Sanctions Relief Won’t Be a $100 Billion Windfall for Iran’s Terrorist Friends

For one, oil money ain't what it used to be. And second, Tehran has bigger problems to deal with at home.

Iranian President Hassan Rouhani (C) sits next to Japanese Prime Minister Shinzo Abe (L) and Iranian Foreign Minister Mohammad Javad Zarif (R) during the World Economic Forum in Davos on January 22, 2014. Iran's President Hassan Rouhani takes centre stage at the Davos World Economic Forum Thursday, as he seeks to drum up investment for his sanctions-hit economy amid thawing relations with the West. AFP PHOTO ERIC PIERMONT        (Photo credit should read ERIC PIERMONT/AFP/Getty Images)
Iranian President Hassan Rouhani (C) sits next to Japanese Prime Minister Shinzo Abe (L) and Iranian Foreign Minister Mohammad Javad Zarif (R) during the World Economic Forum in Davos on January 22, 2014. Iran's President Hassan Rouhani takes centre stage at the Davos World Economic Forum Thursday, as he seeks to drum up investment for his sanctions-hit economy amid thawing relations with the West. AFP PHOTO ERIC PIERMONT (Photo credit should read ERIC PIERMONT/AFP/Getty Images)

As negotiators close in on a nuclear deal with Iran, there’s been a corresponding uptick in ominous expectations about how Tehran could use the potential rush of funds from sanctions relief to prey on its weak neighbors and secure regional hegemony. U.S. lawmakers like Sen. Mark Kirk (R-Ill.) and lobbying outfits like the Foundation for Defense of Democracies argue that once the sanctions are gone, Iran will stop at nothing to support groups like Hezbollah or Hamas, as it has in recent decades.

These fears are wildly overblown. Iran’s domestic economic needs are real, as is Iranian President Hassan Rouhani’s imperative to deliver on the promises that got him elected and proceed with the talks. To ensure the stability of their government, Iran’s leaders must tend to the problems at home and make the investments necessary to sustain their future. Supporting Syrian President Bashar al-Assad and other regional actors is an important, but secondary, objective.

Certainly, Tehran believes it has always been in its interest to support its friends in the region, and that no level of sanctions could stop them from doing so. This is a government that has, after all, funded and armed radical elements since the fall of the Shah of Iran in 1979, through the Iran-Iraq War, and after the intensification of crippling sanctions in 2010. Tehran continued to invest in the Assad regime, despite the immediate loss of over a quarter of its 2012 oil revenues compared to the previous year, and $60 billion in potential revenues from that point forward. Likewise, Iran has assisted Shiite militants in Iraq, the Taliban in Afghanistan, and is now supporting the Houthis in Yemen, despite major economic crisis at home.

So, why should Washington free Iran from sanctions and allow it access to the $100 billion in oil revenues presently locked up in restricted accounts? While the thought of indirectly financing terrorists is, frankly, terrifying, this fear-laced argument assumes that Iran believes the money — which amounts to a little less than one-fifth of its 2013 GDP — would be best spent on proxy wars. But judging from the economic difficulties it faces, especially following the collapse in oil prices over the past year, that assumption seems especially dubious. This argument, irrational though it may be, is a very powerful one, given U.S.-Iran history, the volatile nature of the Middle East, and Iran’s past support of extremist groups (as the State Department reported, again, only two weeks ago). It does not take much to convince Americans that Iran will stop at nothing to support terrorism as vigorously as it can.

But Iran’s leaders know how much money is at stake, and how it can be used. It is implausible that, after the supreme leader allowed Rouhani to be elected president in 2013 on a platform pledging economic recovery — in part, through promises of sanctions relief — he would support initiatives that leave the Iranian population in the cold in order to protect foreign groups and leaders like Assad.

Since the U.N. intensified sanctions against Iran in 2010, it has only grown more desperate. For example, the country’s oil sector now needs anywhere from $50 to $100 billion in investment to improve production, a point that Iranian officials, including Oil Minister Bijan Namdar Zanganeh, have emphasized repeatedly over the past two years. External investment was cut off by sanctions, and Iran has not had the spare capital to maintain, much less improve, its facilities. Nor has it enjoyed access to new technologies that could enhance oil field productivity.

Oil is, of course, only one part of Iran’s economy, which includes struggling industries like automobile and domestic manufacturing. To avoid an overdependence on global oil markets, Iran has also made it state policy to build a diversified export economy. Given the prevailing drop in global oil prices, Iran is likely to continue trying to strengthen other sectors to maximize its growth potential and limit its vulnerability to an uncertain market.

