US Diplomacy toward Iran: Economic Sanctions as a Diplomatic Tool

Hiroki Sugita
Columnist, Kyodo News

1. US-Iran Relations and the History of Economic Sanctions

The mainstay of US policy toward Iran is economic sanctions --- especially financial sanctions that have been intensively implemented since the turn of the century.

Generally speaking, economic sanctions fall into: (1) unilateral sanctions by a single state, (2) sanctions by a voluntary coalition recruiting like-minded countries, and (3) sanctions based on UN Security Council resolutions, widely supported by the international community.1

Of these three, sanctions based on UN Security Council resolutions are considered to be the most effective. UN Security Council sanction resolutions are obligatory for UN member states. Isolated under economic pressure from the entire international community, the target state would be obliged to raise the white flag sooner or later.

However, UN Security Council sanctions are mostly "diluted," because they are often influenced by the interests of the 15 member states of the UN Security Council. It is often the case that since time is needed for long discussions by the Council, sanctions fail to be effective because the target country or organization has already taken countermeasures such as concealing assets or resources.

Recently, the adoption of UN Security Council sanctions resolution has decreased due to the confrontation between the United States and China and Russia. The current situation is reminiscent of a reversion to the time of exchanges of vetoes between the United States and the Soviet Union during the Cold War.

Recognizing the limitations of the UN Security Council, the United States began after the turn of the century to make frequent use of unilateral sanctions. These are not trade sanctions to stop the traffic of goods, but rather financial sanctions to ban the settlement in US dollars and the use of the US financial system. The US financial sanctions, unilaterally imposed as they are, apply extraterritorially to foreign corporations. Since it is difficult for many countries to ignore them, they claim wider participation and eventually turn into international sanctions.

Since the "war against terrorism" became the top priority policy of the United States following the simultaneous terrorist attacks on the US mainland (9/11), financial sanctions that can apply unilaterally, quickly, and internationally have become a principal tool of US foreign policy.

Financial sanctions include (1) asset freeze, (2) suspension of investment, aid, and support from international organizations, and (3) exclusion from financial systems. Meanwhile, trade sanctions aim at stopping the traffic of goods, which, however, involves a vast number of manufacturers and all modes of transportation by land, sea, and air. Since the traffic of goods is hard to control, it is easy for a targeted party to evade trade sanctions.

A vast flow of international currencies such as the US dollar goes through financial institutions like banks, and the routes are limited. Monitoring is, therefore, easy by keeping a vigilant eye on banks. Because banking is a government-licensed business, banks readily accept government regulations.2

US financial sanctions provide severe penalties for their violators, who will be prohibited from using US dollars and excluded from the US financial system. Banks and other financial institutions that have helped violators will also be punished. Unable to use US dollars, the violator will be stripped of necessary means to continue business in the world. Therefore, the punishment for the violation of US financial sanctions is called a "death sentence."

The objectives of economic sanctions, including financial sanctions, are (1) classical economic sanctions to reduce the economic power of an "enemy state" in the event of international disputes and confrontation, (2) the prevention of the development and proliferation of nuclear weapons, (3) sanctions from the viewpoint of human rights and humanity such as those against the apartheid policy of South Africa, (4) counter-terrorism, and (5) punishment for the violation of international law like the annexation of Crimea by Russia.

2. Economic Sanctions Leading to the JCPOA Agreement

Historically, the United States and Iran maintained a good relationship in the past. During World War II, the United States supplied weapons and goods to the Soviet Union through Iran. After the war ended, the United States and Iran joined force in expelling the Soviet army that continued the post-war occupation of northern Iran. Thus a honeymoon period began between the two countries. Overthrowing the nationalist regime in 1953 that had achieved the nationalization of all Iranian oil fields, monarchical Iran emerged as a reliable anti-communist bulwark for the United States. After the United Kingdom decided to withdraw from the Middle East at the end of the 1960s, the United States instead came to govern the Persian Gulf region under "Twin Pillar policy" of using two oil-producing monarchies, Saudi Arabia and Iran, as local guardians of US interests in the region.

