The latest round of nuclear talks between Iran and the P5+1 (the five permanent members of the Security Council plus Germany) in the Kazakh city of Almaty yielded no results. The two sides remained poles apart.
Iran demanded that the world powers recognize what it views at its “inalienable” right to enrich uranium on its soil and that they lift all unilateral sanctions in return for suspending its midlevel uranium-enrichment activities.1 The P5+1, under the terms of a revised proposal known as “stop, ship, and shut,” reportedly asked Iran to stop its enrichment of uranium to 20 percent, continuing enrichment only to the lower levels required for reactor fuel; neutralize its existing stockpile of 20 percent-enriched uranium by converting it into fuel rods or shipping it out; and disable its underground Fordow facility. In return, Tehran would receive partial sanctions relief on trade in gold and on the sale of petrochemical products.
Each side deemed the other’s proposal and demands unrealistic and unbalanced. A senior U.S. official called the meeting “neither a breakdown, nor a breakthrough.”2 The reality is that there is still too much inflexibility and mistrust on both sides, which remain locked in a cycle of mutual escalation, crystallized in the race of sanctions against centrifuges. Neither side is willing to forgo assets acquired at great cost—enrichment for Iran and consensus on sanctions for the West. Both the sanctions regime and the nuclear program have become so extensive and multilayered that they now restrict the two sides’ ability to respond to positive actions with the requisite nimbleness.
Many policymakers and pundits have offered detailed technical proposals for curbing Iran’s nuclear activities. Absent from the debate, however, has been a clear understanding of the sanctions and options for their gradual rollback.
The Sanctions Regime
Since it was established in 1979, the Islamic Republic of Iran has been subjected to a steady stream of sanctions, motivated by its nuclear activities, human rights record, and intervention in regional affairs.3 Over the years, the depth and breadth of the sanctions have increased dramatically, often gradually but at times by leaps and bounds. The current sanctions regime has been shaped by multiple actors with various policy goals.
Unilateral U.S. sanctions, first imposed in the 1980s, eventually transformed into what is now a broad, international regime. The first wave (1979 to 1995) originated as a U.S. response to the embassy hostage crisis, Tehran’s more broadly anti-U.S. policies, and its support for violent groups. The second wave (1995 to 2006), also unilaterally imposed by Washington, sought to weaken the Iranian regime by targeting its oil and gas industry and denying it access to dangerous nuclear and missile technology. The United States aimed to expand the reach of the unilateral measures through extraterritorial application of third-party sanctions compelling U.S. allies to adopt a unified stand or face U.S. sanctions. The third wave (2006 to 2010) encompassed multilateral and UN punitive measures spurred by concerns over Iran’s nuclear ambitions. The failure of these previous rounds of sanctions to resolve the standoff over the nuclear program gave rise to a flood of harsh unilateral and multilateral sanctions (2010 to present).
The end result is a comprehensive set of punitive steps targeting virtually every important sector of Iran’s economy. In principle, these measures are tethered to multiple policy objectives—nonproliferation, terrorism prevention, and human rights—yet, in the main, they are aimed at confronting Iran with a straightforward choice: comply with international demands on its nuclear program or suffer harsh economic consequences.
The sanctions are everywhere: in the financial arena, barring habitual commercial relations; in the oil sector, choking off Tehran’s principal source of currency; and in the insurance sector, thwarting Iran’s ability to transport goods. Without doubt, they are crippling the Iranian economy. Yet, it is much less clear that they are succeeding in their broader policy goals. By at least one important criterion, the intensity of Western concern over Iran’s nuclear progress, they plainly are not.
The Impact of Sanctions
For several reasons, the effects of sanctions are as complex as the nature of the sanctions regime itself. First, not all actors and sectors have felt the consequences equally or precisely as intended. Second, as sanctions evolve and expand, Tehran learns to adapt and adjust. Third and most importantly, the scarcity of information and the difficulty in disaggregating the consequences of sanctions from the self-inflicted wounds of Iranian mismanagement and structural problems pose a challenge to anyone seeking to produce a reliable assessment.
