Who’s Sanctioning Whom?

As the country that gave the world chess, it is only appropriate that Iran’s current sanctions standoff with the United States resembles a game between two inept players. Tehran repeatedly makes bad moves; Washington plays better but has no path to checkmate.

Events this week gave encouragement that steadily tightening Western oil sanctions on Iran, imposed over its alleged nuclear weapons program, were having an effect.

Britain and France are working on a European Union-wide ban on importing oil from Iran, while an amendment to the 2012 U.S. defense authorization bill would try to close down transactions with Iran’s Central Bank. China’s leading refiner, Sinopec, halved its January purchases of Iranian crude on a dispute over credit terms, while Saudi supplies surged by a third. This is exactly the intention of the amendment: to narrow the circle of Iran’s customers to China and a few others, giving them the ability to extract discounts and thus starving the Islamic Republic of revenue.

This follows the stunning effectiveness of sanctions on Syria, where oil exports have fallen almost to nothing, and Shell, Total and other Western operators have withdrawn. (Of course, this has not stopped the killing, and Syria is but a bit player in global oil markets.)

Iran’s response was surprisingly panic-stricken. It’s hardly as if the tightening of sanctions has come as a surprise — they have been in the works for months, and the Islamic Republic has lived under some kind of oil sanctions ever since its birth 30 years ago.

One sign of panic is Iran’s escalating rhetoric about the energy reserves it shares with its neighbors. In November, Iran oil minister Rostam Ghassemi, a Sepah (Revolutionary Guards) commander, announced that development of the "shared fields" would be accelerated. Then, on Dec. 22, the spokesman for the majlis’s energy committee, Emad Hosseini, said that Arab countries were cooperating to steal oil and gas from fields that cross into Iranian territory. He specifically accused Qatar, with whom Iran shares the world’s largest gas field, Kuwait, and Saudi Arabia. Iraq’s coveted Block 9 on the Iranian frontier, to be auctioned in March, is another spot to watch, after Iran occupied a border oil well in 2009. The issue of the shared fields has surfaced episodically for years, but highlighting it now in inflammatory terms puts pressure on Iran’s Arab neighbors.

On the same day as Hosseini’s comments, a Revolutionary Guards admiral announced a war game in the Strait of Hormuz, through which some 40 percent of international oil trade passes. Blocking Hormuz is widely seen as a possible Iranian response to further sanctions or military attacks — but in practice the United States could probably quickly reopen the waterway, and would be supported by Europe, India, China and every other major oil importer. (It’s also worth noting that virtually all of Iran’s own exports go through the strait.)

On Dec. 20, semi-official news agency Mehr News announced that Iran had blocked imports from the UAE, with which it did $15 billion in trade in 2011, to punish it for supporting U.S. sanctions. The Iranian foreign minister quickly backed away from this suggestion, but the damage was done: The Iranian riyal plunged by 10 percent against the dollar as traders hurried to offload the currency, and has now lost half its value in the past few months.

The declining riyal is also part of President Mahmoud Ahmadinejad’s policy to help fill the government’s budget deficit ahead of parliamentary elections in 2012. This comes at the cost of worsening inflation, already boosted by the removal of fuel and electricity subsidies in late 2010 (officially 19 percent, but unofficial estimates put it as high as 28 percent).

Iran’s own mismanagement of its economy and oil sector does it more damage than sanctions. It has oddly failed to use its massive energy resources strategically — by exporting gas to Gulf neighbors, by offering Europe a real alternative to Russian gas, or by making Chinese companies an offer they could not refuse to develop its oil fields.

Iran’s economy is in bad shape, and the country has not been more isolated diplomatically since the early years of the revolution. But Washington should not congratulate itself just yet.

Oil sanctions are a bad idea if they work, and a bad idea if they fail. If they work, American allies will be punished and some economically vulnerable countries, such as Greece, will suffer a cutoff of oil just at the time they can least afford it.

