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Case Studies in Sanctions and Terrorism

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Case 84-1
US v. Iran (1984–: Terrorism, Proliferation)

| Chronology of Key Events | Goals of Sender Country | Response to Target Country |
Attitude of Other Countries | Legal Notes | Economic Impact | Assessment |
Author's Summary | Bibliography |

Economic Impact

Observed Economic Statistics

"According to the General Accounting Office, during the period January 25, 1985, to January 20, 1986, requests were denied for $25 million worth of export licenses for Iran." that figure rose to $132 million in 1989. (CRS 101; US Department of Commerce 19)

Commerce Department analyst estimates that exemption from import ban allowing entry of Iranian oil refined in third country could permit as much as $50 million a year in Iranian oil products to enter US market. Between January, August 1987, US imports from Iran total $1.6 billion, with crude oil making up all but small part. (International Trade Reporter, 11 November 1987, 1388)

Daily US purchases of Iranian oil before US trade ban (1994): Exxon: 200,000–300,000; Coastal: 130,000; Mobil: 40,000–50,000; Caltex: 60,000. US company purchases account for around 25 percent of total Iranian oil exports. (Washington Post, 18 February 1995, A6)

After the announcement of the US trade ban in March 1995, the Iranian rial starts to slide on fears that other countries might join the ban. Iranians begin to buy dollars and gold; some even sell their homes for dollars to protect the value of their assets. The free market price of the currency drops from 2,500 rials/dollar to more than 7,000 rials/dollar. The government steps in and sets a fixed rate of 3,000 rials/dollar until the end of March 1996. (Financial Times, 24 May 1995, 7; Journal of Commerce, 13 June 1995, 1A)

The average unofficial exchange rate, which dropped from an average of IR 2,400: $1 in 1994 to IR 4,000:$1 in 1995 and IR 4,500:$1 in 1996, is likely to continue weakening, but at a slower pace. (EIU Country Report, Iran, 2nd quarter 1997, 18)

"At the current artificial level, with only 3,000 rials to the dollar instead of 6,000, it is unattractive to export, and so non-oil exports have fallen by one billion dollars a year, or one-fourth, from their pre-sanctions trend. That only makes the foreign exchange shortage worse, and compels Tehran to impose more and more controls in a spiral downwards into a distorted and inefficient economy." (Clawson 1997, 17)

"Replacing imports from the United States (including crucial oil-drilling and other equipment) has had to be done at higher prices, or with less desirable substitutes, in third-market parties. And renovating the aging, American-based, oil infrastructure has been expensive. The ambitious post 1989 defense build-up has been cut back, and arms purchases from abroad have been curtailed." (Amuzegar 1997a, 193)

Among other reasons, "US sanctions have been ineffective" because "they have not been airtight. Companies and contractors from other Western countries have served as proxies for US subsidiaries abroad. Shops in Iran are stocked with American goods of every description—many smuggled in, but others imported legally through neighboring countries. Some Iranian exports also have found their way into the American market through third parties and legal loopholes." (Amuzegar 1997b, 37)

"At the time the US embargo took effect, US companies had received nearly $200 million worth of orders for oil equipment from Iranian oil companies—these orders can no longer be filled because of the embargo. The embargo is also expected to hurt US corn and rice growers. US exports to Iran were expected to reach almost 750,000 tons during the same year. In 1993, US exports of rice to Iran (which totaled nearly $60 million) represented over 8 percent of total US rice exports that year. In 1992, US exports of oil and gas equipment to Iran (which totaled $123 million) represented over 3 percent of total US oil and gas equipment exports for the year." (Bureau of Export Administration Annual Report for Fiscal Year 1997, III-23)

