International Sanctions Are Hurting Iran

• JANUARY 22, 2011

They're not perfect. But don't believe the regime's bluster that they have no effect.

By AMIR TAHERI

The five permanent members of the United Nations Security Council (plus Germany) resumed talks yesterday in Istanbul with Iran. Although American officials keep repeating that "all options are on the table" to deal with the Iranian nuclear program, the Obama administration clearly hopes the economic sanctions imposed by the U.N., the U.S. and the European Union will induce Iran to blink. So how effective are the sanctions?
A report published by the Central Bank of Iran (CBI) last Oct. 20 offers a picture of an economy under growing pressure. Two figures suggest the magnitude of the problems. The first is a 7% drop in imports over the previous six months. Because almost all of Iran's nontraditional industries (outside carpet-weaving and handicrafts) depend on imported raw material and parts, this indicates a significant economic slowdown. The second figure is a 45% drop in applications for building permits for commercial and industrial units.
There is also bad news for government finances. Oil exports, which account for 75% of government revenue, dropped by 13.3%, or more than 600,000 barrels a day, according to the CBI. That's a projected loss of $16 billion in annual government income.
Not all of Iran's economic woes are due to international sanctions, but the sanctions do appear to be hitting Iran's vital energy sector. Late last year the National Iranian Oil Company (NIOC) announced the discovery of "major natural gas fields" in Sedipan, in the southwest, and Tous, in the northeast. But the absence of foreign partners, whose investment and technology are needed to develop the fields, means these finds will likely join the much larger offshore fields of South Pars in the Persian Gulf as untapped sources of wealth.
Projects touted by the government for building pipelines to bring the energy resources of the Caspian Basin to world markets and Iranian natural gas to Pakistan, India and Bangladesh are also going nowhere. Worse, the withdrawal of Western technology and experts could threaten output at some of Iran's largest oilfields. NIOC sources tell me that older fields, including Bibi-Hakimeh, Maroun and Ahvaz, may face a significant fall in output within five years.
According to a confidential recent study for the Ministry of Commerce, parts of which I've seen, over the next three years more than 40,000 businesses, including some large corporations, are likely to go under as a result of sanctions. Much of Iran's industry depends on imported parts, many of which are now on the U.N.'s forbidden list because of suspected dual use.
Last September, Yahya Al-Eshaq, chairman of the Tehran Chamber of Commerce, was quoted by the official news agency IRNA as saying that the rising cost of imports caused by having to evade sanctions had led to massive borrowing by many businesses. "Debt is breaking our backs," he warned.
Sanctions are also affecting the regime's nuclear ambitions. At a September press conference in Tehran, Ali-Akbar Salehi, the MIT-educated head of Iran's Atomic Energy Agency, admitted that sanctions would "significantly slow down" the nuclear program. A similar view is held by Aladin Borujerdi, who heads the security commission of Iran's parliament. On Oct. 12 Mr. Borujerdi told IRNA that "sanctions will hurt" and that "there is no use turning our face the other way."
To cope with falling revenues, President Mahmoud Ahmadinejad has unveiled a plan for ending government subsidies by March 2011, subsidies that Minister of Economy Shamsudddin Husseini said account for a third of government spending. The first subsidies to go concern 16 items of mass consumption including water, bread, electricity, gasoline and bus fares. Ending them would save the government around $12 billion a year.

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Iranian President Mahmoud Ahmadinejad

However, it could also increase the cost of living for the poorest families by around 20%, according to critics. Fariborz Rais-Dana, a respected Tehran economist, asserted last month that the proposed cuts could force more than 10 million Iranians below the poverty line. (Mr. Rais-Dana was arrested shortly after making his remarks on subsidies at a seminar in Tehran.) Previous cuts have already provoked labor strikes.
To cope with sanctions on gasoline imports, the government announced in December that it is extending its rationing scheme, under which each vehicle gets a maximum of 60 liters per month at the subsidized price equal to 35 cents a gallon. The scheme is designed to last until March.
The government has also decided to increase gasoline production. However, according to Tehran Mayor Mohammad Baqer Qalibaf, the gasoline produced is of low quality and "full of polluting impurities." The government claims it's safe. But in December and earlier this month the government shut all schools and most offices for two separate three-day periods to reduce air pollution in Tehran. The headline in the government-owned daily newspaper Etelaat last Oct. 20: "Gasoline is Choking Tehranis."
There is also dissension within the regime. Sources in Tehran tell me that one reason Mr. Ahmadinejad dismissed Foreign Minister Manouchehr Mottaki from his cabinet in December was his "persistent moaning" about Iran's no-compromise strategy. Mr. Mottaki's argument was that the strategy forced the U.N. to impose stricter sanctions. He'd asked that the issue be fully discussed by the cabinet but was rebuffed by Mr. Ahmadinejad.
One big question mark is whether countries that are supposed to obey the U.N. sanctions will follow through. Here the record is mixed. Thanks to its banking facilities and exports of dual-use machinery, China has become Iran's biggest trading partner, with $30 billion of exports each year. That's more than the European Union's $22 billion of trade, little of which can be attributed to sanction-busting.
Russia is also trying to cash in by allowing the Islamic Republic access to equipment for civilian and military uses. Hardly a week passes without the official news agencies announcing a new trade agreement with Russia.
Venezuela, Turkey and Malaysia go out of their way to help the Islamic Republic violate U.N. resolutions.Venezuela is helping Iran import gasoline and Malaysia is providing banking facilities. Without Turkish support, Iran's banking system, dominated by banks owned and operated by the Islamic Revolutionary Guards Corps, would be in a deeper crisis.
The fashionable opinion in global circles is that sanctions do not work. Nevertheless, the evidence is that they're hurting the economy and could weaken a regime that is also facing a tenacious internal opposition for the first time since 1981.