The multiplicity of the sanctions objectives means that it is impossible to have a single measure of success. To the extent some sanctions were designed to affect Iran’s human rights practices, the record is rather bleak, and there has not been any notable success in curbing Tehran’s support for state and nonstate allies conducting violent actions in the region.
In other areas, in particular the nuclear and missile programs, the assessment arguably is more mixed. Over the past three decades, Tehran has made significant progress in developing an indigenous nuclear and missile capability. Still, it continues to depend on outside suppliers for procurement of key material and critical components.4 Thus, although most components in its gas centrifuges are built indigenously, sanctions almost certainly have contributed to slowing down the pace of production, notably at its main uranium-enrichment facility in Natanz. Enhanced export controls likewise have impeded Iran’s acquisition of dual-use material and equipment, such as maraging steel, carbon fiber, vacuum pumps, and measuring equipment. A similar procurement predicament has retarded efforts to mass-produce centrifuges that are more advanced than the outdated IR-1 machines and has delayed construction of the heavy-water reactor in Arak.5
The sanctions’ effects are similarly evident in the realm of medium- and long-range ballistic missile production. Solid-fueled systems in particular require foreign materials, such as aluminum and tungsten powder as well as oxidizer salts. Disruption in the supply of these items compels use of substandard substitutes. The lengthy delay in flight-testing the two-stage, 2,000 kilometer-range, solid-fueled Sajjil-2 missile, on hold since its last flight in February 2011, arguably is an illustration.6 Despite such substantial setbacks, both the nuclear and missile programs have grown. Western concerns have grown in parallel.
Iran’s energy sector has been one of the main targets of the sanctions. The country’s oil exports dropped from an average of 2.5 million barrels per day in 2011 to fewer than 1 million barrels per day by the end of 2012.7 After long denying the impact of sanctions, Iranian officials ultimately acknowledged they had caused a 40 percent decrease in oil sales and a 45 percent decrease in repatriating oil revenues.8 Furthermore, financial sanctions have cut Iran’s access to its oil revenue, thus depriving Tehran of financial resources necessary to prop up its own currency. The country’s national currency, the rial, suffered two precipitous plunges, in January and October 2012, losing nearly 80 percent of its value against the dollar.9 Strong currency fluctuations simultaneously destabilized the business sector. According to the Iranian parliament’s research center, between October 2011 and October 2012, industrial production fell 40 percent and unemployment grew by 36 percent, while the price of consumer and primary goods rose by 87 and 112 percent, respectively.10
Despite unquestionable hardship, the Iranian government, which is the most important economic actor and sole dispenser of petrodollars, has myriad tools to avoid an economic meltdown. In this sense, its efforts have focused far more on adjusting the Iranian economy to the reality of sanctions than on seeking their removal. Likewise, whatever lobbying has occurred from key constituencies, such as the private sector and state-affiliated businesses, has been aimed at convincing the regime to amend its economic policies as opposed to its nuclear ones. Accordingly, the government introduced a system of tiered exchange rates; opened an official exchange center for licensed importers; turned to bartering with trading partners; and resorted to conducting transactions through hawala, an alternative remittance system. Although criticism of the government’s implementation of such policies has been rife, markets eventually stabilized to some extent as 2012 drew to a close.
Sanctions also led Iran to reorient its trading patterns toward Asia, including more-immediate neighbors that, in the words of a European official, “can afford to neither provoke Washington’s wrath nor antagonize Tehran.” Trade with China soared from nearly $3 billion in 2002 to more than $44 billion in 2011; trade relations with India also experienced a boom. Billions of dollars of Iranian products flow into Iraq and Afghanistan. Re-exported U.S. and European goods continue to find their way into Iranian markets via Turkey and the United Arab Emirates. A shared experience with sanctions has drawn Iran, North Korea, and Syria more closely together.
