Law
of Unintended Consequences: US Sanctions and Iran’s Hardliners
Mehrdad Valibeigi
(Mehrdad
Valibeigi is an international consulting economist based in Washington,
DC.)
January 28,
2004
In the aftermath
of the earthquake which devastated the Iranian city of Bam on
December 26, 2003, and killed perhaps 41,000 people, many Americans
were appalled to learn that they were technically barred from
sending donations to Iranian-run relief efforts by unilateral
US trade sanctions in place since 1996. Realizing the problem,
the United States quickly relaxed some of the restrictions on
US-Iranian transactions for a period of 90 days. To cope with
the earthquake damage, Iran also accepted direct US aid for the
first time in a quarter-century of hostility between the two countries.
Coming on the heels of Iran's signature of the Additional Protocol
to the Nuclear Non-Proliferation Treaty and just before Iran's
move to resume full diplomatic ties with Egypt, a long-time US
ally, the temporary relaxation of sanctions led some to hope for
an emerging thaw in relations between Washington and Tehran.
But important
forces on both sides remain threatened by the prospect of constructive
US-Iranian dialogue. On the Iranian side, factions within the
conservative camp feel that a full opening to the West could undermine
their grip upon political power. These forces rejected the proposed
high-level US delegation including Sen. Elizabeth Dole (R-NC)
and, in the conservative newspaper Keyhan, called the partial
suspension of sanctions a "deceitful" gesture and criticized
the government for accepting US humanitarian aid. On the American
side, a group of Iranian expatriates around the son of the former
Shah, coached by think tank conservatives and Congressional hawks,
have effectively blocked all avenues of potential improvement
in relations and helped to keep sanctions in place.
Advocates
of punitive economic policies toward Iran point toward the power
of unelected anti-American ayatollahs in Iranian politics, and
the apparent determination of these hardline conservatives to
pursue weapons of mass destruction and continue bankrolling groups
on the State Department's terrorist list. But as dramatized by
the Bam disaster and its political fallout, the US policy of isolating
Iran through economic sanctions has not only failed to achieve
its intended objectives, but has also prolonged the dominance
of Iran's hardliners at the expense of reformists and other democratic
forces.
CONGRESSIONAL
HAWKS
US sanctions
on Iran began on November 12, 1979, seven months after the revolution
that overthrew the Shah, when Washington banned the import of
Iranian oil. President Jimmy Carter followed up with an executive
order in 1980 that froze all Iranian assets in the US. After the
Algiers agreement in January 1981, these measures were revoked
in the spirit of "normalization of relations between the
United States and Iran." But in October 1987, President Ronald
Reagan designated Iran as a state sponsor of terrorism, and by
executive order imposed a more restrictive regime of trade sanctions
blocking the import of all goods and services of Iranian origin.
The Iran-Iraq Arms Non-Proliferation Act of October 1992 further
restricted the export of missile technology, commercial arms sales,
sales of dual-use items and nuclear technology, and provided for
secondary sanctions against foreign countries that supplied the
prohibited items to Iran or Iraq. This legislation, particularly
its provision for secondary sanctions, became a model for the
Iran-Libya Sanctions Act (ILSA) of 1996, the most comprehensive
of the laws passed by Congress.
