Will Tough Sanctions Against Iran Be Effective?

by , October 14, 2009

Negotiations between Iran and the P5+1 group – the five permanent members of the United Nations (UN) Security Council plus Germany – began on Oct. 1. Iran’s negotiating team was led by Saeed Jalili, the hard-line secretary-general of its Supreme National Security Council and an ally of Mahmoud Ahmadinejad. The U.S. team was led by William J. Burns, a career diplomat and undersecretary of state for political affairs. There were face-to-face negotiations between Iran and the U.S.

Unlike what has been said in the mainstream media, negotiations and contacts between the Islamic Republic and the United States are nothing new. They have been taking place over the past 30 years, including for the release of the American hostages in 1980-81, the Iran-Contra affair in the mid-1980s, Iran’s cooperation with the U.S. during the first Persian Gulf War of 1990-91 and the fall 2001 war in Afghanistan that overthrew the Taliban, and the meetings about the internal strife in Iraq in 2007.

On the first day of negotiations Iran made a symbolic, yet significant, concession. It agreed to transfer three quarters of its low-enriched uranium (LEU), about 1200 kg, to Russia to be enriched to 19.5 percent (Iran’s LEU is at the 3.8 percent level) and then to France to be converted to fuel rods. Tehran needs the fuel for its 5 MW nuclear research reactor, now operating at 3 MW due to lack of fuel; it will completely run out of fuel in 18 months after all of its Argentine-supplied fuel is spent. Note that once enriched uranium is converted to fuel rods, it can never be used for weaponization.

What is not yet clear is the next step in the negotiations, to be resumed on Oct. 19. Even the agreement to transfer Iran’s LEU to Russia and France is fraught with complexities. The transfer actually requires a new UN Security Council Resolution, because the previously approved resolutions against Iran were filed under Chapter VII of the UN Charter and barred any nuclear transaction between Iran and the rest of the world.

There has been much speculation that the U.S. intends to demand the new resolution contain some provisions and conditions that could establish precedents for the future. For example, the U.S. and its allies may insist that Iran begin implementing again the Additional Protocol that it signed with the International Atomic Energy Agency (IAEA) in December 2003, the provisions of which Iran followed voluntarily (because the Iranian parliament refused to ratify it) until February 2006, when Iran withdrew from the agreement.

The direction in which any further steps may be taken is completely different for the two sides. Tehran has demanded that its nuclear dossier be returned to the IAEA and, therefore, wants the next steps to be taken based on its relationship with the IAEA. Washington and its allies, on the other hand, are keen on pursuing a path that runs through the UN Security Council, because they believe that such a path gives them leverage over Iran.

The goals of the two sides are also completely different. Whereas Tehran, a de facto nuclear state, wants the U.S. and its allies recognize it officially as a nuclear power with the complete nuclear fuel cycle, Washington and its allies demand that Iran freeze and eventually give up its uranium enrichment program. That is not likely to happen. Iran’s hardliners have indicated on many occasions that they are ready to pay any price in order to preserve their uranium enrichment program.

Thus, there have been many behind-the-scenes maneuvers by Washington to goad its allies into going along with a regime of tough sanctions if the negotiations fail to get Iran to freeze its nuclear program. Right before the trip to Europe by Secretary of State Hillary Clinton there was a secret meeting in Washington led by Stewart A. Levy, undersecretary of the Treasury for terrorism and financial intelligence, in which seven of the eight countries in the G8 group, plus Saudi Arabia, United Arab Emirates, Australia, and South Korea, participated.

Under consideration for sanctions are exports of oil products to Iran, including gasoline; severe sanctions against Iran’s financial institutions and banks; actions against insurance companies that insure Iran’s oil exports and its imports; and limiting visas for Iran’s diplomats and military officials to travel abroad.

Saudi Arabia has been advocating a tougher approach to Iran, and it has promised Japan and China that, if they limit their imports of Iran’s oil – currently 550,000 and 432,000 bbl/day, respectively – it will supply them with oil. With over 4 million bbl/day of excess capacity, Saudi Arabia is well positioned to deliver on its promise.

