Friday, November 09, 2012

Sanctions: Sanctioning Iran - Implications and Consequences

Source: ISN

Both Tehran and the Iranian population are under considerable pressure as a result of unprecedented economic sanctions. However, because the present regime has staked its legitimacy on the nuclear program, sanctions are unlikely to succeed as long as it remains in power and relinquishment of all right to enrich uranium is required, argues Eskandar Sadeghi-Boroujerdi.

By Eskandar Sadeghi-Boroujerdi for Oxford Research Group (ORG)
The Logic behind Western Sanctions
There are three readings of the logic behind Western sanctions, in particular, U.S. unilateral sanctions:
  1. To cause Iran to change policy, compromise on the scale and ambitions of its nuclear programme, and ensure that all proliferation risks i.e. possible military dimensions (PMDs) and highly enriched fissile material, which the P5+1states fear provide Iran with a “nuclear weapons capability” i.e. the ability to build a nuclear weapon in a short space of time, if it were to leave the Non-Proliferation Treaty and eject the IAEA’s inspectors are eliminated. [1]
  2. To cause Iran to scale back its nuclear programme to the research level, and forgo all uranium enrichment. Republican presidential nominee Mitt Romney has unambiguously stated this as his position, and it has been the West’s objective in the past. [2]
  3. To target the lifeblood of the Iranian regime, provoke civil unrest, and ultimately aid the regime’s overthrow. Advocates of this reading of U.S. sanctions policy cite the Johnson-Shelby Iran Sanctions, Accountability and Human Rights Act of 2012, which was passed by the Senate in May 2012, as an appropriate example. [3] The removal of the People’s Mojahedin of Iran from the State Department’s list of terrorist organisations, has also been claimed by Iranian MPs as proof of Washington’s desire to push for “regime change”. [4]

Great Power Rivalry and Sanctions
While there have been meetings between the P5+1 and Iran in Istanbul, Baghdad, Moscow, significant differences continue to divide the two sides, and the immediate response by the western members of the P5+1, has been to ramp up the pressure further through sanctions. Even prior to the Baghdad talks, which proved inconclusive, Congress had passed a new round of sanctions against Iran. [5]
An important question, which sanctions advocates need to ponder, is how effective can the current sanctions strategy be in the medium to longer term, in the face of the recalcitrance of other major powers, namely Russia, India and China, to taking additional multilateral measures against Iran.
As alluded to above, Western sanctions are themselves constrained by divergent Great Power competition, interests and rivalry. [6] Both Russia and China have proven themselves reluctant in the past to back further sanctions against Iran. The main reason in the case of China is because its growing economy relies heavily upon Iranian oil. This is despite the slowdown in Chinese economic growth rates as a result of the global economic slump. China has benefited greatly from U.S. unilateral sanctions, which have been in place and piling up since the Iran-Libya sanctions Act (1995) passed by the Clinton administration. [7] China had signed potentially lucrative agreements to develop Iran’s Azadegan and South Pars oil and gas fields, though it was reported in July that the China National Petroleum Corporation (CNPC) had decided to pull out of the eleventh phase of South Pars. The $4.7 billion deal had been signed in 2009, with CNPC replacing Total. [8]
Notwithstanding, various not insignificant “bumps in the road”, and the concerns of some Iranian politicians over China’s precipitous increase in importance in determining Iran’s economic vitality, [9] over 100 Chinese companies are said to be operating in Iran, and China as of yet has shown little sign of a desire to considerably wind down its economic ties with the Islamic Republic. [10] China also views the American position not as being essentially driven by concern for the non-proliferation regime, but rather guaranteeing U.S. hegemony in the region. That being said, it can be stated with confidence China would not welcome the prospect of a nuclear armed Iran.