Officially, Western policymakers argue that the economic penalties are finely tuned, “smart” sanctions aimed at the political elite rather than ordinary citizens. Yet, as sanctions gradually snowballed and broad-based punishments gradually superseded more “targeted” ones, their impact likewise broadened, affecting nearly all aspects of life, inflicting long-lasting social harm and fueling popular criticism of Western policy. At the same time, in the West, the measure of success is increasingly becoming the sanctions’ comprehensiveness, harshness, and ability to wreak havoc on the economy.
As often is the case with sanctions, members of the elite with greatest access to the regime and state privileges are best positioned to survive and even thrive in the new environment. The multiple exchange rates and the distribution of subsidy stipends provide segments of the ruling apparatus with potent patronage tools to purchase loyalty and protect core constituencies. Iran’s Revolutionary Guard and state-affiliated enterprises generally have benefited most by virtue of privileged access to favorable currency rates. By contrast, the more vulnerable category of citizens without such connections to the regime has been least capable of circumventing their effects, finding substitute sources of prohibited goods or capitalizing on scarcity to boost profits.
There are other unintended implications. The more comprehensive the sanctions, the likelier they are to harm average citizens. Reports of widespread shortages, notably of specialized medicine, abound despite all the West’s efforts to exempt humanitarian goods.11 These shortages can be attributed only partly to the Iranian government’s inefficiency. Sanctions, particularly those as comprehensive and far-reaching as the ones presently in effect, inevitably have both a snowballing and chilling effect. Foreign businesses, fearing they might unknowingly cross a line into impermissible activities, prefer to shy away even from authorized deals. Transaction costs related to food and medicine have escalated, while Iranians’ access to foreign currency has diminished. In turn, the target of public wrath is now shifting from a regime viewed as incompetent to an outside world seen as uncaring.
Iran’s economic predicament, whether caused by sanctions or merely aggravated by them, risks creating a deleterious social climate that is unlikely to be in the longer-term interests of the West or the Iranian people. Crime rates and corruption have been rising. Smuggling is booming as clandestine networks replace commercial ones. Indeed, smuggling networks are becoming an integral part of the shadow economy that reportedly accounts for 21 percent of gross domestic product.12
This does not necessarily harm the regime. On the contrary, it has facilitated a symbiosis between state-affiliated organizations such as the Revolutionary Guard and transnational smuggling networks. Over time, organized crime networks likely will become more sophisticated, enabling them to survive even after sanctions have been lifted.
A Vicious Cycle
Despite the considerable toll that sanctions have exacted on Iran’s economy, they have failed to achieve their proclaimed core objective of influencing Iranian behavior with regard to its nuclear program. This result is unsurprising, as critical differences exist between how policymakers in Washington and Brussels and in Tehran view and interpret the sanctions regime.
The West views the sanctions as an instrument of coercive diplomacy, primarily designed to pressure Tehran into curtailing its nuclear activities and abandoning any military pursuit in that field. Iran sees them and the nuclear issue as a whole as a thinly disguised pretext to undermine the regime.
For many in the Iranian leadership, current hardships have an air of déjà vu—indeed, an air of something not nearly as bad as what previously has been seen. The country has experienced two oil embargoes in its modern history. The British-led boycott of Iranian oil between 1951 and 1953, after Iran nationalized its oil industry, proved highly effective, yet Prime Minister Mohammed Mossadegh did not budge.13 The U.S. embargo on Iranian oil imposed in the wake of the 1979 hostage crisis likewise failed to meet its objective, as U.S. diplomats remained in captivity for 444 days.14
Iran also has dealt with two foreign currency crises in the recent past. Oil revenues dropped from $21 billion in 1983 to $6 billion in 1987, at a time when the country was engaged in a full-fledged war with Iraq. A decade later, amid the Asian financial crisis, oil income fell once more, from $19 billion in 1996 to $10 billion in 1998.15 The situation today, despite shrinking resources and rising prices, is nowhere near the deprivation experienced during the 1980s, when the drain of war had caused widespread shortages and frequent blackouts.
In response, officials from the United States and the European Union occasionally argue that the more recent round of sanctions is unprecedented in scope and thus should be given enough time to take effect. They see the accumulated impact of punitive measures, not the effect of their periodic intensification, as the force that eventually might compel the regime to alter its stance in fundamental ways. Yet, the Iranian leadership offers a mirror image, persuaded that time is on its side and that the sanctions regime eventually will start hemorrhaging.
