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Reports suggest sanctions on Iran aren't working

Two assessments of the West's strategy to stop Tehran's nuclear programme suggest the outlook is grim

Iran and the countries trying to stop its alleged nuclear weaponisation programme seem to be nearing a deal. Talks in Almaty at the end of February were "positive", Iran said. Another round takes place in Kazakhstan on 5 April. Progress will probably wait until after the Iranian presidential elections in June, but a breakthrough in late summer, say analysts, is possible.

A deal would be big news for the oil market. The sanctions imposed on Iran have sharply cut its crude exports, which were around 2.2 million barrels a day (b/d) in 2011. At best, they now sit at around 1.4m b/d and may be much lower. So a lot of pent-up supply would hit a saturated market if the embargo were lifted. The price premium based on the risk of war would deflate, too. Prices would tumble.

That may be a happy prospect for consumers, but no one should get carried away yet, suggest two recent reports on Iran and the elaborate embargo in place against it. The sanctions may be hurting portions of Iran's economy, but if their point is to bring an end to the country's nuclear programme the measures are not working.

The sanctions were supposed to sow division within Iran's elite, forcing powerful businessmen and other interests groups to lobby for a shift in their government's policy. But a paper from the National Iranian American Council (NIAC), Never give in and never give up: the impact of sanctions on Tehran's nuclear calculation, says this strategy has failed. "For sanctions to achieve their objective of shifting Iran's nuclear stance," say the NIAC authors, "stakeholders in the target regime must start building narratives that enable such a course correction, as well as start lobbying the government for a shift in policy."

Neither has happened. Iran's elite is divided. But the infighting has not softened the government's stance. Instead of pressing the leadership for a change in policy, says the paper, which is based on interviews with senior officials and businessmen in Iran, the private sector has lobbied for concessions to help it ride the storm.  

The sanctions strategy misunderstands the way Iran's power structure works, too. Despite rivalries within the country's elite, the factions share one objective: the survival of the regime, says the NIAC. For supreme leader Ayatollah Ali Khamenei, who retains ultimate power, succumbing to Western pressure is far riskier to the regime - which relies on the external threat to justify a burgeoning military-security apparatus - than continued economic deterioration. Even war is seen as a lesser threat.

Iran's economy has suffered in the past 15 months as the embargo was extended to the country's central bank and oil sector. But the situation is complex. Iranians interviewed by the NIAC admitted that the sanctions had worsened the economy. But they blamed local mismanagement, too. Where sanctions have caused obvious damage, on the other hand, people are as likely to blame the West as they are their own government. 

Also, while GDP has shrunk by about 8% since the sanctions were tightened, high oil prices - sustained, in part, by the embargo itself - have limited the damage. At an oil price of $100 a barrel, calculates the NIAC, Iran can still comfortably provide citizens with basic economic needs. Per capita oil revenue has fallen, but remains healthy and above the long-term level Iran has been used to.

Iran has adapted its economy to "bend, not break" under the embargo. This is the "economy of resistance" proclaimed by Khamenei. It involves rebalancing GDP away from dependence on oil; privatisation; increasing taxes such as VAT to plug gaps left by the fall in oil-export revenue; beefing up domestic refining capacity (by handing concessions to small tea-pot processors; a means to get around the embargo banning the sale of petroleum products to the country); and allowing an unofficial banking sector, involving barter and foreign exchange bureaus, to flourish.

Iran is finding some benefits from the sanctions, too. Higher domestic energy prices have curbed demand, while the rise in refining capacity has freed up some natural gas for exports, power generation and re-injection into oilfields. It will also leave Iran with greater petroleum-product export capacity when sanctions are eventually lifted. Hard currency reserves are still abundant - sufficient, calculates the NIAC, to sustain the economy for 17 months in the unlikely event of an all-out ban on exports - and the country has now established ways to barter its goods with trading partners.

In February, Iran agreed to build a 400,000 b/d oil refinery in Pakistan and supply it with natural gas in exchange for wheat, meat and rice as payment for the fuel. The pipeline supplies of gas should start flowing in late 2014.

The sanctions are emboldening Tehran, not cowing it, argues the report. "Within the regime, some relish the hardship, believing it gives Iran more credibility on the international stage." Some also believe "sanctions fatigue" will eventually undermine the embargo, say the NIAC authors, which include Trita Parsi, head of the council and author of an influential book on US-Iranian relations.

Far from changing Iran's behaviour, the sanctions seem to have worsened it. Tehran is doing more to support Islamic Jihad and Hamas in Gaza, including giving the latter technology to fire rockets deeper into Israel, says the NIAC. It has increased budget allocations to the security and intelligence services (allowing another powerful interest group to thrive under the sanctions). Hacking activities have been stepped up: large US banks, Saudi Aramco and Qatar's RasGas have all been targets. 

Worst of all, the NIAC says the sanctions have done nothing to halt Iran's nuclear programme. The stockpile of low-enriched uranium (not necessarily weapons-grade) has grown almost tenfold in the past five years. The number of centrifuges used to enrich uranium has risen sharply in the same period. It has stepped up production of medium-enriched uranium, possibly of weapons-grade. This is part of a plan to change the facts on the ground, the NIAC says.

"The growth of Iran's nuclear programme over the past four years has been steady and slightly escalatory," says the report. "No data suggest that Iran's nuclear programme has slowed down." At best, it has been unaffected by the embargo. At worst it has been driven by the sanctions "in the sense that escalating the sanctions as a bargaining chip gives Iran the incentive to advance its programme for the same reason".

If that is true, then the West's Iran is failing. Yet Spider web: the making and unmaking of Iran sanctions, an equally troubling report from the International Crisis Group (ICG) says the sanctions have become a "path of least resistance, a tool whose effectiveness is assessed by the harm inflicted, not how much closer it brings the goal". 

The sanctions have taken on a life of their own, argues the ICG. "As a tool of coercive diplomacy (sanctions) are only as effective as the prospect of relieving them in exchange for policy shifts is real; the measure of efficacy lies in what can be obtained when they are removed, not what happens when they are imposed."

Unpicking the sanctions will be at least as difficult as imposing them, thanks to their sheer legal and institutional complexity and range. US presidential executive orders could lift some measures, but not all. Congressional approval to scale back the embargo would be needed, which the ICG says will limit President Barack Obama's room for manoeuvre. Some sanctions relate to Iran's support for proxy groups in the Middle East, such as Hamas, and so could remain in place even if the country reined in its nuclear programme.

Says the ICG: "Sanctions have become so extensive and intricately woven that it will be hard to offer significant, concrete relief short of a major - and improbable - turnaround in major aspects of the Islamic Republic's domestic and foreign policies; reaching the threshold for removing US sanctions in particular is hard to imagine."

That leaves the option of a time-limited suspension to some sanctions, says the ICG. But, in turn, that would at best bring time-limited and reversible Iranian reciprocal steps.

The group adds Iran and the West are sitting at the "same chessboard", but are playing by entirely different rules. A worsening cycle is under way. To pressure Iran, the West increases sanctions. To prove it will not give into threats, Tehran does not respond according to plan. So the West further tightens sanctions "whose success is measured less their self-proclaimed political goal (to halt Iran's nuclear programme) than by their sheer quantity and more visible and measurable economic consequences". As the West increases this leverage, through sanctions and acts of sabotage, Tehran feels it must do the same.

Iran has few options, says the ICG, other than "accelerating its nuclear programme or resorting to its own forms of sabotage". The regime must resist and survive, "the former being the prerequisite to the latter".

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