A report
published in 2000 by the Atlantic Council of the United States,
a Washington think tank co-chaired by former National Security
Adviser Brent Scowcroft, notes that "many of the US policies
that are found troublesome by Iran can be traced to the Congress
that took office in January 1995." In that year, prompted
by Israeli allegations of an Iranian nuclear program, the American
Israel Public Affairs Committee (AIPAC) circulated its recommendation
for a comprehensive embargo on commerce with Iran. Shortly thereafter,
Sen. Alphonse D'Amato (R-NY) introduced the Comprehensive Iran
Sanctions Act, which was followed by the introduction of Iran
Foreign Sanctions Act on March 15, 1995. Two months later, D'Amato's
bill was renamed as the Iran-Libya Sanctions Act. ILSA, still
in effect, penalizes any American company that invests even a
dollar in Iran. It further considers secondary penalties for any
non-American company that invests more than $20 million in the
Iranian oil industry. In October 1997, more moderate legislators
introduced two bills that would have required the president to
terminate all sanctions within two years of initiation unless
they were reauthorized. These bills were co-sponsored by 38 percent
of senators and 26 percent of House members, but strong opposition
from Sen. Jesse Helms (R-NC) prevented them from coming to a floor
vote. The Clinton administration did eventually lift some prohibitions
on trade in agricultural products, carpets and handicrafts.
After the
fall of Saddam Hussein's regime and the occupation of Iraq by
US troops, the hawkish Congressional campaign against Iran was
reinvigorated. In May 2003, Sen. Sam Brownback (R-KS), a long-time
supporter of exiled Iranian opposition groups, including the front
organization of the cultish Mojahedin-e Khalq, introduced a bill
called the Iran Democracy Act which would declare US support for
an "internationally monitored referendum" to achieve
peaceful regime change. Brownback later told the press that top
Pentagon officials backed funding for covert operations as part
of the legislation, but the bill was not so amended and remains
in committee. Tougher companion legislation in the House of Representatives,
the Iran Freedom and Democracy Support Act sponsored by Rep. Brad
Sherman (D-CA), was proposed in June. Sherman's bill would roll
back the Clinton administration's partial trade allowances and
discourage the World Bank from giving loans to Iran. The ILSA
Enhancement and Compliance Act, yet another measure introduced
by Rep. Ileana Ros-Lehtinen (R-FL) in October, would also tighten
the existing sanctions.
LEAKY EMBARGO
The effectiveness
of economic sanctions as a tool of foreign policy, particularly
when they are imposed upon authoritarian regimes, became increasingly
controversial over the course of the 1990s. In December 1998,
the Overseas Development Institute (London) held an international
conference funded by Britain's Department for International Development
which produced a consensus of experts on the question: "Can
Sanctions Be Smarter?" Among their other conclusions, the
experts stated that unilateral sanctions such as US sanctions
upon Iran do not work in today's highly integrated global economy.
The US has come under significant international pressure, particularly
from its European allies, to reevaluate its trade embargo on Tehran.
On May 18, 1998, the Clinton administration waived the application
of secondary sanctions proscribed by ILSA when the European energy
conglomerates Petronas, Gazprom and Total signed a contract with
Iran for the development of the South Pars gas field.
The divide
between the US and almost all other industrialized nations over
sanctions has allowed Iran to succeed in attracting foreign capital
into its oil and gas industry. In the year 2000, the French company
TotalFina/Elf wrapped up a $2 billion deal to develop the South
Pars oil and gas fields, Royal Dutch/Shell scored an $800 million
contract to develop the Soroush and Nowrooz offshore oilfields,
ENI-Agip acquired a 38 percent share in the Balal fields and Norway's
Statoil signed a series of agreements with the National Iranian
Oil Company to explore for oil in the Strait of Hormuz. In late
2001 and early 2002, Shell brought part of the $1.1 billion Soroush-Nowrooz
development online. More recently, a consortium of three Japanese
companies bought a 20 percent share in the Soroush-Nowrooz project.
Russia's Lukoil indicated that it had received approval to prospect
along the border with Iraq in September 2003. From 1995 to mid-1999,
Iran attracted about $5 billion of investment in the form of joint
ventures and buyback contracts in the oil and gas companies. According
to the Middle East Economic Digest, the country is expected to
lure an additional $20 billion to its petrochemicals industry
by 2013.