To this end, Iran is preparing itself for a potentially prolonged confrontation. At the core of its strategy is its so-called economy of resistance, which equates survival with victory. From this perspective, the victory of dissuading its foreign foes from toppling it and of establishing the fact of regime endurance is well worth suffering the costs of sanctions.
Iran and the West may be sitting at the same table, but one side is playing chess, while the other is playing checkers. The outcome at times appears akin to a vicious cycle. In an effort to pressure Iran, the West tightens its sanctions. For the reasons described above and in order to prove it will not capitulate to threats, Tehran does not respond according to the West’s plan. This prompts ever-tightening sanctions whose success is measured less by their proclaimed political goal of curbing Iranian nuclear activities than by their sheer quantity and their visible and measurable economic consequences. Finally, as the West seeks to increase its leverage not only through sanctions, but also through acts of sabotage,16 Tehran arguably feels it must do the same. It has few options: accelerating its nuclear program or resorting to its own forms of sabotage. Although some Iranian officials have recently hinted at the possibility of Iran enriching uranium to a level above 20 percent,17 analysts view the recent cyberattack against Saudi Arabia’s most important oil company as a possible warning shot from Tehran that it could resort to different tactics should the economic warfare against it intensify.18
The Way Out
Ultimately, sanctions as a tool of coercive diplomacy are effective only in proportion to the prospects of relieving them in exchange for policy shifts. The measure of efficacy lies in what can be obtained when they are removed, not what happens when they are imposed.
Therein lies the dilemma. Although Western policymakers have made it clear that more sanctions will be imposed if Iran continues on its current nuclear path, there is no clear road map for lifting the sanctions in return for Iranian concessions. Although long reluctant to acknowledge the impact of sanctions or project any eagerness to see them lifted, Iranian officials increasingly are identifying such a step as a condition for any accord.19 Yet, that is far easier said than done. Sanctions have become so extensive and so intricately woven that it will be difficult to offer significant, concrete relief short of a major turnaround in key aspects of Tehran’s domestic and foreign policies. In particular, reaching the threshold for removing U.S. sanctions is difficult to imagine.
Practical considerations also stand in the way. Even assuming Iranian willingness to compromise, the standard for lifting U.S. sanctions is high. The president can modify or revoke an executive order, but most of the sanctions measures have been codified by Congress, thereby limiting his room to maneuver. He can exercise his waiver authority or order greater flexibility in enforcing the penalties, but such short-term and easily reversible steps are unlikely to prompt meaningful Iranian concessions.
Furthermore, not all U.S. sanctions are tied to the nuclear issue; many relate to other elements of Iran’s foreign or domestic policies (figure 1). As a result, without a fundamental reorientation of Iran’s approach, which is highly improbable at this stage, a significant relaxation in sanctions is not in the cards. This is true of sanctions related to human rights violations; designations of persons for involvement in terrorism or pursuit of weapons of mass destruction; the state of emergency regarding relations with Tehran, in place since the 1979 hostage crisis; and Iran’s placement on the list of states sponsoring terrorism.
The ambitious goals set out in the unilateral and multilateral sanctions regimes thus appear in conflict with the more limited yet pressing goal of addressing the nuclear issue.20 The situation is compounded by sometimes discordant views between the U.S. executive and legislative branches, with the latter seemingly less interested in or less convinced of the feasibility of a diplomatic resolution, more eager to impose sanctions, and less mindful of the views of Washington’s allies. Currently, in Washington’s highly politicized climate, Congress is unlikely to show the president much deference in this regard. That leaves the option of a time-limited suspension or waiver, which in turn is likely to prompt time-limited and reversible Iranian reciprocal steps at best. The immediate objective should be a gradual, incremental approach that sets a more constructive process in motion, puts more time on the clock, and allows each side to retain sufficient leverage to guard against the possibility that the other will renege.
