POLITICS JANUARY 18, 2012
With so much alarming going on in the Middle East, it’s hard to keep track of everything that seems to be going wrong. No sooner had the Libyan civil war ended than another erupted in Syria. Iraq appears determined to follow, and perhaps overtake their Syrian neighbors. Egypt remains locked in a multi-sided struggle among the military, the Islamists and the secular liberals. And disturbing reports of low-level, but growing unrest in Saudi Arabia have begun to emerge.
Amid all of this, the one place that the United States has resolutely marched forward—or perhaps been dragged by the Congress and our European allies—has been in applying ever greater pressure on Iran. But if the Obama administration’s forward progress is clear enough when it comes to its Iran policy, its ultimate destination is not. The sanctions against Iran may well succeed on their own terms while producing regrettable, if unintended, consequences.
The latest salvo against Iran came a few short weeks ago, when President Obama signed into law the new Defense Appropriations bill, in which Congressional conservatives had tucked new, draconian sanctions prohibiting transactions with Central Bank of Iran (CBI), or anyone else doing business with the CBI. The importance of these sanctions is that prohibiting transactions with Iran’s Central Bank would preclude long-term oil sales contracts. If no country were willing to deal with the CBI, Iran would be forced to sell its oil either only to countries and companies willing to buck such U.S. sanctions, or rely on spot market sales for cash—an extremely inefficient method that would cut heavily into Iranian oil revenues. Some analysts, in fact, estimate that this could lead to a reduction of Iranian oil revenues by as much as one-third—and since Iran is heavily dependent on oil revenues, this could have a major impact on the Iranian economy.
Now that would seem to be a good thing, right? Maybe, but maybe not. Certainly the Iranian regime has shown absolutely no inclination to halt (let alone give up) its nuclear program in the face of previous sanctions, which are already having a serious impact on the Iranian economy. The hope is that going after Iranian oil revenues in this fashion would apply so much pressure on Iran’s economy, causing rampant inflation and even economic collapse, that the regime will have no choice but to compromise and accept international demands related to its nuclear program.
The problem is that these sanctions are potentially so damaging that they could backfire, creating at least three sets of consequences that would leave the United States in a worse position, whatever the impact on Iran.
Backfire I: The Impact on the U.S. Economy
One of the interesting things about going after Iranian oil exports in this fashion is that it is likely to simultaneously hurt Iran’s economy and our own. The bet is that it will hit the Iranian economy much harder and faster than our own. The sanctions on the Central Bank of Iran have already caused a sudden increase in inflation and a drop in the value of the Iranian rial as Iranians race to dump their rials in favor of dollars, pounds and euros—hard currency that they expect to both hold their value over time and be more easily traded internationally.
But limiting Iranian oil exports is likely to drive up the international price of oil. There is little slack oil production capacity left in the world. The Saudis have said that they would offset any drop in Iranian oil by increasing their own, but many analysts question Riyadh’s capacity to do so completely or for a sustained period of time. In addition, there has been significant, if low-level, unrest across Saudi Arabia—enough to prompt to prompt the Saudi government to indulge in massive domestic spending to try to buy-off popular grievances. Consequently, Riyadh might be willing to tolerate price increases to bolster their own revenues as well.
To the extent that Iranian oil is truly off the market for the U.S. and Europe, it will increase the price for what remains. Even to the extent that Iranian oil finds its way back on to the market in various ways—legal ways, like the spot market, illegal ways, like the black market—the inefficiencies and increased transportation costs will also create a price increase. Estimates of the amount of this jump in price vary, but at least one source has projected a $20 increase in the price per barrel, which is roughly a 15 to 20 percent increase.
In case you missed the past 40 years of American economic history, there is no commodity on earth that affects the American economy faster or more profoundly than oil. A 20 percent increase in the price of oil would result in a very significant increase in American gasoline prices, with a concomitant impact on prices (i.e., inflation) across the board. It’s worth noting that virtually every U.S. recession since the Second World War was preceded by an increase in oil prices. Indeed, our current economic problems were preceded by a tripling of oil prices between 2005 and 2007.
Backfire II: Eroding Sanctions
Another potentially fatal flaw in these sanctions is that they turn up the heat on Iran so much that they may well be unsustainable diplomatically, and that is very problematic because sanctions rarely work quickly. Historically, sanctions work very slowly, and when they do work—against South Africa in the 1980s or Libya in the 1990s, for example—they work because of the perception that they will simply keep getting worse and worse over time. Sanctions have a poor track record of suddenly shocking the targeted government into reversing course, and if the targeted government believes that the sanctions will erode over time, it usually resists, and this often becomes a self-fulfilling prophecy.
Our experience with Iraq in the 1990s ought to be an important warning about what may well happen with Iran. In the case of Iraq, the United States—and the entire international community, acting under the auspices of the UN Security Council—imposed draconian sanctions on Iraq in 1991 at the end of the Gulf War. Sanctions so severe that it was universally expected that Saddam would be forced to accede to all of the U.N. demands in a matter of a few months because no one, not even Saddam, would allow his people to starve to death. But that is precisely what he did. He refused to comply in full (he did not give up the last of his WMD programs until some time after 1995, and of course even then he refused to come clean about this in his self-defeating determination to convince his own people and the Iranians that he retained a covert WMD capability.) In Iraq, exactly as predicted, inflation soared, the dinar collapsed, the economy came to a near standstill. No one knows how many Iraqis died as a result of the sanctions and Saddam’s manipulation of them, but 200,000 is a fair estimate.
