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    Middle East
     Dec 23, '13

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The nuclear deal and the future of Iran
By Hossein Askari

The interim deal (not really an agreement) between Iran and the P5+1 (the five permanent members of the United Nations Security Council plus Germany that in 2006 engaged Iran on its nuclear program) has been hailed by some as a triumph of diplomacy over war mongering, and attacked by others as

President Barack Obama's capitulation in his quest for a foreign policy legacy.

Some commentators have hailed the deal as the best that could be had, while others have damned it as worse than no deal. Yet others have examined the deal from the perspective of the United States, Israel, or the Middle East, but with little focus on what it all means for the future of the Iranian people and US relations with the Muslim world. How will future generations of Iranians and Muslims view this deal? So as to understand our perspective, an assessment of how we got here is essential.

Nuclear enrichment and sanctions
On November 4, 1979, Iranian students sacked the US Embassy in Tehran and took 60 American hostages. This became an international crisis after the de facto ruler of Iran, Ayatollah Khomeini, endorsed and supported their action. This was followed by Iraq's invasion of Iran on September 22, 1980, resulting in a brutal war that was to last nearly eight years with more than a million casualties.

The US and its allies supported Iraq's Saddam Hussein with military hardware, military intelligence, and even with outlawed chemical weapons. Iran became isolated, with Syria as its only ally, and was perceived as a pariah nation. The new masters of Iran, the mullahs, or Shia clerics, managed to hold the country together and expel the Iraqi invaders. The ouster of the Shah and the defense of Iran against great odds afforded the mullahs a measure of deserved legitimacy in the eyes of average Iranians.

Iran's post-revolution vulnerability was a gift to the mullahs, allowing them to cement their rule. But there was also a lesson for them and for Iranians from all walks of life. The Middle East is a dangerous neighborhood, with entrenched superpower interests. The mullahs decided that the cheapest and quickest way to deter regional and superpower aggressors, guard against regime change and stay in power for years was nuclear enrichment.

The process began slowly with a small research reactor in 1990 and then accelerated under the supervision of Iran's intelligence services. Iran's goal became mastery of the nuclear fuel cycle and acquisition of the knowhow for weaponization but not the production of nuclear warheads.

It was not, and is not, in Iran's or the clerics' interest to produce even a single warhead because this could invite quick and coordinated airstrikes, lead to a regional nuclear arms race, encourage a total multilateral trade embargo and possibly lead to the overthrow of the regime by outside forces united against the clerical rule. But Iran wanted, and still wants, to have the capability to produce a bomb in quick order if necessary. I believe that Iran either already has this capability or will have it within a few months.

If the US and others believe that Iran does not already have this capability or will give up its quest because of the interim deal, then there is a serious gap in their understanding of the rulers of Iran. This was a program that amazingly evaded Western and Israeli intelligence infiltration and was brought to top global attention by the regime's armed nemesis - the Mojahedin-e-Khalq Organization (People's Mujahedin of Iran, or the MKO) - an organization that fortunately for the regime is hated by most Iranians.

But the hostage-taking and the nuclear program had another important consequence - economic sanctions and their impact on the Iranian economy, two topics on which many have deeply held views but generally little familiarity either with the impact of economic sanctions or with the Iranian economy. Let me elaborate.

The US imposed unilateral economic sanctions on Iran beginning in 1979 by freezing Iranian assets held in the US. The sanctions later expanded to various exports from Iran to the US and US exports to Iran. Sanctions on Iran were highly porous until 1995 (with the adoption of tougher trade sanctions, for instance, Iranian crude oil imports had long ago been banned, but not refined products) and especially in 1996, with the adoption of the Iran Libya Sanctions Act (ILSA). ILSA did two things. It cut off investments in Iran, especially in its oil and gas industry, and made Iran a riskier country for foreign investors.

With ILSA, the US also managed to cut off investments by third parties in Iran by threatening fines and expulsion from the US market. But even after ILSA, Iran could sell its oil to other buyers with little or no loss in revenues. Iran's non-oil exports, constituting roughly (depending on oil prices and thus oil revenues) 10% of its exports, suffered about a 5% reduction in total export revenues. At the same time, all imaginable foreign goods were available in Iran, including US goods (imported through third countries such as the United Arab Emirates, specifically Dubai).

Sanctions became increasingly serious beginning in 2005 with the adoption of a number of financial sanctions under the term of Treasury Undersecretary Stuart Levy and continuing into 2013 under his successor, David Cohen.

These sanctions included a ban on u-turn dollar flows to Iran (dollars paid by non-US buyers of Iranian oil going to Iranian accounts outside the US), imposition of very heavy fines on foreign banks (such as Credit Suisse and the Union Bank of Switzerland) that had acted on behalf of sanctioned Iranian entities, sanctions on Iran's central bank (which had stepped in to assume the functions of its commercial banks), and cutting off Iranian banks from SWIFT (Society for Worldwide Interbank Financial Telecommunication), severely curtailing their ability to engage in cross-border money transfers.

A summary upshot of these financial sanctions was to (i) cut off Iran from the international financial system, (ii) reduce the flow of foreign exchange into Iranian coffers, and (iii) pressure the Iranian currency downwards.

When Iran was cut off from the international financial system, the predictable fallouts were fast and furious. Iran could still sell its oil, but it could not readily use the funds it received. It could not move the dollars out of the country that had bought its oil to buy goods elsewhere.

Thus Iranian banks could not open letters of credit to finance imports (how most trade is financed); instead, Iran would have to send people with suitcases of money or gold to secure its imports. And yes, Iran could barter for its oil or accumulate money in foreign banks to use on another day. In other words, imports became expensive for Iran. Moreover, as the availability of foreign exchange was squeezed, pressure increased on the exchange rate of the Iranian currency, the rial, because that exchange rate is supported by the central bank's readiness to buy rials for dollars.

