Why economic sanctions on Iran will fail

Joint Chiefs of Staff chairman Adm. Mike Mullen said at Columbia U. that a military strike on Iran over its nuclear enrichment activities would be his 'last option.' He makes an excellent point, too often overlooked. In some instances the price of doing something is just about as high as the price of doing nothing. A US strike on Iran would risk throwing Iraq and Afghanistan into chaos, with our troops in the midst of it. The Obama administration is now moving to tighten economic sanctions on Iran as an alternative to a more direct approach. These measures include pressuring countries and firms not to buy Iranian petroleum and gas; pressuring them not to sell gasoline to Iran; and attempting to make it difficult for Iranian banks to interface with the world economic system. While these measures could impose costs on Iran, these costs can easily be borne by the country, and more especially by the regime. Moreover, it is unclear that Obama can even swing further sanctions on Iranian petroleum and gas. Such harsh measures are opposed by Brazil, Russia, India and China, the so-called BRIC bloc of nations that are emerging diplomatic and economic players outside the US-dominated G7 nations. At the BRIC summit in Brazil last week, a consensus emerged against strong new sanctions on Iran. Brazil is on the UN Security Council at the moment, and in May Lebanon will assume the rotating chair of that body. Given that Turkey also currently has a seat and is strongly opposed to new Iran sanctions, it may be difficult for Obama to get a significant new resolution. Financial sanctions are not all that they are cracked up to be. Iran Oil & Gas reports that from March '09 to March '10, Iran swapped 450,000 tons of petroleum products. Some 90% of the swaps were with nations of the former Soviet Union (CIS), and 10% were with Iraq. Likely we are talking about Azerbaijan, Turkmenistan, Uzbekistan and Kazakhstan. This item is an example of how Iran can import refined gasoline (it has a temporary shortage of refineries) without needing to go through the international banking system. Even if some sort of official ban on trading with Iran could be arranged by the US with these CIS countries and Iraq, private traders and corrupt government officials would simply step into the resulting black market and make a pile. Smuggling oil products out of Iraq on trucks was a specialty of Jordan and Turkey in the 1990s, and that sort of black market would operate quite efficiently were Iran to be put under the sort of sanctions imposed on Saddam Hussein. Few commodities are more easily transported and more fungible (easily exchanged for other goods or for cash) than gasoline, and the plan for a gasoline embargo on Iran (popular in Congress) is a pipe dream. But we are hardly in a stage of black marketeering. Rather, direct deals are being done by major players, despite the withdrawal of some players, such as Lukoil, from exporting gasoline to Iran. Chinaoil just directly sold Iran 600,000 barrels of gasoline, and Sinopec, another Chinese oil giant, is preparing to resume direct gasoline sales to Iran. Soft gasoline demand in Asia because of the global economic downturn has left petroleum companies with high inventories that they are eager to offload anywhere they can, and Iran as a destination suits them fine. Reuters reports, "As long as there is money to be made, and economic benefits to be taken advantage off, Iran will always find ready sellers of gasoline from the international market," a trader said. "The politicians don't understand markets…sanctions are cosmetic." And if direct sales became difficult, indirect ones would be substituted. And if that became difficult, smugglers would step in. A lot of Iraqis would get rich. And while paying extra to smuggle things in would hurt ordinary Iranians, the regime would use its oil profits to cushion the elites and keep them happy. (That cushioning is why very severe sanctions on Iraq never had a chance of shaking the Baathist regime). The man said it all: 'sanctions' are purely cosmetic, designed to make it look as though US politicians had taken some dramatic and effective step. It is odd that the politicians in Washington, who are always loudly proclaiming their belief in the market, think its iron laws can be suspended by a simple vote on their parts. And another development taken as a bellwether of increasingly effective sanctions turns out to have been a mirage. Malaysian Prime Minister Najib Razak clarified remarks he made last Thursday about creeping sanctions on Iran. He was misunderstood to have said that Petronas, the Malaysian petroleum company had suspended gasoline sales to Iran, but he never said any such thing and it never happened. He referred to a cancelled third-party spot oil deal that collapsed for purely economic reasons. Moreover, Iran's need to import gasoline is probably temporary. It has the wherewithal to build new refineries, and is doing so. Germany's ABB Lummus has a a $512 million deal with the National Iranian Oil Company and a consortium in Iran to raise gasoline production at the Bandar Abbas refinery to about 3.5 million gallons a day from the present 1.3 million gallons. In fact, there are ten such projects to expand existing refineries, which could allow Iran to nearly double its production of gasoline by 2012. In addition, Iran is investing nearly $40 billion in building 7 new refineries. So even a successful squeeze on Iran's gasoline imports, if it could be implemented right away, would only have much effect for 2 years. But such a squeeze is unlikely to be successfully implemented in the first place. Nor is Iran lacking for customers. A Swiss company just signed a deal worth $13 billion to import Iranian natural gas over the next 25 years. As for financial sanctions, so far Iran is evading them through banking partners in the United Arab Emirates, and Iran and Venezuela have two joint banks. These measures provide Iran with a back door, allowing it to mitigate the effects of financial sanctions. Very few sanctions regimes have actually produced regime change or altered regime behavior. The US could not even accomplish this goal with regard to a small island 90 miles off its shores, Cuba. That an oil giant half way around the world with a population of 70 million that is as big as Spain, France and Germany can be effectively bludgeoned with sanctions is not very likely. The US needs to engage in comprehensive security talks with Iran, in hopes of striking a grand bargain. Because as Admiral Mullen rightly says, there are no good military options here. reprinted by permission of the author
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