Iran's recent
progress in acquiring nuclear technology is another example of
ILSA's failure on its own terms. Indeed, without the diplomatic
intervention of the European Union, Iran probably would not have
signed the Additional Protocol that calls for full inspection
of known nuclear sites. Iranian hardliners' continued support
for the Lebanese Shiite group Hizballah and the Palestinian militant
group Hamas, and their hesitancy in extraditing suspected members
of al-Qaeda who are reportedly detained in Iran, are further testament
to ILSA's limited accomplishments in realizing its stated objective
of containing the extremist activities of the conservative leadership
in Iran.
LAW OF UNINTENDED
CONSEQUENCES
In addition
to failing on their own terms, US sanctions on Iran have two main
sets of unintended consequences: direct and indirect costs to
the American economy, and extension of an economic lifeline to
the hardliners at the expense of the rest of the population.
As non-American
oil companies penetrate the Iranian market, there are significant
economic losses to the US because of the lack of bilateral trade.
One can roughly estimate the scale of these losses by combining
the gross domestic products of Iran's five main trading partners
in 2002, Germany, France, Italy, China and South Korea. Calculated
on the basis of purchasing power parity, together these GDPs amounted
to over $12 trillion, about 15 percent more than the 2002 GDP
of the United States. Iran's imports from its five largest trading
partners added up to nearly $4.3 billion in 1999-2000. Though
disaggregated figures are not yet available for 2002, Iran's total
imports in that year rose from almost $12.7 billion in 1999-2000
to almost $21.2 billion in 2002-2003, according to the Central
Bank of Iran's latest data. If one assumes that the largest trading
partners' percentage shares did not change, then they exported
over $7.1 billion of goods and services to Iran in 2002-2003.
If one further assumes that Iran would have imported a similar
dollar amount, as a percentage of GDP from the US, then the US
is foregoing $6.2 billion dollars in exports per annum by maintaining
trade restrictions. This extrapolated figure seems reasonable,
given that the US did in fact export $747 million of goods and
services to Iran in 1992, prior to passage of ILSA. After ratification
of ILSA, the volume dropped to almost zero, though US exports
to Iran have recently started to go up again, topping $93 million
for the first eleven months of 2003.
The burden
of lost exports to Iran has fallen mainly on the wheat producers
of midwestern states, aircraft manufacturers such as Boeing and
McDonnell-Douglas, power generation companies such as General
Electric and Westinghouse, and banks and insurance companies.
Before the 1979 revolution, the US was Iran's largest supplier
of wheat to Iran, sending more than 1.8 million tons a year. In
2001, a year of drought, Iran became the largest wheat importer
in the world by bringing in 7 million tons of wheat valued at
over $1.5 billion. But by this time Iran had replaced its main
supplier of the grain, the US, with Argentina, Canada and Australia.
The hardliners, in spite of intense demand for American wheat
from owners and managers of flour mills, continued to block the
purchase of wheat from the US even after the Clinton administration
allowed its export, because the issue is highly charged politically.
On Washington's side, ILSA has also blocked financing of wheat
exports to Iran by American financial institutions.
VESTED INTERESTS
As for their
effect on Iranian politics, US sanctions have not only left the
anti-Western policies and sentiments of the powerful conservative
minority intact, but have themselves become a potent weapon against
the democratic forces that are struggling to blossom within Iranian
society. Furthermore, the embargo gives the hardline clerics a
ready scapegoat for their own economic mismanagement, which began
well before the 1997 elections ushered reformist leader Mohammad
Khatami into the presidency. With or without sanctions, the conservatives
will continue to pursue their present course against opening to
the West, not only because of their deeply rooted anti-modernist
interpretations of Islam, but also because of their vested interest
in keeping control over monopolies in the economy.