However, the US-Iran alliance crumbled with the outbreak of Iran's Islamic revolution in 1979 and turned into enmity. When Iranian students occupied the US embassy in Tehran and held 52 diplomats and personnel as hostages with the approval of the revolutionary leader Imam Khomeini, the United States changed its attitude toward the revolutionary government. Gasoline price hikes due to the Iranian revolution also infuriated Americans.

Thus US sanctions against Iran began. In 1995, the Clinton administration announced a "double containment strategy" to contain both Iran and Iraq, and banned all American corporations from doing business with Iran, condemning Iran's development of weapons of mass destruction and support for terrorism. The US Congress also enacted the Iran-Libya Sanctions Act in 1996 to impose sanctions on American and foreign companies making investments in Iran's oil development. Among the implications of the extraterritorial application of the law is the current suspension of businesses with Iran of Japanese and European corporations.

In August 2002, the Iranian dissident organization, the "National Council of Resistance of Iran" (NCRI), disclosed that Iran owned secret nuclear facilities without the mandatory notification to the IAEA. The disclosure increased the suspicion of the international community about Iran's continued development of nuclear weapons. The Bush administration that had already designated Iran as one of the "axes of evil" took up a hardline stance.

The United States adopted financial sanctions against Iran, judging that it would be most effective to stop crude oil exports of Iran, which accounted for half the country's national income. In the international market, crude oil is traded in US dollars. Therefore, as long as US dollar settlement for Iran-related transactions is unavailable, Iran cannot export its crude oil.3

In September 2006, the US Department of the Treasury decided not to allow non-Iranian banks US dollar settlement for transactions with Iran. While Iranian banks had had no access to the US financial system due to US financial sanctions, non-Iranian banks also came to be banned from conducting transactions with Iran in US dollars. As a result, the world has become no longer able to buy Iranian crude oil in US dollars. Settlement in Euro, British Pound, Japanese Yen, or RMB has less credibility than that in US dollars or is not necessarily available worldwide. In those days, the United States called on the Financial Action Task Force on Money Laundering (FATF) joined by the governments of developed countries to establish a system for monitoring remittances associated with Iran's money laundering, its proliferation of weapons of mass destruction, and support for terrorism. Furthermore, reportedly, the United States launched cyberattacks on Iran's uranium enrichment facilities and caused a one and a half to two year-delay in Iran's nuclear program.

President Obama, who took office in January 2009, was committed to creating an international system of financial sanctions against Iran. In June 2010, he succeeded in having the UN Security Council Resolution 1929 adopted, realizing the change from independent sanctions to a system of financial sanctions endorsed by the international community.

In January 2012, the United States designated the Central Bank of Iran as a "major money laundering concern" stipulated by Article 311 of the Patriot Act. It was the first case of application of the Article since the designation of Banco Delta Asia in September 2005, which had maintained business with North Korea. This measure almost ousted Iran from the international financial system.

Moreover, the Obama administration urged each country to make a binary choice "whether to take the United States or Iran." In August 2011, the European Union (EU) decided to suspend all crude oil imports from Iran. In October 2010, Japan also decided to withdraw from the development project of the "Azadegan oil field," one of the largest Middle Eastern oil fields in southwest Iran, and in 2012 reduced Iranian crude oil imports by 80% from the previous year. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) stopped accepting Iran-related money transfers.

As a result of these sanctions, Iran suffered a formidable loss of 40% of its revenue. The value of the Iranian currency, the rial, dropped by as much as 80%. Inflation increased due to a sharp decrease in imported goods. A certain poll survey found that 60% of Iranians answered that they would abandon their nuclear program if sanctions were lifted.

3. The JCPOA Agreement and US Breakaway

As the Iranian economy became exhausted, in the 2013 presidential election, the conservative moderate Hassan Rouhani won more than triple the number of votes earned by his runners-up. Rouhani immediately appointed dialogue-seeking Javad Zarif as foreign minister and entered into secret negotiations with the United States over nuclear issues.

In July 2015, just two years after the launch of the Rouhani administration, Iran concluded the Joint Comprehensive Plan of Action (JCPOA) with the United States, the United Kingdom, France, China, Russia, and Germany.

