No compromise as sanctions bite in Iran

The Financial Times

Iran billed it as a victory of "self-sufficiency" over dependence. But when the government in Tehran decided this month to convert petrochemical plants to boost domestic production of petrol, it delivered a small victory to the US. It was, after all, admitting that American unilateral sanctions were striking hard.

Although the sanctions against Iran - some of them imposed by the UN and others by the US and the European Union alone - have been building up for years, it is only in recent months that their impact has become most pronounced.

To the delight of the US Treasury, the most potent tool has been the financial restrictions that discourage business with Iran. These sanctions were reinforced by extraterritorial measures approved by Congress in June, which warned banks that dealing with blacklisted Iranian firms would lead to their being shut out of the US financial system and threatened penalties against companies that sold refined petroleum products to the Islamic republic.

As traders have curbed supplies of petrol - Iran depends on imports for about a third of its domestic needs - Tehran has been forced to activate an emergency plan to raise domestic production.

The number of companies and financial institutions cutting ties to Tehran has accelerated. In South Korea, Kia Motors has ended exports to Iran. Even in Turkey, where the government is keen on promoting trade with Iran, bankers are nervous, and those with international ties are unwilling to jeopardise their links with the US by dealing with Iranian counterparts.

Most worrying for the Islamic Republic's leaders, the drying-up of financing threatens to cut into crude oil sales as Middle Eastern and European banks stop issuing letters of credits and insurers shy away from covering cargoes.

The Obama administration can take satisfaction: the sanctions are raising pressure on the government of Mahmoud Ahmadi-Nejad, the president, and exacerbating infighting within the regime.

Hated by a reformist opposition that accuses him of stealing last year's presidential election, Mr Ahmadi-Nejad's every move also draws ire from politicians in his own fundamentalist camp, prompting the supreme leader, Ayatollah Ali Khamenei, to intervene in government decisions more often than in the past.

But is this leading Iran to bow to international demands and curb its nuclear programme? Not so far. According to the latest report by the International Atomic Energy Agency, the UN watchdog, Iran is adding to its stockpile of low-enriched uranium, which, if enriched at much higher levels, could be used for atomic weapons. Iran's co-operation with the IAEA, moreover, has become more restrictive, making it harder for outsiders to monitor its nuclear progress.

The sanctions could be a double-edged sword, hurting many unintended victims. Although designed to be "smart" and "targeted" on the regime, they are inflicting harm on the business community and the middle class, groups segments of society that despise Mr Ahmadi-Nejad.

The harder the sanctions strike, the wider the damage will be. With oil prices at $75 per barrel, the regime still has the financial means to circumvent sanctions for its illicit procurement as it redirects trade towards still sympathetic countries, such as China and Russia.

The cost of financing and transport for businessmen, however, is rising and could soon become prohibitive. Some industries are said to be facing shortages of petrol, as the government restricts supplies to businesses to spare consumers.

"The US sanctions have deliberately been crippling in all but name," says Trita Parsi, president of the National Iranian American Council. "The absence of a deliberate effort to spare the ordinary population from hardships can become problematic for the US."

In any case, it is not the disgruntlement of Iranians, that will compel the regime to change course, whether people blame the US or the Iranian leadership for the hardship. Karim Sadjadpour, of the Washington-based Carnegie Endowment for International Peace, says Iran's rulers are willing to subject the population to severe economic consequences rather than compromise on their ideological and political aims.

"What may force them to compromise is a steep contraction of oil prices for a sustained period. But when oil is over $50 barrel they feel they can weather the sanctions storm," he says.