The Magazine

Sanctions Against Iran Would Work

Too bad they won't be tried.

Feb 19, 2007, Vol. 12, No. 22 • By OLIVIER GUITTA
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After nearly four years of fruitless negotiations between the EU-3 (France, Germany, and the United Kingdom) and Iran over the nuclear issue, the U.N. Security Council on December 23 passed Resolution 1737. It imposed limited, almost meaningless, sanctions on the mullahs' regime. But it also set a clock ticking: If Iran has not agreed to suspend its enrichment of uranium by February 21, the Security Council may contemplate more severe sanctions.

The evidence that sanctions could work is significant. Consider the economic picture inside Iran. A roughly 100-page report prepared by the foreign affairs and defense commission of the Majlis, the Iranian parliament, and dated September 2006 was recently leaked to the French daily Le Monde. The report analyzes the economic and social consequences of potential international sanctions. The product of six months' intensive discussion among economists and oil specialists, it was circulated at the highest levels of the regime, and to president Mahmoud Ahmadinejad.

The report underscores the vulnerability of the Iranian economy--especially the oil sector--to sanctions. At first glance, it might seem that a country with the second-largest gas and oil reserves in the world has nothing to worry about. But as the report notes, 85 percent of Iran's revenue comes from the sale of oil abroad. At the same time, Iran imports most of the refined products it uses, like gasoline. Iran consumes half a million barrels of petroleum products per day, of which 40 percent is imported, at a cost of $3 to 4 billion a year. In the last few years, Iran's consumption of petroleum products has increased 10 percent per annum, putting added pressure on the oil sector. Rising consumption should come as no surprise, given population growth and the government-subsidized price of gasoline, among the lowest in the world at 800 rials a liter, or about 33 cents a gallon. Iran exports 2.5 million barrels of oil a day (3 percent of world consumption). An embargo on these exports would have a great impact, though it would not be felt for at least a year.

Heightening the vulnerability of the Iranian economy to sanctions is the fact that half of its imports come from Western countries, including 40 percent from the European Union. In the event of sanctions, the bulk of Iranian industry would be paralyzed after just three to four months. Iran would lose between $1.5 and $2 billion in annual revenue. Not surprisingly, the authors of the report note: "It is important to delay any measures which could affect the population because of the risks of instability."

The Majlis report recommends "making every political effort to prevent the imposition of sanctions, while protecting the interests of the country and the national honor." It mentions that Iran can use economic leverage with countries that depend on it for oil (Japan, China) and "political and military dissuasion" with others.

An embargo would destabilize Iran's economy and weaken its rate of exchange, while discouraging private investment. As a result, the report says, Iran "would be forced to modify its national priorities, and to devote the bulk of its resources to preventing major social upheaval, which could cause a deterioration of living standards for an important part of the population." It also insists on the need to continue threatening Western nations with a "cold winter," a way of stressing that rising oil prices would have a huge negative impact on Western economies.

The report amounts to a warning to the regime that it could not withstand major economic pressure, because of the structural weaknesses of the Iranian economy and its fragile financial situation. According to the report, "the members of the regime who were interviewed by the commission indicated that any deterioration of the economic situation could cause social disturbances that would weaken domestic stability." Interestingly, the commission seems to distance itself from the hard line personified by President Ahmadinejad. It concludes that the simultaneous freezing of Iranian reserves abroad, imposition of an embargo on Iranian crude exports, and a ban on refined petroleum imports would plunge Iran into a deep hole both economically and socially. The implication is that sanctions could seriously weaken the regime.