Sanctions, Presidents and the Iranian Crisis | Anoush Ehteshami

'Money Talks': Sanctions, Presidents and the Iranian Crisis.

A Talk by Prof Anoush Ehteshami of Durham University at The British-Iranian Chamber of Commerce, March 8, 2013

By way of an introduction...

The Islamic republic has been suffering from sanctions since its birth. Sanctions, imposed on the country for its actual, probable or potential misdemeanours, have become a fact of daily life in Iran and the country seems to have managed to 'discount' the effects of some of these and inoculate its society against the worst aspects of these.

Indeed, Iran given a whole policy genre to the challenge of ameliorating the impact of sanctions by the pursuit of what it has come to call 'resistance economics'! In part this mimics the 'war economy' approach which was adopted in the 1980s, but this new model does not replicate the old one, and has no basis in long-term strategic planning

Since the mid-2000s, as will be shown, under the sharp pen of European and American leaders, sanctions have become more intrusive and more cutting. These targeted sanctions are designed to hurt specific sectors and even individuals. That is to say, they are cutting by virtue of penetrating the fabric of the country's economy and its socioeconomic structures. These 'smart' sanctions are intrusive and debilitating, unlike those imposed in the 1990s. They are designed to make the status quo unsustainable and are designed to force Iranian decision makers to think about the cost and long-term damage of such penetrating and paralysing sanctions on the country.

Sanctions

Iran has suffered three kinds of sanctions since their introduction in 1979: Unilateral, random multilateral, and unilateral and bilateral sanctions in response to Iran's nuclear programme and related activities.

• Unilateral sanctions for policy indiscretions:
• The US (by Congress and/or Executive Order) has either imposed or renewed unilateral sanctions on Iran in several instances: 1979, 1984, 1986, 1987, 1992, 1995, 2001, 2004, 2005, 2006, 2007, 2010, 2011, and more is being considered in 2013!
• The EU has had an arms embargo in place for decades, broke off diplomatic relations over the Mykonos killings in Germany and again over the threats to the life of Salman Rushdie. In 2007 EU sanctions because of Iran's nuclear programme were introduced and deepened in 2010. But the most effective have been the oil boycott and the suspension of Iran's access to SWIFT (society for worldwide interbank financial telecommunication) in 2012.

The EU is at pains to explain this is not a dispute between the EU and IRI but rather between the IRI and the international community. Nevertheless, since 2005 the European Council has taken a consistently hard line on Iran. It has, thus, 'expressed grave concern', 'regretted', 'deplored', 'condemned' Iran in equal measure for its intransigence in the negotiations and also for not curtailing its nuclear activities, despite having reached a comprehensive agreement with Iran in November 2004 to settle the nuclear dispute and rebuild confidence and relations accordingly. The relationship deteriorated dramatically between 2004 and 2006.

• Australia, Canada, India, Japan, RoK, Switzerland have all imposed unilateral sanctions too.
• Multilateral sanctions for policy indiscretions:
• These are sanctions against particular Iranian policies, or relating to the transfer of lethal or dual use technologies to Iran. Thus, both the EU and US have sanctions in place to deter transfer of military hardware and knowhow to Iran.
• Unilateral and multilateral sanctions relating to Iran's nuclear programme:
• The nuclear programme-related ones are by far the most comprehensive and intimidating. Since 2006 six UNSC sanctions have been adopted against the IRI and these are the ones that are biting into the Iranian state.

In addition, the EU and the US have added their own smart sanctions to; 1) weaken the government's ability to shield the country from international punishment, and ; 2) to increase the impact (and therefore cost) of them on Iran.

As a result of these sanctions, Iran's is now arguably subject to the 'toughest sanctions in history', at least according to President Obama. But it is only when this statement is set against the devastating impact that international sanctions have shown to have on Iraq, North Korea and Libya, that we can fully understand what having the toughest sanctions set against one might mean.

Impact of Sanctions

The first point to make is that the latest targeted, or so-called 'intelligent', sanctions are having far more impact than previously assumed. Hitting Iran's lifeblood - its oil industry and export capacity - and its financial networks, has had a dramatic effect on the country's well-being, and its ability to maintain its economic bloodlines clear:

