Economic Blowback from Iran Sanctions

Economic sanctions have notched some successes, like freeing Nelson Mandela and ending South Africa’s apartheid, but other sanctions have lost sight of practical reforms and become destructive ends in themselves, as ex-CIA analyst Paul R. Pillar notes about Iran.

By Paul R. Pillar

An infatuation with economic sanctions, applied against countries Americans do not like such as Iran, loses sight of the concept that sanctions are only a tool for trying to accomplish some other objective, rather than being an objective in their own right.

This lack of understanding shows up mainly in the tendency to think of the economic pain that sanctions inflict on the target country as an end in itself, as if we lived in a completely zero-sum world in which pain for a country we don’t like equates to gain for us. We do not live in such a world, and pain for someone else does not directly mean any gain for us.

Iranian President Hassan Rouhani. (Iranian government photo)

We also tend to overlook, however, how our own sanctions inflict direct costs on ourselves. Think about this partly as a matter of economic theory. Sanctions represent government interference in the workings of the market. They prevent enterprises from doing what the market would otherwise determine to be the most efficient way of supply meeting demand. The interference inevitably entails added costs, which we Americans share.

The formidable, fear-inducing enforcement of U.S. sanctions against Iran entails substantial costs for U.S. companies. Not only are these companies excluded from some major opportunities for new business; they have to jump through additional hoops to make sure they do not run afoul of the enforcers in areas where they still are doing business.

A Washington Post story concerns how this fear leads American companies to report to government regulators in excruciatingly minute detail anything they do that could conceivably brush up against the sanctions. Citibank, for example, felt it necessary to report that it made four dollars in profit from ATM transactions in Bahrain that involved a joint venture that included two Iranian-owned banks.

It is remarkable that some members of Congress who otherwise do not hesitate to preach that onerous government regulations and the administrative burdens they impose are bad for the American economy are also enthusiastic backers of the sanctions.

With Iran there also is, of course, the effect on the oil market. The state of that market has been a major factor in the economic history of the United States over the past half century.

In general (with the exception, of course, of the oil industry itself) it has been bad for the American economy when foreign oil producers and especially the OPEC cartel have gotten their act together enough to jack up prices, and good for the American economy when freer competition among producers has prevailed and oil prices have fallen. Higher oil prices mean higher costs of doing business for most of the American economy.

Notwithstanding all the high hopes about domestic shale oil production, production in the Middle East still matters a lot. We could use some more vigorous, price-depressing competition among foreign producers. West Texas Intermediate is going today for $97 per barrel, about twice what it was five years ago as the recession was close to hitting bottom.

The Iranian oil minister says Iran would like to strike up exactly that type of competition. But it won’t happen as long as the sanctions against Iran are in place.

Then there are all of the other non-economic and non-quantifiable but still significant costs to the United States of the sanctions. The enormous diplomatic effort expended in erecting and maintaining the sanctions regime has burned a lot of chits with other countries around the world, as well as much energy and attention of U.S. officials. It would be nice to see that political capital expended on something that has more direct benefit to U.S. interests.

And as illustration of another sort of cost, consider the case of a Ph.D. candidate at New York University whose field research in Iran was put on hold because of sanctions-inflicted complications and fears of those giving her a research grant that they might run afoul of the government enforcers.

It took nine months of administrative hassles and thousands of dollars of legal expenses incurred by the university before she finally got Treasury Department approval to make her trip. Even then, she was prohibited from taking into Iran any laptop, hard drive, cell phone, audio recorder, or camera. Count this as a blow against greater American understanding, through academic research, of Iran.

This case brings to mind all the hand-wringing after the Iranian revolution in 1979 of how poorly Americans and American officials were said to have understood what was going on in Iran at the time.

Some of the most enthusiastic American promoters of sanctions today make no secret of their longing for some sort of new Iranian revolution that would overthrow the current regime. They are unlikely to get their wish, but if they did, such political change would probably be all the more a surprise because of how their beloved sanctions are getting in the way of broad understanding of what is going on in Iran today.

Paul R. Pillar, in his 28 years at the Central Intelligence Agency, rose to be one of the agency’s top analysts. He is now a visiting professor at Georgetown University for security studies. (This article first appeared as a blog post at The National Interest’s Web site. Reprinted with author’s permission.)