The Jerusalem Institute for Strategy and Security

The US should focus on closing sanctions-bypassing channels (especially through Turkey and Qatar), and on eroding Iranian currency reserves. Use the massive legal judgments against Iran for its role in terrorism to hit the country’s currency reserves.


The Trump Administration has made impressive progress in its sanctions campaign against Iran. Nevertheless, it is not certain that final and absolute blockage on Iran’s oil exports and the complete disconnection of Iran from the international financial system is in fact the optimal way to force a radical reversal of Iran’s nuclear policy and an end to its subversive activities in the Middle East.

Further oil and banking sanctions might lead to a rift between the US and its global partners. A better approach would be to focus on closing sanction-bypassing channels (especially through Turkey and Qatar) and on further devaluating Iran’s currency reserves. A key tool in this regard is enforcement of the massive court judgments against Iran for terrorism. At the same time, the Iranian people should be shown a vision of the opportunities for prosperity if Teheran changes direction or the regime is replaced.


The Financial System: Obama Administration Legacies

The signing of the JCPOA with Iran in 2015 led to a wave of optimism among many actors on the international scene, and among Iranian citizens, in the hope that a new era was dawning. Already in 2013, when President Obama entered covert negotiations with the Iranians, his primary working hypothesis was that the regime in Teheran had reached the critical point of understanding that continued sanctions threatened its survival. Most Administration officials also believed that removal of most sanctions and Iran’s gradual return as a significant player in the international financial market would incentivize the Ayatollahs to abandon the path of nuclear weapons development and terror.

The professionals who managed the financial campaign against Iran and against the terror organizations were divided on whether sanctions were indeed having a critical effect on the Iranian regime. Then-US Secretary of Treasury Jack Lew followed the line that President Obama dictated, but senior Treasury officials were less confident about the efficaciousness of the sanctions. In Israel, where professional diplomats had for more than a decade accompanied successive US administrations in their economic campaign against Iran, assessments were much more definite and negative. The sanctions had not yet maximized their potential.

Notably, this disagreement was not triggered by conflicting aspirations but was the product of different status assessments. The working assumption shared by both parties was that the financial campaign against Iran could be instrumental in sparking a chain reaction, primarily amongst the Iranian public, that that would undermine the legitimacy of the Iranian regime and threaten its survival.

Israel, however, viewed (and continues to view) the financial campaign as instrumentally important in bringing about a radical and permanent reversal in Iran’s behavior. The Obama administration, on the other hand, sought to quickly leverage the initial pressure that it had created into a diplomatic achievement based on compromise and mutual concessions.

In this continued debate over the effectiveness of the economic sanctions against Iran, one of the prominent examples cited was North Korea, which had been a target of US sanctions for more than 50 years and yet the regime did not collapse, and the sanctions lever produced nothing substantial. The obvious question became: Why should Iran be expected to crumble under economic sanctions?

The simple answer was (and remains) that Iranian society is different and far more susceptible to sanctions that North Korean or Cuban societies. Iran faces a growing gap between the public and the government/religious establishment, alongside growing secularization, modernization, and the adoption of Western lifestyles. These deep-rooted trends pose complex challenges for the Islamic Republic, leading to waning public support for government institutions and revolutionary values. Economic sanctions against Iran exacerbate these internal tensions and increase the demand for change in Iran.

A Change of Direction: Why have Trump’s Sanctions been Successful?

President Trump’s decisions in October 2017 to withdraw from the nuclear agreement with Iran; in May 2018 to abandon the agreement and reinstate the sanctions; in November 2018 to tighten sanctions; and in May 2019 to end exemptions granted to major oil importers and to expand the circle of US designated terrorist organizations to include the Revolutionary Guards — were accompanied throughout by doubts about the effectiveness of these steps.

Recall that it took almost a decade to mobilize the international community’s support for tough sanctions against Iran. And when in 2015 the previous US administration loosened sanctions, it immediately became doubtful that an effective sanctions regime could again be constituted.

Nevertheless, President Trump’s renewed economic campaign against Iran seems to have been much more effective than expected. What explains this? It comes down to a combination of the following factors and the ripening of several long-term developments.