• Sanctions are adversely affecting Iran's oil exporting capacity, and the loss of EU markets (20% of its exports) has cost the country dear. While some of the flow has been taken up by Asian countries, still the country may have lost as much as $48 billion in revenue as a consequence of the EU-US- orchestrated oil embargo.
• Iran's oil exports in 2012 may have averaged at no more than 1.5 mbpd, well below the 2.5 mbpd that Iran had intended to produce in its annual calculations. Memo: export rises since December 2012 has boosted the treasury by around $4.5 bn/month, but cost of Syria war to Iran is around $1 bn/month now, and then there is Hezbollah, Hamas and the sheer cost of the nuclear programme itself to consider! Also, not to mention the many billions ($150 billion at a minimum for oil infrastructure investment).
• While continuing high oil prices provide some compensation for the loss of exports (income was estimated at $118 billion for 2012), nevertheless the downward trend in output will damage Iran's market share and its potential role OPEC's second most important member.
• Denial of ship insurance by the EU since 2012 has meant that 95% of supertankers who are covered by EU companies can no longer load Iranian crude. Iran has had to put scarce resource into hiring or buying its own supertankers to compensate for this loss.
• Sanctions have dramatically exposed the structural problems of the Iranian economy and have checked the administration's ability to spend its way out of trouble. And in these hard times it cannot complete the one thing that it started with two years ago, which is to end the subsidies.
• The loss of SWIFT has made cross-border transactions nearly impossible; encouraging barter and therefore a much less efficient and cost-effective method of international transactions.
• Sanctions have crushed the already weak national currency; its value against the dollar having more than halved by end of 2012. Sterling, dollar, Euro, Swiss Franc, Yen, are all much more expensive to acquire and also a lot more scarce. While the CB injects hard currency into the system because of the lack of confidence these get gobbled up and stashed away.
• The currency's collapse has made hard times harder: the US$ has gone up from 870 tomans in 2005 to 3,200 tomans in 2013, which means that a 1 million toman monthly salary's value has dropped from $1,114 to just $313.
• The Iranian population's purchasing power has dropped by 72% between 2005 and 2013.
• With unemployment hovering at between 15-25%, social misery is mounting, with young people under 25 accounting for around 70% of the recorded unemployed.
• The oil 'float' of 21 mb and currency reserves of around $100 billion provide only limited respite from the relentless onslaught.
• Hyperinflation is now a real danger as prices rise by over 40-50% on average. By way of a comparison, neighbouring oil states are worrying about annual inflation rates of 2.5%, or at worst 3.5%.
• The GDP is estimated to have contracted by around 5% over 2012 and 2013, directly due to the impact of sanctions. Economic contraction is taking place just as Iran has been enjoying an historically unprecedented amount of oil income.
• Beyond oil, the state has very few other options for generating revenue as 60% of the population do not pay (direct) taxes. And the shadow economy may have grown to 20% of the GDP because of the sanctions, disguising income-generating activities.
• While the regime pushes for the expansion of non-oil exports its manufacturers' inability to produce sufficiently high quality goods at a competitive price shows itself as a real handicap, which is not helped by the lack of access to FDI and high-powered international investment partners.

As a result of all this, at the socio-economic level, the pauperisation of Iranian society is exposing the increasingly deep cracks in the edifice of the state. Social vices are rising, youth addiction has reached unprecedented levels and alienation is growing.

Furthermore, as a total of 47% of Iran's $1.1 trillion in oil income since 1909 has been earned since 2005, the people are asking where is the oil money that was promised to be on our table by the President?!

	Dates	Oil income
Rafsanjani period	1989-1997	$141 billion
Khatami period	1997-2005	$157 billion
Ahmadinejad period	2005-2012	$644 billion

So, Ahmadinejad, particularly when set against his populist policies, has much to answer for in terms of wasted opportunities and resources. His economic mismanagement, compounded by some of his misguided external policies, has exposed him and the so-called 'Endurance Front' to harsh criticism in the Majlis and in the media.

Also, at another level, the sanctions are rebalancing Iran's trade links towards Asia, with China replacing the EU as Iran's largest trading partner. While the Iranian state seems intent on 'looking east', the urban masses appear still keen to 'look west', and are clamouring for western goods and services. This mismatch provides yet another layer of tension in state-society relations.

Political Consequences

The sanctions have been a feature of domestic politics of both Iran and the United States for some time, though obviously for different reasons, and with different degrees of intensity. Both sides are familiar with them and both judge their contacts with each other by them.

In the United States, Iran was at the core of the FP debates between the 2012 presidential nominees and the final two candidates. For them both, Iran was a central issue and in their final debate they set out their stalls as follows:

On Iran's Nuclear Activity

Obama: "As long as I'm president of the United States Iran will not get a nuclear weapon."

Romney: "Let me also note that the greatest threat that the world faces, the greatest national security threat, is a nuclear Iran"

On Sanctions Against Iran

Obama: "We've put in the toughest, most crippling sanctions ever. And the fact is while we were coordinating an international coalition to make sure these sanctions were effective, you were still invested in a Chinese state oil company that was doing business with the Iranian oil sector."

