Is There Life after Sanctions?

“Happy families are all alike; every unhappy family is unhappy in its own way.” Tolstoy wrote this at the beginning of “Anna Karenina,” and it may still be the fate of the Novosibirsk production of “Tannhauser,” but that’s not what we’re talking about.

Every country placed under sanctions is also “unhappy in its own way.” Let’s look at Iran. Perhaps its experience will come in handy somehow.

Iran has been living under U.S. sanctions since the 1980s, the strictest being imposed in 2012, when exports of Iranian oil were sharply restricted, and the country was cut off from the global financial system.

The Sanctions Imposed on Russia Are a Pitiful Excuse for Those Used Against Iran

The Iranian economy was significantly damaged. By 2013, its gross domestic product had already fallen by 5 percent; in 2014, it grew 1 percent (according to the U.S. Congressional Research Service). The Iranian economy would be 15 to 20 percent larger if it weren’t for the sanctions of the past years. Unemployment is 13 to 20 percent (sources differ), and in March, inflation reached 25 percent. Automobile production fell 40 percent from 1.6 million units within two years. Oil exports fell from 2.5 million barrels a day in 2011 (total production was 4 million) to 1.1 million last year (out of 2.6 to 2.8 million extracted). The European Union stopped buying (having previously bought 600,000 barrels a day).

India and China, upon whom we depend so much, also reduced their purchases of Iranian oil by a third. Although China is the largest buyer of Iranian oil, it’s cooperating with the U.S. in terms of limiting Tehran’s access to convertible currency. The U.S. levied special sanctions on currency Feb. 6, 2013, mandating that Iran be paid for oil in its own currency (contrary to popular conceptions in Russia, selling oil for your national currency is a punishment.)

Iran can receive no more than $700 million per month for oil, plus $65 million earmarked for Iranian students studying abroad. China prefers to pay Iran in goods: clothing or vehicles (like subway cars). Chinese firms that had signed contracts with the Iranians in the energy sector have either subcontracted out to local companies or stopped work. The Americans made an exception for Iran’s gas-production facilities, like the development of the Shah Deniz gas field in the Caspian Sea for example (in which Lukoil is also participating).

The currency shortage led to a severe restriction of imports, from cars to cell phones. “Luxury goods” have essentially been discontinued. Out of Iran’s $100 billion in gold reserves, $80 million is “frozen” abroad. The proportion of “bad” debt in Iranian banks is around 30 percent.

Did the Sanctions Achieve Their Stated Goals?

In its report, Congress admits that it definitely did not manage to reduce Iran’s influence in the region; Iran continues to support friendly groups, from Hezbollah in Lebanon to the Houthis in Yemen, with money and arms. Despite difficulties in importing modern weaponry and dual-use goods (until recently, even spare parts for civil aviation), the country launched the production of old models. Iran produces short- and medium-range missiles and cruise missiles. It also buys a range of weaponry (like submarines) from countries that don’t obey the sanctions, like North Korea.

The Sanctions Have Not Affected the Regime

The “thaw” that supposedly came with the election of President Rouhani is largely a relative one. The main thing is that Iran, not having changed the policies the U.S. called “support of international terrorism” (and for which the first sanctions were imposed), has not abandoned its nuclear program. The current agreement is largely happening on its terms. The U.S. has begun easing off in order to get Iran’s cooperation on a number of hot spots in the region (in Iraq, Afghanistan, Syria, etc.), while at the same time playing the “Iran card” against Moscow.

In place of the 1,500 uranium enrichment centrifuges Iran had a few years ago, there are now 19,000, of which nearly 10,000 are functional. There is talk of reducing these to around 6,000, despite America’s earlier insistence on a few hundred. Iran defended its right to enrich uranium (for “peaceful purposes”) and will keep all its nuclear facilities, including its high-security location. However, it promises to convert them, abandoning production of weapons-grade plutonium. At best, this is a very limited result of sanctions.

A consistent pattern confirms this. Sanctions, as once calculated by G.C. Hufbauer, J.J. Schott, K.A. Elliott, B. Oegg in”Economic Sanctions Reconsidered,” are only effective in one-third of the cases. They are observed to be relatively more effective when used against regimes controlled by some kind of collective junta. In those cases, you can play on the tensions between different factions, and the regime is more sensitive to damage to certain institutions (like the military).

