touted by a number of observers, have not affected the regime as is widely believed. The regime has not used oil revenues to put Iran on the path of rapid growth and development. It has, instead, used the country's non-renewable resources to buy domestic support in order to survive, through wasteful subsidies and to enrich senior members of the establishment (intelligence services, Revolutionary Guards, military, clerics and bureaucrats). For these purposes it has had sufficient funds, especially in the last eight or so years, with high and rising oil prices. Foreign investment and better technologies for its oil and gas sectors would have paid off more into the future (and could now become important as the regime struggles economically).

Second, for the sender. The US has sent mixed signals with policies that look at times bizarre from an Iranian perspective. The US stated long ago that Iranian oil was embargoed from coming into the US, yet Iranian refined products were exempt for a number of years. The US turned a blind eye towards most u-turn financial transactions for about 28 years. [2] The US has frozen accounts of individuals by their name; does anyone really believe that members of the Revolutionary Guards, intelligence services, and clerical and government establishment open big foreign bank accounts in their own names? These are not boy scouts. These powerful men in Iran have partners, fictitious names and numbered accounts. Is it believable that the US with Saudi support could not persuade the United Arab Emirates, Oman and Malaysia to cut their ties with Iran? No.

The fact that is most inexplicable and puzzling is the issue of financial sanctions. Let me explain. Financial sanctions have been arguably the most effective of all sanctions. They have slowly cut off Iranian banks and government institutions from the US financial sector, and in turn the global financial sector. This has increased the cost of imports and reduced revenues from exports, squeezing Iran for revenues. Yet with this confirmed success, some US actions show a timidity that is inexplicable.

The US has only recently imposed heavy fines on banks that have continued to deal with Iran but want to maintain their access in the US. The US Treasury is fully cognizant that the central bank of Iran, Bank Markazzi, is circumventing sanctions on Iranian commercial banks. Yet it has not sanctioned the Iranian central bank.

When one looks at the sanctions on Iran, one gets the feeling that there is something of a country club atmosphere. It is steady as you go and a little bit at a time. If the US wants change in Tehran, then there has to be sufficient pain on the establishment to change their policies or on the citizenry to rise up and overthrow the regime. The US is just prolonging the agony, giving the impression that it is not really serious. That it really likes the mullahs and wants to reach a workable accommodation. Why?

At times, the US professes that it does not want to cause the Iranian people more pain. If that is the case, then it is forgetting the most important way that sanctions are supposed to do their work - to motivate a general uprising against an unpopular regime and its policies. It is willing to watch Iranians suffer, either by leaving their homeland in unprecedented numbers or by barely surviving under the oppressive and economically bankrupt rule of the mullahs, but it will not help them to put an end to their misery by supporting their demonstrations for basic human rights.

What would be the choice of Iranians: to suffer a little bit more and end their misery or continue down the same road for another 30 years?

What could the US do to put the regime under real pressure? Are their sanctions and associated policies that could force the regime to change its oppressive policies or be overthrown? The answer is yes, but it seems that either the US does not have the political will to do so or, more likely, it is not as concerned about the suffering of the Iranian people as it professes.

So what could work? First, financial sanctions on the Iranian central bank could squeeze Iran further. This, the US could adopt unilaterally and threaten countries that did not comply. Second, Iran's foreign exchange reserves are being rapidly depleted given lower oil prices and capital flight. The regime is worried. During the week of September 25, the Iranian currency lost about 20% of its value against the US dollar as the demand for dollars was rising and the central bank did not offer sufficient dollars to calm the market. A spark could cause a total collapse of the Iranian riyal, an economic and political catastrophe for the Tehran regime.
Given these realities, by announcing the enforcement of a number of existing laws, the US Treasury could spark a panic: motivate Iranians, as well as expatriates residing in the US and elsewhere to liquidate their assets and to withdraw their money from Iran. Existing US laws include the payment of taxes by all US citizens and permanent residents (holders of green cards) on all foreign sources of income (including interest income and profits) and the prohibition of investments in Iran (requiring a license from the US Treasury's Office of Foreign Asset Control).