  • Investing in terror. Iran invested most of the funds it amassed through the nuclear agreement to expand the Islamic revolution and re-establish its support network for international terrorism. In doing so, Iran proved that it had no intention of becoming a moderate country (contrary to the expectations and prognostications of the Obama administration). Iran continued to transfer hundreds of millions of dollars a year to reinforce Hizballah. Then-IDF Chief of Staff Gadi Eisenkot noted that Iran gave Hizballah $800 million in 2017 alone. This amount is dwarfed by the security expenses involved in Iran’s campaign in Syria. According to Israeli estimates, Iran invested $15-20 billion in the civil war in Syria between 2015 and mid-2019. It is possible that had the Iranians believed that the sanctions might be reinstated, they would have managed their economy differently.
  • Changes in the international banking system. The global economy’s central nervous system experienced a powerful shock on September 11, 2001 and has been in a state of turmoil since. Other developments have brought about dramatic changes in the global financial system too, including: the transformation of the international banking system into the main battleground in the war against terror organizations and nuclear proliferating countries, the trade wars between the US and China and even Russia over the past decade, the war against criminal organizations and money laundering efforts of various types, and more.

Corporate fears of unprecedented collective and individual penalties and lawsuits filed by victims of terror have created a new situation, one in which the banks have become their own regulators and have established (occasionally disproportionate) restrictions in order to avoid confrontations with the US regulator or legal system.

As a result, even after sanctions against Iran were withdrawn, most banks worldwide refused to permit fund transfers and other transactions by Iranian nationals, for fear that such transactions would be used in terrorist or other activities that threaten the international banking system. The first indications of this emerged during the Obama administration, when US banks refused to accede to the administration’s demands to conceal the release of frozen Iranian funds, and justified their position citing the “reputation risk of doing business with Iran.”

  • The US market. European efforts to provide Iran with an alternative trading channel to circumvent US sanctions also encountered formidable obstacles posed by the European and global banking system. The banks are much more concerned over a possible disconnect from the US banking system and are not easily placated by European government promises to provide guarantees. European conglomerates facing the same choice – have access to the US market or to the Iranian market — have given a clear answer: the US market. Large European corporations such as Volvo, Peugeot, Renault, Airbus, Deutsche Telecom, Air France, and British Airways have severed ties with Iran. The EU is Iran’s third largest trading partner, after the UAE and China, with $30 billion in trade in 2018 (equaling 16% of Iran’s total trade). Yet EU trading with the US that year was $720 billion.
  • Indirect implications of the changes in the geopolitical system. While Iran benefited from some degree of support from countries that helped them circumvent the sanctions during the previous round of sanctions (2006-2012), recent geopolitical developments, and especially the inter-Muslim conflict, have altered this. These changes first and foremost affected Dubai, which had served as the payments channel for all of Iran’s transactions for many years. In view of Iran’s current relations with the Persian Gulf states, Dubai ceased to be Iran’s primary point for clearing trans-border payments. Russia and China are preoccupied with their own economic wars with the US and with US sanctions of their own and are searching for (but not easily finding) alternatives to the US-dominated system. Turkey and Qatar are the only countries that currently are willing to help Iran. As a result, it has become more difficult than ever for the Iranian financial system to find “loopholes” in the global banking system through which to circumvent sanctions.
  • Additional sanctions. Added to the above factors is the recent wave of sanctions on Iran imposed by President Trump. This time, the sanctions are targeting the soft underbelly of the Iranian economy – the oil sector — and appear to be more extensive and painful. Beginning in August 2018 and again in April 2019, the administration imposed a series of sanctions, mainly revoking many of the waivers previously issued by the Bush and Obama administrations that had effectively created a supply of oxygen for Iran’s economy. The current administration also extended the sanctions to oil shipping, which is critical for the Iranians.

In the previous round of sanctions (2006-2012) Iran managed to skirt the sanctions on oil through manipulations including the use of “ghost” tankers, switching-off oil tankers’ automatic tracking system signal, and ship-to-ship oil transfers.

The third wave of sanctions, imposed in June 2019, is mainly symbolic. These sanctions target the personal assets of Iranian leaders. This is meant to signal to Iranians that the root cause of their problems with the world are the nefarious leaders of the current regime.

  • The revolution of rising expectations. The 2015 nuclear agreement and expectations for a better Iranian future generated what is known in political science as a “revolution of rising expectations.” But when expectations and hope for a better life are dashed, the regime comes under threat.

The nuclear agreement and the withdrawal of sanctions raised hopes in Iran. Conditions genuinely began to improve:  the price of commodities stabilized, growth increased, and government spending on subsidies dropped. But these gains were reversed by a single decision taken by President Trump.

