x Abu Dhabi, UAEWednesday 26 July 2017

Iran and the US brace for long and risky sanctions stand-off

The sanctions against Iran may take a long time to bear fruit: the next few months could be more trouble than Obama expects

You don't hear much these days about the proverbial "window closing" on nuclear diplomacy with Iran. That's because instead of the old PR line about Tehran using negotiations to run out the clock, the Obama administration is now confident that time is on the side of the western camp, thanks to the punishing new sanctions that formally took effect over the weekend.

The combination of the US banking sanctions against financial institutions doing business with Iran's central bank that went into effect on Friday, and Sunday's European Union embargo on importing Iranian oil and on insuring tankers carrying Iranian crude anywhere in the world, is putting an unprecedented squeeze on Iran's economy. So western leaders believe that their leverage over Iran continues to grow while talks remain stalemated - which is why, in the recent Moscow round, they effectively toughened their demands on Tehran.

The Obama administration believes sanctions will cost Iran $32 billion (Dh118 billion) in lost oil revenues this year, and they are ready to tighten the sanctions with further measures in the coming months. Iran's leaders have given up pretending that sanctions have no effect. That claim would look ridiculous when the price of chicken rose by 30 per cent last week alone, as a result of a shortage of feed caused by sanctions. And chicken is but one indicator: the price of grain has risen by more than 50 per cent in recent months, sending the price of bread soaring. Fruit costs 66 per cent more now, while vegetable prices have almost doubled - and that's according to Iran's central bank, which puts the official inflation rate at 22 per cent and youth unemployment at close to one in four.

The true figures, then, are likely to be even worse. Iran's currency, the rial, has lost close to half of its value against the dollar.

The regime is starting to acknowledge these hardships, but blames them on sanctions imposed by the perfidious West to deny Iran nuclear rights supported by a majority of the population. Obama administration officials earlier this year told The Washington Post that the goal was to impose sufficient economic pain to "create hate and discontent at the street level so that the Iranian leaders realise that they need to change their ways".

It remains to be seen, of course, whether such hatred is directed against the regime, or against those imposing the sanctions. And the most fervent advocates of sanctions in Washington acknowledge that the latest measures are unlikely to change the regime's nuclear calculations - which is why they're already demanding more.

Tehran, however, believes the balance of leverage tilts in its favour, because western powers are anxious to avoid a confrontation that could wreck the world economy and are simply trying to assuage Israel to deter it from starting a shooting war. Tehran sees President Barack Obama as politically hamstrung in his ability to compromise during an election year, but expects that he will be more forthcoming next year.

The Iranian view may, like the western one, be wishful thinking. But it's clear that Tehran has some margin to absorb the measures that went into effect over the weekend. Most of the embargo's effect has already been factored in by oil orders cancelled in recent months in anticipation of the measures taking effect. There has also been a significant break in the US banking sanctions designed to stop non-EU countries importing Iranian crude - most of Iran's top 20 customers, including China, India, Japan, Turkey and a host of other countries, have cut back orders only slightly. Although China, which was granted a last-minute waiver from the banking sanctions on Thursday, cut back imports significantly earlier in the year, that appears to have been based on a pricing dispute and the figure has bounced back to previous levels. Despite the predictable derision the decision provoked among Republican hawks, Mr Obama blinked rather than risk the consequences of punishing America's largest creditor to force it to comply with a sanctions policy it opposes.

Although the insurance ban has stopped South Korea importing oil from Iran, other Asian countries are reportedly seeking ways of circumventing it. Iran, meanwhile, has turned off the tanker-tracking devices that would allow monitoring of oil sales, further complicating efforts to monitor the trades. There's no question Iran is taking a hit - those willing to court the opprobrium of the US by continuing to buy from Iran will be in a position to demand significant discounts.

But even this year's sharp cuts in Iran's oil revenues should be measured against the massive boost in revenues over the past decade. IMF predictions for oil revenues before the sanctions took effect had been $104 billion - four-and-a-half times the figure for 2002. Even if it lost half of that projected income as a result of sanctions, it would still be collecting twice as much as it did a decade ago. And although it mismanaged much of that oil dividend, it did allow the Iranians to amass foreign exchange reserves of close to $100 billion.

The coming months, then, will likely see pressure for new sanctions in Washington, while the waivers on applying US banking sanctions come up for renewal in six months - although Mr Obama's concession to China may be instructive. Russia and China strongly oppose the western sanctions, and their patience for western strong-arming may wear thin if Beijing leads a push-back.

And, of course, if the sanctions have made the US and its allies more comfortable about walking away from the negotiating table, then the logic of the chess game might compel Iran to create a crisis to boost its own leverage. Iran's Revolutionary Guard yesterday test-fired a ballistic missile that is capable of hitting Israel, while parliament debates a bill to close the Strait of Hormuz to European and US traffic. The months ahead could be stormier than would suit Mr Obama while he is on the campaign trail.

 

Tony Karon is a New York-based analyst

On Twitter: @Tony Karon