Aug. 14, 2019
- The U.S. has made impressive progress in its sanctions campaign against Iran. While further oil and banking sanctions might lead to a rift between the U.S. and its global partners, a better approach would be to focus on closing sanction-bypassing channels (especially through Turkey and Qatar) and on further devaluating Iran’s currency reserves. At the same time, the Iranian people should be shown a vision of the opportunities for prosperity if Tehran changes direction or the regime is replaced.
- In the continued debate over the effectiveness of economic sanctions against Iran, the example is cited of North Korea, which had been a target of U.S. sanctions for 50 years and yet did not collapse. Why should Iran be expected to crumble under economic sanctions?
- The answer is that Iranian society is different and far more susceptible to sanctions that North Korean society. Iran faces a growing gap between the public and the government/religious establishment, alongside growing secularization, modernization, and the adoption of Western lifestyles. These deep-rooted trends lead to waning public support for government institutions and revolutionary values. Economic sanctions against Iran exacerbate these internal tensions and increase the demand for change.
- There have been changes in the international banking system since 9/11. Corporate fears of unprecedented collective and individual penalties and lawsuits filed by victims of terror have created a new situation, one in which the banks have become their own regulators – and have established restrictions in order to avoid confrontations with the U.S. regulatory or legal systems.
- European efforts to provide Iran with an alternative trading channel to circumvent U.S. sanctions encountered formidable obstacles posed by the European and global banking system. The banks are much more concerned over a possible disconnect from the U.S. banking system and are not easily placated by European government guarantees. The EU is Iran’s third largest trading partner, after the UAE and China, with $30 billion in trade in 2018. EU trading with the U.S. that year was $720 billion.
- Dubai, which had served as the payment channel for all of Iran’s transactions for many years, has ceased to be Iran’s primary point for clearing trans-border payments.
- The plunge from high expectations among the Iranian population after the 2015 nuclear agreement to unprecedented despair is the greatest threat to the regime. Since early 2018 the value of the Iranian rial declined by more than 75%. Unemployment is at 30%, mainly among young Iranians.
- These factors are combining to create a critical mass of opposition to the government. The key question is when the process will ripen into a reaction in Iranian society, not only among the upper-middle class (who long have loathed the regime) but also the poverty-stricken neighborhoods of southern Tehran. The strong economic leverage now in place against Iran should be given time to ripen and bear fruit.
The writer served for over 30 years in IDF intelligence, the Civil Administration in Judea and Samaria, the National Security Council, and the Prime Minister’s Office.
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The Islamic Republic may be able to delay economic collapse by tapping into its currency reserves, cutting infrastructure spending, and bypassing sanctions to the extent that it can. But as time passes, its diminishing currency reserves and lack of foreign and domestic investment will almost certainly sap employment numbers, weaken domestic supply lines, and inhibit the import of consumer and capital goods. This would put the regime in danger of financial collapse.
Given Tehran’s growing economic crisis, the administration should maximize its maximum pressure campaign and not be overly anxious for a deal. The writer is a senior Iran and financial economics advisor at FDD. (Foundation for Defense of Democracies)