Romney: "We're four years closer to a nuclear Iran. We're four years closer to a nuclear Iran. And we should not have wasted these four years to the extent they continue to be able to spin these centrifuges and get that much closer."

'Dealing with Iran' has arguably shaped US' relations with many of its regional allies, and at the same time influenced Washington's interactions with such powerful states as China and Russia. Iran is a domestic US politics issue now and at the same time a FP issue. This complication makes it even harder for the American administration to cut through to a deliverable agenda with its Iranian counterpart. This is being made worse still by the fact that no bilateral talks have been taking place. The politics of sanctions have taken root in the United States, limiting the White House's ability to manoeuvre beyond them and navigate towards a wider, dare one say 'grand bargain', strategy.

In Iran, the political fallout from the nuclear crisis and the accompanying sanctions has been dramatic. But the country's political crisis cannot be reduced to just the sanctions. For one, the 2009 crisis has left a deep mark on the nature of political interactions in the country. The 2009 crisis broke the boundaries of intra-elite, factional, politics for the first time and created from the ranks of the elites of the Islamic Republic a genuine 'opposition'. Now much of the 'Green Movement' opposition purports to want to orient the regime towards the democratic light, but there are elements in the GM who confront the regime in its entirety. They want the regime as currently constituted gone, and the lurking presence of such forces inside the country makes the regime extremely nervous.

The 2009 crisis also created a real crisis of legitimacy for the regime, both for its executive branch and the Leader. While governments have come and gone in Iran, 2009 was the first time that the Leader was actually caught up in the country's factional politics. Not only did he take sides in the elections and in its aftermath came out in full support of Ahmadinejad, but also suffered very public criticism of Ayatollah Rafsanjani at Tehran Friday Prayers just weeks after the June elections and the widespread protests. Ayatollah Khamenei's partisan role ended up enmeshing his office in the institutional and personality infightings of the state, from which position he has struggled to expedite himself. He has in effect gotten the lofty office of the 'Leader of the Revolution' down and into the petty politics of the state.

In this sense, the politics of 'resistance economics' also has to be managed and responsibility for high prices of basic goods, fuel, medicine, capital goods and consumables at this time of oil income plenty has to be explained somehow! Blame too has to be apportioned.

Institutional protection, of course, is one sure way of ensuring that the blame for the economic, political and foreign policy mess goes elsewhere, but President Ahmadinejad has found it harder and harder to dodge the bullet and as he rushes to protect himself and his allies from the wrath of the traditional conservative forces, so he embroils other institutions of the state and other elite members in the personal and inter-institutional quarrels taking place.

... Which brings me to the country's 11th presidential elections in June 2013!

Despite the growing authoritarianism of the state, this race is likely to be as historically significant as all the previous 10 such elections, but this time the battle lines are being drawn between the conservative factions themselves and not between them and the reformists. The latter has effectively been wiped off of the country's political map and their institutional presence has shrunk to a low level. Indeed, in the 2012 parliamentary elections their number of seats dropped to just 28 in the 290-seat chamber.

The contest therefore is being undertaken between the allies of Ahmadinejad on one side, and a plethora of conservative candidates, potentially from Velayati, Qalibaf, Hadad-Adel, Ali Larijani, Motaki, Salehi, Jalili, to Rezaei, on the other side. While the neoconservatives close to Ahmadinejad do not expect support from the Leader's office, the traditional conservatives entering the race are all vying for the Leader's endorsement, which puts Ayatollah Khamenei in a difficult position. Many of the potential conservative candidates have personal ties with the Leader and have enjoyed his support and patronage, so choosing his horse in the race will not be uncontroversial, nor will it be without longer term consequences for his ability to keep his alliances intact and loyal followers obedient.

And then there are the political issues to consider. As tasters, Iran will have to show willing in the nuclear negotiations, if it is to stop the pressure building for even harsher sanctions from the West, if it is to put an end to the threat of an attack on the country. But how?!

It will also have to find an alternative strategy to its current strategy of blind support for Assad of Syria, which is eroding its legitimacy in the region as a revolutionary state.

It will have to try and reach accommodation with the KSA as a means to containing the growing Sunni-Shia tensions in the region and as a way of trying to moderate the anti-Shia winds blowing across the Arab world.

And finally, it will have to find a way of reaching accommodation with the new and novel Arab-Islamist political elites in the AS countries which have no sense of loyalty to Iran's Islamic Republic. Tehran is finding out the hard way that these Islamist elites are indeed very different from it, are ideologically and politically distinct, and not always favourable towards Iran.

The content of this talk does not necessarily express the views of The British Iranian Chamber of Commerce. The views and opinions expressed are those of the author.