The West in quandary over Iran sanctions

The United States and its allies are facing a difficult situation as they deal with Iran over its NUCLEAR PROGRAM. If UN sanctions are the solution to the nuclear stand-off, what economic levers could they use against a country that controls a significant share of the oil supply for Europe and Asia? It is a difficult question, but it becomes more complex in light of Iran’s unique political and economic situation, an article on the International Herald Tribune argues.

Although the United States, and the European Union succeeded in convincing permanent UN members, Russia and China, to refer Iran’s NUCLEAR dossier to the Security Council, sanctions remain a purely hypothetical topic. Moscow and Beijing may still veto any attempt by the Council to impose an economic embargo on Iran. Also the BUSH Administration and European officials said they don’t want to take steps towards the imposition of an oil embargo, or other trade sanctions that could affect Iran and the West at the same time.

The U.S. has already banned all commercial and financial transactions with the Islamic Republic. And analysts say there are very few areas where more punitive measures could be used.

Some experts say that comprehensive economic sanctions wouldn’t pressure Iran as the West wants, while others estimate that sanctions are likely to take weak forms such as travel bans and freezes on Iranian foreign assets.

One reason is that the Iranian government has discouraged the formation of an industrial middle class, says Abbas Milani, director of the Iranian studies program at Stanford University. This would mean that the government holds 80 percent of the economy. As a result, there is no strong cadre of business leaders to pressure the government.

Another reason is the difficulty of sanctions’ enforcement. "Sanctions are very, very porous," said Hussein Askari, who holds the Iran professorship of international business at George Washington University. "In the case of Iran, both because of where it is situated and where it can get things from, it can get what it wants."

Even stopping the flow of high-technology goods mostly made in the United States and Europe could be difficult, said Ali Fatemi, dean of the graduate school of business at the American University of Paris. "The only thing that it could do in most cases is it could raise the price," he said, "because there are so many loopholes, as we've seen in IRAQ."

One acute move that could really hurt Iran’s economic growth is preventing it from developing its natural gas industry. The Islamic Republic has the world’s second-largest gas reserves but has yet to become a net exporter of the commodity. "They know they're sitting on a ton of gas and they're dying to develop it," said Cliff Kupchan, an Iran analyst at Eurasia Group who was in the U.S. State Department. "They can't do it by themselves, and sanctions that prevent them from doing it would hurt Iran."

However, such sanctions might be counterproductive because they will provoke Iran to turn off its oil taps, says Paul Stevens, a professor of petroleum policy at the University of Dundee who helped Iran to unravel its international legal claims after the 1979 Islamic revolution. "They're quite capable of doing so," he said. "Cutting off noses to spite faces is something that comes to mind."

Iran, OPEC's second biggest producer, has already threatened to withhold its oil if trade sanctions are levied against it. Earlier this week, Iran’s Economy Minister Davoud Danesh-Jafari warned that any sanctions from the West could, by disturbing Iran's political and economic situation, raise oil prices "beyond levels the West expects," Tehran Times reported.

This warning, beside the threat of an oil embargo, have already helped drive the price of crude toward $70 per barrel in the past week. Indeed, oil is the main focus of any talk of sanctions, as it was in IRAQ’s case under SADDAM HUSEEIN. But several experts caution against trying an IRAQ-style embargo on Iran. "If Iran was not allowed to export its oil, probably the price of oil in today's dollars would go over $100 a barrel," Hussein Askari said.

Fathi Hamed Ben Shatwan, the Libyan oil minister who was meeting counterparts from OPEC, also warned today that referring Tehran to the UN would cause a surge in oil prices. "Everybody frightened that something will happen. We’re going to meet and watch the market," he said.

A high oil price would affect consumers all over the world, but particularly hurt Iran's major markets, which include China and Japan, said Milani of Stanford University.

But another expert says that EU countries are also “afraid of a boycott of oil.” Some in Europe fear they would be "cutting their own throats" if a sanctions regime include a ban on Iranian oil imports, says Stuart Eizenstat, who helped negotiate sanctions against Iran after the 1979 hostage crisis.