from Greenberg Center for Geoeconomic Studies

A Weakened but Resourceful Iran

Sanctions have weakened Iran, but expert Hossein G. Askari says the country’s leaders continue to muddle through, in part because of popular support for uranium enrichment--the cause of mounting global pressure.

August 9, 2010

To help readers better understand the nuances of foreign policy, CFR staff writers and Consulting Editor Bernard Gwertzman conduct in-depth interviews with a wide range of international experts, as well as newsmakers.

Recent economic sanctions are weakening Iran’s economy, with gasoline imports down and European firms pulling up stakes. But Hossein G. Askari, an expert on Iran’s economy at George Washington University, says sanctions’ aim of getting Iran to negotiate over its nuclear program will likely prove unsuccessful, in part because of Iranian public support for its nuclear endeavors. Still, Iran’s military capabilities are severely diminished after years of U.S. and international embargoes, Askari says, and the latest efforts will surely mean an increase in the cost of imports. But Askari predicts the bulk of Iran’s population will go unaffected, thereby limiting the role sanctions may play in ending the nuclear impasse.

Give us a broad-brush overview of Iran’s economy. Is it chugging along just fine, or on the precipice of collapse?

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Let me put that in a historic context. If you go back to the time of the [Islamic] Revolution [in 1979], Iran’s economy was about double that of South Korea’s. Today, South Korea’s is four times that of Iran’s. Another dimension is oil. Around the time of the revolution, Iran’s oil production was around six million barrels a day. Today, we’re talking about three and a half million barrels a day. Real per capita income in Iran over the last thirty years has gone up very, very slightly--depending on how you do the calculations, less than 1 percent. The reason for that is, primarily, Iran’s misguided and terrible [economic] policy. The Iranian government has basically gone the way of subsidies, which they adopted during the Iran-Iraq war [in the 1980s], and they really neglected the private sector. There’s a second reason--a very, very costly eight-year war between Iran and Iraq. It was devastating for Iran’s infrastructure. A third reason is that Iran has had, in the early years after the revolution, very, very rapid population growth. [According to the UN’s Population Division, Iran’s population rose from thirty-nine million in 1980 to nearly seventy-one million in 2005.] And lastly, there are of course sanctions.

The international community seems to hope that by exploiting Iran’s economic hardships with sanctions, Iran’s leadership will make the calculation that continuing its nuclear program is simply too costly. Will this strategy succeed?

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Whenever you impose sanctions on a country and you want to change a policy, it is much more likely to succeed if the population of that country is also against that government policy, in this case nuclear enrichment. But the people of Iran are not against that. So that makes it very, very difficult. Namely, the people of Iran are not telling the government to abandon enrichment. They actually approve of enrichment. And so in that, it makes it more difficult to squeeze Iran.

As you could probably guess, Iran is one of the most sanctioned countries in the world. And it has gone through this and kind of limped along. But for the longest time, until President Clinton came along, Iranian refined products were coming into the United States. U.S. oil companies and others were bringing Iranian crude into the Caribbean islands, refining it, and then bringing it into the United States. And so we weren’t really serious. Where we started getting very serious was in 1996, with the Iran Libya Sanctions Act [later modified to the Iran Sanctions Act, or ISA]. Then we started on oil, which really didn’t do much, and we started on all kinds of exports to Iran--everything was basically banned. But Iran always found a loophole. [Banned products] could go through third countries like Dubai and Canada. Iranian vegetables, canned vegetables, lots used to come in, but most importantly, there was a demand for oil. And Iran could always sell its oil.

Some have begun to argue that the human costs of these sanctions are being ignored, while others argue squeezing the public is precisely the point. What are your thoughts?

[T]he people of Iran are not telling the government to abandon [uranium] enrichment. They actually approve of enrichment. And so in that, it makes it more difficult to squeeze Iran.

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These sanctions without a doubt affect the well-off people, the middle class, the upper-middle class, and the rich. It affects them much more than it affects the very, very poor at this point. However, if you are trying to change any policy, one of the ways sanctions are supposed to work is to pressure the population to try to overthrow that government or to try to change that policy. It is supposed to bring hardship. But in this case, I don’t think that hardship is on the poor as much.

The poor, who by my estimation represent over 60 percent of Iranians, rely heavily on government subsidies for food, electricity, and the like. They will be affected to the extent that the government does not have enough revenues to provide them with these basic benefits. The government, in turn, would be caught in a squeeze. As sanctions bite, revenues decline, the cost of imports increases because of higher prices to third parties in order to circumvent sanctions, [and] the government can [either] tax the merchants or deny the basic needs of life to average citizens. In either case, its very survival would be threatened. Yes, if the government chose to deny the poor their basic needs, they would suffer, but then the government would be highly unlikely to survive. So it will do all that it can to avoid this.

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It would appear that those who raise this [human cost] issue want sanctions that work by magic and cause no pain. That is unrealistic. There will be pain, or the threat of pain, on someone--the rich merchants or average citizens or both. It is a mistake to increase sanctions little by little; instead, one should adopt the toughest sanctions to get it over and done with as quickly as possible. More pain but for a shorter period.

