Iran sanctions: Just right or a step too far?—Q&A session


A Economist Intelligence Unit webinar was held on March 22, 2012 by Edward Bell, their Middle East/North Africa analyst.  What follows are my notes from question & answer session that was held after the webinar.

1.   How much is cost to Iran of sanctions offset by increased revenue from higher oil prices due to rumors of attacks against them?

This was my question, by the way, and Edward Bell said that it was a good one.   He said that we would be shooting ourselves in the foot, so to speak, if the effect of the sanctions and the rumors of attacks had the effect of increasing Iran’s overall oil revenue.  However, the latest round of sanctions by EU by restricting Iran’s access to the international clearing mechanism SWIFT (Society for Worldwide Interbank Financial Telecommunication) are intended to prevent Iran from even trading oil on the international oil market.   For that reason, they go beyond the sanctions that were put in effect previously by the UK and the US.

2.  What are the countries in the Middle East which are most affected by the sanctions against Iran.

Dubai, Qatar, UAE, Bahrain and Saudi Arabia are most at economic risk.  If their counterparty is doing business with Iran, the liability has now shifted to them and they will have to have to do due diligence to prevent this.   They can’t get letters of credit, so Iran needs to pay them up front in cash for shipments.  In addition, they ship through the Strait of Hormuz which puts their oil shipments at risk in the conflict.

If sanctions create more severe pressure on Iran, the risk could spread to Lebanon and Iraq.  Iran may claim oil fields that are in Iraqi territory, or Iran may activate Hezbollah in Lebanon to fire rockets into Israel, which would in turn cause a direct assault against Iran by Israel.

3.  Can the Iranian people turn against regime and cause regime change?

The Iranian government is characterizing sanctions not as a part of negotiation, but simply as punishment against Iranian people.   The nuclear program is quite popular among the Iranian people at present and the government tries to make the people think they are doing what is best for them.   There is no electable voice of dissent in Iran, and the regime is quite capable of putting down any popular protest in the same brutal way that they did in 2009 against the so-called Green Movement.

4.   What is probability of unilateral attack by Israel by May?

Security establishment in both US and Israel say nuclear weapons program is not being pursued at present.   Netanyahu will not allow Iran to either develop a nuclear weapon or even have the capability of developing a nuclear weapon.  The only way to get that last option would be to have Iran give up its nuclear energy program entirely.   If the negotiations being proposed by the US are not successful, the only alternative short of a unilateral attack would be for the US and Israel to accept the possibility of Iran having the capability of having a nuclear weapon at some point in the future.   US may be able to accept, but it remains uncertain whether Israel is capable of accepting this.

If Israel is impatient enough that they unilaterally attack Iran, the head of IMF has said oil prices worldwide could increase 30-40% if Iran’s oil were removed from the market.   Also Iran is threatening to not allow other oil to go through Strait of Hormuz which would further increase oil prices.   The most immediate effect in EU would be those countries most dependent on Iranian oil, which just happen to be some of the countries which are weakest financially (Greece, Spain, and Italy).

Edward Bell thinks that one of the purposes of the EU sanctions are meant to give these countries time to get oil from other sources such as Libya or Iraq.

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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.

Summary

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.