Since taking office, President Biden has sought to implement a stated intent to rejoin the Iran Agreement of 2015, including welcoming talks with Iran.
By Subhash Jangala
Sayyid Ebrahim Raisolsadati, often called Ebrahim Raisi, is slated to assume the office of the President of the Islamic Republic of Iran on 3rd August 2021. Ebrahim Raisi’s election comes at a time when geo-political tensions between Iran and the US are at a high that hasn’t been seen in a decade.
The most recent spur to the deterioration of ties was the death of an American citizen and the shooting down of an American drone, both different incidents in 2019. The US believed that both were acts of the Islamic Revolutionary Guard Corps (IRGC), an extremely powerful branch of the Iranian Army. It was reported that one of the more violent options placed before President Trump to respond to the Iranian aggression was the targeted killing of the head of the Quds Force, the arm of IRGC that specializes in secretive military operations. Trump chose the option and in a drone-launched-missile-strike in January 2020, the head of Quds was killed near the Baghdad Airport. The event sent shock-waves not just in the middle-east but in American politics as well with questions being raised on the disproportionate nature of the reaction. A wave of anti-US sentiments is claimed as one of the reasons for the election of Ebrahim Raisi who is known to be lavishly conservative in his political ideology.
What makes Ebrahim Raisi’s election crucial for the security of the region in specific and Eurasia in general is the rapidly unravelling nuclear crisis in Iran. Iran’s tryst with nuclear energy started as a project for peaceful generation of electricity by the last Shah in the 1950s and slowly turned into an exercise of criminal proliferation in a span of half a century, thanks to Abdul Qadeer Khan, the father of Pakistan’s nuclear program and architect of the world’s first nuclear black market. A series of sanctions followed, crippling the Iranian economy and bringing Iran to the negotiating table in 2013.
Iran agreed to a deal in which it was allowed to produce nuclear power while placing restrictions on the amount of enrichment, the number of centrifuges it used and the like. In 2018, Donald Trump abandoned the deal calling it “decaying, rotten” and ineffective in preventing Iran from making a bomb. While the evidence on which the 2018 decision was taken is often debated, what ensued was an escalation of nuclear proportions. Iran started reneging on its commitments on restricted enrichment and quality of centrifuges. The United States imposed stricter sanctions and is now considering more.
In this background, a question that is not frequently answered is what sanctions are and what gives them so much power. How do sanctions bring entire countries to the ground? Or do they really bring them to the ground? A study of earlier economic sanctions and their effects will throw light on the applicability of the same in 2021 and beyond.
On 4th November 1979, 52 Americans were taken hostage by Iranian students during the Iranian Revolution. Since the use of military force appeared impractical or impossible, the application of economic force was the only option to secure the freedom of the American hostages. In 9 days, the USA fired its first salvo by banning all oil imports from Iran. The impact of this order, expectedly, was lukewarm. The USA was not the only buyer in the oil market. However, the messaging was clear. The economic war had well and truly begun. As soon as the oil embargo was announced, US intelligence picked up news about Iran considering withdrawing all the deposits that the Iranian government had in US banks. Within 24 hours, Jimmy Carter, the then President of the USA issued Executive Order 12170, freezing all assets owned by the Government of Iran or the Central Bank of Iran which are located in the United States or in possession of persons subject to United States jurisdiction. What this essentially meant was that all cash belonging to the National Iranian Oil Company, the Iranian Central Bank and other Iranian public sector entities situated in any American bank stood frozen. Also all amounts payable by any American company to an Iranian entity were frozen. Initial estimates of the deposits was about 10 billion USD, a significant sum in 1979 and the equivalent of USD 37 Billion today.
While causing a sudden hole in Iran’s books of accounts, the freeze was a bureaucratic nightmare in the United States, like any sledgehammer type decision. Several issues arose. How diplomatic accounts would be dealt with. How would the millions of dollars in inward remittances to fund Iranian students in the USA be handled. What would happen to the loans that banks had given to Iranian entities? Could they set them off against the frozen deposits? Would banks be paying interest on these frozen deposits? While the US was caught up in managing and monitoring the freeze, Iran managed, atleast a little, to wriggle out of the situation. Iran stopped using dollars for payments and started converting its dollar reserves into non-dollar reserves. Iran also began to invest funds through the Algerian Central Bank. Iran started pricing its oil in order to leverage its position as an oil supplier.
In April 1980, with Iran not giving in to American pressure, a fresh round of sanctions were imposed by the USA. Since the UN Security Council vetoed multilateral sanctions, the United States imposed the sanctions unilaterally. All imports and exports to and from Iran were banned barring food and medicines. No new contracts for provision of services would be signed. All outbound remittances were also banned. The effectiveness of these measures can be gauged from the fact that after oil imports from Iran were banned by the earlier set of sanctions, the only products affected by this Executive Order were pistachio nuts and rugs.
