Actually, the Sanctions on Iran Aren't Working

How will hurting the country's economy achieve either a nuclear concession or the outbreak of democracy?

Iranian smugglers drive a boat loaded with sheep. (Ahmed Jadallah/Reuters)

There are two misconceptions about sanctions on Iran and the country's currency crisis: one, that sanctions are the only cause for the rial's free-fall in value last week. And two, that sanctions are achieving their strategic objectives.

The unprecedented fall in the value of the rial last week brought on another flood of accusations from within Iran that the West was waging economic warfare on Iran.

Speaking to reporters, Iranian President Mahmoud Ahmadinejad said that "currency fluctuations" were "due to psychological pressure" from outside. The Iranians were not alone in blaming sanctions for their troubles. The U.S. State Department pointed to the devaluation of the rial as proof that sanctions were working: "The currency is plummeting. And firms all over the world are refusing to do business with Iranian companies [...] this speaks to the unrelenting and increasingly successful international pressure that we are all bringing to bear on the Iranian economy."

Sanctions have certainly weakened the economy. They have cut off Iran's access to the international financial system, making it difficult for Iran to sell and receive payment for its oil. But the collapse of the rial is not as simple as that.

Iran's economy has been mismanaged for years. The only effort made to redress it -- the removal of the subsidy program in 2010 -- only worsened the situation by contributing to rising inflation and unemployment. As a result, the Iranian public appears to be having a crisis of confidence in the government's ability and will to tackle the country's economic problems. This is exacerbated by the fact that there seems to be no end in sight to Iran's problems. In fact, the United States and European Union are working on further measures to tighten the squeeze on Iran.

But what is the goal of sanctions? If the objective is to change the Iranian leadership's strategic decision to continue developing its nuclear program, then clearly, they have not worked. U.S. Secretary of State Hillary Clinton disagrees. In July she said, "We believe that the economic sanctions are bringing Iran to the table." The so-called "P5+1" have indeed been engaged in negotiations with Iran for most of 2012, but they have not led to anything concrete. Iran continues to make progress in 20 percent enrichment, producing approximately 14.8 kilograms a month.

While sanctions may not change the regime's intentions, they have been effective in curbing Iran's nuclear progress. Sanctions that target Iran's access to international financial services, transportation, and trade insurance are the best way to disrupt the illegal black market trade that Iran has turned to. For example, they have limited Iran's access to foreign parts and components necessary for the improvement of its centrifuges.

But today, sanctions are going beyond just slowing the Iranian nuclear program. They are affecting all segments of the Iranian population. Iran faces a dire fiscal situation, exacerbated by the massive devaluation of the rial. Although the government maintains that the official inflation rate is 25 percent, it has actually spiraled out of control, with some analysts claiming that actual figures are double the government rate. In addition, unemployment has soared, with estimates stating that between 500,000 and 800,000 Iranians have lost their jobs in the past year.

Businesses are closing up shop -- especially small and medium-sized companies that had already lost out following the removal of the subsidies in December 2010. Such businesses had been hit hard when consumers switched to buying foreign goods, which had not been affected by the rise in prices. "Business is drying up, industry is collapsing. There's zero investment," said an Iranian businessman in September.

Every sector of the Iranian economy has been affected. From the energy sector -- the main source of revenue for the government -- to staples such as foodstuffs, including relatively strong Iranian industries such as automotives. The biggest losers, however, are middle-class Iranians.

The entire population has suffered from the rise in prices, but the government has attempted to shield the lower classes by offering them cash handouts and subsidizing certain imported staple goods, making them relatively affordable for poorer segments of the population. But even these efforts have had a limited effect, as the price of goods such as Barbari bread went from 1,000 rials to 5,000 rials last week.

Importing specialized goods, an activity reserved to merchants, businessmen, and the middle classes, is considered a lower priority. The government maintains a less advantageous rial-to-dollar exchange rate, driving businessmen to the black market. The collapse of the currency then seals their fate. The middle class can no longer afford small luxuries like new electronic appliances, travelling abroad, or even paying for the education of their children abroad. International banking sanctions have also affected many Iranians who are unable to access their funds or are being forced to close their accounts. Surely affecting the middle class, the primary agents of social change, is contrary to the goal of encouraging democracy in Iran?

The way sanctions were discussed in the past made it sound like it was only about the nuclear program -- "squeezing" the Iranian Revolutionary Guards and the government to make them change their strategic calculation. They were called "smart sanctions" and were targeted. But today, we've gone beyond that. Some U.S. officials are talking about regime change and punishing Iranians for their government's choices. In the words of a sanctions proponent: "Critics...argued that these measures will hurt the Iranian people. Quite frankly, we need to do just that."

Sanctions have a habit of polarizing the population: those who support the government blame foreigners for their worsening economic situation, and those who do not, blame their government. But only up to a point. The most dire economic situation will eventually turn those most loyal to the regime against them. It seems that with the latest round of sanctions and those being currently negotiated we are reaching this point. Is the goal now to push a nation of 75 million people to starvation and poverty to encourage regime change?

This post appears courtesy of Radio Free Europe/Radio Liberty.