Sanctions against Iran

(rightweb.irc-online.org)

There exists a belief in Washington that by sanctioning Iran’s hydrocarbon industry, the government of the Islamic Republic will be persuaded to divest from its nuclear energy program, and ultimately give up the right to enrich uranium on its own soil. However, this is hardly a logical argument to make since part of the very reason for having a nuclear program in the first place is to allow the country to broaden its energy sources beyond a dependence on fossil fuels.

Sanctions, conversely, only make the need for such a program even more pressing, and not less so. The United States, it should be noted, proposed to invest in India’s hydrocarbon sector in order to persuade the country to scale back its nuclear industry. This assistance was offered in spite of the fact that India had actually produced and tested an atomic bomb.

Iran’s experience of sanctions over the course of the last 30 years, moreover, has been to view them not really as a burden but something of an opportunity with which to spur on the nation’s industrial development and economic progress. Necessity is the mother of invention, and Iranians lack no shortage of ingenuity when it comes to circumventing the effect of economic sanctions. Indeed, if they have taught the Iranians anything, it is to rely on one’s own resources, technology and indigenous talent above all else. Attaining self-sufficiency is also politically expedient.

The pressure placed on global energy companies not to supply gasoline to Iran, which has needed to import fuel because of massive over-consumption resulting from an artificially-lowered price, has encouraged Iranian carmakers to develop alternative CNG (compressed natural gas) and dual-fuel engines. Since these are also very efficient, they have helped boost the Iranian automobile industry such that it has become one of the world’s leading producers and exporters: Iran now makes more motor vehicles than even the United Kingdom does. Just 5 years ago, it was nowhere near this level of industrial productivity and technical proficiency.

Iran has also recently announced that it has succeeded in greatly increasing gasoline production at its refineries and petrochemical plants such that it now meets domestic needs, and so thwarts the effect of any possible disruption in supply. Even it had not been successful companies from China, India, Russia and Venezuela were standing by to ship fuel to Iran in place of the Europeans and Japanese. These countries, and others like Turkey, are also likely to help fill the void in the sale of oil industry equipment, 70% of which Iran manufactures locally anyway, now that the European Union has taken the decision to impose a ban on the export of these goods.

Companies like Sinopec can also be expected to heavily invest in Iranian oil projects along with established domestic firms, many of whom have worked as partners with western energy corporations and have acquired a great deal of technical know-how in the process. They feel confident that they can implement important projects, such as the remaining phases of the giant South Pars gas field project, even if the likes of Schlumberger and Total have decided to call an end to their dealings with Iran.

This is a prime example of how sanctions imposed on Iran actually serve to hurt western commercial interests and only benefit those of foreign competitors. British Petroleum (BP) has recently suspended production at its Rhum gas field in the North Sea, which is co-owned with the Iranian state oil company. BP, still reeling after the Gulf of Mexico disaster, is taking no chances on whether cooperation with a sanctioned Iranian company is worth pursuing. The effect of this is to hurt the local Scottish economy and hike up fuel prices for British consumers.

None of this detracts from the fact that sanctions against the banking, insurance and shipping sectors are having adverse consequences for Iranian business. Merchants are finding it increasingly difficult to open letters of credit with which to import goods. Dubai, which serves as major transit point for international trade with Iran, has been hit badly. However, all this means is that Iranian businessmen will now seek to invest their money within Iran if opportunities for commerce are less so in the U.A.E - it is no surprise that the Tehran stock exchange is now booming as capital returns home. Although the costs of imports are rising, this only helps local producers compete as well as those black market profiteers and smugglers who thrive whenever legal business becomes difficult. Mapna, a major Iranian manufacturer of power and industrial equipment, has now stopped importing engineering spare parts and is making its required purchases only from domestic firms. For all the talk of a financial squeeze on Iran, Entekhab industrial group (a local producer of household appliances) had no problem in buying up Daewoo Electronics of South Korea last month.

Because of American-led economic sanctions, Iran has now taken measures to cease the old practice of making its oil and gas transactions in dollars but instead using euros, yuan and yen. This saves the country millions when converting between a currency that belongs to a country with whom it has little trade with. In addition, Iran has dumped the dollar from its foreign exchange reserves. If other countries were ever to follow suit the consequences for American hegemony over financial markets would be dire. Meanwhile, Iran’s exports of goods and engineering services continue to grow, and western sanctions have only forced Iran to seek markets for its products all around the world, from Indonesia to Bolivia and South Africa to Belarus. Iran currently finances 40% of its imports through the export of non-oil goods which have doubled since 2006 when the first round of U.N sanctions was imposed.

The timing of the fourth round of sanctions in June of this year was, in certain respects, actually welcome news in Tehran because it coincided with the launch of the government’s ambitious economic reform plan which was conceived to eliminate waste, boost productivity and make the country less vulnerable to sanctions. At its heart, is the scrapping of state subsidies on basic goods and services that fuel profligacy and a thriving illegal trade whereby cheap fuel and food is smuggled into neighboring countries. Instead of artificially reducing prices the government plans to compensate up to 85% of the population with direct payments. Another effect has been for the government to rely increasingly on tax revenues which most economists see as being necessary to stabilize the budget and avoid harmful deficits when oil prices drop: an obvious problem associated with an over-dependency on oil income.

For the Ahmadinejad administration the imposition of the latest sanctions has been instrumental in quelling major objections regarding the implementation of the plan, and to rally opposing factions and politicians around it for the sake of national unity in the face of foreign adversity. As with threats of military action made against Iran, economic pressure has the unintended consequence of pulling people together and not in causing any major rift. Both Mousavi and Karroubi, who claim to lead the largely defunct green movement, have been notably tempered in their criticisms since the success of the plan is seen as being vital to the national interest. It has been difficult for those opposed to Ahmadinejad, including those who apparently want to impeach him for alleged violations of the law, to condemn him for not avoiding sanctions when the Iranian government agreed to a plan brokered by Turkey and Brazil to ship large quantities of enriched uranium out of the country. The United States, however, ignored this important breakthrough and pushed for punitive measures regardless.