The signatories agreed to the following: the number of uranium enrichment centrifuges operated by Iran should decrease from 19,000 to 5,060; Iran's uranium enrichment level should be lowered to 3.67% so that low-enriched uranium is unsuitable for use in nuclear explosives; the storage of enriched uranium should be no more than 300 kilograms; Iran's heavy water reactors should be remodeled so that they cannot produce weapon-grade enriched uranium. The United Nations, the EU, and the United States jointly declared that they would lift multilateral and unilateral economic and financial sanctions imposed against Iran for its nuclear program. The UN Security Council also decided to lift sanctions related to Iran's nuclear program adopted by its resolution in July 2015.

The JCPOA was a landmark agreement between the United States and Iran, but there were still some remaining issues.

One of them is the question of how to address Iran's nuclear program after 2030. The JCPOA agreement stipulates that Iran's nuclear program should be subject to the above restrictions during the period from 10 to 15 years. In 2030, Iran will therefore be entitled to proceed with its nuclear program without interference. The JCPOA agreement is incapable of permanently restricting Iran's nuclear program.

Second, problems related to Iran are not only limited its nuclear program, but to its support for terrorism, its development of ballistic missiles and other weapons of mass destruction, and its support for multiple militia organizations in the Middle East. Sanctions imposed on Iran for its nuclear program were lifted under the JCPOA agreement, but the so-called non nuclear sanctions remained intact.

Iran hardliners in the United States did not support the JCPOA agreement that they considered to be too lenient. From the outset, the Obama administration estimated that Congress would not ratify the JCPOA agreement, and did not attempt to turn it into a treaty. Nations such as Israel and Saudi Arabia committed to the containment of Iran also opposed it. The fragile JCPOA failed to obtain expected support in the United States and abroad.

As soon as he took office as US president, Donald Trump demanded that other signatory countries rectify the above-noted flaws of the JCPOA. Iran fiercely protested, and President Trump finally declared US withdrawal from the agreement in May 2018.

On that occasion, the Trump administration presented twelve tough demands that Iran had to meet, including the permanent abandonment of the nuclear program, the abandonment of ballistic missile development, the release of detained Americans, the termination of support for Shiite militias, and the termination of threats against neighboring countries.4

The Trump administration has restored sanctions against Iran and called on all countries in the world to agree to zero imports of Iranian crude oil, especially from May 2019 onward. Hard pressed whether to take side with the United States or with Iran, European and Japanese corporations are reluctantly following the US request.

The Trump administration identified the Iranian Revolutionary Guard Corps (IRGC), an independent elite troop, as a terrorist organization, and placed financial sanctions targeting the Supreme Leader Khamenei (the head of state of Iran), and froze his assets. The Trump administration extended financial sanctions to Rouhani, Zarif, and the Central Bank of Iran.

Thus, Iran is now subject to relentless sanctions, from the head of state, military, government leaders to the top diplomat. The current comprehensive sanctions are comparable to those against Japan and Germany during World War II.

4. Mounting Tensions Pave the Way for a Possible Military Clash

Facing such comprehensive sanctions imposed by the United States, Iran assumed the strategy of increasing military tensions to upset the United States, and of capitalizing on President Trump's aversion to war to have the sanctions mitigated.

In June 2019, the IRGC shot down a US drone in the Persian Gulf. In retaliation, the United States prepared an airstrike on Iran's military installations, but President Trump ordered it cancelled ten minutes before the attack was to start.

On September 14, 2014, the international community was surprised by attacks on the world's largest oil production facilities in Abqaiq, in eastern Saudi Arabia, and the Khurais oil field to the east of the Saudi capital Riyadh. Half of Saudi Arabia's oil production capacity was temporarily lost, which corresponds to 5% of the world's oil output. The incident resulted in crude oil price hikes and revealed the fact that both Saudi Arabia and the United States were incompetent to check attacks on huge oil production facilities in the desert. If such attacks continue, the world's energy supply would be paralyzed.

The Yemeni anti-government organization, the Houthis, issued a claim of responsibility, while Iran denied its involvement. But it is highly likely that the Houthis or other groups conducted the attacks in support of Iran. The US again refrained from retaliation against Iran.

