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A smarter way to sanction Iran

'Crippling sanctions' on the oil sector wouldn't work. But the US Treasury Department can deal Tehran a significant financial blow using existing laws.

By Hossein Askari / September 22, 2009


In an effort to squeeze Iran into submission over its nuclear policy, there is talk, as Secretary of State Hillary Rodham Clinton has put it, of adopting "crippling sanctions" on Iran.

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Although the Obama administration has not spelled out the nature of these crippling sanctions, politicians in Washington have floated two bad options: halting Iran's import of gasoline, and embargoing its oil exports.

The US should drop these potential sanctions and instead enforce a bold new campaign to devastate Iran's financial sector – using existing US laws.

To set up an effective gasoline embargo, the US would have to go to the UN Security Council for approval – a lengthy process and by no means certain. Perhaps even more important, a gasoline embargo would help, not hurt, the regime in Tehran.

Here's why: The government of Iran imports a sizable part of its domestic gasoline needs. It sells those imports along with domestically refined gasoline at a heavily subsidized price. This subsidy encourages waste, but it also dramatically reduces government revenues.

The regime hasn't been able to eliminate this subsidy and increase the price of gasoline for fear of a domestic backlash. If the US imposed a successful gasoline embargo, Iran would then be able to decrease domestic consumption, eliminate smuggling, and increase government revenues. Jackpot.

The added bonus for Iran there is that with an imposed embargo, Iranians would blame higher prices and reduced availability on the United States. This is the last thing the US should be doing at a time when it wants to force a change in Iran's policies. Most pointedly, a gasoline sanction would lend further support to end the smuggling activities of regime insiders.

An embargo of Iran's oil exports would be even more problematic. If effective, such a step would adversely affect all importers of crude oil because of dramatically higher prices. China, a big oil importer, would certainly oppose such a move. Russia, for its own strategic interest, has also expressed its opposition to more sanctions. And now Germany has indicated it is also unlikely to support sanctions.

The US should forget proposals that would face highly uncertain adoption by the UN and focus instead on the sanctions that have worked on Iran over a 30-year period – financial sanctions. The US Treasury has successfully cut off Iranian banks from the global banking system and isolated the National Iranian Oil Company. These efforts have had a significant effect on the Iranian economy in the past year, including increasing Iran's cost of imports by about 20 percent.

The US could also act immediately by adopting policies that would cripple Iran's financial sector today.

Iran's foreign exchange reserves are being rapidly depleted, given lower oil prices and capital flight due to political uncertainties and a sick Iranian economy. Regime insiders say that about $350 billion has been pulled out of Iran during the past seven years, and cost of capital flight just to Dubai is estimated to be more than $250 million per day. The last official figure, in June 2008, placed Iran's foreign currency reserves at a little over $80 billion. My estimate is that they now stand in the $40-$50 billion range.