Sanctions Derail Diplomacy on Iran

Mohammad ElBaradei, former International Atomic Energy Agency (IAEA) chief, used to say using the so-called “carrot and stick approach” on Iran – simultaneous use of sanctions and incentives to induce cooperation – is doomed to fail, because “Iran isn’t a donkey”. Others would go further and say that Iran is a proud civilization, and an ambitious regional power, which will not give up an iota of its nuclear ambitions, no matter how painful the price.

On the contrary, the Barack Obama administration – together with its European allies – contend that a combination of debilitating sanctions and nominal incentives will push Iran closer to a desirable compromise.

Recent developments suggest that the truth may lie somewhere in between: sanctions might induce Iran back into the negotiating table, but they (alone) can’t force Tehran to its knees. Looking at the dynamics of recent nuclear talks between Iran and the world powers (the so-called P5+1), it is increasingly clear, rather ironically, that sanctions are undermining and further complicating the course of negotiations.

Sanctions are hurting the prospects of a negotiated solution to the Iranian nuclear conundrum on two levels.

First of all, both sides are claiming diplomatic victory and political sagacity against the backdrop of tightening sanctions. On the one hand, the Iranians are claiming that they have valiantly stood their ground, displaying tremendous resilience by pushing the boundaries of their nuclear program despite the barrage of Western sanctions. Meanwhile, the Obama administration is touting the deep impact of sanctions – on the Iranian economy and its willingness to negotiate – as an indication of the success of its vigorous diplomatic efforts to curb Iran’s nuclear ambitions. Thus, both sides are caught in an intractable nuclear brinkmanship: the Iranians are intensifying their enrichment activities, and expanding the scope of their nuclear program, while the West is piercing the knife of sanctions ever deeper into the flesh of Iran’s fragile economy.

Secondly, the sanctions are further complicating the process of negotiations. Due to the wide scope and complexity of sanctions, both sides are facing a “sequencing dilemma” in pushing the diplomatic envelope and installing an effective confidence-building regime. While the Iranians seek the reversal of transatlantic sanctions as a prerequisite to kick-off any meaningful negotiation, the West is greedily holding onto the sanctions card as a means to keep Iran’s behavior in check. In this sense, both sides are talking pass each other.

The negotiations have moved in parallel universes, because Tehran has focused on lifting Western sanctions, while the West is demanding a total halt to and shipping out of Iran’s high-grade (20%) enriched uranium and the closure of the Fordo nuclear plant – atop universal calls for greater transparency and cooperation with the IAEA.

The sanctions have also developed a life of their own. The incumbent governments in the West will need tremendous political will and tireless coordination to reverse and re-configure the sanctions regime, layer by layer. The sanctions are wide-ranging and multifaceted: they cover oil exports, financial transactions, shipping insurance, and trade across a wide range of commodities. To make matters worse, the legal character of Western sanctions – especially those by America – provide little wiggle room for the executive to make any meaningful bargaining in the nuclear negotiations.

Domestic politics is another obstacle. In Iran, the nuclear negotiations have (once again) become a centerpiece in an ongoing national debate over the destiny of the revolutionary state. With the 2013 presidential elections in sight, Iran’s leading politicians are jostling for influence and popularity. From the leader of the parliament, Ali Larijani, to Iran’s chief nuclear negotiator, Saeed Jalili, and Tehran’s charismatic mayor, Mohammad Reza Ghalibaf, all are putting up a brave face and encouraging the nation and its leaders to withstand growing external pressure – no matter how paralyzing and destabilizing they have been – and defend Iran’s nuclear rights.

President Obama is also facing his own domestic challenges vis-a-vis the Iranian crisis. In a bid for re-election, his administration has tirelessly sought to keep Republican Hawks – calling for military intervention – at bay, while trying to project a strong foreign policy profile on the Iran issue. Crucially, he can’t make any substantive concession – no matter how decisive in resolving the crisis – in the nuclear negotiations lest he risks further backlash from the Israeli lobby as well as certain sections of the American electorate, who are worried about Iran’s nuclear ambitions – thanks to incessant media-led disinformation and sensationalization.

Ultimately, sanctions are also questionable in terms of their impact on the nuclear calculus of Iran. There is no doubt that the sanctions are biting. The Iranian currency is down by almost 50%, the inflation rate is highest in a decade, oil production is the lowest in two decades, while oil exports are down by almost 40% and the economy is on the brink of a recession. By some estimates, the sanctions – if pushed even further – could slash Iran’s trillion-dollar economy by as much as 10%.

Iran’s Asian partners have also reduced their exposure by slashing Iran crude imports by almost 18%. South Africa, South Korea and Singapore have or are set to completely halt Iranian imports. Facing the double evil of falling currency and declining foreign trade (in international currency), Iran is resorting to barter deals, costly transactions schemes, tightening monetary-fiscal policies, oil discounts, unfavorable credit terms, and heavy crackdown on black market currency exchange and imports of luxury products.

Not to mention, the Supreme Leader, Ayatollah Khamenei, has encouraged the Iranian nation to purchase local products in order to protect the country’s deteriorating trade balance, while the government has increased refined petroleum production to counter US sanctions. In addition, the slash in public subsidies, beginning in 2010, has also exerted a downward pressure on overall energy consumption in the country, forcing the population to consider a more economized lifestyle. Austerity has been in the books for sometime now.

Clearly, the nation is moving towards an emergency mode, yet the history of the Islamic Republic is replete with such collective display of sacrifice and resilience. The sanctions do hurt, but the regime can withstand them. Despite the sanctions, Iran is still expected to earn around $40 billion in oil exports. Also, the country has low foreign debt, a positive trade balance, and a relatively manageable budget-deficit (as long as oil prices hover above $80 per barrel). Moreover, it benefits from substantial foreign currency reserves, estimated at above $100 billion, and is still enjoying substantial trade with emerging economies in the region and beyond. Surely, tighter sanctions will have great impact on the civilian economy, but the regime will always have enough cash to pump into its nuclear and military ambitions.

What is increasingly clear is that at a certain threshold the sanctions have helped to bring Iran back to the negotiating table, but the West’s unwillingness to properly leverage its sanctions has undermined the prospects of a negotiated settlement. If the West becomes evermore inflexible with sanctions, and push for even more punitive measures, the hardliners in Iran could eventually outmaneuver the pragmatists and moderates – who have called for nuclear negotiations – and push for a more defiant and uncompromising nuclear posture.

Richard Javad Heydarian is a Manila-based foreign affairs analyst specializing on Iran and international security. His has contributed to or been quoted in the Diplomat, Tehran Times, Foreign Policy in Focus, Asia Times Online, Russia Today, and other publications