Iran sanctions: Just right or a step too far?

A Economist Intelligence Unit webinar was held on March 22, 2012 by Edward Bell, their Middle East/North Africa analyst.   Here is my summary of the webinar.

1.  Purpose of sanctions

European Union made an unprecedented move in mid-March by imposing sanctions on banks that have financial transactions with Iran, matching sanctions already imposed by the US on companies that do with business with Iran.  The purpose of the sanctions was to put political pressure on Iran to enter negotiations regarding their nuclear program.   The US government and the Israeli government claim their nuclear program is geared towards eventual production of nuclear weapons, but Iran claims it is for nuclear energy only.   The purpose of the webinar is to analyze what effect the sanctions are having on Iran’s economy, and to analyze whether on a political level they are likely to succeed in bringing Iran back to the negotiating table.

2.  Economic impact of sanctions on Iran

The economic effects in Iran have been severe—since a year ago:

  • Inflation has gone from 10% in 2010 to 23% following removal of subsidies such as heating fuel by government
  • Rial dollar exchange rate has gone from 10,500 to 12,260, will go up to 18000. That’s the official rate; actual exchange rate is 50% higher, up to 23000.   In practical terms for the average Iranian, a flight to Dubai which used to cost the equivalent of $2000 is now $4000.

Iran sends its oil exports to China (17%), Japan (10%), India (10%), Turkey (7%), and South Korea (6%).   The US has tried to use its political leverage on the countries it has the more influence with (Japan and South Korea) and has made a deal with them not to press sanctions against their countries if they make a sincere effort to limit their imports of Iranian oil.   Officially China and India have not made concessions to the US on this point, but unofficially their consumption of Iranian oil has reduced.   Of course, this reduction in oil imports has had the effect of increasing oil prices.   It is estimated that $0.25 of the cost of gasoline at the pump can be said to be due to the sanctions.

3.  Iranian response to sanctions:  strategic

The Iranian reactions have been negative:   there were attacks on the British Embassy in Iran last November when UK imposed the first financial sanctions.   Threats have come from the Iranian government that if attacked, they would shut down the Straits of Hormuz.  Iranians have been doing war gaming, and in response US has been doing its own war gaming, and sending aircraft carriers through the Strait in response to show that they intend to keep it open.

4. Iranian response to sanctions:  political

The Supreme Leader Ayatollah Ali Hosseini-Khamenei and the clerical conservatives are solidly behind the nuclear program.   The conservatives represented by the President Ahmadinejad were probably more willing to go to the negotiating table, but at the beginning of March there was a parliamentary election where the clerical conservatives and other supporters of the Supreme Leader Khamenei gained a majority in Parliament, and effectively sidelined Ahmadinejad.   Any opposition like that of the Green Movement that protested in the streets in 2009 has been squeezed out of the political system.   The only potential opposition to the nuclear program was Ahmadinejad whose allies were against the theocratic dogma of the clerical conservatives.   However, he now faces an unfriendly parliament which may either impeach him or wait until the next election, where the next President will certainly acquiesce to the wishes of the Supreme Leader who as mentioned is firmly behind the nuclear program.

If sanctions make things so bad for ordinary people that they riot in the streets, the current government has shown it is perfectly willing to use violence to suppress any such protests, as evidenced in their response to the Green Movement of 2009.   Note that the intelligence estimates from senior figures in the US and Israel security services have stated that Iran is not currently pursuing a nuclear weapons program; this pronouncement gives the clerical conservatives some confidence in their being able to pursue their present course.


Although the sanctions against Iran have had considerable economic effect, they have not yet been able to translate into political pressure on the Iranian government to come back to the negotiating table regarding their nuclear program.   In fact, one could say the sanctions have actually had the opposite effect of strengthening the power of the clerical conservatives.

There were several questions from the audience regarding what the effect would be on the region if Israel were to unilaterally attack Iran’s nuclear facilities.    These will covered in a separate blog post tomorrow.


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