The direct
political impact of US sanctions on Iran boils down to the fact
that by retarding the growth of the private sector and competition,
the disproportionately large public sector, kept afloat by state
subsidies, will continue to prevail in the economy. The industrial
sector, for instance, is dominated by over 1,100 nationalized
industries that produce over 60 percent of the total value added
in this sector. In Iran, extensive involvement of the regime in
direct production has distorted prices and conspired to cheat
consumers. For example, the price of a Samand, an 80 percent locally
manufactured car that hardly matches foreign-made cars of the
early 1970s in quality, was over $17,300 until recently. Iranian
consumers could have bought a brand new Toyota Camry or Nissan
Maxima for that amount if the Japanese car was directly imported.
But the government, under pressure from corrupt interest groups,
did not allow the private sector to import foreign cars. This
meant that the Iranian consumer had to pay over $48,000 to purchase
a locally assembled Nissan Maxima. Only after recent economic
reforms did the regime permit private import of cars -- with hefty
170 percent import duties.
Economic
gains resulting from this price distortion have mainly benefited
the ruling conservatives, who directly or indirectly have a claim
on any activity that involves large profits. It is a common understanding
among the business community that, without paying kickbacks to
local or national political figures or government administrators,
there is little chance of establishing a profitable large-scale
enterprise. In the absence of competition, rent-seeking activities,
speculation, bribery, monopolistic pricing and nepotism have thrived.
Government subsidies for gasoline and food have been another major
source of super-profits for the economic elites and their conservative
allies. Because one needs special privileges to obtain permits
in order to purchase, process, distribute and market the subsidized
commodities, there are many hands who illegally take a share of
these transactions. According to Mohammad Hossein Adib, an Iranian
economist, in 2002 special permits to import rice were sold in
the black market at 1,000 rials per kilogram. A permit to import
100 tons of rice would have been sold at 100 million rials, or
over $12,500.
A significant
percentage of public-sector economic activities are controlled
by shadowy semi-public "revolutionary organizations"
such as the Mostazafan Foundation. While the scope of these organizations'
power has been exaggerated in the West, nonetheless they constitute
a major economic power base for the conservatives, who use some
of their proceeds to further political agendas. According to its
director, the book value of the Mostazafan Foundation was about
$2.1 billion in 2000-2001. Assuming an 80 percent increase in
value over the last two years, and adjusting for inflation, a
conservative estimate of the current market value of the Foundation's
assets is about $4.4 billion. According to the same source, the
Foundation's exports amount to $180 million a year, most of which
is in construction of roads, bridges, ports and refineries, as
well as technical assistance, engineering and design. These foundations
have certainly benefited from closed-door policies and lack of
competition in the economy.
The impact
of 20 years of US sanctions therefore has not been borne by their
ostensible targets, that is, the conservative clerics and their
allies among the managers of public-sector enterprises or the
owners of the various private monopolies in Iran. The sanctions
have not made a dent in the financial aid such players send to
groups like Hizballah or Hamas. The Revolutionary Guards and the
security apparatus of the regime have not suffered from the embargo
either, as the Iranian military relies heavily on vast numbers
of readily available conscripts who, in the absence of jobs, have
had little choice but to spend years away from their families.
There is no doubt that sanctions, combined with the US policy
of actively opposing Iranian membership in the World Trade Organization
and Iran's attempts to obtain major foreign loans, have all impeded
the pace of economic recovery and technological advancement. These
impediments to growth have generally come at the expense of the
Iranian populace and their struggle against clerical rule.
GROWTH DESPITE
OBSTACLES
Upon resumption
of economic relations with the US, and on the back of major market
liberalization reforms, one could expect a more rapid and equitable
pattern of economic growth that would better benefit the middle
classes and the deprived segments of the population. Indeed, research
published by Mahmood Tavassoli in the Iranian Journal of Trade
Studies in 1999 indicates that for every percentage point of increase
in the rate of exports growth, the rate of growth of GDP increases
by 0.16 percent. In order to roughly gauge the impact of the resumption
of exports to the US, one can use the 1987 estimate of the US
Census Bureau that Iranian exports to the US reached a post-revolutionary
high of $1.67 billion in 1987. Assuming that everything else remains
constant and that this amount did not come at the cost of decreased
Iranian exports to other countries in that year, it would appear
that had Iran exported an equal amount to the US in 1999, the
rates of growth for 2000 and 2001 would have increased by 0.64
and 2.08 percent, respectively. These are significant numbers
indeed.