Have the sanctions as they are currently deployed cost Iran’s leadership anything politically? Or is the Iranian leadership using them as a political tool to rally public support?

Iran is using this as a political tool in every instance, but doing it very subtly. It doesn’t want to say that the total reason for problems is sanctions. One day they’ll say sanctions have no effect because they want to be able to tell the public, "We can handle sanctions." They do try to come across that they can handle it. When they get into a bind, however, they’ll blame it on the international community.

Crisis Guide: IranThe average Iranian will actually see sanctions in a very different way. They believe that the day Iran makes up with the United States and sanctions go away, Iran will explode economically [and] everything will be great. They don’t quite see the subtlety of the government destroying them. If I was the international community and I wanted to put more pressure on this government, what I would be talking about is the total economic mismanagement, which is awful, almost approaching disaster.

Another focus of recent sanctions has been the Iranian military--including businesses owned by the Revolutionary Guards Corps. Have these sanctions hit their targets?

There’s no doubt that the sanctions are having a tremendous effect on Iran’s military. They have not been able to, for over thirty years, import the most sophisticated equipment. Without a doubt, American aircraft--[which] Israel can import, Saudi Arabia can import, South Korea can import--are the most sophisticated. Iran basically has some leftover American airplanes, some Tomcats which are very modern, but they don’t have the various things you need for the Tomcat to make it an effective airplane. They have old Phantom jets, about forty-year-old jets. So Iran’s air force is not in any way, shape, or form modern. What Iran has done is develop a reasonable indigenous military equipment production capacity. It’s been forced to do that, but these are not the most sophisticated things. Iran has bought some diesel submarines, but these are not the most sophisticated.

It is a mistake to increase sanctions little by little; instead, one should adopt the toughest sanctions to get it over and done with as quickly as possible. More pain but for a shorter period.

The process of turning a lot of the Iranian economy to the Revolutionary Guard [happened] before [Mahmoud] Ahmadinejad came to power. It started actually over ten years ago that the Revolutionary Guard started getting contracts to do Iran’s natural gas development in the Persian Gulf. Of course, it doesn’t take a genius to know that the Revolutionary Guard wasn’t set up to do this. What the Revolutionary Guard would do is subcontract this to an Italian firm, and then they would skim a percentage off the top. The Revolutionary Guard has probably used some of the economic revenues that they’ve gotten to import some arms, etc. But I don’t think that they’ve been able to really import anything that could be a real threat to the rest of the world. Of course, in this day and age, you do have asymmetric systems. You could go through surrogates, like Hezbollah and Hamas, [and] that gives you a great deal of power without having the most sophisticated air force.

Are there any loopholes in the latest flurry of sanctions? Or are these sanctions, as they’ve been described in the West, really the last straw that might break the Iranian economy’s back?

We have other economic sanctions in our arsenal that we have not and do not want to use. We should be cognizant of this. These [current sanctions] are not the crippling sanctions that Secretary [Hillary] Clinton talks about. One of the entities that we were very careful not to sanction was the Iranian Central Bank. We could have sanctioned that and that would have put much more pressure on Iran. Another thing we could have done, there are various things available to us to make sure that Iranian expatriates [in the United States and Europe, in particular] do not invest and go to Iran and do business there. And we haven’t [put such restrictions on them].

Why did Washington avoid these added measures?

There was not the political will to do that. [On the central bank issue], we’ve been very reluctant because by sanctioning the central bank, we would be in conflict with the IMF Articles of Agreement. If my memory is correct, we have only done this in the case of Iraq leading up to the first Gulf War. This is, in some sense, the "nuclear" option when it comes to financial sanctions. [On sanctioning Iranian expatriates], there are potentially two million Iranian Americans, and there are also many abroad in Europe, and if they were penalized for transferring money to Iran, for buying real estate or generally engaging in business activities in Iran, for failing to report their Iranian bank accounts and avoiding U.S. taxes, they would strenuously object that this affects ordinary Iranians as opposed to regime insiders. The U.S. Treasury has not enforced existing laws, which in fact restrict such activities, because Iranian Americans have become a strong lobby in the United States, especially in California. It would be an important channel for further reducing Iran’s access to foreign exchange and initiating a run on the Iranian riyal, leading to its collapse.

And the loopholes?

Iran will always have loopholes. As with any market system, if I want to buy something or Iran wants to buy something and it is sanctioned, somebody will be willing to sell it to them. Iran has reportedly bought critical parts for its enrichment and missile program on the black market and most recently it reportedly bought sophisticated Russian air defense missiles in the same way. We should recall that Iraq under Saddam Hussein bought French Exocet missiles on the black market. That is a feature of markets. You can get most things through third parties as long as you are willing to pay the required higher price. But as the sanctions get tighter, the price will be much higher. The main thing these sanctions will do is increase the cost of imports for Iran. Iran’s cost of trade is going to go up, in turn effectively reducing Iran’s foreign exchange resources.


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