The challenge is to come up with a P5+1 package of meaningful but realistic sanctions relief to match a parallel Iranian package of meaningful but realistic nuclear concessions. Meaningful sanctions relief, from an Iranian standpoint, would include reversal of some measures that have significantly affected its economic well-being; “realistic” signifies that the sanctions can be lifted, waived, or suspended in spite of legal and political constraints in the sanctioning entities.
On the other side, Iran’s nuclear concessions should provide some reassurance to the P5+1 that Tehran will not “break out” by withdrawing from the nuclear Nonproliferation Treaty to dash toward the development of nuclear weapons. Such concessions could meet the “meaningful” criterion even if they fall slightly short of the demands that the P5+1 currently is making.
To break the deadlock, the two sides should take the following steps:
• Establish a means of ongoing, expert-level contact. Given the level of technical complexity of the issues that the two sides need to address, expert-level meetings will be required to reach any agreement. Iran and the P5+1 might establish a Vienna- or Istanbul-based contact group aimed at regular interaction that does not produce intense media coverage.
• Address all dimensions of the urgent issue of 20 percent uranium enrichment first. Iran should be prepared to suspend its 20 percent enrichment for a period of 180 days and convert its entire stockpile of 20 percent-enriched uranium to fuel rods. This would effectively restrict operations at Fordow, which is now used solely for the purpose of enrichment to a level of 20 percent,21 and address the most urgent proliferation concern. As such, it merits a reciprocal step of commensurate value. Simultaneously, the P5+1 would provide medical isotopes to Iran, refrain from adopting any new sanctions, suspend unilateral sanctions on the sale and transfer of precious metals such as gold and semifinished metals such as steel, or waive sanctions that block Iran’s access to its revenues from oil sales to its remaining customers for the same period of 180 days. It is unrealistic to expect Iran to shut down its Fordow enrichment facility. Still, Iran should agree to maintain the status quo, thereby refraining from installing any advanced centrifuges, an issue of considerable concern to the West and Israel. Iran should use the Fordow center exclusively for research and development and should upgrade the provisions regarding Fordow in its safeguards agreement with the International Atomic Energy Agency (IAEA) to allow in-house resident inspectors or installation of live-stream remote camera surveillance. In return, the United States and the EU could suspend their sanctions on Iran’s petrochemical sector or halt pressure on Iran’s remaining oil customers to reduce their purchases of Iranian petroleum significantly.
• Devise a road map for a longer-term agreement. Reciprocal concessions for an accord could include Iran’s agreement not to surpass a mutually acceptable quantity of stockpiled uranium enriched to 5 percent, with any amount in excess to be converted into fuel rods. In return, the P5+1 would provide Tehran with modern and safe nuclear fuel manufacturing technology, while rolling back restrictions affecting Iran’s financial system. As part of a second phase, Iran should ratify and implement an additional protocol to its safeguards agreement, thus strengthening and broadening the IAEA’s ability to carry out inspections in the country; implement the modified version of Code 3.1 of its safeguards subsidiary arrangement, which details specifically how a country’s safeguards agreement is to be applied, thus agreeing to inform the IAEA of any new nuclear facilities as soon as Iran decides to construct them; and establish an enhanced safeguards monitoring system for its nuclear facilities. In return, the United States and the EU would remove or suspend oil sanctions, allowing Iran to increase its petroleum exports. This step would require substantial coordination between Washington and Brussels, as well as with oil-producing countries such as Saudi Arabia, which likely would need to reduce production to make space for Iranian crude oil.
To further facilitate progress, both sides should clarify the broad principles governing the endgame. The P5+1 should recognize in principle Iran’s right to enrich uranium for peaceful purposes on its soil, while Iran should acknowledge legitimate international concerns about its nuclear program and agree to steer clear of acquiring a short-term breakout capability.
In parallel, Iran and the IAEA should agree on a structured framework to resolve the agency’s 13 outstanding questions regarding possible military dimensions of Iran’s nuclear program. The P5+1 and Iran should agree on a formula that links incremental lifting of other nuclear-related sanctions with resolution of specific issues between Iran and the IAEA. Once Tehran has answered questions to the IAEA’s satisfaction, the five permanent members of the UN Security Council should sponsor and press for a new resolution in the council removing existing UN sanctions on Iran and returning the matter to the IAEA.
