Economic Regime-Change Can Stop Iran Bomb

Iran’s threat to close the Strait of Hormuz, the choke-point for Persian Gulf oil shipments, reveals how deeply the latest Western sanctions — and the threat of even tougher measures — have spooked the clerical regime.

Yet, as the U.S. and its allies aim to tighten the noose, they have to consider two new realities. First, given the progress we now know Iran has made on its atomic-weapons programs, there is little reason to think the leadership will voluntarily disarm. (Unfortunately, if a nuclear-armed Iran is truly unacceptable, military action is the most likely route to success — and the window for that option is closing fast.)

Second, if we are going to pursue tougher international sanctions against Iran — and we should — the goal should be regime change in Iran, not stopping proliferation. In fact, regime change would make the idea of an Iranian bomb far more tolerable.

For the first time since Iraq invaded Iran in 1980, Iran’s leadership fears for its oil wealth. Yet the Barack Obama administration, which has justifiably applauded itself for advancing sanctions, appears hesitant to implement aggressively Congressional legislation against Iran’s central bank — the punishment the clerical regime dreads most, as it is the critical financial institution for petroleum sales.

Politics of Oil

The White House’s hesitancy is understandable. Central-bank sanctions would be a redefining moment for the administration, which came into office eager to talk to Iran’s virulently anti- American supreme ruler, Ayatollah Ali Khamenei. Effective central-bank sanctions could shatter Iran’s economy, and would quash any hopes for progress through engagement. And, if imposed rashly, sanctions could also shock the oil markets, possibly causing considerable political trouble for Obama in an election year.

A nasty conjunction has developed in 2012. The International Atomic Energy Agency’s recent revelations about the military dimensions to Iran’s nuclear program have shrunk the timeline for a Persian bomb. Israeli and French calculations that Iran could produce a weapon within 18 months seem increasingly credible; 2012 might not be the year of nuclear- armed theocrats, but it could well turn out to be the last year in which a preventive military strike against Iran’s nuclear sites would possibly still be effective.

Since the death of the Islamic Republic’s founder, Ayatollah Ruhollah Khomeini, in 1989, too many Western politicians have played up any sign of moderation in Iran’s revolutionary politics and ignored the regime’s continuing penchant for violence. However, should the West wake up one morning to find that Iran’s Revolutionary Guard possesses a functional atomic bomb, it would become harder to play down Iran’s longstanding relationship with al-Qaeda and other militant Islamic terrorist groups; the alleged plot to blow up a Saudi ambassador in a Washington restaurant; the killing of U.S. troops in Iraq and Afghanistan; and the entire mind-set that sees embassy-sacking and hostage-taking as statecraft.

There is also the role of the 2012 U.S. presidential election to consider. Let’s face it: Obama is probably more concerned at the moment about sharp oil-price increases, which could occur if American and European sanctions stopped Iranian oil from reaching the market, than a still-theoretical Persian bomb. An Israeli attack on Iran’s nuclear sites, which could also cause the price of oil to soar by $50 per barrel or more, might seem equally worrisome for his re-election chances.

Yet that’s not the case. An Israeli strike (or an American one) would not necessarily be damaging politically, especially since Obama’s likely challenger, Mitt Romney, has said he won’t allow Iran to go nuclear. Depending upon how he responded to an Israeli raid or an Iranian provocation that forced an American military strike, Obama electorally could gut the Republican national-security challenge.

Short-Term Increases

And, as oil analysts at the International Energy Agency in Paris will tell you privately, an Israeli or American military strike against Iran’s nuclear sites would likely cause only short-term price increases, so long as Iranian oil infrastructure wasn’t damaged (an angry clerical regime would still need to sell petroleum). Iran might go on the warpath in the Persian Gulf, which would certainly roil the oil market, but the U.S. Navy’s war-gaming of this scenario — two weeks to knock out the Iranian military — is probably accurate. Western governments could also release emergency reserves; anti-Iranian, oil-rich Arab states might also put more oil into the market.

A truly effective embargo of Iranian crude, conversely, would have a lasting impact, given the tightness in the global oil market. Iran’s exports of around 2.5 million barrels a day are about equivalent to the amount of minimum spare capacity the market needs to see before it prices in a significant risk premium. This means that increased production by Saudi Arabia, Kuwait and the United Arab Emirates probably couldn’t completely offset the disappearance of Iranian crude without causing market anxiety over the decreased spare capacity being too low to respond to further supply disruptions or seasonal demand fluctuations. Gasoline at $5 a gallon on Election Day is a real possibility.

Not only would a total ban on Iranian oil threaten to hamper the global recovery, it’s difficult to imagine sanctions actually stopping the nuclear program if the Islamic Republic truly requires fewer than two years to produce a bomb. No one has a precise idea of how much money Tehran still needs for the program, but the most expensive part of the undertaking — the construction of centrifuges and the development of long-range ballistic missiles — is mostly complete.