On January 3, 2020, a US drone bombed and killed in Baghdad Commander Qasem Soleimani of the elite Quds Force of the Islamic Revolutionary Guard Corps (IRGC). In late December 2019, the Iran-backed militia "Kataib Hezbollah" (KH) and the US military repeatedly exchanged attacks, which escalated to the assassination of Soleimani. On January 8, Iran counterattacked a US military base in Iraq with a dozen short-range ballistic missiles. There were no deaths of US soldiers because the US military had predicted the counterattack and had evacuated its service members.

Both sides declared that they did not want war. Under such a high alert, the IRGC erroneously shot down a Ukrainian airliner and kept the Iranian government uninformed of the fact for several days. This tragic blunder by the Iranian side somewhat helped to avoid a full-fledged conflict.

The United States and Iran are still in military tension, which is not being given enough media coverage amidst the COVID-19 crisis. On March 11, 2020, two American soldiers and one British soldier were killed in a rocket attack on Camp Taji, a US military base in Iraq. The United States concluded that the KH was responsible for the attack and carried out retaliatory strikes on the Iran-backed Shia militia's bases located in five sites.

On April 1, President Trump said that Iran was planning further attacks and warned Iran that the next US retaliation would be massive. On April 15, in the Persian Gulf, 11 Iranian gunboats approached six US navy vessels as close as nine meters and crossed at high speed in their way. Those US vessels had engaged in drills on the high seas of the Persian Gulf, accompanied by US army helicopters. Ignoring repeated warnings from the US ships, the Iranian gunboats continued "provocative maneuvers" for about an hour.

This series of events reveals that: (1) military tensions still remain between the United States and Iran, regardless of huge damage they have suffered from the COVID-19 pandemic; (2) there seems to exist a tacit understanding between the two parties that they should avoid a full-fledged military conflict; (3) Iran embraces various military organizations that are not under the Iranian president's control, such as the IRGC; these organizations are feared to affect the Iranian government's implementation of foreign and security policies; and (4) an accidental incident would readily escalate to a military conflict.

It has also transpired that their thoughts do not mesh each other. Iran has adopted brinkmanship tactics in the belief that President Trump could not withstand military tensions but would backdown and ease or lift the sanctions. Iran's military retaliation for the assassination of Soleimani has been restrained, but there is no prospect of mitigating sanctions. The brinkmanship tactics has failed to achieve its goals.

The US analysis is that the Iranian Shiite theocratic regime has become vulnerable, losing popular support due to rampant hardships coupled with the Iranian government's failure to address the COVID-19 crisis in the initial stage. Nonetheless, there is no sign of the collapse of the current regime, nor does Iran appear to be preparing any concession to the United States. Maximum pressure forced by US sanctions has not so far created any result.

5. Are US Sanctions Effective?

When Iran could no longer withstand US financial sanctions it sat at the negotiation table in 2012 and signed the JCPOA agreement. US sanctions were then undoubtedly effective.

With a similar result in view, President Trump has in a like manner placed extensive financial sanctions on the Iranian government, high-ranking officials, the IRGC, banks, and corporations. The targets of US financial sanctions can appear on the "Specially Designated Nationals and Blocked Persons List" made by the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury. According to the statistics prepared by the think tank Center for a New American Security (CNAS), jointly with the law firm Gibson, Dunn & Crutcher LLP, new annual entries in the list during the Obama administration era numbered 300 to 600, while more than 1,000 new entries are added every year under the Trump administration.5 Secretary of the Treasury Mnuchin says that he spends half of his time working on security and sanctions matters.

For the Trump administration that needs to take some compulsory measures against anti-American countries like Iran, North Korea, Russia, and Venezuela, sanctions may be the most effective option instead of military force that is difficult to use. President Trump clearly favors sanctions; whenever some diplomatic problems occur with Turkey or Iraq, he threatens with verbal intimidations, "We will destroy Turkey's (Iraq's) economy by imposing unprecedented sanctions."

Iran has lost foreign currency revenues and is now in financial distress. The IMF estimates the Iranian economy contracted 9.5 percent in 2019. Its crude oil exports dropped from the previous 2.8 million barrels a day to some hundreds of thousands of barrels, while the value of the rial halved.

