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More Iran Sanctions: Peterson Institute and Israeli Leaks

by | October 4th, 2012 | 06:02 am

We follow Iran because of its history of cooperation with North Korea, the similarity of ongoing negotiations and non-negotiations (five parties trying to cajole a petulant sixth) involving its nuclear program, and because of the sanctions issue. Can sanctions be effective for non-proliferation ends?

We managed to miss the Peterson Institute’s own Jeffrey Schott, who offered up a nice overview of the sanctions effort in a July issue of Business Economics; the Peterson team has also updated their exhaustive Iran sanctions case to include the current efforts.  In July, Schott was concerned about Iran using a rope-a-dope strategy to wear down the sanctions coalition. A crucial difference between North Korea and Iran, of course, is oil; Schott suggested diplomacy with Saudi Arabia and even release of US strategic petroleum stocks to hold the coalition together if supplies were to tighten and prices rise for Iran-dependent consumers. With oil prices falling in recent weeks, despite QEIII, the issue seems moot at the moment.

Nonetheless, the general problem remains: how to hold sanctions coalitions together? In North Korea, this issue arises with the respect to China, particularly as stories mount that North Korea is giving away the proverbial store to any Chinese investors willing to drop a dime on the regime.

But more intriguing are leaks coming out of the Israeli foreign ministry—echoed recently by the ministry of finance—that the Iran sanctions might be having political effect and that the Iranian economy is “on the verge of collapse.”  On Monday, the rial went into free fall. The leaked Israeli analysis—from hardline foreign minister Avigdor Lieberman no less—even predicts an Arab Spring in Tehran within a year. The orchestrated nature of the leak suggests this was at least one considered view within the Israeli intelligence community.

Some analysts claim that oil may make it easier for Iran to give up its nuclear program since it is not as reliant on blackmail as an economic development strategy as North Korea, even if sanctions are more difficult to impose.  But in other regards some of the macroeconomic dynamics appear to be surprisingly similar in the two countries; we have noted the return of macroeconomic instability in North Korea in particular. Iran’s troubles also highlight clearly some of the dilemmas in the use of controls that we see in North Korea as well. The recent collapse of rial was caused in part by the central bank’s effort to dampen inflation by offering preferential exchange rates for the import of basic commodities. Markets drew very different conclusions, interpreting the move as a sign that central bank reserves may not be adequate to meet import needs. And an effort to limit deposit rates to a government-set–and fictitious–interest rate has fueled financial disintermediation.

There can be little doubt that the North Korean regime’s quest for foreign exchange is being driven by the precarious state of the economy. But the central challenge to the sanctions strategy remains: to date this has not translated into any signs of urgency on North Korea’s part to get back to the talks.  It looks like the same constraints might operate in the Iranian case as well if Ahmadinejad’s New York/UN performance is any indication.