Sanctions are nearly always ineffective against autocracies. In such cases, the elite rallies around the leader “in fear”; intra-elite “betrayals” are impossible due to strict control, and the nation rallies around the leader.

In such countries, the leader prefers to fight to the bitter end, having nowhere to retreat and no other parties with which to negotiate. This pattern can be traced even among Latin American countries, which are in the United States’ own backyard, and against whom sanctions are often used. William Walldorf, Jr. analyzes these relationships in a recent issue of Political Science Quarterly: “Sanctions, Regime Type and Democratization: Lessons from U.S.-Central American Relations.”

The Iranian regime, if it can’t be called an autocracy, is all the same one with high social cohesion (at least when it comes to interfactional tension on key issues, like in any other autocracy). It rests on an ideological-religious (and anti-Western) foundation. In this sense, the threat of elite “betrayals” is also minimal, just like in Cuba, where sanctions were powerless to prompt regime change. By the way, even before Fidel, American sanctions (of which few Russians are aware) turned out to be just as ineffective in attempts to change the behavior of another autocratic dictator, Batista. There was a predictable change of one leader for another, who turned out to be worse than the first for the United States, the one who imposed the sanctions.

Iran “after sanctions” is also in many ways worse for America than before. The sanctions must be taken into consideration more often, as the U.S. depends on Tehran to resolve numerous regional issues.

Another lesson from the history of American sanctions: Sanctions are easy to impose, but harder – and slower – to cancel. At the same time, it’s incredibly difficult for a country living under sanctions to re-integrate into the international economic and technological system.

How quickly will Iran return to the oil and gas markets? No earlier than the end of this year. Iran will instantly dump its current oil stores – around 30 million barrels – on the market. Massive investment is needed to build up oil production to previous quantities.

According to the USA, Iran missed out on $60 billion in energy investments over the past years. Tehran believes it will need $130 to 145 billion by 2020 just to halt the decline in oil production.

Our energy sector is in a similar state (technologically) to Iran’s, although not as bad. As such, a number of specialists indicate a fall in the ratio of recoverable oil, comparable to one experienced in Soviet times, to the levels the U.S. produced in the 1960s.

The Iranians are supporting their current levels of oil production thanks largely to the gas industry, since gas is mostly exported to Turkey and Armenia. The complete development of the new South Pars gas field alone will require $100 billion, since Iran doesn’t have the technology to produce liquefied natural gas. This is a predictable picture: The process of returning a long-isolated country to the international scene is a long and difficult one.

Complete Re-integration Will Never Occur

Iran has achieved some success in import substitution and economic diversification, despite dependence on imported components and the absence of normal lines of credit. The cohesion of the Iranian ruling elite, their focus on defending the country’s interests, relatively low levels of corruption, and, conversely, a high level of true democracy (with its own particularities, of course) as well as “feedback” from the population, played significant roles in these achievements. This is a typical picture of “ideocratic” regimes in general.

Under the sanctions, production of cement, metals, fertilizer, agricultural products, even traditional vehicles, increased (including for export). Non-oil exports provided two-thirds of the necessary revenue for critical imports, reducing dependence on oil. Of course, in many ways, import substitution came down to austerity measures. But achievements in industrial production are not least due to the highly educated workforce and engineering culture; Iran is number-one in the world in terms of individuals with a higher education in engineering. Iran avoided falling behind in science and education. Many Iranians study abroad; the government not only doesn’t restrict this, but encourages it as much as it can.

If the sanctions against Russia continue and are strengthened, then our “return” (which is inevitable sooner or later) will have its own particularities. We already experienced such a “return” at the beginning of the 1990s. Of course, it was like landing on another planet. We learned a lot of new things: about technology, society, economic and corporate practices, etc., about which we had been completely ignorant.

I am certain that the USSR killed off the “old-fashioned” leadership and intellectual class of the country. Since then, independence, progress (especially regarding scientific and technological breakthroughs) has only increased. Therefore, the next “landing” might occur on a planet even further away. It’s unknown whether it will be suitable for the life we’ve grown accustomed to as we continue, as usual, to “go our own way.”