Indeed, the perceived injustice of sanctions is one of the few common grounds shared between rival principlists and reformists. The ban on the sale of civilian aircraft and parts to Iran is in part responsible for the high incidence of air accidents that have claimed hundreds of lives. The reformist business daily Jahan-e-Sanat, usually a stalwart critic of the government, has bitterly condemned the hypocrisy of those who claim to champion human rights in Iran but who are conspicuously silent on a policy that denies ordinary Iranians access to safe air transportation. President Obama has recently toured Asian countries seeking to create jobs back home through increased exports but is content with doing nothing to lift trade restrictions with Iran.

The Iranian government claims that it will be able to build 90-120 seat planes in the near future, but tens of thousands of American jobs could be created right now through the export of American goods to the Islamic Republic. In addition, the safety of thousands of Iranian lives would be secured through the sale of modern aircraft. At present, this trade policy is proving to be disadvantageous to the interests of American workers.

Sanctions are also incredibly myopic. They lack any focus on the pressing long-term issues of energy security in the region. The United States needs stability in both Iraq and Afghanistan but both countries need imports of electricity from Iran as demand rises and where violent protests have erupted amongst ordinary people angry over the continuing shortfall. U.S Brigadier-General Kendall Cox has admitted that the military’s reconstruction efforts cannot meet the levels required. So where is the sense in impairing Iran’s energy sector when it contributes to pacifying the populations of countries where US forces are currently present? US special envoy for Pakistan and Afghanistan, Richard Holbrooke, has warned Pakistan against building a pipeline to Iran with Italy’s ENI that is intended to bring the much-needed natural gas to the energy starved country. The Pakistanis have prudently ignored his objections because the project is essential to meeting the needs of its people and reducing a growing radicalism. Again, what does the U.S. gain from extending Pakistan’s already prolonged energy crisis just to spite Iran?

The intensification of sanctions certainly does not send out the right signals to Tehran ahead of talks in December. The West currently refuses to sell Iran items as basic as gaskets, so why should Iran suppose that the Europeans would sell fuel rods for its research reactors? Iran will naturally presume that the only viable means of doing so is by relying on its own enrichment facilities. Similarly, the pressure put on Russia not to sell the defensive S-300 missile system only forces Iran to attempt to build its own reverse-engineered version (as it has done with the upgraded S-200 system). It also informs Tehran that Russia might also be pressured not to supply fuel to the Bushehr

nuclear power plant which would make having an industrial-scale (not just a pilot) indigenous enrichment program absolutely essential to ensure reliable deliveries.

Sanctions are ultimately self-defeating as a means for achieving political coercion and persuasion. They are based on a flawed assumption that the affected party will make decisions based on a limited cost-benefit analysis. At the very most, they can be expected to elicit a temporary and tactical retreat by Iran – perhaps making it suspend enrichment for a few months or agree to more intrusive inspections. What they singularly fail to do is to persuade Iran to make any strategic decisions regarding its nuclear program. With peak oil having already arrived, the world needs access to Iranian hydrocarbon reserves more than ever: this is a country with the fourth and second largest oil and gas reserves, respectively. Applying sanctions because of some perceived fear of a threshold nuclear weapons capacity makes little real sense.

Does the pro-Taiwan lobby in Congress believe that an aggressive policy of sanctions against the People’s Republic of China would serve to improve Taiwan’s security situation? Of course they do not. What makes Chinese policy relatively restrained towards Taiwan is not just an American military presence in the Western Pacific but the hugely important trade partnership it has built up with the United States over the course of the last 20 years, and which it doesn’t want to put at risk. So why does the pro-Israel lobby in the US take the view that at least by trying to weaken Iran economically this would endear it to take a different approach on the nuclear issue and other affairs? Rather, sanctioning and attempting to isolate Iran does not in any way help to change its policies towards Israel but likely hardens them. In 1995, the relatively pragmatic Rafsanjani administration in Iran awarded the American oil firm Conoco a $1billion contract deal – the message in selecting an American corporation was clear: invest in Iran and we can have a productive relationship. However, the proposed deal was scuppered by the White House under intense pressure from the likes of AIPAC and their then chief ally in Congress, ex-Senator Alfonso D'Amato.

Only by investing in Iran and its energy industry, and therefore buying a stake in that country, can the West possibly hope to influence the behavior of its government and reap real foreign policy dividends. One would have though that in a capitalist society like the United States, where special interest groups use their financial clout to sway the policy-making process, this would be an obvious point to understand. Offering Iran real incentives would also alienate those (few) elements in Tehran opposed to a constructive relationship with the United States and boost the position of the moderates. This has indeed been the case with China, which is more pliable and accommodating to western concerns on international issues than could ever have been envisaged some 40 or so years ago before the US decided to engage with Beijing.

Stuart Levey, undersecretary for terrorism and financial intelligence at the US Treasury department, has repeatedly claimed that sanctions give the United States important “leverage” in negotiations with Iran over its nuclear program like the one recently held in Geneva. But how on earth do you hope to have leverage over the decision-making of a country by trying to isolate it economically? And how do you honestly expect to achieve such economic isolation in an international market which is increasingly less under the control of the United States and its European allies? The pursuit of economic sanctions is not a clever negotiating instrument, nor is it a principled political response. Instead, it testifies to a real lack of imagination and an excuse not to seriously engage with Iran in order to exercise the real political will that achieves a mutually desirable outcome for all concerned.

By Reza Esfandiari (Al jazeera)