Nonetheless, Iran seems to be achieving economic viability that does not rely on its crude oil exports by (1) establishing an autonomous economy by raising its capability of producing agricultural, petrochemical, and steel products, as well as construction materials; (2) expanding regional trade with countries with which Iran shares borders or those it faces across the Persian Gulf, such as Iraq, Turkey, Central Asia, Afghanistan, Pakistan, and Qatar, and (3) promoting non-dollar trade with China and India.6

"Iran has first made it possible to establish an economy less reliant on crude oil exports," said President Rouhani. The Central Bank of Iran stated that in 2019 Iran's non-oil sectors registered 1.9% growth. Particularly, the agricultural and mining sectors registered 7.8% and 7% growths, respectively. These figures, however, may not be taken without reservation, because they were given solely by the Iranian government or media.

It is necessary to keep watch on what impact the COVID-19 pandemic will have on Iran's national economy, already exhausted by sanctions. According to an Iranian government release dated April 15, the COVID-19 death toll in Iran was 4,777. Iran requested a $5 billion emergency loan from the IMF. Meanwhile, the Iranian government has recently stated that the daily death toll fell below 100 and the spread of infection has slowed. In mid-April, the Iranian government announced a gradual resumption of economic activity.

The Iranian government predicts that more than four million Iranian people will lose their jobs unless restrictions on economic activities are lifted. It argues that the resumption of economic activity and the prevention of coronavirus infection can be achieved simultaneously by taking proper measures like social distancing. However, the possibility that the speed of infection will rise again cannot be ruled out.

Humanitarians criticize US financial sanctions for destroying Iran's medical system suffering under the weight of COVID-19. The United States has announced that it has exempted a wide range of humanitarian supplies, including medicines and medical devices, from its sanctions list, and that it is ready to provide humanitarian aid to Iran. Iran rejects the overtures. At a press conference in Tokyo on March 25, Iranian ambassador to Japan Morteza Rahmani said that Iran has failed to receive medical supplies, and condemned US sanctions as medical terrorism. The Iranian ambassador seems to have taken the opportunity to appeal to the world that US sanctions are inhuman.

The Obama sanctions succeeded in bringing Iran to the negotiation table, whereas the Trump administration has failed to initiate negotiations with Iran. Iran's supreme leader Imam Khamenei reiterates, "We will not negotiate with Trump."

Among the reasons for the difference in Iran's response to the sanctions of the Obama and Trump administrations are: (1) The Trump administration's withdrawal from the JCPOA increased Iran's distrust in the United States and undermined the value of negotiations with the United States. (2) Iran's conservative hardliners won an overwhelming majority in the parliamentary elections in February 2020 and the moderates represented by President Rouhani lost influence. (3) On top of the abandonment of the nuclear program, the United States issued to Iran a broad range of demands such as the abandonment of missile development and the termination of support for Shiite militias including Hezbollah. From Iran's perspective the United States seems to aim for overthrowing the Shiite theocratic regime. (4) The Trump administration is in tune with anti-Iranian countries such as Israel and Saudi Arabia. US policy toward Iran assumes the character of a regional hegemonic struggle. (5) China, Russia, and India are providing support for Iran to check US influence in the region, while pro-Iran states are increasing in number --- France, Germany, and the UK have established the Instrument in Support of Trade Exchanges (INSTEX) mechanism to bypass US dollar settlement.7

6. The Legality of US Financial Sanctions

US sanctions against Iran are an example of the extraterritorial application of US legislation that enables the imposition of penalties on business corporations of third-party countries. The International Emergency Economic Powers Act (IEEPA, 1977), which provides the legal basis for US sanctions against Iran, stipulates that foreign nationals and companies should be punished if they violate the Act. Ordinarily, settlement of transactions with Iran in US dollars is done through American banks that maintain accounts at the Federal Reserve Bank of New York. In this procedure are involved US corporations, US citizens, and a US government agency. Consequently, the procedure is subject to relevant US laws.8

The well-known examples of huge penalties for violation of the IEEPA and the related US laws are BNP Paribas Bank (France 2014): US$8.9 billion; HSBC Holdings plc (UK 2012): US$1.921 billion; Standard Chartered Bank (UK 2012, 2019): US$1.675 billion; and MUFG Bank, Ltd. (Japan 2012, 2014): US$575 million. American banks also paid a large sum of penalties totaling US$15 billion in 2014, according to a report of the US think-tank Center for Global Development. In fear of possible penalties, Japanese megabanks have stopped all transactions with Iran, and as a result, Japanese corporations are at this moment unable to make investments in or to trade with Iran.

