Analysis: Iran sanctions push is test for West diplomacy

LONDON/WASHINGTON Thu Jan 5, 2012 10:13am EST

Iranian protesters shout slogans as one of the protesters climbs over the gate of the British embassy in Tehran November 29, 2011. REUTERS/Raheb Homavandi

Iranian protesters shout slogans as one of the protesters climbs over the gate of the British embassy in Tehran November 29, 2011.

Credit: Reuters/Raheb Homavandi

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LONDON/WASHINGTON (Reuters) - A plunging rial. A ransacked embassy. A flurry of war games.

Evidence abounds of the unprecedented pressure on Iran wrought by a sharp escalation in sanctions intended to compel the Islamic Republic to rein in its nuclear program.

Whether the measures translate into real leverage or simply entrench Iranian defiance is another question, and rising Gulf tension suggests any Western cheers would be premature.

Some sanctions experts argue that, paradoxically, growing evidence of the restrictions' impact may complicate the diplomacy that will eventually be needed to resolve the West's long-running standoff with Tehran.

Following years of patient statecraft, the tightened curbs represent a step-change in efforts by Western governments to hold back activities they suspect are aimed at building an atomic bomb. Iran insists its work is strictly non-military.

In large part, the curbs' new clout stems from a U.S. measure signed into law on December 31 in effect targeting Iran's central bank, the OPEC member state's payment conduit for its lifeline oil exports.

On Wednesday European Union diplomats said European governments had agreed in principle to ban imports of Iranian oil, further raising pressure on the world's Number 5 crude exporter.

The resort to heavier coercion must be balanced by a corresponding increase in diplomatic attention so as to avert deeper Iranian inflexibility and exploit any new openings the sanctions might deliver, some sanctions skeptics say.

WAR THROUGH MISCALCULATION?

Yet to some, it's not clear whether the West will be as adroit in engaging with Iran as it has been in sanctioning it.

"The West needs a flexible and imaginative approach to enable the Iranians eventually to climb down," Richard Dalton, Britain's ambassador to Tehran from 2002 to 2006, told Reuters.

Dalton fears Washington could stumble into a war with Iran through mischance or miscalculation by either side, as tension rises.

George Lopez, a political scientist at the University of Notre Dame, Indiana, who has long monitored sanctions policy against Iran, North Korea and Iraq, said Obama's targeting of the central bank was a turning point in which Tehran in effect was now being treated as "an outcast regime."

"The U.S. is moving from essentially non-proliferation sanctions to condemnation of the system," he told Reuters.

Lopez added the onus was going to be on the Obama administration to reemphasize the possibility of the diplomatic track and the goal of denuclearization rather than regime change.

"Here's the danger: sanctions are meant to be a tool to accomplish a set of policy outcomes. But within the U.S. we have diverse constituencies which disagree about what they want the outcome to actually be," Lopez said.

He said many in the U.S. Congress wanted to go further than stated U.S. policy and actually bring down Tehran's rulers.

"If we allow the kind of macho-ism with the military in the Gulf to get in the way here we may miss the diplomatic leverage that the sanctions finally are dealing."

"We have to be ready for astute diplomacy when the other guy cries uncle (concedes defeat)..otherwise they are going to learn to live with an even higher level pain."

AGGRESSIVE WARNING

Iran's war of words with the West show that that pain is real, but they also suggest that for now the new curbs have helped hardliners deepen a refusal to review their nuclear work.

Along with the fiery rhetoric, Iran has also sent out more conciliatory signals: inviting senior U.N. nuclear inspectors to visit and suggesting a resumption of long-stalled talks with the six big powers involved in the crisis - the United States, Russia, France, Germany, China and Britain.

But Matthew Levitt, a former deputy assistant secretary for intelligence and analysis at the Department of the Treasury, told Reuters the overture on talks was "how Iran buys time. I think it is a sign the pressure is working but not so much that this is changing their calculus that now they want to talk. "

"Whenever they are under pressure they want to put out feelers try to alleviate the pressure. That's all there is."

Whether or not Iran is sincere in calling for contacts, the mood among the officials who devise sanctions is clearly upbeat.

That hopefulness stems from the broadening of international support for, and compliance with, such measures, according to a December 2, 2011 report from the US Congressional Research Service.

The report's author, Kenneth Katzman, told Reuters "a lot more" sanctions pressure could be brought to bear, targeting the vulnerability that arose from Iran's large international trade.

"Iranians, especially the middle class, demand and expect a certain level of goods, including luxury items, in their shops," said Katzman, adding Iranians were quite prepared to communicate their displeasure to the authorities if such supplies dwindled.

