Home Digital Magazine Are U.S. trade sanctions on Iran really working?

Are U.S. trade sanctions on Iran really working?


Alex Vatanka |

By the end of 2018, it was not an exaggeration to call Hassan Rouhani a lame duck president. His person and his office were in a process of retrenchment. The Presidential Palace in Tehran produced no new policy initiatives that might correspond to the deep political and economic anxieties felt in the country. In light of the decision by the administration of President Donald Trump to impose the so-called “maximum pressure campaign” on Iran from November 2018, Rouhani early on decided that his best bet was to wait out the American president.

Instead of challenging established policy practices in Tehran – that have clearly proven to be insufficient – Rouhani doubled down by reaffirming his ties to the old circle that has been his political home since he began his presidential career. Rouhani’s cabinet reshuffle was a telling example of this reality. He appointed four new ministers and none are prominent political figures with original ideas to bring to the cabinet. Instead, they are seasoned bureaucrats with proven loyalty to Rouhani only.

But the problem of political nepotism at the expense of bureaucratic competence is exacerbated by a parliament that is hardly a sentinel even though it has the constitutional prerogative to demand ministerial competence and can reject presidential cabinet nominations. It has to be noted that the Majlis, the Iranian Parliament, swiftly approved all the four cabinet nominees without much of a debate about their qualifications besides affirming these individuals being politically trustworthy bureaucrats.

During the last round of sanctions on Iranian oil, the role of informal middlemen led to a number of major multi-billion dollar corruption scandals.

Furthermore, it has to be remembered that Rouhani is not the only one who is prioritizing familiarity with policy and individuals over the pursuit of policy innovation or the injection of fresh blood in his cabinet. Supreme Leader Ayatollah Ali Khamenei has repeatedly in recent months stressed the importance of perseverance in the face of American pressure. This is no doubt viewed by many in the regime as a call to adherence to business-as-usual and a warning that it is not the time to pursue any kind of fundamental change in how the regime operates.

On the economic front, Tehran was focused on one objective: circumventing US sanctions. According to Foreign Minister Javad Zarif, Iran has become so good at this craft that it is willing to transfer its sanction-busting know-how to other sanctioned countries. Among other things, Tehran began to sell its oil on the private bourse. In a move that has been widely anticipated since July, the National Iranian Oil Company (NIOC) for the first time sold some oil in a private trading exchange house. This is a new policy.

Read more: Iran nuclear deal: from US walkout to fresh sanctions

Tehran has openly declared this new effort is only established as a way to go around US sanctions. As part of this new policy, some of Iran’s crude oil exports will be sold to anonymous private customers. In this first round, Iran sold 280,000 barrels to a customer (or customers) whose identity Tehran has said it will closely guard. Whether it will be that much harder for Washington to identify and penalize private customers – as opposed to big national oil importers – remains to be seen.

The nature of such anonymous transactions is also inherently corrupting. During the last round of sanctions on Iranian oil, the role of informal middlemen led to a number of major multi-billion dollar corruption scandals. Except for looking for ways to go around the sanctions, the Iranian energy sector is today devoid of strategic ideas about keeping intact the country’s once major role as an energy powerhouse.

The American Game vs Iran

Meanwhile, anti-Iran voices and organizations in the United States are worried that President Trump’s policy of “maximum pressure” against the Islamic Republic is falling short of achieving its intended objective in the time span originally planned. These critics are worried that the Trump administration will soon accept two realities: That Iran cannot be entirely cut off from the international financial system, and that the Europeans, the Chinese and the Russians continue to threaten to find alternative ways to keep Iran, in one form or another, connected to financial channel, so trade with Iran will remain possible.

Supreme Leader Ayatollah Ali Khamenei has repeatedly in recent months stressed the importance of perseverance in the face of American pressure.

There are those in the US that are now expressing reservations that too much effort against Iran could end up undermining US financial interests elsewhere. The Trump administration’s willingness to issue waivers to nine countries – so they can continue buying Iranian oil – is also considered in Washington by anti-Iran entities as basically undermining the “maximum pressure” campaign against Iran. The Trump administration had for months promised that its sanction policy against Iran would be “maximum” pain.

Read more: Iran seeks to leverage diplomatic goodwill

The promise was that Iran under no circumstances will be able to sell any oil until it comes back to the negotiations table. At the moment, it looks like Iran will be able to sell between 1 and 1.5 million barrels of oil per day until summer 2019. If the Iranians are creative in going around the US sanctions, or if they can incentivize buyers with more discounts, then Iran’s net oil loss due to sanctions will be less than a million barrels a day. It has to be remembered that the maximum Iranian capacity to export oil in the last few years has been about 2.5 million barrels even when it was not under oil sanctions.

Two things stand out from this compromise that Trump has made with the nine countries. One, even if these states gradually reduce their imports then there is still a long way to go before Iran reaches “zero” oil exports. China buys around 600,000 barrels of oil from Iran and India buys around 400,000 barrels a day. This means a combined 1 million barrels a day, which is what the Iranian parliament has said is what Iran needs to sell to survive economically while Trump remains in the White House.