But this was not all. Earlier in 2006, the United Nations adopted multilateral sanctions against Iran and, most recently in 2012 and 2013, other countries boycotted Iranian oil, causing Iran's oil exports to fall by about 50% in 2013. This was made possible with little international disruption because there was sufficient oil on the international markets to make up for much of the reduction in Iranian oil exports.

Looking back at the evolution of sanctions against Iran, we conclude that beginning in 1995-1996 sanctions became mildly serious and started becoming really serious around 2005-2006. To our mind, total financial sanctions, if strictly enforced, would be almost sufficient to cause serious harm to any economy. Think about it. Even if you could sell your oil, or whatever other goods you had, how could you use the proceeds effectively if you were totally cut off from the international banking system with no foreign bank willing to deal with you?

Even so, we must note that while financial sanctions have become serious, (i) they have not been effectively and fully enforced, and (ii) financial sanctions that could have caused much more pain for the mullahs have been curiously avoided by the Obama Administration. Let me explain.

Financial sanctions have been engineered and enforced by the Office of Foreign Asset Control (OFAC), reporting to the Undersecretary for Terrorism and Financial Intelligence, housed in the US Treasury. Under OFAC regulations, US citizens and residents cannot, without a license: directly or indirectly transfer money to Iran; repatriate money from Iran; buy or sell assets (real estate, shares, etcetera) in Iran; or open bank accounts in Iran.

OFAC has made an example of a few small violators but has not gone after the big lawbreakers - individuals who have moved millions of dollars back and forth, have made significant investments in Iran, have not reported any of their Iranian income or capital gains for US tax purposes (if they did, their violations would immediately be exposed), and, most importantly, have indirectly (knowingly or unknowingly) supported the rule of the mullahs and undermined US policies.

These lawbreakers may run into the thousands, with their activities running into the billions of dollars and enriching a number of important regime insiders in Iran.

OFAC could easily stop these big-time transgressors and support legitimate transactions for needy US citizens and residents of Iranian origin. The Treasury could simply and publicly announce the law of the land: financial transactions with Iran (as described above) without a license are illegal and US citizens and residents must report their worldwide income; there would be an amnesty if violators reported all their income, repatriated their funds and paid their taxes.

The idea would not be to punish these US citizens and residents but to enforce the law and cause a financial panic inside Iran. This announcement would in all likelihood: (i) motivate many, if not most, of these US citizens and residents to liquidate Iranian assets and repatriate their funds, (ii) cause residents of other countries with investment in Iran to panic and liquidate their assets, and (iii) cause even Iranian citizens, especially regime insiders including those with vast assets acquired under the rule of the mullahs, to panic and try to sell their assets in Iran and convert their rial proceeds to foreign currency before the big fall in the rial's value.

It is not too difficult to see how a financial panic would ensue with the expectation of falling real estate and other asset prices in Iran and a total collapse of the Iranian rial. Such a financial collapse could turn even regime insiders against each other and motivate a positive change within Iran. As an aside, regardless of OFAC violations, not reporting foreign income is a violation of US tax laws.

Some inescapable facts about sanctions
It may help to look at some simple facts about sanctions to see how we got here, what mistakes we have made along the way and what the likely impact of the interim nuclear deal could be.

Those in power in Iran and their cronies - important clerics, senior members of the intelligence services and of the military, and business middlemen - have invariably gained from sanctions. They operate in the shadows and make more money from illicit trade and financial dealings because sanctions afford them unusual opportunities and encourage opaque activities.

The US is about the only country that uses economic sanctions as a foreign policy tool because of its large economy - it is a big importer of goods, a big exporter of some goods and the country with the power to threaten third countries with fines and sanctions if they do not support its sanctions against a target country. Thus for similar reasons multilateral sanctions are more likely to succeed than unilateral sanctions.

But there are also facets of the target country that matter. If the target country has a diversified economy, is a member of a big trade block (such as the European Union), exports goods in heavy global demand (oil), and has little in terms of economic relations with the US (little trade and few US investments to begin with), then it is less vulnerable to US economic sanctions.

The US uses economic sanctions to motivate a change in the objectionable policies of the target country. The premise behind such sanctions is that the target country's economy will suffer, either affecting the leadership directly or affecting the general population, which will then demand that the leadership change its objectionable policies. Clearly, sanctions are unlikely to succeed if the citizens endorse and support the policy that the US finds objectionable.

In the case of Iran, sanctions prior to 2002 targeted Iran's support of terrorism, its interference in other countries, belligerence toward the Arab-Israeli peace process and human rights. Iranians would like to see some, if not all, of these objectionable policies changed, especially those dealing with human rights and social freedoms.

Since about 2002, Iran's nuclear program (to master the nuclear cycle) has become a US obsession. But the program is one that the majority of Iranians support because of the country's vulnerability during the Iran-Iraq War. As a result, although sanctions became more threatening toward the Iranian economy, the targeted policy was not one that most Iranians wanted changed.

At the same time, we should note that US sanctions on Iran included some elements that were not going to win supporters in Iran. The US sanctioned spare parts for Boeing commercial jets (raising a clear safety issue) on the silly premise that these planes also had a dual military use; the US insisted that third countries could not supply fuel to Iranian passenger planes (again raising a safety issue and increasing flight times because of more stops); sanctions also impeded the flow of medicines to Iran, and tightened visa regulations for Iranian students. All of these have, in my opinion, been counterproductive on humanitarian grounds.

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