Israel Matzav

Another reason sanctions won't work against Iran

I'm not a big believer in solving the crisis over Iran's pursuit of nuclear power through sanctions. I don't believe the Iranian people will wake up tomorrow morning and overthrow their government because they don't have enough breakfast cereal or beef. I don't believe that sanctions can be airtight even if everyone agrees on the necessity of imposing them and everyone agrees to abide by them, which unfortunately is not the case with Iran. We have already seen instances - particularly in Europe - in which governments agree to sanction Iran and private companies circumvent them.

Now, there is a new reason to believe that sanctions will not be effective against Iran. The Washington Post reports this morning that Iran has shifted its trade to the East, principally to Russia and China, with the result that sanctions imposed by the United States and Western Europe will have less of an impact. As a result, 'analysts' believe that Iran will be able to withstand even 'severe' sanctions.

China, a permanent member of the Security Council that can veto any U.N. resolution, is expected to overtake Germany as Iran's biggest trading partner this year. Germany and other European countries had consistently been Iran's largest trading partners for more than a decade, according to the Iran Investment Monthly.

The U.S. Treasury said that more than 40 banks, mostly in Europe, have curbed business with Iran as a result of U.S. pressure, but smaller banks, Islamic financial institutions and Asian banks are likely to step in and replace the Western financial institutions through which Iran has long sold oil on the international market. Oil traders said that Iran does an increasing portion of its petroleum sales in euros and yen, instead of U.S. dollars, and often through third parties, to help its customers circumvent U.S. financial sanctions.

"Given particularly the price and demand for oil, Iran clearly has leverage with countries that need Iran's oil," said Shaul Bakhash, a George Mason University historian and author of "The Reign of the Ayatollahs." In addition, he said, "Iran has a huge cushion of foreign-exchange reserves."

Iran's oil revenue this year will far exceed the government's budget forecasts, which had assumed an average oil price of $60 a barrel. On Friday, oil settled above $90. The extra revenue will make it easier for the government to maintain social-services payments designed to bolster its popularity amid economic problems.

Iran has also moved to protect what Leo Drollas, chief economist of the Center for Global Energy Studies in London, calls its Achilles' heel -- gasoline imports. Because of its limited refining capacity, Iran last year imported 200,000 barrels a day of gasoline, about a third of its consumption. But the government has trimmed gasoline subsidies, which has curtailed consumption and smuggling, cutting imports of gasoline in half.

This does not mean that the current round of sanctions, announced by US Secretary of State Condoleeza Rice last week, is having no impact:

Lukoil, a Russian company with an extensive gasoline marketing network in the United States, announced last Monday that its exploration work in Iran's big Anaran oil field "is currently impeded because of the U.S. sanctions," which bar investments of more than $20 million in Iran.

The U.S. sanctions, announced Thursday, complicate new oil projects by targeting Iran's main oil-field engineering firms. The firms are controlled by the Revolutionary Guard, which the Bush administration has accused of supporting terrorism and aiding nuclear proliferation. One of the firms sanctioned Thursday, Khatam al-Anbiya, is the rough equivalent of the Army Corps of Engineers, according to Karim Sadjadpour, an associate at the Carnegie Endowment for International Peace. The Treasury Department said the firm had $7 billion of contracts in the oil, natural gas and transportation sectors.

European oil companies are holding off on exploration and production deals in Iran. Royal Dutch Shell, Total of France and Italy's ENI have held talks or reached preliminary agreements for new oil and gas projects in Iran in recent years. But now they say they are unlikely to move ahead, in large part because of the commercial terms Iran is offering.

Chinese oil companies have not signed contracts yet for commercial reasons, according to Julia Nanay, a Caspian region expert at PFC Energy, a Washington consulting firm.

The picture on the financial front is similar. The United Arab Emirates, a key transit point for Iranian imports and a major financial center for Iran, had closed 42 firms doing business with Iran before the new sanctions list, said an official there.

He said it remained unclear how the new U.S. measures would affect Iran's Bank Melli, targeted by Treasury for allegedly facilitating ballistic and nuclear equipment purchases. The bank, Iran's largest, had nearly $1.4 billion in assets in its U.A.E. branches at the end of 2005, according to its Web site. Bank Melli also has branches in London, Paris and Hamburg.

Sanctions are not effective against a totalitarian regime that does not expose itself to its people's will. Mahmoud Ahmadinejad and Ayatollah Khameini could care less how much the people of Iran suffer from shortages of basic staples. The average Iranian may hate his government - we have seen enough student demonstrations to confirm that. But he would rather stay alive than rise up against it because he believes that an uprising is unlikely to be effective.

If Iran wants to go ahead and build nuclear weapons it will. Unless the United States and/or Israel stops it.

posted by Carl in Jerusalem @ 3:30 PM