Specifically, the US Treasury could make an announcement that Iranian Americans and permanent residents (estimated to number over two million) are honestly unaware of these US laws and the Treasury would give individuals an amnesty from prosecution and from loss of permanent resident status, say for six months, if holdings are declared, taxes paid and funds repatriated.

Why would this hurt the regime in Tehran? Many Iranian Americans and permanent residents in the US have quietly transferred money to Iran (giving dollars to individuals in the US and receiving rials in Iran, a practice that is facilitated through international trade with third countries). They have made such transfers to make lucrative bank deposits in Iran; with three-year interest rates in the range of 15% to 24% and an essentially stable exchange rate (fluctuating in about a 20% band over the period), such deposits possibly earn on average about 15% more in annual interest, even when converted back into dollars, than could be earned on deposits in the US.

They have invested in real estate, which has boomed by more than 1,200% in Tehran in the last 12 years. They have invested in the Tehran Stock Exchange, where prices have surged but which is also a mighty bubble that could undo the regime at any moment. They have invested in business and have worked in Iran. Some have even fronted for the regime and received cash payments or real estate in Iran for their services.

Some of these investments and transactions are illegal under US law and require a license from the US Treasury. These individuals should have paid taxes on all income and profits. Thousands of Iranian Americans and permanent residents find themselves in this predicament.

A US announcement on the lines outlined above would cause a panic, not only in the US community but also in Iran, because Iranians would fear the consequences of a rush to sell, and subsequent fund outflows, on the value of assets in Iran and on the exchange rate of the rial. Iranian Americans, permanent residents in the US, Iranians residing in other countries and even Iranians in Iran would sell and try to take their money out before everything crashed.

The rush to take money out of Iran would put a squeeze on Iran's foreign exchange reserves. The regime, already sensitive about supporting the value of the rial (for prestige, support of businessmen and the wealthy, and to keep a lid on inflation), would have no choice but to pre-empt this by instituting foreign exchange controls blocking the outflow of funds from Iran; the black market exchange rate would become multiples of the official rate; import costs for unsubsidized non-essentials would soar; and inflation would skyrocket.

More importantly, these rapid financial developments - collapse of asset prices and currency controls - would turn ordinary citizens, and especially those with vast assets, the wealthy, regime loyalists, and prominent bazaar merchants, against the regime as their enormous wealth was decimated in terms of dollars. The ensuing inflation, and it is already over 25%, would fuel dissatisfaction among average citizens struggling for survival.

Some may question the workability of this approach on the grounds that the US government does not know who has transferred money to, or invested in, Iran. The US does not need this information to ignite panic among these individuals. The Treasury could even play up one or two cases in the media to further ignite a panic. This is how panics do their work. These are initiatives that the US could adopt and would not need the backing of the UN.

At this stage, to get the backing of the Iranian people, these initiatives should be targeted towards improving the regime's human rights record, not the nuclear enrichment issue, which Iranians largely support. Iran's nuclear program could be better addressed with a weakened regime, or with a new regime in Tehran.

A number of human rights advocates and anti-regime activists have argued against new sanctions, or any form of pressure, that might increase the burden on ordinary Iranians. While their concerns are understandable, they should recall the experience of South Africa.

Unfortunately, there's unlikely to be any gain without pain. But luckily in this case, much of the burden would fall on the elite. It is they who have money to take out of the country as the average Iranian has barely enough to survive.

Is this the best course of action for the US?

1. The country imposing sanctions is normally referred to as the "sender", the country whose policies it finds to be objectionable the "target".
2. Until 2008, the US allowed Iran to sell oil to non-US entities for dollars. When a foreign entity buys Iranian oil, it instructs a US bank to issue funds to an Iranian bank. The fund transfers to Iranian banks were achieved through what has been coined a "u-turn".

Part 3: More sanctions - or a change in course?

Hossein Askari is professor of international business and international affairs at George Washington University.

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New Iran sanctions as war chorus rises (Oct 1, '10)



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