The US realized that unilateral measures weren’t affecting Iran much and tried to diplomatically pressurize allies in Europe and Japan to follow suit but to little success. Countries did not want to alienate Iran or the wider Muslim world for a crisis that could be reversed any moment. However, there were other pressures on Iran. The Iraqi invasion of 1980 added to the weight of the sanctions. Iran’s Forex reserves were quickly falling due to military purchases, obtaining spare parts for machinery was getting difficult and political isolation was creating fatigue in international policy circles. Eventually both countries came to the negotiating table, Iran received 8 Billion USD of its assets back in exchange for the 52 hostages. Several lawsuits continued in arbitration for several years in international tribunals adding to the cost of the sanctions to both Iran and USA.
While Iran realized that unilateral sanctions from a close economic partner can be costly, the USA realized that bringing allies from across the world to put sanctions on a domestic issue is not an easy task in a globalized, multi-polar world.
Come 1995, Democrats came to power after a 15 year Republican rule in the USA. This created renewed American political interest in Iran and Iraq. Since a steady flow of cheap oil has always been one of the central pillars of American geopolitical strategy, Iran, with its alleged funding of Hamas and Hezbollah and a perceived interest in acquiring weapons of mass destruction, was seen as a potent destabilizing factor. The concept of “Dual Containment” of Iran and Iraq took birth. It was a radical departure from the conventional American strategy of propping up one regional hegemon to counter the other.
One of the key drivers of dual containment was economic sanctions. On 15th March 1995, Bill Clinton issued Executive Order 12957 which prohibited, in essence, all American companies and their subsidiaries from taking up management/servicing/financing contracts for development of oil resources in Iran. The immediate result of this embargo was several missed opportunities to American oil mining companies and it came at a time when Iran was trying to bridge some irreconcilable differences with the USA. Domestically, it was understood from the experience of 1979 that the unilateral measures would not have the desired impact and participation of other countries in Europe and Asia would be required. However, domestic pressure kept piling up to introduce stricter sanctions. In May 1995, Bill Clinton issued Executive Order 12959 which exponentially broadened the scope of the sanctions already applied on Iran. Through this Order, import and export of goods and services was banned between the USA and Iran or any entity controlled by Iran. All third countries were banned from exporting goods to Iran which contained substantial US technology and all foreign subsidiaries of American companies were banned from entering into any transaction with Iran.
The only breathing space to Iran was, unlike 1979, Iranian assets were not frozen this time around. However, having banned the provision of all services, including financial, banks had substantial scope of interpretation on how to deal with Iranian money in the US.
However, just like in 1979, the US administration failed to pressurize the G7 countries into endorsing the sanctions. The G7 meeting of July 1995 issued a statement, which was laughably lukewarm, calling Iran to “participate constructively in regional and world affairs”. The rebuke wasn’t taken lightly by the US. Within a few months, the Iran and Libya Sanctions Act (ILSA) was passed, which, most importantly, sanctioned companies from third countries for dealing with Iran. The Act attempted to position the US as a supra-national enforcer of international jurisdiction. The law empowered the President of the US to sanction any company which invests USD 40 million or more, directly or indirectly in the enhancement of Iran’s ability to develop its petroleum resources. The company would then be denied assistance, licenses and funds and would face bans and prohibitions of several kinds from the US government and other US financial institutions. The extraterritoriality of the legislation evoked sharp criticism across the world terming the law “unacceptable”, “a serious problem” and “inappropriate”. The European Union promptly passed a blocking legislation with the aim to protect European countries from ILSA. The private sector wasn’t amused either. Within a few weeks, France’s Total, Russia’s Gazprom and Malaysia’s Petronas signed a multi-billion dollar contract to develop an offshore gas field in Iran. Frantic and drastic efforts of the US Administration to sanction these companies failed and after a year of negotiation, under the aegis of the European Union, the President granted a waiver to the three companies to develop the gas field.
History seems to be speaking for itself in the sanctions space. While unilateral sanctions do amplify the stresses to a country’s economy, it appears, the 20th and 21st century has seen rapid growth and proliferation of democratic institutions, free media and independent judiciaries that have resisted extra-territorial ambitions of economic super powers. Since the 2018 abandonment of the Iranian nuclear deal, several sanctions were reimposed on Iran. As a result of this, Iran’s GDP contracted by close to 5%, unemployment rate shot up to 16.8% and oil production plummeted. Iran found other ways to sell oil in-spite of the sanctions. Some accuse Iranian ships of switching off their Automatic Identification Systems while also conducting ship-to-ship transfers of oil.
Since taking office, President Biden has sought to implement a stated intent to rejoin the Iran Agreement of 2015, including welcoming talks with Iran. US Officials too have acknowledged that a U.S. return to the agreement would entail an easing of the stipulated U.S. economic sanctions. And from history, it appears the right way to go ahead.
(The author is an officer of the Indian Revenue Service of the 2011 batch. The views expressed are personal and do not represent the views of the Government of India nor does it reflect the official position or policy of Financial Express Online.)