"After experiencing slowed economic activity in 1993 and 1994, the Iranian economy showed improved economic performance in 1995 and 1996, despite the imposition of unilateral US sanctions. In both 1995 and 1996, Iran's GDP grew at annual averages of slightly above 4 percent. The bulk of increased economic activity was in the manufacturing sector, which expanded by more than 5 percent in 1996… Oil export revenues currently comprise about 80 percent of Iran's total export earnings, the balance coming from sales of carpets (40% of non-oil export revenues), chemicals, pistachios, and metals. Though non-oil exports have been hurt by an overvalued rial, higher world oil prices in 1996 led to estimated oil export revenues of $18 billion. This contributed to a widening of Iran's trade [surplus], which was estimated at $8 billion in 1996. In an effort to improve its trade balance and raise the foreign exchange reserves necessary to service its foreign debt, Iran has continued to cut its imports from traditional European trading partners." (US Department of Energy, Energy Information Administration, Iran Country Analysis Brief, 1997)

"Iran is OPEC's second largest oil producer, with an estimated 1996 oil output of 3.76 million b/d, of which 3.65 b/d is crude oil. Since 1993, Iran has remained relatively close to its OPEC crude quota of 3.6 million b/d… Iran currently exports about 2.5 million b/d… the imposition of US sanctions in May 1995 resulted in a temporary alteration in the way in which NIOC (National Iranian Oil Company) sells its crude oil exports… Iran was faced with the necessity of selling roughly 650,000 b/d that usually went to US buyers. While term customers where found shortly thereafter for about 2/3 of that amount, roughly 200,000 b/d had to be sold on spot markets in mid-1995. Subsequently, US purchasers have been replaced by term customers from a number of countries, including those in Italy, Spain, South Africa, Bulgaria, and Poland." (US Department of Energy, Energy Information Administration, Iran Country Analysis Brief, 1997)

"Iran was able to clear up much of its overdue foreign debt last year because of a sharp rise in oil prices and the huge increase in the purchasing power of the dollar… [However], the threat of US retaliation and the desire to stay in the good graces of the United States have discouraged some major potential investments in Iran… Australia's giant Broken Hill industrial conglomerate canceled a pipeline project. A Japanese construction firm, JGC, backed out of onshore gas projects because it could not obtain financing for projects in Iran. And some foreign oil companies have reportedly backed off after considering investments in Iran." (Washington Post, 3 March 1997, A8)

The latest EIU [Economist Intelligence Unit] estimates that there has been a steep 24 percent drop in per capita GDP in dollar terms from 1993 to 1997, although the picture is clouded by high inflation and Iran's deplorable reliance on multiple exchange rates… There are also signs of progress despite Iran's problems. Inflation fell to around 30 percent last year from 50 percent in 1995 and is expected to drop to 25 percent this year. (Journal of Commerce, 20 May 1997, 3A)

After the imposition of US sanctions it was widely surmised that Iran's future financial resources would be severely restricted, not only by limited access to foreign investment, but by the massive foreign debt that was accumulated during the country's rebuilding activities in the early 1990s. Since June 1995, however, Iran has acquired $5 billion in medium-term credits from European countries (primarily Germany) that have been used to finance dozens of new infrastructure projects. In late 1996, Iran had rescheduled $10 billion of its $20 billion foreign debt. This rescheduling has greatly eased Iran's repayment schedule, which up until last year was estimated at $4 billion per year. (US Department of Energy, Energy Information Administration, Iran Country Analysis Brief, 1997)

Iran: trade with the United States, 1983–2004 (millions of dollars)

	Exports			Imports
Year	Total	Oil1
1983	1,167	1,098		190
1984	730	629		162
1985	762	640		74
1986	612	505		34
1987	1,752	1,612		54
1988	9	–		73
1989	9	–		60
1990	7	–		166
1991	260	257		527
1992	0.8	–		748
1993	0.2	–		616
1994	0.9	–		329
1995	0.2	–		277
1996	–	–		0.3
1997	0.1	–		1
1998	–	–		–
1999	2	–		48
2000	175	30		17
2001	149	–		8
2002	163	–		27
2003	167	–		99
2004	156	–		85

Source: Comtrade.
¹ SITC Rev.2, code 33.

