Hossein Askari

WASHINGTON—Today’s calls for “crippling sanctions” on Iran—a country that has been sanctioned by the United States for the past thirty years and by the United Nations for about three years—if negotiations fail should be called in question. What have ongoing sanctions achieved? Why do these Iran policy experts in New York and Washington calling for a gasoline sanction think that it will accomplish what the U.S. government has been unable to accomplish with previous sanctions?

The latest recommendation is that a gasoline embargo on Iran would “cripple” the country. Just read the op-eds of all our foreign policy experts. A gasoline embargo will do the trick, the experts say, if only the United States could get China and Russia to support it.

In my opinion, a gasoline embargo would be difficult to enforce, but much more importantly, it would be counterproductive because it would help the Iranian regime. Consider these facts: Iran imports roughly 30 to 40 percent of its domestic gasoline consumption at world prices, and then sells it to Iranian consumers along with its domestically refined gasoline at a government-subsidized price. Because gasoline is sold at a fraction of the world price in Iran, fuel conservation is not pursued, and gasoline frequently is smuggled by individuals with the backing of the Islamic Revolutionary Guards Corps into neighboring countries and sold there. Over the past ten years, this policy of selling gasoline at government-subsidized prices has cost Iran in the range of 10 to 20 percent of GDP annually, depending on world gasoline prices and on the government mandated pump price.

For years, the government has wanted to eliminate this subsidy, to increase the price to world levels and reduce consumption, but fearing a domestic backlash, it always has moved with caution.

Even assuming that somehow a gasoline embargo could be effective in cutting off Iran’s gasoline imports, what would happen? Consumption of gasoline would decline by 30 to 40 percent and government revenues would go up, because no payments would have to be made for gasoline imports. If the government allowed the reduced supply of gasoline—namely, domestically refined gasoline—to be sold at a price that would equate demand to supply, the price would increase to a level that would eliminate the subsidy (no subsidy for imported gasoline and no subsidy for domestically refined gasoline). The smuggling of gasoline from Iran to its neighbors would no longer be profitable.

Not only would the sanction offer the regime cover to eliminate the subsidy, the regime also could call this turn of events an act of war and a national crisis caused by the United States. A significant number of Iranians would rally behind the regime. This is the last thing the U.S. should want.

So, instead of a gasoline sanction, what type of sanction might work? Additional financial sanctions by the U.S. Treasury could squeeze Iran—cutting off all Iranian bank access to the international financial system. This would require the cooperation of the Europeans, but more importantly of Iran’s partners—China, Russia, Dubai, and Malaysia—as these countries could facilitate Iran’s financial transactions by fronting for Iran.

The U.S. government has been hard pressed to get even our European allies to cut off Iranian banks, but it could enlist Saudi Arabia, Kuwait, and other Gulf Cooperation Council countries in getting Chinese and Russian support. We also could pressure Dubai. It would be easier to get their backing to cut off Iranian banks than it would be to get their backing for a gasoline embargo that could boomerang.

An examination of thirty years of sanctions demonstrates how ineffective they have been. In 1979, the United States froze Iranian financial assets, but returned them after the Algiers Accord in 1981, which was an agreement brokered by Algeria between Iran and the United States to solve the hostage crisis. Washington confiscated military equipment that Iran had paid for—some of it the United States used and some rotted in storage—and since then has been engaged in a tedious process at The Hague to compensate Iran on a line-by-line basis.

The United States banned the importing of Iranian crude into the United States, but allowed refined products to enter the country. Then there was a ban on importing refined products and of all non-oil products from Iran, so Iran sold all it had to sell to other countries, albeit in the case of non-oil exports at a slightly lower price. Iran hardly felt even a side blow.

In the mid-1980s, the United States embargoed all U.S. exports to Iran. You surely wouldn’t know it if you have been to Tehran, where most American goods are abundantly available, sometimes at a lower price than even in the United States. Dubai is forever the fan of our sanctions policies because most imports from the United States go through Dubai, and their merchants take a 5 to 10 percent commission, which hurts Iran very little. More importantly, U.S. sanctions have afforded Iran’s intelligence services and the Revolutionary Guards another source of revenue, because they also take a cut of these transactions.

Under President Bill Clinton, the Iran Libya Sanctions Act (ILSA, now ISA after the removal of Libya) was enacted in 1996. This act banned investment in Iran’s energy sector and threatened third countries with sanctions if they did not do the same. This slowed Iran’s oil and gas development, which also has hurt the United States and its allies by causing higher oil prices. However, these sanctions had minimal effect in terms of domestic pressure from Iranian citizens. Iran’s leadership hardly has used oil revenues to advance and develop the country—what money they have earned instead has been squandered and a good chunk has been squirreled away in the foreign bank accounts of regime insiders—so the absence of that revenue results in no public pressure for the regime to change its ways.

There are simple lessons to be learned. Sanctions on the exports of a country will do little if that country’s main export is a commodity in global demand. Simply put, others will buy Iran’s oil if we don’t. Sanctions on the imports of a country will do little if the country can buy its American goods from third countries. Iran gets most of what it needs from Europe, Japan, and China. Sanctions to change a target country’s policy that the majority of its citizens support is unlikely to succeed. For example, Iranians support the regime’s nuclear program, but targeted sanctions to change Iran’s human rights policies might be much more likely to succeed.

Starting in 2007, the U.S. government began to develop more targeted financial sanctions. The U.S. Treasury reduced the access of Iranian banks to the international financial system. This has increased Iran’s cost of letters of credit and thus the price of imports by about 15 percent.

On November 6, 2008, the U.S. Treasury further tightened restrictions on Iran by revoking a special financial arrangement referred to as a “U-Turn License,” Ever since the Islamic Revolution in 1979, U.S. administrations have allowed Iran to sell oil to non-U.S. entities for dollars. Thus, when a foreign entity bought Iranian oil, it issued instructions to a U.S. bank to issue funds to an Iranian bank. The fund transfers to Iranian banks were achieved through what has been coined a “U-Turn.” The revocation of this license means that U.S. banks cannot make such dollar transfers to Iranian financial institutions. Until recently, the U.S. Treasury had been persuaded of the advantage of this financial U-Turn License because it added to the demand for dollars and afforded the United States the benefits of seignorage (the costless issuing of paper money to buy something tangible).

But after all this effort, have sanctions worked? Has Iran changed its objectionable policies? The answer is a resounding no.

Hossein Askari is the Iran Professor of International Business and International Affairs at the George Washington University.