Tackling Tehran

With each passing month, Iran appears closer to the nuclear capability threshold everyone expects to be a regional game-changer. With diplomacy unable to yield a desirable compromise and widespread scepticism about the viability (let alone desirability) of military pre-emption, sanctions remain the best way forward. But are they working?

Sanctions are primarily meant to raise Iran's stakes and convince its leader a compromise is better than economic distress. By this yardstick, sanctions have failed. Negotiations have continued on and off for almost ten years, with no compromise in sight. Iran now has thousands of centrifuges installed, successfully enriching uranium at nearly 20 per cent—a step away from the threshold for weapons-grade fuel. No amount of pressure seems to be stopping a regime that is impervious to the economic pain felt by its subjects.

Even the International Atomic Energy Agency concedes that there is no evidence that sanctions are working. Speaking to reporters after he released the IAEA's November 2012 report on Iran's nuclear programme, IAEA General Director Yukiya Amano was quoted as saying, “We are verifying the activities at the nuclear sites in Iran and we do not see any effect” [from sanctions]. IAEA graphs, published in the agency's September 2012 quarterly report on Iran's programme, chart Iran's enrichment progress, showing a steadily rising curve, clearly devoid of any sign of disruption from sanctions or covert action.

Part of the reason sanctions appear to be failing is that much of their focus has been on preventing proliferation rather than undermining the regime's stability. Whenever UN, EU or US sanctions have gone after a particular proliferating concern—usually an Iranian company or one of its subsidiaries—Iran has simply proceeded to move its operations into another jurisdiction, or created new front companies to elude restrictive measures. It may take months, if not years, to expose such diversions. By the time the new companies have been targeted as well, Iran is several steps ahead.

Then there are the challenges of evidentiary rules for Western-backed sanctions. Neither EU nor US policymakers can target companies or individuals unless they have sufficient open-source or declassified evidence that can withstand judicial scrutiny, since Iran is taking every measure to court.

This is doubtless a costly and time-consuming game for Iran as well, but as long it buys time and maintains its impetus, its rulers care little about costs. Except that Iran is running out of time—because of sanctions. Despite all the evidence to the contrary, the regime is heading for disaster. Since the EU enacted a partial oil embargo backed by tough US sanctions, Iran's oil revenues have dwindled by more than 40 per cent.

As if this were not enough, increasingly tight financial sanctions that targeted the vast majority of Iran's banking sector all the way up to the Central Bank are crippling its economy. Iran's manufacturing is plunging. The country is getting ever closer to the point where it cannot honour international payments. Its government will soon find that even printing money no longer works. Though Iran can still sell oil on the international market and it still holds considerable foreign reserves, the regime is finding it harder and harder to access its money and to move it around freely.

Its agents may still be running money-laundering networks and procuring technology, but the billions deposited by the Central Bank in foreign accounts are no longer accessible. Even when money is available, it comes with burdensome restrictions because Iran cannot find banks that will process its revenues in hard currencies.

With hyperinflation at the doorstep and the currency in free fall, Iran has resorted to hoarding gold. Meanwhile, its wealthy elites—including those closest to the regime—are transferring money abroad in suitcases. The government has established a three-tier exchange rate system to enable companies engaged in foreign trade to afford payments for vital merchandise. Yet the system is already giving way to cronyism. Shortages of basic commodities caused by mismanagement and corruption are being blamed on the regime.

Sceptics are understandably driven in their judgment by the unlikely expectation that sanctions would disrupt Iran's nuclear programme's supply lines to the point of stopping it or getting the regime to negotiate. Instead, as the song goes, they are killing Iran's regime softly within, by crippling its financial system and preventing the regime from banking on its energy resources.

If this continues, well before Iran can assemble its nuclear weapon, its economy will collapse. The ensuing social pandemonium is the last thing the regime can afford-which is why a further tightening of sanctions is the best bet for a compromise before Iran has the bomb. Otherwise someone will sooner or later conclude it is time to stop Iran by more drastic means.

Emanuele Ottolenghi is a Senior Fellow at the Foundation for the Defense of Democracies