Iran: Petroleum exports and revenues, 1983–2005

	Crude oil exports (1000 barrels per day)		Value of petroleum exports (millions of dollars)		Iran light crude (spot price per barrel in dollars)		Iran heavy crude (spot price per barrel in dollars)
1983	1,719		20,273		28.15		27.22
1984	1,522		15,713		26.81		26.18
1985	1,568		13,012		26.03		25.56
1986	1,454		5,900		13.50		13.04
1987	1,710		9,400		17.03		16.57
1988	1,696		8,419		13.26		12.85
1989	2,120		11315		16.04		15.54
1990	2,220		16,831		20.64		19.91
1991	2,420		15,276		17.34		16.33
1992	2,528		15,184		17.77		16.72
1993	2,600		12,773		15.06		14.08
1994	2,650		13,576		14.84		14.56
1995	2,621		14,973		16.17		16.26
1996	2,630		19,441		19.03		18.49
1997	2,587		15,553		18.24		18.00
1998	2,512		10,048		11.97		11.45
1999	2,291		16,098		17.25		16.93
2000	2,492		25,443		26.75		26.02
2001	2,185		21,420		22.90		21.67
2002	2,094		19,219		23.52		23.09
2003	2,396		26,124		26.89		26.33
2004	2,684		34,289		34.60		33.06
2005a	2,700		46,600		50.66		48.32

Source: OPEC.
^a Source: Energy Information Administration.

Calculated Economic Impact

Phase I, 1984–2005:
Impact of oil import embargo; welfare loss estimated at 10 percent of annual average sales to US in 1983–87 (given availability of other markets)	$90 million
Reduction in high technology exports; welfare loss estimated 30 percent of value of licenses denied	$40 million
Phase II, 1995–2005:
Ban on US company-mediated indirect oil exports from Iran; welfare loss estimated at 10 percent of annual average sales to all markets 1995–99 (given availability of markets and transaction costs of breaking into them)	$380 million
US export embargo; welfare loss estimated at 20 percent of average annual US exports in 1990–94	$100 million
US investment ban and impact of threat from US secondary sanctions on foreign investors; welfare loss estimated at 5 percent of potential investment of about $7 billion/year (or about $70 billion over a period of 10 years)	$350 million
Phase I, 1984–2005:	$130 million
Phase II, 1995–2005:	$830 million
Average annual total	$545 million

Relative Magnitudes

Gross indicators of Iranian economy
	Iranian GNP (1984) Iranian population (1984) Iranian GNP (1993) Iranian population (1993)	$151 billion 46 million $115 billion 64 million
Annual effect of sanctions on gross indicators (1984-base)
	Percentage of GNP	Negl.
	Per capita	$ 2.83
Annual effect of sanctions on gross indicators (1993-base)
	Percentage of GNP	0.7
	Per capita	$11.72
Iranian trade with the US as a percentage of total trade
	Exports (1984)	5
	Imports (1984)	1
	Exports (1993)	0
	Imports (1993)	7
1984 Ratio of US GNP (US GNP: $3,774 billion) to Iranian GNP		25
1993 Ratio of US GNP (US GNP: $6,288 billion) to Iranian GNP		55

Source: OECD, Geographical Distribution of Financial Flows to Aid Recipients, 1997; IMF, Direction of Trade Statistics, various issues.

 

Assessment

Business Week
"Polhill's release was engineered by Iranian President Hashemi Rafsanjani…[who] knows that he cannot fulfill his mandate of reviving the war-ravaged Iranian economy without Western help. He also needs allies to help hammer out a peace settlement with heavily armed Iraq." (Business Week, 7 May 1990, 49)

Washington Post
"Rafsanjani reportedly has decided that freeing the hostages is necessary before he can overcome his economic estrangement from the West, which has been a major obstacle to rebuilding Iran's war-ravaged economy." (Washington Post, 1 May 1990, A1)

Charles Lane
"With European and Japanese cooperation in Clinton's new embargo, the Iranian economy might well have been fatally crippled. But without it, the chief result of tighter US trade restrictions will be to surrender business to American companies' European and Asian competitors. American policy, then, while morally unassailable, seems practically problematic ... If the stick of American sanctions were to be wielded in clever alternation with the carrot of European trade, both instruments might be more effective in inducing changes in Iran's behavior. As matters now stand, the Iranians are the ones exploiting the rifts among Western countries. A rethinking of tactics by Washington could help turn the tables." (Lane 88-89)

