Six Myths About Iran Sanctions

Since the seizure of the American embassy in Tehran more than 34 years ago, economic sanctions have been at the heart of Washington’s strategy for dealing with Iran. For most of that period, sanctions had more symbolic than strategic value. All that changed over the course of the past decade, when Washington erected a far-reaching set of restrictions on Iran’s access to the international financial and persuaded the world to abide by the measures and to curb their own investment and trade with Tehran.

This pressure had a devastating impact on Iran’s oil exports and revenues, the value of its currency, the stability of its economy as well as the confidence of its citizens. And after decades of skepticism about their utility, sanctions were widely credited with turning Tehran toward a more moderate leadership and facilitating the recent diplomatic breakthrough on the nuclear issue.

In the wake of that success, the debate surrounding sanctions has only intensified. “The Iran Nuclear Weapons Free Act of 2013,” introduced by Senators Robert Menendez (D-NJ) and Mark Kirk (R-IL) last month, would ratchet up restrictions on Iran’s crude exports if Tehran reneges on the interim nuclear deal or fails to achieve a final deal — one that includes the sponsors’ harsh terms — within the year. Senate support for the bill has steadily mounted, and at last check nearly 60 Senators have signed on as co-sponsors. The Obama administration has waged a fierce public campaign against any new sanctions, arguing that they would undermine or even upend the efforts to hammer out a comprehensive nuclear accord with Iran, and the president has threatened to veto the bill it is passed.

The Iranians aren’t pulling their punches; Foreign Minister Mohammad Javad Zarif told TIME Magazine last month that any new sanctions would mean that “the entire [nuclear] deal is dead.” Zarif explained that “(w)e do not like to negotiate under duress. And if Congress adopts sanctions, it shows lack of seriousness and lack of a desire to achieve a resolution on the part of the United States.”

So the gauntlet has been drawn, the stakes are rising, and the debate has become polarized and, frankly, somewhat unproductive. We’ve done a lot of work on sanctions here at the Saban Center and across the Brookings Institution — see this compilation of articles and this symposium of Brookings scholars, just for starters — and it’s an issue we’ll be returning to here on Iran @ Saban repeatedly over the forthcoming weeks in greater detail and with the diversity of perspectives that is the hallmark of this institution. To kick things off, I’ve assembled a few of the most commonly articulated shibboleths surrounding sanctions and tried to offer some correctives based on my own analysis, which is part of a forthcoming book on Iran’s political economy.

Myth 1. The interim nuclear deal has eroded the credibility of the sanctions regime and legitimized business with Iran.

Nope, not a chance. This line may sound awfully compelling, but it’s a hollow argument that disregards the very factors that have made the Iran sanctions so powerful. Specifically, the sanctions are grounded in an onslaught of shrewd American measures that outlaw nearly all aspects of business with Iran. These measures achieved broad global compliance and were bolstered by parallel restrictions imposed by the United Nations, the European Union, and several of Iran’s most important trade partners. The sanctions’ efficacy also reflects revolutionary changes in energy markets that blunted escalatory pressures on prices after the loss of half Iran’s crude exports. Finally, the force of sanctions has been amplified by the profound dissuasive impact of Iran’s own conduct, particularly the repugnant rhetoric of Mahmoud Ahmadinejad.

The synergy among these factors created an almost unstoppable momentum around isolating Iran. As a result, over the past decade, doing business with Iran became increasingly illegal, unnecessary, and even immoral.

It is that final aspect of the sanctions juggernaut that has begun to erode, thanks to Rouhani’s election, the subsequent charm offensive, and the diplomatic progress. Four years ago, amidst fresh memories of Ahmadinejad’s outrages and the repression of massive anti-government protests, much of the world saw Iranian business as untouchable. Today, the pendulum has shifted markedly in the opposite direction.

However, the two most important facets of the sanctions campaign remain robustly intact. The multiplicity of regulations and the stiff penalties that have been levied against firms and individuals not only for ongoing activities but even for past business loom large for companies and individual investors. The legal and monetary liability and ongoing political risks incurred in doing business with Iran vastly outweighs whatever financial gain there may be. And the advent of unconventional petroleum resources and explosion of North American production leaves Tehran paying the price for its lost oil exports — rather than the governments that have imposed the sanctions or their citizens.

The myth about collapsing sanctions is grounded in misrepresentation and hyperbole. Proponents suggest that the diplomatic environment will prevent Washington or other governments from enforcing those sanctions already on the books. As Weatherford International and an array of other firms that have recently been penalized for their ties to Tehran can attest, this is simply untrue. Others argue that the modest sanctions relief of the interim accord will empower muscular lobbies to ensure their perpetuation, a contention that vastly overestimates the interests of either the oil majors or other heavyweight industries in a trickle of renewed trade with Iran. The reality is that the sanctions regime remains muscular and stringently enforced.

Myth 2. The sanctions relief in the interim nuclear deal has opened the floodgates of foreign investment.