The second factor to remember is that Iran will sell its oil but will not be able to receive the income in dollars. Instead, it will either be paid in other currencies (such as Indian rupee) or have the money sit in the so-called “escrow accounts,” which means Iran will not have immediate access to its money. Iran can spend the money but only on a narrow range of humanitarian items. In other words, Iran will sell its oil and either receive the money at some point later on or receive goods and services in return. This puts Iran at a highly disadvantageous position and at the mercy of Iran’s trading partners.

Read more: US sanctions on Iran, ‘toughest ever,’ take force Monday

It is very damaging to Iran’s interests. And yet, the Trump administration has also failed so far to break Iran’s ideological resolve and can only hurt, but unlikely to make Tehran capitulate in the foreseeable future. The Iranians are learning that the Trump administration is not blind to the long-term consequences of its anti-Iran sanctions and when necessary it is willing to make exceptions to secure long-term American strategic interests.

The United States are worried that President Trump’s policy of “maximum pressure” against the Islamic Republic is falling short of achieving its intended objective in the time span originally planned.

For example, the decision to give India an exemption so it can continue to participate in the development of Iran’s Chabahar port is rooted in the fact that the US does not want China to replace India as the major foreign investor in Iran’s port of Chabahar. What the latest US actions show is that Washington is both politically and strategically sensitive to the costs of imposing sanctions on Iran. If the costs are greater than the benefits then the Trump administration will look for a way out by giving specific exemptions to countries or even companies. This provides Tehran with an opportunity to look for weak spots in the US sanctions regime, as a way of undermining Trump’s Iran overall sanction strategy

Europe’s Unenviable Role

At the same time, Iran and EU continue to remain in an uneasy bargaining process. The Europeans are in reality still unwilling to openly fight President Trump on the question of Iran but will continue to take small steps to save the 2015 nuclear deal. Europe’s difficult balancing act has repeatedly been put on vivid display. On the one hand, the Europeans continue to speak of the need to preserve the nuclear deal and find ways to keep trade with Iran open. However, in order to keep Iran in a process of political dialogue, the Europeans are forced to tackle Iran gently.

For the Europeans, the question of opposing Washington on Iran is about much more than just what to do with Tehran. It is about defending European sovereignty and not being forced by the US to act in a certain way on the international stage. The Europeans will, therefore, continue to tell Iran that they are committed to the nuclear deal and ask for Iranian cooperation. The Iranians are happy to do this but for a price, and that price is that EU finds ways to preserve major-scale trade (including the purchase of oil) with Tehran. To this day, the Europeans have not been able to deliver on this and the question is whether the Iranians will wait forever for the EU.

Read more: Russia seeks to dump dollar as new US sanctions loom

In fact, for months the EU struggled to create the ‘Special Purpose Vehicle’, a mechanism to enable Iran-EU trade to bypass US sanctions on Tehran. Abbas Araqchi, the top Iranian negotiator who is working with the EU to set up the so-called SPV for months continued to express the same tired line, which is that there are “legal and technical” reasons for why the SPVs are not up and running. He blamed the extensive role of the American dollar in the European banking sector.

The Iranians are learning that the Trump administration is not blind to the long-term consequences of its anti-Iran sanctions and when necessary it is willing to make exceptions to secure long-term American strategic interests.

The SPVs were supposed to be operating from November 4, 2018, to cancel out American sanctions. Araqchi conveniently leaves out the fact that the EU states are in disagreement about “burden sharing” (for example, where the SPVs will be located; first it was to be located in Austria and now it might be Luxembourg). The Iranians are still hopeful that the EU can come up with practical solutions to enable trade and not just focus on the rather symbolic issue of passing legislation to condemn American “extra-territorial legislation,” which looks good on paper but does little to keep Iranian-EU trade alive.

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And even in the best of scenarios, as European leaders have repeatedly underscored, while the 2015 nuclear deal with Iran has to be preserved, it was “only a first step” in the process to curb and contain Iran’s regional ambitions. German Chancellor Angela Merkel during her visit to Washington in April 2018 had said, “Europe and the US should be in lockstep” in this regard. German Foreign Minister Heiko Maas put it this way: “[Germany and the US] in the end pursue the same goals with respect to Iran but have just different paths that we [each] want to follow.”

For Tehran the message is clear: a lasting and sustainable normalization of Iranian foreign policy requires a broader reassessment in Tehran about what constitutes Iranian national interests and what is the price Iran is willing to pay to secure such interests. It is no exaggeration to say there is no agreement in Tehran on this crucial point.

Alex Vatanka is a senior fellow at the Middle East Institute. He is the author of Iran and Pakistan: Security, Diplomacy and American influence and has a forthcoming book coming out The Making of Iranian Foreign Policy: Contested Ideology, Personal Rivalries and the Domestic Struggle to Define Iran’s Place in the World. The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Global Village Space.