Jahangir Amuzegar, minister of finance in Iran's pre-1979 government
"Altogether, the first test of the sanctions effectiveness, i.e., hurting the intended target, indicates some positive results. But, the second test, namely, achieving states objectives, has so far been unsuccessful. There has been no notable change in the behavior of the Islamic Republic on any of the issues of major concern for the United States ... Washington may have made a point, but it has not reached its objectives." (Amuzegar 1997b, 194)

"The psychological effects of the sanctions have been mixed. There are signs that despite their defiance of the United States, President Hashemi Rafsanjani and his government are wary of the costs of American enmity. They prefer compromise to sanctions and abhor the sanctions even as they claim immunity to them ... On the other hand, US sanctions have created a siege mentality; the regime's remaining supporters have become determined to rely on their own resources and ingenuity. The determination to become self-sufficient in most of their needs heralded a shift to other sources of equipment for exporting oil and stronger ties with Asia, Africa, and Latin America." (Amuzegar 1997b, 34)

Rep. Lee H. Hamilton, (D-Indiana)
"Trade disputes over US sanctions could reduce, not increase, multilateral cooperation on Iran and Libya. Other governments are likely to conclude that cutting economic ties with Iran and Libya would mean capitulation to US pressure—a precedent they will not want to set." (International Economy, May/June 1997, 49)

Kenneth Katzman, Iran analyst, Congressional Research Service
"Terrorism is cheap. There's no way these sanctions will hurt Iran's finances enough to reduce its ability to sponsor terrorism." (The International Economy, May/June 1997, 47)

“Washington sought to expand international adherence to its embargo via diplomatic pressure, most notably through the 1996 Iran-Libya Sanctions Act. . . . Cooperation from Europe and Iran’s other trading partners proved elusive, however, severely undermining the US effort to economically isolate Iran. Approximately 85 percent of Iran’s foreign exchange derives from oil exports, and given the fungible nature of the oil market, US sanctions have had a negligible effect on Iran’s export revenues and a limited impact on its overall economic development. Meanwhile, the Islamic Republic embarked on a concerted international initiative which—while not mitigating its most problematic policies—substantially enhanced its diplomatic and financial relations with Europe, Japan, and the Arab states of the Persian Gulf.” (Maloney 2001)

“ILSA looks like an exhausted and toothless tiger…the litany of US unilateral sanctions on Iran has neither affected nor deterred European and Japanese investment in Iran’s energy sector. Instead, our unilateral sanctions have prevented US companies from pursuing lucrative business opportunities, thereby isolating only the United States. Attempting to add more teeth is not likely to yield additional leverage or to produce desired outcomes. One must therefore conclude that this legislation has outlived whatever usefulness it may once have had and that its continuation is more likely than not to have a net negative effect on US interests and policy goals.” (Eizenstat 2004)

President George W. Bush
“We’re relying upon others, because we’ve sanctioned ourselves out of influence with Iran.” (New York Times, 29 January 2005, 3)

“Iran’s nuclear policy is increasingly predicated on a mixture of ideological imperatives and nationalistic determinations that are largely immune to threats of sanctions or dangled rewards.” (Financial Times, 21 December 2005, 17)

Jon B. Wolfsthal, fellow, CSIS International Security Program
“The ability of the United States and its allies to gain support for tough action at the UN, however, is a major question. China imports a considerable percentage of oil from Iran, and its unlikely to support sanctions against Iran’s oil business. China, moreover, is largely opposed to UNSC intervention except in the most extreme cases. It is also not clear what possible UN actions might be effective in persuading Iran to reverse its recent actions. Domestic political considerations are a major factor in Iran’s decision to resume its nuclear activities. President Ahmadinejad has gained power on a nationalistic platform and increasingly vitriolic rhetoric, and Iran’s uranium enrichment efforts are increasingly case in terms of its national sovereignty and prestige.” (Wolfsthal 2006)