Russia has a comparable view, but has proven more willing to bargain its support for Iran into tangible concessions from the United States. For this reason there have been repeated statements emanating from Tehran, that its faith in Russian support is far from assured, even if for the moment the latter remains unwilling to join the U.S. directly in dialling up economic pressure against Tehran. Russia, while not possessing substantial trade ties with Iran (it doesn’t even feature in Iran’s top ten trading partners [11] ), has been reluctant to advocate sanctions since it believes them destabilising for the region, and could possibly result in armed conflict. Moreover, the possible fall of the Assad regime, has arguably made buttressing Tehran all the more necessary.

Tehran’s increasing dependence upon China and Russia, has not been wholly welcomed. In fact Asadollah Asgarowladi, who heads the Iran-China Chamber of Commerce, and whose brother, Habibollah, is the former Secretary-General of the influential traditional rightist (rast-e sonnati) Islamic Coalition Party, which represents Conservative clerical and bazaari interests, has described the increase in trade between the two countries as deriving more out of necessity than design. [12]
Loss of Iranian Oil Export Revenues
Advocates of crippling sanctions understood early on that Iran’s energy sector is the state’s lifeblood and key source of revenue, constituting an estimated 70-80% of the country’s oil export earnings and an estimated 50% of total income.

The EU oil embargo came officially into effect on July 1, itself a response to U.S. legislation which penalizes any entity which deals with Iran’s Central Bank, through which Iran’s oil revenues have traditionally been channelled. [13] Europe had accounted for approximately 20% of Iranian oil revenues. The embargo did not enact an immediate shock to the Iranian economy, or the oil market since traders had already factored in the approximately 1 million bpd of Iranian oil which would exit the market. Saudi Arabian, Iraqi, Libyan and U.S. increases in production have also thus far forestalled any major spikes in oil prices, which are Tehran’s best chance to cushion the considerable loss in export earnings.

In the face of the July 1 European oil embargo, Iran’s rhetoric directed at the outside world has remained defiant, but there have been an increasing number of admissions by senior leadership figures that sanctions are having serious negative effects on the Iranian economy. While President Ahmadinejad had initially acknowledged that the latest round of sanctions are the toughest yet, his retort was that Western policy would only compel Iran to wean itself off oil revenues, and thus decrease the nation’s dependency on them.

[14] This, however, seems wishful thinking, since oil revenues would ideally be necessary in order to stimulate the growth of domestic industries, which can only be a long-term strategic objective and not a short-term solution to Western pressure. It also wouldn’t solve the difficulties Iran faces as a result of U.S. extra-territorial financial sanctions. While Ahmadinejad’s statements concur with the Islamic Republic’s ideological emphasis on “autarky” and “independence”, they do little to help Tehran confront the immediate and considerable drop in revenues, to which the Iranian state has now to become accustomed.

In 2011, Saudi Arabia, the world’s largest oil exporter, had oil export revenues valued at $318.5 billion, compared with $215.4 billion in 2010. A considerable increase in oil export earnings, and also part of the reason for the aversion of the spike in oil prices some analysts had feared. [15] Iran’s oil revenues also increased in 2011 compared with 2010 from $72.2 billion to $114.8 billion, despite a decrease in shipments of 8.5%. [16] The influx of high revenues, especially when compared with historical precedent, might be thought of as both a blessing and a curse, since as will be shown below, poor economic management and spending policies, have caused as many problems as they have solved.

