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Avoiding the Iran sanctions quagmire - Why the US should not repeat sanctioning Iran

In its limited tools of diplomatic armoury, when pitted against an obstinate and perceived rogue regime, the US has resorted to either coercive regime changes or economic sanctions.

Avijit Goel        Last Updated: January 11, 2016  | 16:14 IST

Avijit Goel
'All power is, at the end of the day, economic'. US foreign policy has for the past few decades rallied around this central theme.

In its limited tools of diplomatic armoury, when pitted against an obstinate and perceived rogue regime, the US has resorted to either coercive regime changes or economic sanctions.

In its experiences with Iraq, Myanmar and Iran, which have seen either of the tools in application, one question is answered for the 22nd century - coercive regime changes do not produce the desired results.

The learning post Iraq can be largely summarised in one statement: Threat becomes related to the perceived character of the regime. Changing the behaviour of regimes over changing the regime itself is a more mature and risk-free alternative.

The second, larger and more pertinent, question lingers: Do economic sanctions work?

One of the most definitive studies on the effectiveness of sanctions, covering the period from 1915 to 2006, has shown that comprehensive sanctions are effective at best 30 per cent of the time, and that the more comprehensive the level of sanctions, the lesser their degree of success.

Russia, Zimbabwe and Iraq are just a few examples of how US sanctions have never yielded any of the desired results.

By the sheer law of unintended consequences, although the desired impact of sanctions is to impact the elite and the ruling class, the results might be paradoxical. For example, Putin's popularity, post sanctions, has been rarely as high as it is today.

Rhodesia (current day Zimbabwe) had Ian Smith removed from power, largely due to the economic sanctions, but his long-term replacement, Robert Mugabe, plunged the country into chaos and economic uncertainty again.

About a quarter million children lost their lives to disease and malnutrition in Iraq when sanctions were imposed.

Now, let's consider the Iran sanctions. Using the leverage it has on the global financial system, into which it is so deeply integrated, the US imposed draconian sanctions against Iran, and played a major role in convincing the EU to launch its own set of unilateral sanctions.

There was complete global financial exclusion of Iran (financial institutions were told to choose between severing all links with Iran or face exclusion from the US banking system). In 2012, Iran was excluded from the SWIFT system of cheque clearing, thereby effectively rendering all global business near to impossible from Iranian soil.

No doubt that the average Iranian was hit by severe inflation, lack of business opportunity and economic hardship, but the intended effect of Iran halting its nuclear programme or that of regime change did not materialise.

What it created in turn was a certain road to self sufficiency for Iran. Spend one day in Tehran and you would see how the Iranians have created their own ecosystem of necessities. From their domestic brands in foods to their own airline manufacturing facilities, though imperfect, they have found solutions.

The grey market is flooded with European brands and knock-offs at exorbitant rates. China is their largest trading partner and Chinese, Turkish and Egyptian products are also widely available.

The current agreement of easing of sanctions against Iran and the ending of its stature as a global pariah has its roots in the will of Obama and the efforts of the P5+1. The P5+1 (US, China, France, Russia, UK and Germany) is a group of six world powers, which since 2006, through diplomatic channels, have been jointly negotiating with Iran with regard to its nuclear programme.

This group finally brought about the JCPA (Joint Comprehensive Plan of Action) in Vienna in June 2015, which is the final agreement on Iran's halting of its nuclear programme in return for global easing of sanctions.

In US diplomatic circles, the deal struck in Vienna is certainly not perfect. They believe that Iran's implementation of the deal is not likely to be perfect, either. A recent development saw Iran test two missiles (without nuclear capability) in December 2015, much to the chagrin of the US.

But the US now needs to consider whether it should confront perceived Iranian transgressions through re-imposition of sanctions and foiling of the agreement.

It is interesting thinking about what the consequences of a foiled agreement would be. The rest of the partners in the P5+1, now at the edge of their patience in US-Iran relations, might behave very differently with Iran than what the US expects. There might not be a continuation of the multi-lateral sanctions regime against Iran. US might have to go it alone.

Broadly, a foiled agreement might distance the US from the P5+1 and get them to rally around Iran after more than a decade when the reverse was the case. Also, it might jeopardise any future negotiating effort between the US and Iran.

The biggest risk for the US, however, is its own status in the global financial system, which it has lorded over. The US is so deeply entrenched into the financial system that it can touch almost all international financial entities. For example, even the soccer organisation FIFA faced the brunt of US attack on its corruption, not because bribes were offered on US soil, but because they passed through entities connected to US banks.

In case of return of the U.S sanctions on Iran, and little support for the same from the rest of the P5+1 powers, there would be an attempt to develop robust financial instruments that would be beyond US reach. The reason, of course, is that sovereign states agree to abide by international agreements, not by the political vicissitudes of the US in an election year.

One can already see the creation and development of institutions and a financial structure that would be apart from and protected from US scrutiny. The US Treasury Department would have nil influence on these institutions. The New Development Bank (previously the BRICS Development Bank), China-India-Russia's new Asian Infrastructure Investment Bank, and other institutions could be part of the financial ecosystem that Iran could rely on, and states with energy interests in Iran could be financial allies in this parallel system.

This arrangement and establishment of a financial system, which a US sanctioned Iran could access at a later date, defeats the very purpose of any economic arm-twisting by the US.

The nuclear deal signed in June 2015, with its perceived imperfections, would have the US and Iran on standoffs multiple times in the near future. It might be compounded by acts or posturing of Iran against US allies in the Middle East, and the US not taking Iran missile testing in course of the agreement too kindly.

Given the internal dynamics of Iran, it would be important for President Hassan Rouhani to be seen (and posturing) as not compromising the security interests of Iran and its right to defend in return for sanction relaxation.

It would behove the US strategy makers well to realise that economic sanctions again on Iran will have a self-defeating impact. It is critical for the US to play a very mature and enabling role in seeing the deal through, and not make a repeat of its past mistakes, in light of mild perceived violations and posturing by the Iranians.

The US will have to change its long-term policy on Iran from regime change and economic coercion to regime behaviour change and engagement.

It would do the US a world of good.

The author is Business Head-New Country Development at Marico Ltd. The views in the article are personal

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