The death of so many innocents was not only a humanitarian catastrophe—it also directly undermined the sanctions regime, precisely because it appalled people across the world. Over time, international opinion turned decidedly against the Iraq sanctions because of what was happening to the Iraqi people. It became harder and harder for the United States to enforce the sanctions, to the point where by 2000, the sanctions were hemorrhaging and Iraq was taking in over a billion dollars (and growing) in illicit payments.
Similarly draconian sanctions on Iran could follow a similar trajectory. In the near term, they would doubtless do tremendous damage to the Iranian economy, and with it, the Iranian people—as they already are. However, this regime has shown absolutely no inclination to allow economic hardship to sway their nuclear intentions. Indeed, it is important to keep in mind that those who rule in Tehran are very different from the more divided groups that ran the country in the past. Amid the 2009 Green revolution, Iran’s hardliners purged the government of its more moderate elements, such that today those running the Iranian regime are more homogeneous and more hardline than at any time since the early days of the Iranian revolution. They appear determined to resist all international pressure, they are famously indifferent to the plight of the Iranian economy (having ignored the impact of economic sanctions for virtually the entire lifespan of the Islamic Republic), and they have shown tremendous attachment to their nuclear program. All of which suggests they will continue to stand firm, as Saddam did, amid economic ruin. And over time, there is a high likelihood that other countries will come to see the misery of the Iranian people as being the fault of the United States, not of the Iranian leadership, exactly as happened with Saddam. At that point, we may find that with Iran, as was the case with Iraq, overly harsh sanctions will become self-defeating and will crumble where more gradual and moderate sanctions might have been sustained and more likely to achieve their goal.
Backfire III: Inadvertant War
It is hard to miss the signals from the Obama Administration that it is not looking for a fight with Iran. Administration officials have kept dutifully intoning that “all options are on the table” with Iran, but then immediately enumerating why the military option is a terrible one. The President himself has made clear that he wants to reduce the number of wars that the U.S. is waging in the Middle East, not increase them. Unfortunately, its moves toward Iran may push us into the war that the Administration is seeking to avoid.
It’s important to try to see the world from Tehran’s perspective. What the Iranians see is a concerted, undeclared war being waged against them by a coalition of the United States, Israel, Saudi Arabia, and some European states. The fact that all of these countries are not necessarily always coordinating their actions is doubtless lost on the Iranian leadership. They are under cyber attack like the Stuxnet virus. Someone is killing their nuclear scientists in the streets of Tehran and blowing up their missile facilities. The United States and Europeans have ratcheted up their contacts with the Iranian opposition. The Iranians believe that foreign elements are also making contact with dissident groups like the Kurds, the Baluch, and the Arabs in Khuzestan. The United States has ratcheted up its efforts to broadcast into Iran to undermine the regime’s control over information. Washington is building up the military capabilities of states in the Gulf Cooperation Council. The Saudis are funding proxies to fight against Iran’s proxies from Bahrain to Lebanon to Iraq to Yemen. And the Americans and Europeans are waging economic warfare in the form of increasingly crippling sanctions.
From the vantage of Iran’s leadership, it would be easy to see an all-out, undeclared, covert (but multi-pronged) offensive being mounted against them. And the Iranians seem to be fighting back however they can. While I have no independent confirmation that the Iranians really did try to kill the Saudi Ambassador to the United States last fall, U.S. government officials at all levels appear remarkably certain that they did, and claim that it was one of only several operations the Iranians were developing. It would certainly make a lot of sense that given the campaign they see being waged against them, the Iranians would strike back in exactly that fashion—going after a symbol of the U.S.-Saudi relationship, and doing it in the American capital in retaliation for the assassinations taking place in their own.
What’s more, it seems unlikely that that will be their last such effort. Their threats to close the Strait of Hormuz are not serious—they know full well that doing so would be horribly counterproductive to their own cause—but they were undoubtedly an effort to panic the oil market, driving up prices which help them and hurt us. It was a bid at economic warfare of their own. We should expect more.
The great problem is that at some point, the Iranians might succeed in one of their retaliatory gambits. Imagine how the American people would have reacted had they succeeded in blowing up a restaurant in the heart of Washington, D.C., killing dozens and injuring scores more? Of course, Americans would have seen it as an unprovoked attack and there likely would have been a public cry for blood. In short, the more we turn up the heat on Iran, the more Iran will fight back, and the way they like to fight back could easily lead to unintended escalation.
Doubtless such a war would leave Iran far, far worse off than it would leave us. But it would be painful for us too, and it might last far longer than anyone wants because that is the nature of wars, especially wars involving this Iranian regime. Thus, if we continue down this path, we had best be ready to walk it to its very end. And if we don’t have the stomach to countenance the possibility of such an escalation, we may want to reconsider our current course.
Kenneth M. Pollack is Director of the Saban Center for Middle East Policy at the Brookings Institution.