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The Collapse of Sanctions on Iran

Lee Smith

The economic news from Tehran is good—good, that is, if you are a state sponsor of terror moving toward a nuclear weapons program. If on the other hand you were hoping that sanctions might persuade the Iranians to cease and desist, the news is disastrous.

Since the Obama administration relaxed sanctions on Iran, oil sales are up 25 percent, from 1.06 million barrels per day to 1.32 million, and the White House reportedly has no intention of preventing the rise in sales and consequent swelling of Revolutionary Guard bank accounts. And that’s not all. The leading economic indicators show an Iranian economy on the mend, thanks to the interim nuclear agreement struck in November. Inflation has decreased from 40 percent-plus to 20 percent and falling. The rial-to-dollar exchange rate is steadily recovering from the depths to which it had fallen in 2012. And where Iran’s GDP fell 3 percent in 2012, the IMF now projects modest increases for 2014 and 2015.

In short, with the sanctions regime eroding, Iran’s business climate has been transformed. What was once a foolish gamble is now a promising opportunity, and trade delegations are exploring investment options in Iran’s petrochemical and automobile industries. The White House’s early assessment that the regime was getting only $7 billion in sanctions relief was way off. The figure is far closer to those estimates of $20 billion that administration officials scoffed at.

What happened? Is it possible that the White House, with all the economic expertise at its disposal, simply miscalculated? Is the Obama administration just bad at math?

No, it was intentional. Contrary to the administration’s public stance, sanctions relief was never about rewarding the regime with relatively small sums of money in exchange for steep concessions on the nuclear program. The plan rather was to get Iranian president Hassan Rouhani lots of cash, the more the better. The White House’s idea is that once Rouhani understands how much easier his life is with lots of money pouring into the economy, it will be in his interest to petition Supreme Leader Ali Khamenei for more concessions on the nuclear file. The problem with the strategy is that it shows how badly the White House has misunderstood not only the regime’s behavior, but also Rouhani’s role and how sanctions affect it.

“The administration wanted to strengthen Rouhani’s position vis-à-vis the hardliners,” Iran’s Revolutionary Guard Corps (IRGC), says Mark Dubowitz, executive director of the Foundation for Defense of Democracies, whose work has been central in building the Iran sanctions regime. According to Dubowitz, the White House wanted to empower Rouhani while weakening figures like Quds Force commander Qassem Soleimani, who use their proximity to Khamenei to argue against concessions. The administration assumes, says Dubowitz, that “the more Rouhani becomes ‘addicted’ to cash, the better he’ll be able to make the case to Khamenei that they need to make more concessions. The White House’s idea was to show Rouhani some leg.”

They gave away much more than that. What was significant about sanctions relief was not merely the exact amount of money. Rather, it was that any relaxation of sanctions would give rise to an international lobby with a vital interest in making sure the White House never made good on its threats to reimpose stiff sanctions on the Tehran regime. And it’s not just businesses wanting to trade with Iran that have a stake in sanctions relief, but also politicians. A European corporation doing business in Tehran means jobs back home. What politician would gladly turn his back on thousands of jobs or potential jobs to agree to observe the restoration of a sanctions regime that the Obama White House wasn’t serious about in the first place?

Accordingly, businesses sensing a new climate have flocked to Tehran. “Administration officials said our estimate of $20 billion was exaggerated,” says Dubowitz. “But they had to know about the secondary effects of sanctions relief. They were counting on it. It was key to their whole economic strategy of giving Iran’s economy a lift to incentivize Rouhani to deliver more on the nuclear file. As Iran’s economy continues its shift from a deep recession to a modest recovery, and Congress challenges administration officials on the impact of sanctions relief, administration officials may begin to change their tune and claim that this was their strategy all along.” 

John Kerry chastised a French business delegation for visiting Tehran, but other State Department officials saw it differently. “We hope people don’t go to Tehran,” said undersecretary of state for political affairs Wendy Sherman, the administration’s lead Iran negotiator. “That is our preference. But those who go raise hopes that the Rouhani administration’s going to have to deliver on.”

The administration’s strategy, says Dubowitz, “has nothing to do with rational economic models. Rather, it’s a psychological profile of the regime based on its assessment of Rouhani as a pragmatist who was elected to secure sanctions relief and will be further strengthened if he can deliver.”

But that’s a misreading of Rouhani’s position. The last thing he wants is more sanctions relief, says Iran specialist Ali Alfoneh. “Rouhani uses the sanctions regime, and the threat of new sanctions, as a stick in his fight with the IRGC and Khamenei. It may seem counterintuitive, but the fact is that sanctions relief and Obama’s threat to veto additional sanctions are only likely to weaken Rouhani in Iran’s political power structure.”

To be sure, Rouhani was elected to win sanctions relief for a beleaguered Iranian economy—and perhaps more importantly for the Revolutionary Guards. “The IRGC was initially a beneficiary of the international sanctions regime,” says Alfoneh, a senior fellow at FDD. Sanctions eliminated competition, especially in Iran’s energy sector, and further concentrated economic power in the IRGC’s hands. “However, as the sanctions regime continued,” Alfoneh explains, “the IRGC suffered because of the overall deterioration of the Iranian economy and shrinking oil revenues.” Contrary to the White House’s understanding, sanctions relief not only enriches the IRGC but also weakens Rouhani.

Khamenei has long seen Rouhani as a useful asset in his dealings with the West. The Iranian president often boasts of his role in duping his American and European counterparts as lead negotiator when he held the regime’s nuclear file from 2003-05. But that was after the U.S.-led coalition invaded Iraq, and Khamenei was terrified the Bush administration might move on Iran next. Rouhani was the regime’s happy face. When Khamenei saw that the Americans were tied down in Iraq, says Alfoneh, he got rid of Rouhani and moved back to hardball tactics.

The same is likely to happen here. Now that Western businessmen and politicians are pecking away at the sanctions regime, Rouhani has already served his purpose. Khamenei has a deal he’s perfectly happy with. He’s getting paid for doing nothing, and if the interim agreement is renewed after six months, as many anticipate, then it’s just more money to spend on whatever he likes—backing Bashar al-Assad in the Syrian civil war, or building the bomb. What’s peculiar is that the White House seems just as pleased with the agreement.

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