By Mark Wallace and Matan Shamir
With the election of Hassan Rouhani as President of Iran, the P5+1 have discussed agreement on a potential interim nuclear accord with Tehran. As part of such an agreement, the notion of ‘sanctions-easing’ has entered the lexicon as a potentially viable inducement for Iran to assent to such a deal. President Obama has likened the use of sanctions to that of a spigot – to be turned up or down as needed by the administration.
It is widely accepted that the consequences of the current sanctions law and regulations is what spurred Tehran to come seriously to the negotiating table over the particulars of its nuclear program. The U.S. and international sanctions on Iran have been arguably the most robust sanctions regime in history against any country dependent on trade with the global economy. However, the lessons and experience of Iran sanctions belie comparisons to a spigot and suggest that ‘sanctions-easing’ is not possible to implement with the precision of a spigot.
The current sanctions regime is similar to the precise architecture of a building made of disparate but necessary elements such as metal, mortar and brick. Take away any of the necessary elements and the building becomes structurally unsound. In the case of Iran sanctions, the architecture has relied on four interdependent elements: (1) Increasingly strict laws and regulations, (2) enforcement action, (3) reputational risk, and; (4) the psychological impact on the Iranian economy. The danger is that if the White House agrees to roll back any of these key elements as part of ‘sanctions-easing,’ or through a substantial unfreezing of sanctioned assets, the carefully constructed sanctions house will crumble and consequential pressure on the Iranian economy will ease far more than intended.
Back in 1996, for example, the newly passed Iran Sanctions Act (ISA) was touted as a revolutionary piece of legislation that would hold the Iranian regime accountable for its state sponsorship of terrorism and burgeoning nuclear program by disrupting foreign investment badly needed to modernize its crumbling petroleum sector. According to the law, any foreign company making a material investment in Iran’s energy sector would face costly penalties and jeopardize its access to the U.S. market and to U.S. government contracts and loans. Despite the ostensible strength of the law, the absence of enforcement due to broad presidential waiver authority and resistance from allies exposed ISA as a non-factor. Accordingly, businesses the world over feared no reputational risk for work in Iran and the Iranian economy, flush with hydrocarbon wealth, was unaffected.
Not until the culmination of four sets of UN Security Council sanctions, the passage of the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) by the U.S. Congress in the summer of 2010, and the imposition of an oil embargo by the European Union did the key elements of law and regulation with enforcement spur reputational risk and psychological pressure on Iran. At the same time, the U.S. Treasury Department from the Bush administration through the Obama administration ramped up to a more aggressive approach to enforcement, regularly blacklisting and freezing the assets of Iranian and foreign entities violating sanctions. Finally, the egregious conduct of the Iranian regime during the Ahmadinejad years (coupled with the aforementioned new laws and enforcement) heightened the reputational and financial risk of doing business to such a degree that multinational corporations began exiting the Iranian market en masse.
With hundreds of major multinationals like General Electric, Siemens, Caterpillar, Ingersoll Rand, and KPMG leaving Iran, the increasingly successful sanctions regime triggered powerful economic and psychological pressure on the Iranian economy with measureable effect—the collapse of the Iranian rial. From 2002 through 2010, the official and black market rates of the Iranian rial corresponded closely with each other at about 10,000 rials to the dollar. The gulf between the official and black market rate began to widen in January 2011, and by October 2012, the black market rial exchange rate had dropped as low as 40,000 to the dollar, more than three times the official exchange rate of 12,260. Iran was suffering from hyperinflation with little hope of correction because of the inability to adequately sell its vast hydrocarbon resources and its inability to access sanction-frozen foreign currency reserves that were stranded in various central banks abroad. Iranian consumers and the international currency markets had clearly lost confidence in the Iranian economy.
Since President Rouhani’s inauguration, the pressure on the Iranian economy has already begun to ease even before agreement on an interim nuclear accord that ‘eases’ sanctions. While he is a steadfast regime loyalist, Rouhani has given hope to Iranians and the P5+1 that with his diplomatic approach on the nuclear issue, he will be able to gain relief from the sanctions that have been crippling the Iranian economy. Moreover, with such hope and since his election the United States has been loath to aggressively enforce sanctions in the early days of his presidency. The U.S. Treasury Department has virtually stopped the blacklisting of sanctions-violating entities as the Obama administration prepared for potential détente with Tehran. And, the administration has leaned hard on the U.S. Congress to forego action on any new sanctions legislation during these diplomatic overtures. President Rouhani’s election and the current cycle of apparently friendly negotiation has inspired greater consumer confidence in Iran, and less reputational risk for international companies that have begun to openly prepare themselves to reenter the Iranian market. Just as a result of these factors alone have sanctions been ‘eased’ and the black market rial exchange rate rallied to 29,950 to the dollar in early November, bringing it nearly in line with the official exchange rate of 24,900. Iran’s sanctions-hobbled economy has rallied despite the fact that Rouhani has not yet secured an iota of official sanctions relief.
Consequently, entering into continued nuclear negotiations, the leverage of the U.S. and its partners has declined as reputational risk declines, enforcement is loosened and plans for the enactment of more rigorous laws and regulations are shelved. So far President Rouhani has made good on his mandate and sanctions have already been ‘eased’ without a single legal or regulatory change. The P5+1’s leverage will decline much further and the air will effectively be let out of the sanctions balloon if an interim deal is struck that provides actual sanctions-easing. Contrary to the administration’s claims, it is a fallacious notion that sanctions are akin to a spigot to turn off and back on. Rather, regulating the severity of sanctions is more like attempting to stop air from escaping a popped balloon. As soon as a part of the sanctions regime is withdrawn, and enforcement continues on the decline, the reputational risk of business with Iran lessens and the psychological impact on Iran and its rial dissipates -- quickly. The result of so-called limited ‘sanctions-easing’ will be to strengthen the Iranian rial in a manner far quicker and disproportionate to the notion of ‘easing’ and will effectively serve to gut the measurable impact of sanctions that has taken years to develop. In such an event, Iran’s economy will rise quickly from its state of duress and the U.S. and its partners will find themselves with insufficient coercive leverage to conclude a minimally acceptable final agreement in which Iran accepts physical limits on the scale and scope of its nuclear program.
While an interim deal is far less desirable than a comprehensive nuclear deal, if an interim agreement is in the offing there are better approaches that may be a legitimate economic incentive for the Iranians. If an interim deal is to be struck, a way to allow Iran some modest economic relief without popping the sanctions balloon would be to keep current sanctions law and frozen Iranian assets in place, continue deliberate if not overreaching enforcement while allowing on a case-by-case basis certain and limited sanctions-prohibited transactions to proceed similar to the current Presidential waiver program on the sales of Iranian oil. Such case-by-case transaction waivers are by definition far easier to regulate than a rollback of sections of the sanctions architecture. There should be no doubt that allowing such individual transactions will ease pressure on the Iranian economy disproportionate to the size of such transactions. However, case-by-case transaction approvals will prevent all the air from quickly escaping the sanction balloon that will result from sanctions-easing.
Mark Wallace is chief executive officer of United Against Nuclear Iran. He is a former U.S. ambassador to the United Nations. Matan Shamir is UANI’s research director.