Well, this depends on your definition of floodgates. It is true that Rouhani’s election and the surprisingly swift breakthrough in negotiating an interim nuclear has revived interest in a market once considered mildly promising but for most of the past decade increasingly off limits because of both political risk within Iran and legal prohibitions on Iran. Trade delegations are once again jetting to Tehran, and business analysts have dusted off their files and reports about a country that had practically fallen off the foreign investment map in recent years.

But the assertion that “the gold rush is on” is simply fantastical. For all the reasons discussed above, any reputable firm will be proceeding slowly in Iran even in those narrow sectors that are now open; and only rogues and gamblers will venture into aspects of Iran’s economy, including most of its energy sector, that remain off-limits. There have been wildly buoyant forecasts regarding elements of the sanctions relief package in the nuclear deal, grounded in conjecture and/or chicanery. We’ll have posts here over the course of this week that delve further into this issue, including an examination of the big-ticket energy trade. For now, suffice it to say that neither the temporary resumption of some foreign investment in Iran’s auto industry nor the possibility of expanded petrochemical exports can offset the billions in lost crude revenues that Tehran continues to suffer as a result of sanctions.

Finally, there is almost no conceivable outcome to the nuclear negotiations that would result in a lifting of the comprehensive U.S. embargo on trade and investment in Iran. Washington’s broader differences with Tehran are too profound — particularly its support for terrorism and for the Syrian regime — to set aside even for the most perfect resolution of the nuclear issue. In fact, it’s entirely possible that these tensions will become more inflamed even as the nuclear crisis abates. In other words, even the most successful outcome to the current diplomacy would still leave Iran locked out of the world’s largest economy. Bottom line: there will be a trickle of new business with Tehran, but the floodgates remain firmly shut for the foreseeable future.

Myth 3. Sanctions have caused most of Iran’s economic problems, and their removal will result in rapid economic growth in Iran.

If only it were so simple. Iran’s economic challenges vastly transcend and long predate the tightening noose of sanctions. Tehran must contend with an economy battered by decades of disruption due first to revolution, then to a long and costly war, corruption, mismanagement, and botched state interventions. Any relaxation of the restrictions on Iran today may help the government’s bottom line, but they will do little to resolve the underlying issues that shrank the Iranian economy over its first post-revolutionary decade and more recently squandered the epic oil boom of the 2000s.

“I do not deny the effect of sanctions, but the weight of mismanagement is heavier,” an Iranian economics professor told Washington Post columnist David Ignatius on a recent trip to Tehran. Similar sentiments have been voiced for years by officials and experts from across the Iranian political and business spectrum. With or without sanctions relief, Iran must address a series of other thorny policy challenges: finding a viable solution to the country’s addiction to subsidized prices for energy, food and other goods and services; divesting the state of its central role in the economy through a genuine privatization process, rather than simply recycling state assets into the hands of parastatals and regime cronies; encouraging productivity rather than speculation; and much more. None of the policy solutions are politically painless.

Not surprisingly, the interim nuclear deal has boosted the Iranian stock market – which has always been dominated by public entities and firms with close ties to the regime – and marginally revived the black-market value of its currency. Iran is likely to resume modest economic growth this year after 12 months of retraction, and inflation – particularly on consumer goods – appears to have dampened. However, these accomplishments owe more to Rouhani’s election, and the more prudent policies put in place by the technocrats in his administration, than to the sanctions relief promised in the interim deal, a fact that even the deal’s critics have acknowledged.

Rouhani has yet to deliver on the high expectations set by his own rhetoric and by the optimism spurred by the nuclear deal. Iranians want a tangible ‘peace dividend’ in the form of jobs, growth, stable prices, and an economy and society that interact normally with the rest of the world. A comprehensive deal, if it can be achieved, will help considerably, but even then Tehran will continue to confront formidable challenges in restructuring its economy if it is to fulfill its citizens’ expectations.

Myth 4. Sanctions are a silver bullet for negotiating with Iran.

Yes. And no. The ferocious impact of sanctions has given the West immense leverage, and it appears to have persuaded Iran’s most stalwart skeptic, Supreme Leader Ayatollah Ali Khamenei, that a negotiated resolution to the impasse may be preferable to wholesale recalcitrance. However, sanctions are tricky instruments for influencing negotiations. Using economic restrictions as bargaining chips to extract specific concessions in ongoing talks has a spotty track record. They are difficult to calibrate and even more difficult to remove. As the current tussle between the U.S. president and the Congress underscores, executive authority is circumscribed by political realities.

And as bargaining chips, history suggests sanctions are clumsy tools for resolving crises. In past efforts to use sanctions relief to encourage changes in Iranian policies, the West has overestimated the value of its hand. Washington’s offers of spare parts for Iranian airplanes have repeatedly been met with a resounding thud in Tehran, and the Bush administration’s 2005 decision to green-light Iran’s bid for World Trade Organization accession talks only ensured that Tehran shelved the idea altogether.

