PIIE Blog | RealTime Economic Issues Watch
The Peterson Institute for International Economics is a private, nonprofit, nonpartisan
research institution devoted to the study of international economic policy. More › ›
Subscribe to RealTime Economic Issues Watch Search
RealTime Economic Issues Watch

Iran Revisited: Can Economic Sanctions Delay a Military Showdown?

by | October 10th, 2012 | 04:13 pm
|

Back in 1992, Congress enacted the Iraq-Iran Non-Proliferation Act—the first in a long parade of Congressional acts and Presidential executive orders designed to stop Iran’s nuclear ambitions. Reinforced by extensive cooperation from US allies, the most recent measure, the Threat Reduction Act of August 2012, has imposed crippling sanctions on Iran’s banking system and oil exports. Iran’s currency is plunging, inflation is soaring, and the Iranian people are miserable. This ranks among the sternest applications of economic pressure in the past hundred years, visibly exceeded only by sanctions during the two world wars and against Iraq.

From the beginning, US-led sanctions have struck Iran with two prongs: the first is aimed at Iran’s ability to build nuclear weapons; the second is aimed at leadership intentions. Contaminated materials, degraded centrifuges, faulty timers, and computer viruses are among the problems that have disrupted Iran’s nuclear program, widely attributed to sabotage supported by the United States, Israel, and perhaps others. Considering that Iran has talented engineers and scientists and ample cash to buy sensitive materials and recruit foreign technicians, the fact that Iran has now spent 20 years trying but not yet succeeding to join the nuclear club speaks to the success of the first prong. By contrast, India tested its first bomb after 12 years of concentrated effort.

These difficulties, combined with trade and financial sanctions, have yet to alter the intentions of the Iranian leadership, however. President Mahmoud Ahmadinejad’s bellicose rhetoric, stalled negotiations with the permanent five members of the United Nations Security Council plus Germany (the so-called P5+1), and the cat-and-mouse routine with the International Atomic Energy Agency (IAEA) all suggest that Iran remains dedicated to the nuclear goal. Despite extreme hardship, regime change through popular uprising seems highly unlikely. Iranian security forces are well-paid and well-trained, and they easily quelled student uprisings in 1999 and 2003, the election protests of 2009, and the most recent protests over shortages and rising prices caused by the sanctions. Other autocrats have forced their people to endure great economic hardships, yet the leaders, backed by secret police, still retain power—Cuba, North Korea, and Zimbabwe come to mind. In fact, as the sanctions noose tightened, so did the grip of the ruling dictators, thanks to their control over the necessities of daily life.

Change in Iran will probably not come from below, but it might come from above. Without some breakthrough in the nuclear standoff, Iran faces years of economic hardship, which could become more severe if the United States deploys cyber attacks against Iranian financial institutions. To be sure, Iran can gradually create clandestine routes for trade and finance, but the depth of misery—bad as it is now—can easily get worse. This prospect seems to be generating cracks in leadership circles. Supreme Leader Ali Khamenei and his fellow clerics might decide to jettison Ahmadinejad even ahead of elections scheduled for June 2013. Compared to Ahmadinejad, almost any political leader will seem reasonable, and a different president could paint a more acceptable (if still duplicitous) face on Iran’s ambitions. If a new approach were carried out with diplomatic skill, there might be pressure to peel away some of the sanctions, particularly those imposed by Asian importers of Iranian oil like China and India, who have for now agreed to cap their oil purchases to reinforce the Western boycott.

New Iranian leaders might pursue the business of building a bomb, but rely on foreign nuclear experts to check the design and forego an actual test. This is after all what Israel did (perhaps without the foreign expertise), and the Jerusalem approach—building but not testing—could be emulated by Tehran. Another possibility—more to US liking–would be some kind of arrangement to let Iran enrich uranium close to 20 percent, but with inspections in an effort to ensure that Iran is not taking the additional steps to make a weapon.

Where would that leave the United States, Israel, Saudi Arabia, and other deeply concerned countries? Conceivably the standoff scenario of the past decade might last for years: continued but less comprehensive sanctions, with neither rapprochement nor a military strike.