Regardless of the precise sequence of negotiated steps, time is of the essence. Before further escalation pushes the two sides into a confrontation that is likely to be catastrophic for both of them, they should begin the long and tortuous process of rolling back the multilayered sanctions and nuclear program. The diplomatic effort for untying this Gordian knot should be as rigorous and comprehensive as each side’s coercive efforts have been to date.
Ali Vaez is a senior Iran analyst at the International Crisis Group. Formerly, he headed the Iran Project at the Federation of American Scientists, focusing on Iran’s nuclear and missile programs. This article is based on the International Crisis Group report “Spider Web: The Making and Unmaking of Iran Sanctions.”
5. Simon Henderson and Olli Heinonen, “Nuclear Iran: Technical Issues Overshadowing Negotiations,” PolicyWatch, No. 1993 (October 23, 2012); International Atomic Energy Agency (IAEA) Board of Governors, “Implementation of the NPT Safeguards Agreement and Relevant Provisions of Security Council Resolutions in the Islamic Republic of Iran: Report by the Director General,” GOV/2013/6, February 21, 2013.
16. Four Iranian nuclear scientists were assassinated in the past three years. Masoud Ali Mohammadi, an expert on quantum mechanics, was killed in January 2010 by a bomb attached to his car. On November 28, 2010, Majid Shahriari, an expert on making the nuclear fuel needed for the Tehran Research Reactor, was killed with a similar device. On the same day, nuclear laser expert Fereydoun Abbasi was injured by a similar bomb. Iranian President Mahmoud Ahmadinejad subsequently named Abbasi as vice president of Iran and head of its atomic energy agency. On July 23, 2011, Darioush Rezaei, a nuclear scientist, was shot and killed by a motorcycle-riding assassin. On January 12, 2012, a motorbike assassin with a magnetic bomb killed the Natanz enrichment facility’s deputy head of procurement, Mostafa Ahmadi-Roshan, in Tehran. David E. Sanger, “America’s Deadly Dynamics With Iran,” The New York Times, November 6, 2011. It is also well known that the United States and Israel cooperated in waging cyberattacks against Iran’s nuclear installations. See William J. Broad, John Markoff, and David E. Sanger, “Israeli Test on Worm Called Crucial in Iran Nuclear Delay,” The New York Times, January 16, 2011.
18. Nicole Perlroth, “In Cyberattack on Saudi Firm, U.S. Sees Iran Firing Back,” The New York Times, October 23, 2012, http://www.nytimes.com/2012/10/24/business/global/cyberattack-on-saudi-oil-firm-disquiets-us.html?pagewanted=all&_r=0.
19. For instance, Iran’s deputy nuclear negotiator, Ali Bagheri, recently said that Iran’s goal in future talks is a lifting of the sanctions, which from his perspective could happen gradually. See “Iran Negotiator: Sanctions Can End ‘Step By Step,’” Associated Press, April 12, 2013.
20. International Crisis Group (ICG), “The P5+1, Iran and the Perils of Nuclear Brinkmanship,” Middle East Briefing, No. 34 (June 15, 2012); ICG, “Spider Web: The Making and Unmaking of Iran Sanctions,” Middle East Report, No. 138 (February 25, 2013).
21. In late 2011, probably in anticipation of reaching a deal on uranium enrichment to the 20 percent level, Iran modified its responses provided on the IAEA Design Information Questionnaire for the Fordow facility from exclusive production of 20 percent-enriched uranium to enrichment at the 20 percent and 5 percent levels. This change likely was designed to keep the facility open in the event Iran were to stop enrichment at higher levels. See IAEA Board of Governors, “Implementation of the NPT Safeguards Agreement and Relevant Provisions of Security Council Resolutions in the Islamic Republic of Iran: Report by the Director General,” GOV/2011/65, November 8, 2011.