Iran currently earns about $80 billion per year from oil and natural gas sales, about 20 percent of its gross domestic product. The Obama administration estimates that sanctions currently on the books will cost Iran about $14 billion in oil revenues annually over five years. This would still leave the clerical regime with the few billions of dollars required to build an atomic weapon.

So, are we stuck with a choice between two grim options –a military strike or nuclear-armed mullahs? There is a more optimistic long-term option: to use careful, comprehensive sanctions in a way that gives rise to the sort of popular economic discontent that led to the uprisings in the Arab world a year ago.

Tsunami of Sanctions

A quick tsunami of sanctions is possible if the U.S. and the European Union impose them on Iran’s Central Bank in a manner that effectively makes it impossible for most countries to purchase Iranian crude. If it really wanted to, the EU, which purchases about 20 percent of Iran’s oil, could rapidly ban the importation of the Islamic Republic’s petroleum. The Europeans obviously have differences on when and how comprehensively they should prohibit the import of Iranian oil. Momentum has certainly built for a total ban, but it still remains unclear whether the EU can act rapidly.

Acting alone, officials in Washington could move more expeditiously — a six-month phase-in of economy-crushing central-bank sanctions is practicable, though not obligatory for the president, under current Congressional legislation. However, election-year concerns will certainly encourage Obama to show caution on any price-spiking approach. Politics aside, caution is wise: It makes no sense to implement sanctions that increase the price of oil but allow Iran to sell less petroleum for more money.

One way to guard against a severe shock in oil markets would be to selectively choose targets for economic punishment, as opposed to a blanket ban, thereby channeling Iran’s oil sales into a smaller pool of buyers. The objective here is to reduce Iranian oil revenue, which can be accomplished through fewer purchases of Iranian crude, or through drops in the price Iran receives per barrel, or both. We could choose which nations and companies we wanted to punish for doing business with Iran’s central bank, and let other (namely China) off the hook for the time being.

This would lead to an oligopsony effect, in which a reduced pool of buyers would allow purchasers of Iranian crude to demand discounts — the fewer the buyers, the bigger the discounts. If the Saudis, Kuwaitis and Emiratis — the only major exporters with substantial spare capacity — increased production, this would further force down Iranian oil revenue.

One advantage of this plan is that neither the U.S. nor the EU would have to confront China, a major consumer of Iranian crude; they would just want the Chinese to buy as much petroleum as they want from Tehran at the best price possible. The U.S. Treasury Department would not need to interfere in all the normal commercial activities of the Iranian central bank; it would just selectively prohibit oil transactions denominated in dollars.

Support for Terrorism

To further fortify this approach, Washington can sanction Iranian companies, primarily the National Iranian Oil Co. and its subsidiaries and other enterprises active in Iran’s oil- supply chain that are owned directly or indirectly by the Revolutionary Guard Corps, which oversees both the nuclear program and terrorist operations. (NIOC is now headed, like so many important organizations in Iran, by a “former” Revolutionary Guard commander, himself under EU and U.S. sanctions).

Officials in Washington could also establish the U.S. as an Iranian-oil-free-zone, closing a loophole in the law that allows for the importation of refined products made from Iranian crude, such as gasoline and some plastics.

Economic modeling on all these selectively-enforced sanctions suggests that the Chinese, who are already demanding discounts from Tehran, could see the price of Iranian crude drop by as much as 40 percent. If the Saudis and other Gulf Arabs wanted to punish the Iranians by putting more oil into the market, the pressure for discounts would be even greater.

Such a revenue drop would probably convulse the Iranian economy. But we doubt it would lead Khamenei and his praetorian Revolutionary Guard to cry “uncle.” Halting the nuclear- weapons program and allowing foreign inspectors unchallenged access to any facility in the country would be a complete loss of face and would undermine the combination of prestige, attraction and fear of established power — what Iranians call heybat — that sustains Khamenei’s rule (and that he almost lost during the protests after the fraudulent presidential election in 2009).

For the supreme leader and his guards, Iran is center stage in the great Islamic passion play, where their faithfulness stops Westernization and the U.S.. Secularized Americans and Europeans have poorly appreciated the tenacity and appeal of this salvation narrative to the Islamic Republic’s rulers. Designing sanctions to make Khamenei relent in his 30-year quest for the bomb is a delusion; sanctions that could contribute to popular unrest and political tumult are not. The Great Arab Revolt and its forerunner, the Iranian summer of 2009, were propelled by profound economic frustration as well as indignation at tyranny.

Through sanctions, a democratic counterrevolution in Persia might be reborn. A democratic Iran might keep the bomb that Khamenei built. But the U.S., Israel, Europe, and probably most of the Arab world would likely live with it without that much fear. Khamenei and his loyal guard are unlikely to go down peacefully. The clerical regime had a violent beginning; its end, whenever it comes, may be far worse.

Reuel Marc Gerecht, a former Central Intelligence Agency officer, is a senior fellow at the Foundation for Defense of Democracies. Mark Dubowitz is the executive director of the foundation and the head of its Iran Energy Project.