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June 26, 2009
Exclusive: Iran’s Unrest Shows Power of Economic Sanctions
Iran’s S upreme Leader Ayatollah Ali Khamenei and the theocratic Guardian Council continue their violent suppression of those protesting the re-election of President Mahmoud Ahmadinejad in a vote that looks to have been rigged on a massive scale. Pro-democracy demonstrators have suffered hundreds of casualties as security forces have swept them from the streets. "Those arrested in recent events will be dealt with in a way that will teach them a lesson," said Ibrahim Raisi, a judiciary official.
The central issue in the election was the deteriorating state of the Iranian economy which is hurting the middle class and limiting the opportunities of the country’s rising generation. Many commentators have claimed that because of the domestic focus of the political campaign, there is no connection to the foreign policy issues that darken U.S.-Iran relations. Such an interpretation fails to understand that Iran’s behavior in world affairs has carried a high price in the form of sanctions that have hit key sectors of the economy quite hard.
Economic sanctions are most commonly thought as a way to pressure foreign governments to refrain from behavior at odds with American interests. Where, however, a regime is determined to follow an adversarial course of action – as has been the case in Iran where a militant dictatorship pursues policies based on religious zeal, the aim of sanctions is to weaken the ability of the rogue rulers to act by denying them the material and financial resources they need to support their ambitions. In the long run, it is hoped that the pain felt by the general population from the hardship imposed by sanctions will discredit the regime. Economic failure can lead to unrest, even revolution, as people come to understand that their standard of living is being adversely affected by the dangerous actions of their nation’s leaders. This appears to be happening in Iran.
According to the most recent (August 2008) country report prepared by the International Monetary Fund, unemployment is Iran is expected to stay above 10 percent for the foreseeable future. It is currently estimated to be around 17 percent. Every year, 800,000 new people enter the labor market, but only half that many jobs are created. To stimulate the economy, the government has resorted to monetary and fiscal policies that have done more to generate inflation than jobs. The IMF expects inflation to remain around 25 percent per year.
Iran is caught in a stagflation trap it cannot escape unless it improves its business climate, reduces investment risk, loosens the regulatory grip of the mullahs, and regains access to international capital and technology. It cannot do these things until it changes its aggressive foreign policy that is threatening regional and global stability. Its restless population, yearning to advance, must realize that their lives cannot improve until Iran abandons its nuclear program and stops spreading terrorism.
The United States has imposed an array of economic sanctions on Iran. Often it is said that unilateral sanctions are ineffective, and certainly the impact of American sanctions have been weakened by Iranian trade with Europe, Russia and China. Multilateral sanctions imposed by the United Nations Security Council have been watered down by Russia and China. Yet, U.S. sanctions have targeted Iran’s most vulnerable sectors, and the power of the United States is such that it can do great damage even with only limited support from others. As the IMF report states, “ Intensified international pressures on Iran have negatively affected economic activity. UN and U.S. sanctions against certain Iranian institutions have created difficulties for trade financing and payments, discouraged foreign investment, and adversely affected the profitability of the targeted financial institutions.”
As a result of Iran's support for international terrorism and its aggressive actions against shipping in the Persian Gulf during the Iran-Iraq War, President Ronald Reagan issued an executive order imposing a new import embargo on Iranian goods and services on October 29, 1987. Though there have been some modifications of this embargo in the years since (the Clinton administration relaxed the trade sanctions in 2000 to allow the import of carpets and food products such as dried fruits, nuts, and caviar), the effect has been to prevent Iran from using exports to diversify its economy by expanding industries outside the oil sector. Iranian growth has not only been stunted, but the country has been kept more vulnerable because of its dependence on trade in one commodity.
In 1995, President Bill Clinton issued an executive order prohibiting U.S. involvement with petroleum development in Iran. And in 1997, he issued another order confirming that virtually all trade and investment activities with Iran by U.S. persons, wherever located, are prohibited. As the IMF reported, “Iran is endowed with vast hydrocarbon resources, but its capacity to increase hydrocarbon production is limited. In 2006, Iran had the second largest proven oil and gas reserves, and it was the fourth largest oil producer in the world. However, its oil production has remained virtually flat in recent years and will most likely stagnate in the medium term due to insufficient investment.” U.S. sanctions are meant to deny Iran that investment.
Tehran’s state oil firm estimates annual investment needs at $25-30 billion in the oil and gas sector. Iran plans to issue $12.3 billion worth of foreign currency and rial-denominated bonds over the next three years to help finance development of its huge South Pars gas field. But with American capital markets closed, and other foreign investors on edge due to the high level of tension in the area, Iran will have trouble raising such sums. One area Iran needs to expand is its petroleum refining capacity. Despite its large oil reserves, it still has to import gasoline. In a crisis, the U.S. could blockade Iran, cutting off both its oil exports and gasoline imports. Even without military action, the imposition of new sanctions to penalize companies that sell, ship, finance or insure refined petrol exports to Iran would breed further unrest as gasoline became scarce.
U.S. prohibitions on doing business with Iran’s banking and financial sector cripples the ability of the regime to trade or attract capital. The regime knows that to improve its economic performance, it needs to reduce deficit spending, privatize state-owned industry, and curtail inflationary money creation. But it cannot make these reforms without finding other sources of capital and markets to take the place of government spending. And as long as its foreign policy behavior isolates it, it cannot find those sources. Indeed, the theocratic state has taken more direct control of the Central Bank to keep the money flowing because its priority is still spreading militancy in the region. Its nuclear ambitions and proxy armies in Lebanon and Gaza are more important to it than the economic progress of the Iranian people.
Presidential contender Mirhossein Mousavi wanted to reverse many of Iran’s destructive economic policies. Many, including President Barack Obama, questioned whether in foreign policy Mousavi and Ahmadinejad were much different in outlook. But Mousavi could not change the Iran economy without changing its foreign policy, as long as the United States holds its ground and maintains sanctions.
The danger is that the Obama administration will lift sanctions in the spirit of “engagement,” allowing the theocratic regime to reduce domestic discontent without giving up its foreign ambitions. In his response to President Obama’s “open hand” speech in March, Supreme Leader Khamenei asked, "Have you released Iranian assets? Have you lifted oppressive sanctions? Have you given up mudslinging and making accusations against the great Iranian nation and its officials?" That Khamenei gave first priority to the removal of American sanctions indicates that they are a source of real pain to the regime.
To his credit, President Obama on March 12th extended existing sanctions on Iran due to the "unusual and extraordinary threat to U.S. national security" that Tehran poses. Unfortunately, the extension was only for one year, implying Obama hopes that relations might improve in the near future through his diplomatic initiative. Yet, the president has also said that if Iran continues its aggressive policies, additional “crushing” sanctions could be imposed.
At his June 23rd press conference, Obama still tried to cling to his “open hand” policy towards Iran, saying, "We have provided a path whereby Iran can reach out to the international community, engage, and become a part of international norms. It is up to them to make a decision as to whether they choose that path." The decision not to change the path they are on has been shown in Tehran as the regime’s agents defend the fraudulent election results with force so as to stay in power. Therefore, the United States cannot afford to change its course either.
Economic sanctions must be increased to deny the Iranian theocracy the resources it needs to further its ambitions, and to convince the Iranian people that its leaders cannot provide them with the material progress they crave. The message must be clear: confronting the United States leads only to isolation and failure.
FamilySecurityMatters.org Contributing Editor William R. Hawkins is a consultant specializing in international economic and national security issues.
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