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U.S. Sanctions Biting Iran

Author: Lionel Beehner
January 23, 2007
This publication is now archived.

Introduction

Iran is beginning to feel the effects of U.S.-led financial pressure aimed at blocking foreign banks from dealing with Iranian financial institutions and companies linked to terrorism or weapons proliferation. The effort coincides with a UN Security Council resolution that imposes limited sanctions, including asset freezes against Iranian firms and travel bans against individuals connected to Tehran’s nuclear and missile program. The financial pressures have helped squeeze Iran’s economy and isolate the regime of President Mahmoud Ahmadinejad, but experts say more will be required to reverse Iran’s current course. 

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How has Washington targeted Iranian financial institutions?

The U.S. Treasury Department has stepped up pressure on foreign banks and companies that conduct business with Iran by warning them they could lose access to U.S. financial markets if they deal with Iranian firms tied to terrorism or the nuclear industry. U.S. Undersecretary of the Treasury Stuart Levey, on his recent tour of Europe, urged business leaders to sever their ties to Tehran. “I can assume he’s not asking them to do this out of the goodness of their heart but rather laying out penalties,” says Abbas William Samii, research analyst at the Center for Naval Analyses.

Most recently Treasury banned U.S. institutions and individuals from doing business with the state-run Bank Sepah, Iran’s fifth-largest bank, citing its alleged role in proliferating weapons of mass destruction. The bank will be prohibited from conducting transactions in U.S. dollars, the second such Iranian bank targeted in recent months (in September, Saderat was sanctioned for its alleged support of terrorism). Fearing a rebuke from Washington, several European financial institutions have severed ties with their Iranian counterparts. Others—including Germany’s second largest, Commerzbank—plan to continue business relations with Iran but will shift to euros instead.

Are these maneuvers part of the UN resolution?

No. These unilateral American moves go beyond the restrictions called for by Resolution 1737, which freezes the assets of only ten Iranian firms and twelve individuals with alleged ties to Iran’s nuclear sector. The resolution also bans the transfer of materials and technology that could abet Iran’s uranium-enrichment program. Washington had pressed for tougher sanctions against Tehran but was rebuked by China and Russia, both which have strong economic and energy ties with Iran. EU officials are also considering additional moves against Iran not included under Resolution 1737, such as imposing travel bans against Iranian officials, scientists, and students of “proliferation-sensitive subjects.”

How close are Europe’s economic ties with Iran?

The European Union accounts for some 40 percent of Iran’s imports. According to a study by the Conflict Securities Advisory Group, a Washington-based consultancy with ties to the U.S. State Department, an estimated 124 publicly-traded European businesses have financial interests in Iran, much of them in Tehran’s energy and telecom sectors. A year ago Iran, anticipating a financial squeeze, began to shift some of its accounts from Europe to businesses located in the Persian Gulf region.

Why is the U.S. Treasury putting financial pressure on Iran?

U.S. officials stress it is aimed at altering the behavior of the Iranian regime and restricting its ability to acquire outside nuclear know-how and materials, not crippling Iran’s economy or causing hardship for the Iranian people. Some experts liken the move to the U.S.-led disinvestment campaign used against apartheid-era South Africa. Political sociologist Amandeep Sandhu, writing in the Asia Times, says the purpose of these financial sanctions is to “cause a social revolution within the country.” Michael Hirsch of Newsweek calls the Treasury-led effort a “financial crusade.”

How effective has this financial squeeze been?

Experts say financial pressure from Washington may discourage European investors from doing business with Iranian banks but that the political impact of this pressure will be minimal. “It will have negative consequences for economic growth, trade, and so forth,” says Kaveh L. Afrasiabi, a U.S.-based expert on Iranian foreign policy. “But will financial pressure have the desired effect of forcing Iran to relent on the nuclear issue? I seriously doubt that.” Many of the European institutions, barred from doing business with Iran in dollars, are switching currencies. Given the euro’s increase in value relative to the dollar, this has helped Iran’s economy. The Iranian government, says Samii, is further shielded from outside financial pressures because most of the banks targeted are state-run and helmed by political appointees of Ahmadinejad. Yet Akbar E. Torbat, a sanctions expert at California State University, suggests that if financial difficulties were to arise, Iranian bankers may pressure the business-friendly elements within the Iranian government. He cites these leaders’ contacts with former President Hashemi Rafsanjani, who represents the older wing of Iran’s conservative class and has clashed with the more grassroots-friendly wing of Ahmadinejad.

What is the state of Iran’s economy?

Iran’s economy has stagnated in recent months, partly because of the country’s growing isolation in the world economy, partly as a result of dipping oil prices, and partly because of the government’s statist policies which limit private enterprise. Prices on goods like vegetables have tripled in recent months, while housing prices have doubled since last summer, reports the Associated Press. Economists say the government, which oversees 7 percent of the world’s oil reserves, has failed to redistribute this windfall of energy profits. Yet Torbat says Iran’s economy is not faring poorly when compared to its Middle Eastern neighbors. After all, annual growth hovers around 5 to 6 percent, Iran has $60 billion in foreign exchange reserves, and it boasts a current accounts surplus (that is, it exports more goods and services than it imports). Unemployment figures (officially 10 percent but probably closer to 30 percent) are also on par with the region, Torbat says. 

Is Iran’s economy vulnerable to outside financial pressure?

Yes. Its economy is reliant on foreign capital and investment to develop its untapped oil fields and fledgling nuclear energy sector. By denying Iran extensions of credit and other financial assistance, Iran’s primary industry—oil and gas—may be adversely affected, economists say. Iran may be forced to obtain loans with less favorable terms and at higher interest rates. And some Western investors may decide doing business in Iran is not worth the risk. In this sense, financial sanctions may be more effective than unilateral trade sanctions, argues Torbat, because oil is a fungible commodity; that is, Iran can just find alternate customers—namely China and Russia—to replace the United States (Of course, multilateral trade sanctions that include Iran’s energy sector would be more effective; a secret report leaked to Le Monde from Iran’s parliament estimates Iran could sustain itself for one year in the face of a full embargo). On the other hand, Torbat writes, financial sanctions “curtail Iran’s ability to borrow funds and finance its oil development projects.”

What effect will the current UN sanctions have on Iran’s economy?

Probably none, because of their limited range. “Basically these are symbolic sanctions,” Torbat says. Moreover, the sanctions have not stopped deals between Iran and Russia and China. “Since the resolution’s passage, China has struck a gas deal with Iran for $3.6 billion, and Russia has announced its delivery of its defense systems,” says Afrasiabi. “Both Beijing and Moscow are trying to have business as usual with Tehran.” Travel bans included in the resolution against select Iranian military personnel and atomic energy officials also have little impact, says Samii, because “these guys don’t travel overseas anyways.”

Have U.S. efforts to target foreign banks elsewhere proven successful?

Yes. Sanctions against the Banco Delta Asia in Macau—which was accused of involvement in the North Korean government’s counterfeiting and drug activities—are credited with helping to force Pyongyang back to the bargaining table. Speaking at a recent CFR meeting, David D. Aufhauser, former general counsel at the U.S. Treasury Department, calls this kind of financial pressure “an elegant and powerful tool to put in the hands of fighting terror.”

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