Since August 2012, Iran has been losing an estimated $133 million per day as a result of U.S.-led sanctions. [17] According to figures compiled by Bloomberg, Iran has been confronted with a decrease in oil exports of 1.2 million bpd, tantamount to $48 billion in revenues annually, and estimated at approximately 10% of the Iranian economy. [18] Iranian oil revenues have and most likely will continue to decline. The rate at which they decline is contingent on how quickly Tehran can find buyers for its oil, and find creative means of circumventing the European embargo. There are few reasons to be sanguine, especially if Majles Deputy Speaker, Mohammadreza Bahonar’s slip on 23 September that Iranian oil exports in July fell to approximately 800,000 bpd, or two thirds of what they were last year, is accurate. [19] The International Energy Agency (IEA) reported an increase in August to 1.1m bpd, but this small gain is likely to fall again in the event of further sanctions. [20]
In June 2012, Turkish purchases of Iranian oil decreased from 180,000 bpd to 110,000 bpd compared with June of the previous year; [21] a net decrease of some 39%. [22] As a result, Turkey was granted a waiver by the United States and for the time being seems like it will initiate further cuts in the future. Increases in crude imports from Saudi Arabia, Russia, Libya and Iraq also seem to imply the prospect of additional cuts in the coming months. [23] The fact that the two nations have locked horns indirectly over the turmoil in Syria has not helped matters either. A planned delegation to Turkey to ensure sales would continue headed by the Iranian Oil Minister, Rostam Qassemi, was cancelled. [24] The precise reason for the cancellation remains unclear, but given Turkey’s heavy reliance on Iranian gas, and non-oil trade and tourism, it is unlikely that the two nations will publicly clash.

While Iranian-Turkish relations have undeniably reached one of their lowest points in recent years, this rift should not be exaggerated however, since the two continue to have considerable bi-lateral trade relations, reaching $16 billion in 2011. [25] Iran and Turkey have been able to maintain a relatively stable relationship post-1979, largely because they have been successful in compartmentalising their disagreements, and have not allowed them to jeopardise longstanding cooperation on the so-called “Kurdish question”, and above all energy. Given these factors, as well as numerous other shared interests and historic ties, it is unlikely Turkey will take a more overtly aggressive posture vis-à-vis Iran than it has during the first half of 2012. [26]
On 20 June 2012, Japan’s parliament provided sovereign guarantees of $7.6 billion for Japanese shipping companies transporting Iranian oil in response to the EU oil and insurance embargo, as a result of concerns over the embargo’s negative impact upon Japan’s own economy. [27] In 2011, Iran supplied 9% of Japanese oil demands. Nonetheless, Japanese purchases of Iranian oil were down this summer by over half the volume they stood at in July last year, [28] and they are set to decrease for the remainder of 2012. [29] It remains to be seen how sustainable Japan’s policy is into the longer term, especially if U.S. extra-territorial sanctions continue to expand their reach and eventually force Japan to end all Iranian oil purchases under threat of being heavily penalised. Other questions which are yet to be answered are whether Japan can insure up to pre-embargo volumes, which seems very unlikely, or whether as far as Japan is concerned this is merely an intermediary solution until it can replace Iranian oil with an appropriate substitute.

Switzerland has passed limited sanctions which affect supplies for the petrochemical industry, telecommunications equipment, as well as the purchase and sale of precious metals and diamonds. Switzerland did not however adopt the European oil embargo, but does not import Iranian oil in any case, so the most recent Swiss sanctions won’t affect Iranian oil income. [30]
Despite the recent return of Chinese oil purchases to their pre-March 2012 levels in June 2012, it is unclear whether China will replace lost Iranian revenues by increasing their demand for Iranian oil, even at sizable discount. China continues to be Iran’s most important purchaser of oil, buying around 20% of Iran’s total oil exports. In 2011, these amounted to approximately $16 billion. [31]
Many analysts have argued that the U.S. had little choice but to grant Beijing a waiver and Washington’s move was primarily a face-saving gesture. It is not politically expedient or perhaps even desirable for the U.S. to sanction China or push it to the point whereby it will have to cease all business with the Islamic Republic. Iranian oil tankers are able to carry some 20 million barrels of oil and Beijing has been using Iranian vessels to sidestep sanctions since July. [32] If China were prepared to use its own ships to cargo Iranian oil, then that could be of significant help to Tehran in increasing export levels. [33] Thus far, Beijing hasn’t been forthcoming in making any such offer.