The plunge from high expectations to unprecedented despair is the greatest threat to the regime. Since early 2018 the value of the Iranian rial declined by more than 75%. Unemployment is at 30%, mainly among young Iranians. The deep blow to oil exports and other exports has slashed government revenues by 40% within a span of several months. Reports from Iran indicate that factory owners are finding it difficult to source basic raw materials and are forced to dismiss most of their employees to avoid bankruptcy. At the same time, the regime has prohibited exports of basic commodities such as toilet paper, butter, milk powder, tea, and paper packaging.

These factors are combining to create a critical mass of opposition to the government. The key question is when the process will ripen into a “nuclear reaction” in Iranian society, not only among the upper-middle class (who long have loathed the regime) but also the poverty-stricken neighborhoods of southern Teheran.

It seems that Iran’s recent violent responses to the sanctions clearly attest to the regime’s situation and its fear of destabilization. Iran has attacked oil tankers in the Arabian Gulf, increased Houthi aggression against Saudi targets, conducted forbidden ballistic missile launches, and returned to enriching uranium at proscribed levels. In short, Iran has shifted to a policy of defiance and brinksmanship versus the Trump administration.

It sometimes seems that Iran desires a confrontation with the US, in the belief that a conflict would unite the ranks of the Iranians and bolster the regime. Iranian political culture traditionally has lauded individuals who refused to succumb to foreign dictates. This may be a source of comfort for the regime, if Iranians are willing to rally around the flag.

Putting More Pressure on Iran

In late summer 2019, an Archimedean point has been reached regarding the economic campaign against Iran. At issue are next steps to change the equilibrium in Iran; to bring the Iranian people to the barricades and force the regime to back away from confrontation with the West. Iran must decide whether to risk further escalation or return to the negotiating table from a position of weakness – where Iran will have to accept significant modifications to the nuclear agreement and change other aspects of its conduct.

Will expanded sanctions have a decisive impact on Iranian decision making, or will a US military strike against Iran be necessary? Of course, the Trump administration is highly sensitive to the domestic mood, and the 2020 presidential election campaign is underway. Nor is the US operating in a global vacuum. Ramping up the sanctions on Iran, to say nothing of launching a military campaign, would have many implications for the US and its allies. Even US National Security Advisor John Bolton, who is considered a hawk on Iranian issues, recently admitted that the US probably won’t be able to go the full distance with oil sanctions because this would too harshly impact some US allies. And US Treasury Secretary Steven Mnuchin, a supporter of harsh sanctions, has advised not to disconnect Iran from the SWIFT international financial messaging system, so that Iran can purchase basic commodities and medicine for its people.

What Can be Done?

First, Iran should be cautioned against further escalatory actions in the Gulf and elsewhere.

Additional sanctions should directly target senior Iranian government officials, in order to convey the message to the Iranian people that the enemy is their own regime, and not the US.

The US should avoid measures that could cause serious harm to US allies, especially allies that are critically dependent on oil.

More importantly, the strong economic leverage now in place against Iran should be given time to ripen and bear fruit, without further strictures. In the current situation, additional sanctions could upset the balance between the achievements of external pressure and too much insult to the national pride of Iranians, which might goad the regime into greater resistance and into acceleration of its nuclear enrichment program.

At the same time, the West should target two components of Iran’s support system: 1. the assistance the country receives in bypassing sanctions, and 2. its foreign currency reserves.

Turkey is Iran’s main partner in bypassing sanctions, and it should be pressured hard by Washington to stop doing so. Qatar should also be pressured in this regard, so that it does not replace Dubai as an Iranian ally in circumventing US banking sanctions.

A second instrument of useful pressure runs through Iran’s foreign currency reserves. Western countries should be mobilized to participate in a dramatic move to actualize federal and international court judgments against Iran for its involvement in terror activity. There are over $43 billion in judgments against Iranian government entities and officials that can be enforced.

Enforcing these judgments would strike a powerful blow on Iran’s currency reserves; a high price for Iran’s sponsorship of terrorism. Washington should demand that European countries respect US court judgments against Iran. In in return, the US might reconsider some sanctions against Iran – especially oil sanctions to which Europe is very sensitive.

At the same time, the US should consider unveiling a “Deal of the Century” for Iran, a broad-based economic development plan that would catapult Iran back into the global community and the 21st century. This would offer a “horizon” for Iran, if it agrees to adopt an entirely new approach to nuclear disarmament and terrorism. Doing so might usefully fuel political turmoil and dissent within Iran, and perhaps lead to significant change in regime policy or even to regime change.

Dr. Udi Levi served for over 30 years in a series of positions in IDF intelligence, the Civil Administration in Judea and Samaria, the National Security Council, and the Prime Minister’s Office.

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