Or, if they "succeed" more dramatically, and Iran’s exports are really interrupted, oil prices will soar, plunging the world back into renewed recession. Tehran can also respond by sabotaging oil facilities in its Gulf neighbors and fomenting trouble via its proxies in Iraq’s oil hub of Basra. An isolated Iran can afford to play such a dangerous game with the global economy.

But most likely, oil sanctions would fail, and a great deal of diplomatic capital will have been expended to no avail. Japan and South Korea, for instance, both rely on Iran for 10 percent of their crude imports, and waived oil sanctions. Turkey renewed its long-standing crude contract last Wednesday. And despite its incompetent response so far, Iran should be able to find ways round tightened oil sanctions — barter trade, for example, or smuggling via Iraq and Pakistan — with the assistance of ingenious sanctions-busters lured by lucrative deals. What it loses in discounts to China is largely made up by the higher prices these geopolitical tensions bring. The United States’ last secret weapon — embargoing gasoline shipments to Iran — inspired Tehran to make its long-overdue subsidy reform and step up domestic refining capacity. In a way, the U.S. Congress did Iran a favor.

As for the shared fields — with production potential of 1.1 million barrels per day — these are largely to be developed by domestic Iranian companies linked to the Revolutionary Guards, enormously enriched by smuggling, corruption, and sanctions evasion. Meanwhile the middle class, historically the driver of democratization, is being decimated by inflation and economic malaise.

The geopolitics of the proposed sanctions make even less sense. In the United States’ interminable confrontation with Iran, a country with 2 percent of its GDP and 1.5 percent of its military budget, it is handing gifts to two real rivals: China and Russia. China benefits, as noted, from discounts on its oil purchases. If the Central Bank sanctions work as intended, a China hooked on cheap Iranian oil is hardly going to work for any resolution to the standoff.

Meanwhile, Russia’s Urals grade is, unusually, fetching higher prices than better-quality Brent oil as European refiners scramble for alternatives to Iran. And the Kremlin is glad to see the neutering of its greatest potential rival in the EU gas market.

The lengths to which the United States will go to shoot itself in the foot are sometimes astounding. Despite a supposed cooling of relations, U.S. officials visited Saudi Arabia to persuade it to overcome its reluctance to help bear the "costs" of sanctions, "costs" which for Riyadh amount to selling more oil at higher prices. The cost to the U.S. economy of expensive oil, quite plausibly half a trillion dollars, caused by decades of sanctions on investment in Iran, Iraq, and Libya is never mentioned.

Still unanswered is the rather important question of how the U.S. plans to turn any tactical gains from sanctions into strategic success — or, indeed, even to define what realistic "success" looks like.

Veterans of the Iran-Iraq war, the Iranian hard-liners have seen their country survive even tougher times than today, and emerge, in their view, with revolutionary fervor strengthened. For them to bow to sanctions by making significant concessions on the nuclear issue would be political suicide.

So, is Washington trying to delay Tehran’s obtaining nuclear weapons for long enough for the situation to change in some undefined but favorable way? That would fit with the covert campaign of sabotage and assassination currently taking place. Does it hope that economic pressure will bring about the ascendancy of pragmatic conservatives such as former president Ali Akbar Hashemi Rafsanjani or Ahmadinejad opponent Ali Larijani? Or is it gambling on a total collapse of the regime?

Success thus requires a diplomatic finesse and an understanding of Iranian politics notably absent to date. To open up real fissures in the regime, the West needs to make an offer capable of acceptance — acknowledgement of Iran’s legitimate interests, with removal of some sanctions as carrots for cooperation. Inevitably, Supreme Leader Ali Khamenei and the hard-liners would regard such a deal, probably correctly, as a Trojan horse engineered for their downfall.

My advice? Ignore all the crowing coming from Washington this week. Iran’s position may have weakened, but despite dangerous brinkmanship with the world economy at stake, the game is still essentially in stalemate.