Author's Summary

Overall Assessment
Impairing Military Potential
Policy result, scaled from 1 (failed) to 4 (success)	2
Sanctions contribution, scaled from 1 (none) to 4 (significant)	2
Success score (policy result times sanctions contribution) scaled from 1 (outright failure) to 16 (significant success)	4
Political and economic variables
Companion policies: J (covert), Q (quasi-military), R (regular military)	Q
International cooperation with sender	2
International assistance to target A (if present)	—
Cooperating international organizations	—
Sanction period (years)	22+
Economic health and political stability of target, scaled from 1 (distressed) to 3 (strong)	2
Presanction relations between sender and target, scaled from 1 (antagonistic) to 3 (cordial)	1
Regime type of target, scaled from 1 (authoritarian) to 3 (democratic)	1
Type of sanction X (export), M (import), F (financial)	X,M,F
Cost to sender, scaled from 1 (net gain) to 4 (major loss)	3

Author's Comments

Sanctions contributed in the early 1990s to Iran’s willingness to release some hostages and to a less blatant use of terrorism. The Clinton administration’s flexible severity in administering ILSA also encouraged Khatami’s qualified verbal rapprochement with the US, but sanctions have not prompted Iran to renounce the use of terrorism or the acquisition of nuclear weapons.

Sanctions have not had more impact, in part, because the United States was unable to generate international support for its policy against Iran until 2005. First, and to put it bluntly, its allies do not put as high a priority on punishing Iran for its inflammatory policies as the United States does, nor do they have the same willingness to sacrifice short-run commercial profits to demonstrate outrage against Iranian practices. The G-7 countries do control the export to Iran of dual-use items, but continue to trade extensively with Iran and to extend substantial amounts of trade and development finance. A second and related problem involves other countries that are willing to supply Iran with arms and material and nuclear technologies. Black Knights like China and North Korea are even more driven by the profit-motive and concerns for oil security than the industrial economies of Europe and Japan. Russia continues to see Iran as a key both to its diplomacy in the Middle East and for future cooperation on the pricing and transportation of oil.

Bibliography

Amuzegar, Jahangir. 1997a. Adjusting to Sanctions. Foreign Affairs 76, no.3 (May/June): 31-41.

Amuzegar, Jahangir. 1997b. Iran’s Economy and the US Sanctions. Middle East Journal 51, no.2. (Spring): 185–99.

Banks, Arthur S., Alan J. Day, and Thomas C. Muller, ed. 1997. Political Handbook of the World. Binghamton, NY: CSA Publications.

Carter, Barry. 2002. Terrorism Supported by Rogue States: Some Foreign Policy Questions Created by Involving U.S. Courts. New England Law Review 36, no. 4: 932–42.

Clawson, Patrick. 1997. The Impact of US Sanctions on Iran. Paper prepared for the Council on Foreign Relations Economic Sanctions Study Group.

Clawson, Patrick. 1998. Iran. In Economic Sanctions and American Diplomacy, ed. Richard N. Haas. New York: Council on Foreign Relations.

CRS (Congressional Research Service, Library of Congress). 1988/1992. US Economic Sanctions Imposed Against Specific Foreign Countries 1979 through 1992. August 10 (revised). Washington.

Eizenstat, Stuart E. 2004. Do Economic Sanctions Work? Occasional Paper. The Atlantic Council, February.

The Jamestown Foundation. 2006. China Brief VI, no. 3 (1 February).

Katzman, Kenneth. 2006. Iran: US Concerns and Policy Responses. CRS Report for Congress. Washington: Congressional Research Service, Library of Congress.

Lane, Charles. 1995. Germany's New Ostpolitik. Foreign Affairs. 74, no. 6 (November/December): 77-89.

Maloney, Suzanne. 2001. American and Iran: From Containment to Coexistence. Brookings Policy Brief 87 (August). Washington: Brookings Institution.

President’s Export Council. 1997. Survey of US Unilateral Economic Sanctions. Washington.

Viorst, Milton. 1995. The Limits of the Revolution. Foreign Affairs 74, no. 6. (November/December): 63–76.

Wolfsthal, Jon B. 2006. Understanding Iran’s Nuclear Maneuvers. Washington: CSIS (12 January).

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