Lest observers assume that Iran would have turned its entire economy into a terrorism-financing machine if only it had the money, consider the fact that the most intensive sanctions on the country are only 3 years old. Before January 2012, oil sales were bringing in nearly $88 billion annually, money that Tehran largely spent as any government would: on domestic and foreign-policy priorities — not solely to back anti-Western interests.

As with the effort to wean its economy off oil, Iran has also sought to reduce costly subsidies on everything from food, to housing, to energy, to improve the economy’s efficiency, reduce waste, and spur competitiveness. But sanctions targeting Iranian oil revenues hampered that effort, as the country lacked the hard currency — and political will — to forge ahead with subsidy reform, at least until Rouhani’s election. It is now struggling to complete this project, one that sanctions relief would undoubtedly boost by providing Iran with fresh revenue and reducing its citizens’ dependence on government handouts. This is particularly important for Rouhani, who will be looking to shore up domestic support in the run-up to parliamentary elections in February 2016 and win reelection in 2017.

But beyond this, any rosy expectations for Iran’s economy must be tempered by the reality that oil, still its primary economic driver, is worth less today than in years past and is predicted to stay that way for the foreseeable future. Iran simply won’t have as much money coming in on an annual basis, due to global economic conditions, until the rest of its economy picks up speed. Even if Tehran had wanted to spend $100 billion on nefarious side projects a few years ago (and let’s be clear: given $100 billion was more than the entire annual oil export revenue for Iran at the time, even when prices were high, this would hardly be credible), it makes even less sense today.

Consequently, it is much more likely that only a portion of the liberated $100 billion and any future revenues will go to support Tehran’s regional adventurism. No one knows how much, but experts have made some educated guesses. Eli Lake’s recent survey of a variety of analysts in Bloomberg View suggests that Iran sends the Assad regime anywhere from $3.5 to $20 billion a year, figures that pale in comparison to annual military spending by the United States and the Gulf Cooperation Council.

Moreover, the negotiated end of nuclear-related sanctions against Iran does not mean the United States will stop monitoring where Iran spends its money. Even if negotiations produce a deal, U.S. terrorism-related sanctions against Iran will remain in place. Some of these sanctions bar certain identified individuals and entities from accessing the U.S. financial system, while others deny Iran wholesale access to the U.S. economy. Some specific Iranian banks and entities will remain sanctioned, and new ones can be added if their conduct violates the terms of U.S. sanctions, such as Executive Order 13224, under which Iran’s state-owned Bank Saderat was sanctioned in 2007.

Moreover, since 9/11, the international banking system has adopted new standards and helped create intergovernmental groups like the Financial Action Task Force to crack down on money laundering and terrorism financing. Banks monitor their business far more aggressively now than ever before to detect and prevent such activities, in part by using the best practices and guidelines developed by FATF. Banks are also under greater scrutiny by their national regulators — and, in fact, by the U.S. Treasury Department — to keep their systems from being used by terrorists and their financiers for illicit acts.

If need be, Washington and its partners can always augment sanctions to deal with specific Iranian threats, such as Iran’s conventional arms market. These could be modeled on an existing authority, like sanctions covering the manufacture, shipping, and financing of weapons of mass destruction. Rather than completely abandoning sanctions as part of the nuclear deal, the United States could use them as an effective deterrent in this regional context. Care, however, will have to be taken to avoid giving Iran a pretext to argue that the United States is undermining the very sanctions relief that made a nuclear deal possible in the first place.

The United States has tools to combat Iranian regional adventurism and need not jettison the nuclear deal to preserve sanctions, which is just one of them. Regardless of the conflicting views of the nuclear deal itself, there is near-universal agreement that it will benefit Iran economically. And there is a convincing body of information and analysis to support the position of President Barack Obama’s administration that Tehran will use sanctions relief to generate economic stability at home, and that it can successfully counter any part of Iran’s newfound wealth that it delivers to bad actors.

Opponents can always point to a history of Iranian support for nefarious actors to justify their skepticism of the deal. But all this suggests is that Iran may continue to engage in this policy after a deal, not that it will ignore its domestic needs in this pursuit. In fact, an Iran with the political will and monetary resources to rebuild its economy and restore stability at home will have fewer incentives to shore up its alliances with those who oppose the United States and the international system. It’ll have too much to do at home and potentially too much to risk. Far from being a giveaway to a terrorism-supporting regime, then, sanctions relief may be the key to creating an Iran with a real stake in the international order.

Photo credit: Eric Piermont/AFP

Richard Nephew is a fellow at the Center on Global Energy Policy at Columbia University. He was formerly part of the U.S. negotiating team with Iran and advisor on Iran at the White House.