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North Korea: Witness to Transformation

Still More Iran Sanctions

by | February 25th, 2013 | 07:00 am
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We follow Iran because North Korea has so few comparators; an ongoing theme is the design of sanctions and whether they work either economically or politically. The new round of sanctions on Iran are of interest for several reasons: the continuing threat by the US of secondary sanctions, particularly on financial institutions; new techniques of restricting Iran’s access to dollars; and—perhaps most interesting—new sanctions against entities involved in human rights abuses and internet controls. But as always, the more fundamental question is whether they work; until the upcoming negotiations play out—if they even convene—the jury is clearly still out.

Under existing legislation, the United States can limit foreign financial institutions’ access to the US market if they engage in oil-related transactions with the Iranian central bank. This legislation was so draconian that it generated an exemptions process that allowed 20 countries to maintain trade and payments in exchange for promises to reduce oil imports; South Korea was one of the countries receiving an exemption.

The countries granted exemptions will now be subject to a new set of conditions: the exception now only applies to financial transactions that facilitate bilateral trade between the country granted the exception and Iran. Moreover, for the exception to apply to a financial transaction, funds owed to Iran must be credited to an escrow account located offshore in the country granted the exception; they may be used to finance trade, but may not be repatriated to Iran. In effect, the measure denies the regime control over much-needed dollars.

Executive Order (E.O.) 13628, which implements the Iran Threat Reduction and Syria Human Rights Act of 2012 (TRA), provides the authority to designate those in Iran who “restrict or deny the free flow of information to or from the Iranian people.” To date, this type of sanction has not been used in North Korea although there are certainly plenty of entities that fit the bill. The four sanctioned organizations in Iran are:

  • Islamic Republic of Iran Broadcasting (IRIB)
  • Iranian Cyber Police, formed in 2009
  • Communications Regulatory Authority (CRA)
  • Iran Electronics Industries (IEI); previously cited for its links to WMD production, the entity is now targeted for production of equipment related to internet control.

What we don’t know is whether these designations have any bite or not; if any of our readers know, please use the comment function below. On the one hand, we would be surprised if any Americans are doing business with these entities, although it is certainly not out of the question. The sanctions block “any property or interests in property in the United States or in the possession or control of U.S. persons in which the designated entities or individuals have an interest.” Moreover, U.S. persons are generally prohibited from engaging in transactions with them.  On the other hand,  maybe the administration thinks that such designations have a symbolic or ratcheting effect, or maybe they know something that we don’t.

Whether these sanctions work politically is much more difficult to gauge, but it is clear that they will only work of multilateral and bilateral negotiations resume and the Iranians agree to curtail their enrichment activities. Last week, Iran’s foreign minister said Tehran would respond positively to direct talks with the United States as well as the resumption of the stalled multilateral talks scheduled to resume at the end of the month in Kazakhstan.

But the foreign ministry hardly makes policy, and on Friday none other than supreme leader Ayatollah Ali Khameni denied any interest in bilateral talks, saying “The U.S. is pointing a gun at Iran and wants us to talk to them. The Iranian nation will not be intimidated by these actions.” The Iranian and North Korean cases both reveal the ongoing conundrum of sanctions: how to calibrate defensive sanctions, tactical sanctions, and adequate engagement to assure some forward momentum. At present, both fronts are stalled.

The outcome may hinge on how the Iranian economy adapts to shortage, both economically and politically. An academic brawl on that topic can be found in exchanges between CATO’s Steve Hanke—who claims to have detected evidence of hyperinflation by looking at black market exchange rate data—and the University of Virginia’s Djavad Salehi-Isfahani, who believes the effects are much more modest. But even if the effects have been grave—which we are inclined to believe—the regime may simply impose the costs on the poor—who suffer most from inflation; the North Koreans are past masters at that game.