"The merchant class is highly influential and is concerned about the course of events. It's putting pressure on the leadership to resolve the issue. Don't forget that (Supreme Leader Ayatollah Ali) Khamenei himself has always been close to that class."

A SHIFT TO BARTER

He said some of Iran's multibillion dollar trade with China was now being done on the basis of barter "because targeted financial measures mean that barter is the preferred solution."

Levitt, now at the Washington Institute for Near East Policy, said pressure on Iran resulted from "the accumulative effect of smart sanctions" applied in previous years.

So-called smart sanctions, in which U.S. authorities placed financial curbs on individuals and entities deemed to have supported the nuclear program or been involved in terrorism, play to America's strength as the world's leading financial centre.

"We have had slow but steady increases in multilateral cooperation ... to the extent that that participation is broad, they are by definition more effective," he said.

Sanctions imposed since 2006 represent a marked improvement over the broad-based, country-wide sanctions levied against Iraq that President Saddam Hussein easily evaded and abused, Levitt wrote in a 2010 paper.

In a 2010 study of U.S. sanctions policy Brendan Taylor Of the Strategic and Defense Studies Centre at the Australian National University wrote that perhaps the greatest impact that sanctions had had on Iran was in terms of their capacity to engender a sense of economic and diplomatic isolation.

The curbs were "arguably more psychological than material."

In March 2008, for example, the U.N. Security Council passed resolution 1803 which added very little to the existing sanctions regime, he argued in "Sanctions as Grand Strategy."

But the fact that this was almost unanimous (Indonesia abstained) and involved governments such as China and Russia with traditionally close ties to Iran was widely seen as imposing psychological costs upon Iran.

The latest raft of sanctions, if fully applied, would reach much further because they would directly curb oil earnings.

They represent the latest example of the United States using unilateral sanctions as a rallying point around which to build international support for its use of economic leverage on Iran.

For example, Taylor writes, Bank Saderat, initially the target of U.S. financial sanctions in Sept 2006, was subsequently identified in March 2008 as a target for U.N. sanctions in U.N. Security Council Resolution 1803.

Likewise resolution 1803 also listed Bank Melli, which was subjected to U.S. financial restrictions in October 2007.

But as the pressure mounts, so do the risks, as Britain discovered in November.

Britain imposed new financial sanctions on Iran on November 21, ordering all UK financial institutions to stop doing business with their Iranian counterparts and with the central bank of Iran.

On November 28 Iran's parliament passed a bill obliging the government to downgrade Britain's diplomatic status and expel its ambassador in reprisal for the fresh sanctions. Two days after that hardline youths ransacked Britain's embassy.

On December 27, three weeks after EU foreign ministers decided to tighten sanctions, Iran threatened to stop the flow of oil through the Strait of Hormuz if foreign sanctions were imposed on its crude oil exports.

In additional signs of displeasure Iran tested long-range missiles and staged 10 days of naval exercises in the Gulf.

Iran expert Farhang Jahanpour, an Associate Fellow at the Faculty of Oriental Studies at Oxford, said such incidents suggested that fresh sanctions were unlikely to change Iranian policy and could have unpredictable consequences.

"Iran has been under intense sanctions ever since the victory of the Islamic revolution, but they have made the regime and the people more belligerent, rather than more submissive. There is no reason to assume that the latest sanctions would have a different effect," he said.

"MAXIMUM PAIN"

Trita Parsi, an Iran expert and head of the National Iranian American Council, told Reuters: "The financial sanctions are having a significant bite on the Iranian economy, but there are no clear signs that the pain has translated into a change of policy in Tehran.

"On the contrary, the Iranians are escalating in turn. It's a negative sum game in which both sides are trying to inflict maximum pain on the other."

Some downplay the risks of a military conflagration.

Some like Kenneth Pollack, a former CIA and National Security Council analyst who now heads the Saban Center at the Brookings Institution in Washington, said he believed that Tehran was trying push back against what Iranians see as an undeclared war against the Islamic state by the United States and its allies, including Israel and Saudi Arabia.

But if Iran pushed too strongly, and actually translated its threats into action, the tactic would backfire, Pollack said.

"If they actually try to shut down the Strait of Hormuz, everybody in the world turns to the United States and says: 'These guys have gone too far. Re-open the Strait.' And the U.S. gets to blow up whatever the hell it wants to in Iran at that time," he said.

A U.S. official, speaking on condition of anonymity, said the view in Washington was that it was highly unlikely that Iran was trying to provoke an attack.

Rather, the threats were more likely designed for internal consumption or as a "poke in the eye" against the United States.

"It's certainly not in Iran's self-interest to close the Strait of Hormuz. They understand the consequences," the official said.

(Additional reporting by Phil Stewart in Washington, editing by Janet McBride)

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