The attempt to be too clever in the Iran sanctions

To understand the Iranian drama requires dual lenses. To the left are the nuclear talks, in which international negotiator Yukiya Amano has announced a potential breakthrough — Tehran may agree to serious scrutiny of its nuclear research installations. To the right are Western-led sanctions, an attempt to motivate Iran as regards the left lens by slashing its main source of hard cash — oil export revenue.

We are focused today on that right lens. But to dispense with the left first, Amano, head of the International Atomic Energy Agency, yesterday publicly announced the potential for a new day with Iran (above left, with Iranian nuclear negotiator Said Jalili). IAEA inspectors might for the first time in a half-decade take a look at all the sites, and interview all the players, that they have sought in order to remove the conclusion that Iran is bent on possessing a game-changing nuclear weapon. Later talks could focus on the end-game, which is elimination of Iran’s weapons-grade nuclear material.

This announcement instantly unsettled my antennae. In most processes, announcements coincide with the peak achievement. According to that logic, the peak should be an actual binding agreement. That we get it when the peak is simply anticipated makes me suspicious that something less is forthcoming. Amano, himself a past doubter as to Iran’s genuineness, says he perceives real movement this time.

Putting that aside, let’s skip to the right lens — the sanctions. As of July 1, they deny Iran access to the international banking and insurance system, without which it is very, very difficult to conduct a large-scale oil business. This blog has been skeptical that the sanctions will work — the history of Iraq and South Africa, for example, shows that stubborn nations can work around apparently crippling sanctions. Iran specialists say the evidence is that Tehran is either anticipating or already feeling the pain, hence its presence and attitude at the talks. We are watching.

In an angle missed by everyone else as far as I can tell, the Financial Times’ Javier Blas, James Blitz and Geoff Dyer report on Western sanctions tinkering. This is an attempt to address a serious flaw in the sanctions strategy that, if left untended, could seriously boomerang on the international community.

[Update: at Eurasia Group, David Gordon reminds me that their own Greg Priddy and Cliff Kupchan pointed out this problem, and its solution, a week ago at the New York Times a week ago. It is a must-read.]

The flaw involves tanker insurance, which no tanker will go without and risk the potential of billions of dollars in liability should there be an accidental spill or other incident. The tinkering is to waive the sanctions to allow insurance for certain volumes essentially to four countries — China, India, Japan and South Korea. These are the biggest customers for Iran’s 2.2 million barrels a day of oil exports. The last three have agreed to cut back their purchases, but still intend to buy some, which the West actually has encouraged. But the worry is that they won’t buy any at all if there is no tanker insurance, or that rogue insurers could step in and offer so much insurance that the sanctions could become meaningless.

You see, in a perfect sanctions world, the punishment is bad for the victim, and does not inconvenience anyone else. However, should too much Iranian oil vanish from the global market, prices could surge, which would be very inconvenient, say, to President Barack Obama, currently a candidate for re-election, not to mention the struggling economies of Europe.

So the idea is to exchange this insurance tinkering — they are calling it a shipping waiver — for an Iranian "pledge" not to develop nuclear weapons. The trick is to do this in a way that does not appear weak, since pledges are not enforceable. To check this logic, I queried Daniel Byman, a Middle East analyst and professor at Georgetown University. Byman:

A pledge would be viewed with a lot of suspicion; [it would be] better than nothing, but most would doubt. And Obama could not publicly embrace this politically.

Yet Byman also thinks the story is credible. "Europeans are far more amenable to this than the U.S.," he told me. "It depends what the [Iranian] guarantees are in practice."According to the FT, the U.S. is together with Europe in the shipping waiver idea, the strategy being to lock in the cuts to Iranian exports, and no more. Here is what Citibank’s Ed Morse told me about the report:

The shipping waiver is a bone. It enables the original sanctions to go into effect globally but enables those governments who limited the amount of oil being imported to have insurance coverage for that amount of oil. It reduces the impact of the unintended consequences of ancillary sanctions on insurance and makes for smoother relations with allies.

What troubles me is the attempt to be clever. When you try to be perfect in real life, you can end up with some imperfect results. Take our economic history of the last decade.