For its part, Tehran has persistently undervalued any incentives put on offer. The Clinton administration’s March 2000 overture, which removed sanctions on Iranian carpets, pistachios and caviar, prompted no reciprocal gesture, and among Iranians themselves is typically derided as trivial. Not true — these products represented Iran’s largest non-oil exports, and their production employed hundreds of thousands of Iranians. The Clinton move (along with other changes exempting agricultural and medical products from all sanctions) produced a sizeable increase in U.S. trade with Iran.

Myth 5. More sanctions will produce more concessions.

Maybe. Let’s be fair here: nearly all of those who oppose the new measures under discussion in the Congress — myself included — have routinely warned against ratcheting up pressure on Iran on the grounds that such tactics empower Iranian hard-liners and undercut advocates of diplomacy. Yet in practice, those same measures plainly contributed to Ahmadinejad’s fall from grace and to Tehran’s embrace of the more moderate Rouhani. So it’s simply inaccurate to insist that all pressure is counterproductive.

At the same time, it’s anything but a sure bet that more sanctions will generate more Iranian generosity at the bargaining table or a better deal at the end of the day. As many others have written, sanctions play into Iran’s deeply-rooted historical narrative of persecution at the hands of the West. Its current leadership assesses the risks and rewards associated with negotiating through the lens of a deeply paranoid worldview that reflects both ideology and experience.

Iranians drive a hard bargain, and there is ample historical precedent (including in disputes long pre-dating the current regime) for Tehran elevating a fiercely-held principle over payout. The Islamic Republic spurned Gulf offers of reparations and withstood more severe economic pressure in its determination to continue its conflict with Iraq in the 1980s, despite little ultimate gain. And the Supreme Leader’s mistrust of the West leaves a very short leash and a brief window for his negotiators. He repudiated an earlier effort by Rouhani to broker a cease-fire in the nuclear impasse on the grounds that Tehran had conceded too much and received too little from the world in return. It is hardly inconceivable that new sanctions would once again shipwreck an imperfect negotiating process.

Sanctions have an escalatory logic that has a way of inflating objectives. When they fail, the presumption is that more pressure is required. When they succeed, as they appear to have done with Iran, the impulse again is to intensify the pressure to improve the terms. In this sense, the nuclear standoff can become self-sustaining — an outcome that is neither in American nor Iranian interests. The simple reality is that there is a tipping point in the efficacy of pressure, and no one sitting in Congress, without a shred of direct exposure to Iran, can reasonably ascertain where it might be.

Myth 6. Support for additional Iran sanctions is the equivalent of support for war.

No. With all due respect to the Obama administration officials who have been making this argument, it is an overstatement and, in many cases, patently untrue and unfair. It may be effective domestic politics, given the country’s understandable weariness of Middle Eastern conflicts, but it is an ugly smear to accuse all those who are skeptical about the current diplomacy or who seek additional pressure on Iran of war-mongering.

More to the point, the outcome of new sanctions is almost certainly not war. Tehran has come to the negotiating table despite, and because of, severe economic pressure. Rouhani’s determination to achieve a deal, the speed with which he has advanced this agenda, and the flimsy pushback (by the rough-and-tumble standards of Iranian internal politics) he has received from hard-liners suggests that there is a broad and deep consensus around ending the nuclear stand-off with the West. No one should doubt Foreign Minister Zarif’s sincerity when he says sanctions will end the talks, but there is a reasonable chance that Tehran will continue to seek a diplomatic resolution under almost any circumstances — there simply is no better alternative for Iranian interests.

The same is true for Washington. Few in Congress are truly eager for another costly Middle Eastern conflict, and despite the tough talk from successive U.S. presidents on preventing a nuclear Iran, there is nothing automatic about military action. Even if the current diplomacy collapses, Washington and the world will have an array of alternatives for blunting Iran’s nuclear advances, including many that fall short of war.

That should not imply that new sanctions would be free of costs. In fact, the tortuous history of negotiating with Iran suggests that the almost certain outcome of any new pressure on Iran will be a less optimal context for negotiations. In other words, diplomacy would probably prevail, but the context and the terms would become substantially inferior to what they are today. Iranian lawmakers are already set to retaliate with their own counterproductive measures, Iran’s hard-liners would direct the pain toward the Iranian people and the blame toward Washington, and at least some of our allies would see less impetus for adhering to the extraterritorial measures that have made the sanctions regime so powerful. So the end result would be greater Iranian recalcitrance and less cohesion among Washington and its partners on a path forward. Congressional supporters of new penalties should consider how that might serve U.S. interests.

One final word

Sanctions are a policy tool, not a policy objective. All those who are seduced by the newfound efficacy of sanctions should contemplate what made this campaign necessary. Had the Bush Administration been willing to deal directly with Iran in 2003 or 2004, it might have been possible to curtail Iran’s nuclear activities at a much more preliminary stage. A decade’s delay means that deal is no longer within reach. In light of subsequent developments, the Bush Administration’s briefly-held dogmatism against diplomacy with Iran appears ill-advised, to put it mildly. How will history judge Congressional actions that threaten to undermine the first constructive movement toward a diplomatic resolution of the Iranian nuclear crisis?