In December 2018, at the request of the US Department of Justice, the Canadian authorities arrested in Vancouver the chief financial officer of Huawei on suspicion of violating US sanctions against Iran. Likewise, Chinese telecommunication giant ZTE Corporation was accused of violating US sanctions against Iran and was added to the US sanctions list.

Foreign governments and private banks criticize the United States for its extraterritorial application of sanctions, arguing: (1) The principle of international law is that national legislation is applied domestically; the extraterritorial application of US legislation is, therefore, a violation of international law. (2) Multiple US government and public agencies investigate and punish the violation of sanctions --- the US Department of the Treasury, the US Department of Justice, the state departments of financial services, the state departments of justice, etc. (3) The calculation basis of the huge penalties is unclear. (4) Huge penalty money enters the US exchequer.9

The US government is answering such criticism by enumerating its reasons. The argument of the US Government is: that the US sanctions against Iran are the application of US legislation to US corporations and to US citizens --- not the extraterritorial application of US laws; and that the prevention of the development by Iran of nuclear weapons and missiles and the termination of Iran's support for terrorism have been agreed internationally by the Treaty on the Non-Proliferation of Nuclear Weapons (NPT), antiterrorism treaties, and UN Security Council resolutions --- these are problems to be addressed in concert by the international community. The US government asserts that the United States alone could enforce these international agreements by exercising coercive force.10

The United States also resorts to the idea of Universalism that international law would not prevent a particular state from extraterritorial action for safeguarding the values shared by the international community --- human rights and humanity. According to the US government's logic, the idea of universalism justifies US sanctions against Iran, and the scope of justification of sanctions can be expanded to include support for terrorism and the development of weapons of mass destruction.

As for complaints about the entrance of penalty money into the US exchequer, the US government argues: Since the targets of the penalties are American subsidiaries of, for example, BNP Paribas and MUFG Bank, Ltd., it is not irregular that penalty money collected from them enters the US exchequer, as is the case with penalties paid by US corporations and US citizens. The US government explains that the amount of penalties is determined partly with an intention to send a punitive message to offenders.11

7. Future of US-Iran Relations

If Iran is determined to withstand maximum pressure from the United States, while the Trump administration does not agree to lift sanctions in defiance of Iran's brinkmanship tactics designed to increase military tensions, the present situation of sanctions and military tensions will still continue. If both countries share the intention of avoiding a full-fledged military clash, the stalemate is most likely to continue until the US presidential election slated for November 3, 2020.

If President Trump wins re-election, Iran hardened by a "persevering economy" would attempt to survive another four-year endurance battle. Imam Khamenei seems unlikely to make any concession to President Trump. Even if the second-term Trump administration tried to make a soon-to-be-historic concession to Iran, Iran would not easily respond. Given that North Korea has failed to have sanctions eased despite three summit talks, Iran would not anticipate negotiations with President Trump. Even under the second-term Trump administration, the present stalemate will continue with military tensions.

If former Vice President Biden wins the coming Presidential election, Iran would turn to negotiations to agree on something more than the JCPOA. In that case, President Obama's expert team of Iran advisers would be reinstituted and negotiations between the two countries would accelerate. However, a profound suspicion of Iran is shared by the Republicans and Israeli and Saudi lobbyists. The parties committed to frustrating a new agreement would become active.

In Iran, resistance from conservative hardliners and the IRGC against a new agreement with the US would become much stronger than they showed toward JCPOA. Such an agreement would jeopardize their influence and interests. Since Iran will gain support from the other actors in the power game with the United States --- China, Russia, India, and Turkey ---, Iran, aware of the decline of US power in the international community, may not be eager for an agreement with the United States. Imam Khamenei, aged 80, will be succeeded after his demise by a conservative hardliner, then the prospect of negotiations with the United States looks slim.

(This paper was translated into English by Tsutomu Inuzuka, SSDP Associate)

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