Iran-Chinese relations are far from invulnerable to pressure from Western sanctions, however. In a meeting with Parliamentary Speaker, Ali Larijani in September 2012, the Chairman of the Congress of the People’s Republic of China, had complained of how sanctions have hampered Chinese investment opportunities in the Islamic Republic. [34] Not only has Chinese CNPC pulled out of the $4.7 billion deal to develop the eleventh phase of South Pars, Iran also suspended a contract with a Chinese company to build a liquefied natural gas plant in the Persian Gulf port of Assaluyeh, valued at $3.3 billion, because the Chinese group was unable to finance the project. [35] The question is thus not whether Western sanctions will impinge upon Chinese-Iranian economic ties, they very clearly do, but rather a question of the extent and depth of their impact, and whether Beijing and Tehran, over time, will fashion innovative means of circumventing U.S.-led sanctions.
India, which is the third largest purchaser of Iranian oil, has also agreed to provide insurance for Iranian oil shipments. However, as a result of sanctions and subsequent asset freezes, the Shipping Corp of India will end its joint venture of 37 years with the Islamic Republic of Iran Shipping Lines. [36] Due to the intervention of the Indian government, in response to the redundancy of some 95% of Protection & Indemnity (P&I) clubs due to the European oil embargo, Indian insurers have agreed to provide $100 million of cover per voyage to allow shipments to continue. [37] Nevertheless, Indian oil purchases will decrease in the coming year by a projected 11%. [38] This is most likely the result of the lower cover offered by Indian insurers, because their access to reinsurance has been blocked, which will in turn hamper the amount which can be realistically shipped. India is offering a mere $50 million in indemnity insurance compared to the usual $1 billion, and thus another vital question arises as to who will cover the costs of an oil clean up if an accident should occur in third party waters? [39] This might be part of the reason why India’s top oil buyer Mangalore Refinery and Petrochemicals Ltd, despite receiving embargo waivers, has been purchasing significant volumes of Omani oil to compensate for the shortfall in Iranian supplies. [40]
South Korea, another key purchaser of Iranian oil had said it would suspend all oil imports from the Islamic Republic as of July, so as to comply with U.S. sanctions. But two of its refineries, SK Energy and Hyundai Oil bank have continued to import Iranian crude. According to the state-run Korea National Oil Corp, Seoul imported 137,400 bpd in July, 42 percent lower than a year earlier. [41] Seoul has previously refused Iran’s offers of sovereign insurance for oil shipments, [42] even though the Economy Ministry had announced that as of September 2012, Iranian oil shipments would increase up to 200,000 bpd. [43] Nevertheless, Seoul should not have much trouble obtaining a further sanctions waiver from the U.S. in December, because their purchase of Iranian oil would have decreased by 20% since last year. [44]
Iran’s best hope for damage control under Western pressure is high oil prices, which will also have the added effect of encouraging the evasion of sanctions. The national budget was calculated on the premise of $85 per barrel, [45] while the IMF has estimated Iran needs prices to stand at $117 per barrel for it to meet its budgetary requirements. [46] This estimate was projected before the initiation of the European oil embargo, and thus Iran will need an even higher spike in oil prices if it is going to avoid the destabilising effects of massive loses of oil revenue.

At the beginning of September 2012, the price of Brent crude was $114 per barrel, and this is not even factoring in the sizable discount Iran has started to offer, [47] the bartering agreements by means of which goods are swapped for oil, and private sales on which it will be forced to pay commissions. [48] All of these issues reduce the amount of hard currency that will flow into Iran’s coffers. It therefore appears that Iran’s only real recourse for the time being is serious austerity measures, which will increase with time, and add to the difficulties of ordinary Iranians, including the regime’s key base of support.

Eskandar Sadeghi-Boroujerdi is a Researcher on Oxford Research Group's (ORG) Middle East program, focusing on its Iran project. He is a doctoral candidate in Modern Middle Eastern Studies at Queen’s College, University of Oxford. His research pertains primarily to issues of religious and political reform in post-revolutionary Iran. Other interests include Shi’ite clerical politics and political Islamism in the Shi’ite world. He taught the MSc in International Politics of the Middle East at the School of Oriental and African Studies (SOAS) in 2010-2011.

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