Will sanctions force Iran to freeze its nuclear program? To address the question, we must first recognize that the U.S. has imposed some of the toughest sanctions on Iran for the past 30 years, but thanks to its strategic significance and energy resources, Iran has proven to be very resilient. One might argue that the sanctions will be effective if there is an international consensus behind them and their enforcement is monitored by, for example, the UN Security Council. But even that may not be effective.

Consider, for example, sanctions against exporting gasoline to Iran – smart sanctions, as they are sometimes called – which are frequently mentioned as an effective way of pressuring Iran. Despite its great oil reserves, Iran must import gasoline because of its lack of refining capacity. The U.S. Senate is considering imposing tough sanctions on the countries and companies that sell gasoline to Iran. But anticipating the sanctions, Iran has been busy preparing itself for them.

First, there is a simple way of boosting the gasoline production with the present refineries. All Iran must do is change the so-called crude diet (the feedstock to refineries) to improve the yield by lowering the refinery cut points (the degree of refining at which gasoline of various qualities is made), which reduces the quality of the gasoline but increases its volume greatly. The gasoline can be mixed with octane enhancers for improved quality.

Iran has also moved to curtail consumption. Up until July 2007, Iran was importing 225,000 bbl/day of gasoline. Then it began rationing gasoline and increasing its price greatly. As a result, imports of gasoline have declined to 160,000 bbl/day, a 28 percent drop. But there is still room to further reduce the consumption of gasoline.

Currently, 97 percent of gasoline in Iran is sold at 10 cents/liter. The government is reducing the volume of the subsidized gasoline to decrease consumption. A piece of legislation is before Iran’s parliament to end all gasoline subsidies, though if approved, its implementation will proceed slowly, because its rapid implementation would cause great social strife.

There are 1.5 million vehicles (out of a total of 12 million) in Iran that use compressed natural gas (CNG). Vehicles run on CNG are more economical and environmentally friendly. The technology to produce CNG is, relatively speaking, much less complex than that of refining crude oil. Iran is also the 4th-largest producer of natural gas in the world. Since 2007, Iran has been investing in the manufacture of low-consumption, flexible-fuel engines run on CNG, as well as constructing CNG refueling stations. As of last July there were 837 CNG stations in Iran, which will be increased to 1,200 by early next year. These efforts have made Iran the world’s 4th-largest CNG-vehicle producer and reduced gasoline consumption by 25,000 bbl/day.

There are also plans for the refineries at Abadan, Arak, Isfahan, and Tehran to be upgraded in order to increase their capacity. For example, China is supposed to modernize the Abadan refinery on the shores of Persian Gulf, which, at one point, was the world’s largest.

At the same time, Iran has been stockpiling gasoline by buying from Swiss suppliers and Malaysia’s Petronas, and it has four months worth of gasoline needs in storage. Most of the stockpiled gasoline is stored onshore and hence less vulnerable to military attacks. Because gasoline has been cheap in Iran, there has always been a major problem with smuggling to neighboring countries. But the government has moved to stop the smuggling and has reduced it by about 20,000 bbl/day (from a peak of 30,000 bbl/day).

A worldwide boycott of Iran’s oil and gas industry will also be difficult, if not impossible, to enforce, without war. Given its excess refining capacity, China has begun to directly supply 1/3 of Iran’s gasoline imports. Iran has also developed contingency plans for importing gasoline from Turkmenistan (acting on behalf of Russia) and Venezuela. The latter has announced that it will export 20,000 bbl/day of gasoline to Iran.

Realistically, Venezuela may be less reliable than it seems (despite its close ties with Tehran), because it is vulnerable to U.S. pressure. Citgo, Venezuela’s state-controlled refining company, has extensive assets throughout the U.S. In addition, the U.S. is the largest importer of Venezuela’s oil. Most importantly, a significant fraction of Venezuela’s oil is of the heavy type, and the U.S. is one of the few nations with the technological know-how to refine the heavy crude.