Khatami's
government and its allies in Parliament have been able to carry
out serious market liberalization reforms that have consolidated
the institutional basis of a more open and competitive economy.
Among these reforms are the unification of the foreign exchange
system, the creation of an oil reserve fund, passage of the New
Foreign Investment Law, reform of the fraud and bankruptcy laws,
the opening of pilot private banks, issuance of private bonds
with flexible interest rates, mandatory taxation of the revolutionary
organizations, introduction of a value-added taxation system,
substitution of import quotas and licensing with tariffs, revitalization
of the Tehran Exchange Market, the creation of exchange markets
for metals and agricultural products, privatization through stock
offering of the nationalized industries and privatization of the
communication industry, to name a few.
Combined
with sustained high oil revenues, Khatami's reforms have recently
helped to strengthen the Iranian economy. For example, there has
been a significant increase in the volume of non-oil exports,
which reached $6 billion in 2003. This rate of growth has been
accompanied by notable progress in technological know-how and
quality in such areas of domestic production as shipbuilding,
high-rise buildings and automobile manufacturing. There are signs
of more fiscal discipline as the tax revenues showed a 24 percent
increase during the last fiscal year. On the employment front,
for the first time in seven years, the rate of unemployment was
lowered. US sanctions and other measures designed to prevent Iran
from joining the global economy have not prevented this growth,
but were they absent, it is safe to assume that the growth would
be greater. Meanwhile, only the hardliners benefit from the widespread
resentment of the embargo among ordinary Iranians.
The mass
disqualification of reformist candidates in Iran's upcoming parliamentary
elections by the conservative-controlled Council of Guardians
is a prime example of the hardliners' opposition to the democratic
process. The US and the European Union have correctly condemned
this maneuver, which has been only very slightly reversed so far.
However, if after inclusive and fair elections, a new parliament
is voted into office, the Bush administration and the Congressional
hawks should have a closer look at the merits of the ILSA sanctions
regime, and revise their ideas about what policies might offer
a boost to the democratic aspirations of the Iranian people.
Iranian-US Trade, 1980-present
| Year
|
US
Exports to Iran |
US
Imports from Iran |
Balance |
| 2003 |
93.8 |
145 |
-51.2 |
| 2002 |
31.9 |
156.3 |
-124.4 |
| 2001 |
8 |
143.5 |
-135.5 |
| 2000 |
16.8 |
168.7 |
-151.9 |
| 1999 |
47.9 |
2.4 |
45.5 |
| 1998 |
n/a |
|
|
| 1997 |
n/a |
|
|
| 1996 |
n/a |
|
|
| 1995 |
277.4 |
0.2 |
277.2 |
| 1994 |
328.8 |
0.8 |
328 |
| 1993 |
616.2 |
0.1 |
616.1 |
| 1992 |
747.5 |
0.7 |
746.8 |
| 1991 |
527.6 |
230.7 |
296.9 |
| 1990 |
162.5 |
6.8 |
155.7 |
| 1989 |
55.2 |
8.6 |
46.6 |
| 1988 |
80.5 |
9 |
71.5 |
| 1987 |
54 |
1,667.50 |
1,613.50 |
| 1986 |
34.1 |
568.9 |
-534.8 |
| 1985 |
73.9 |
725.1 |
-651.2 |
| 1984 |
n/a |
|
|
| 1983 |
1,112.0 |
190.0 |
|
| 1982 |
124.0 |
121.0 |
|
| 1981 |
63.0 |
300.0 |
|
| 1980 |
338.0 |
23.0 |
|
Source: US Census Bureau, http://www.census.gov/foreign-trade/balance/c5070.html#2003