Chinese companies are partners with the National Iranian Oil Company in phases one and two of the development of the giant Iranian oil field Yadavaran, which contains 17 billion barrels of oil (of which about 4 billion are recoverable with current technology). China has also signed an agreement to develop a medium-size oil field, the North Azadegan.

Last June, China’s National Petroleum Company signed an agreement with Iran to participate in phase two of the development of the giant South Pars field in the Persian Gulf that contains 8 percent of the world’s total natural gas reserves. Iran and Pakistan have agreed to construct a pipeline that will export Iran’s natural gas to Pakistan.

On July 13, Iran’s Ministry of Oil announced that China will construct the new Hormuz refinery in southern Iran, which will be able to produce 300,000 bbl/day of gasoline. Although China has been noncommittal regarding sanctions against Iran, given its large investment in Iran’s energy sector totaling tens of billions of dollars, it is likely that it will resist any UN Security Council Resolution that calls for tough sanctions in the oil and natural gas sectors.

What about Iran’s banking system? The UN Security Council resolutions have already imposed sanctions on some of Iran’s major banks. There has also been an unofficial sanction by the European Union (EU) on many Iranian banks. Iran moved to transfer its foreign currency reserves from the EU to Chinese banks and has prepared itself to live with such sanctions.

Sanctions against insurance companies will reduce the margin of profit for Iran’s oil exports, since they will increase the insurance costs. But Iran learned to cope with such effects during its war with Iraq in the 1980s, when the insurance costs of its oil exports increased by a factor of four or five. As a result, Iran developed one of the largest oil tanker fleets in the world and can transport its oil anywhere.

While Iran will be able to live with the sanctions for a prolonged period, there is no question that prices will increase. Whom will be hurt most? Ordinary Iranians, not the hardliners and the political elite. At the same time, sanctions have rarely, if ever, been effective in inducing change. The best examples are the plights of the people of Iraq, Libya, and Cuba. Sanctions did not overthrow the regimes of Saddam Hussein, Muammar al-Gadhafi, and Fidel Castro; they only worsened the lives of ordinary people. In addition, at least 500,000 Iraqi children died as a result of the sanctions in the 1990s.

On the other hand, sanctions can lead to war. In Iraq’s case, for example, one argument used to justify an invasion was that sanctions had failed.

At the same time, the Iran sanctions have been, and will be, used by the hardliners to rally the nation, at a time when they have lost their legitimacy due to the rigged presidential election of June 12. If the rally does happen and push comes to shove, Iran’s hardliners are likely to become increasingly aggressive about their nuclear program.

Since the 1979 Revolution, Iranian leaders have been preaching the virtues of sacrifice for the sake of national solidarity and perseverance. And if the sanctions truly threaten the foundation of its economy and social fabric, Iran will begin to seriously think about the "nuclear option" that it already has in its arsenal, namely, closing the Strait of Hormuz.

Sanctions will also enable the hardliners to justify their mismanagement of Iran’s economy. This is one reason why leaders of Iran’s democratic movement – Mehdi Karroubi, Mir Hossein Mousavi, and Mohammad Khatami – are vehemently opposed to sanctions.

New sanctions on Iran will, in fact, benefit the hardliners. The Islamic Revolutionary Guards Corps (IRGC) already controls a significant portion of Iran’s economy. Imposing sanctions will only tighten the IRGC’s grip on the economy by enabling it to control the import of the needed materials and products by going around the sanctions. Needless to say, more economic power means more political power for the IRGC. This is not in Iran’s long-term interests, nor in the interest of true peace and stability.

I repeat what I have been saying for quite some time: Iran’s nuclear program is not a threat to any nation. There is no credible evidence that Iran is seeking nuclear weapons. But, even if it is, they would be for deterrence only.

Therefore, while negotiating with Tehran is essential, the West must not do anything to divert the attention of the Iranian people from their suppression by the hardliners and the political and economic failures of Supreme Leader Ayatollah Ali Khamenei, Mahmoud Ahmadinejad, and their IRGC supporters. Democratization in Iran will go a long way toward removing the nuclear program as an issue of international significance.

Read more by Muhammad Sahimi