The Empty Threat of Iran Sanctions

Let's try actually enforcing the sanctions against Iran, for a change.

Iran's president-elect, Hassan Rouhani

Iran's president-elect, Hassan Rouhani.

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The issue of Iran sanctions is, once again, rising to the top of the foreign policy agenda as new negotiations over Iran's nuclear program loom ahead following the inauguration this weekend of Iran's President-elect, Hasan Rouhani. Some argue for sanctions relief as a goodwill gesture. Others argue for continued pressure to demonstrate to Rouhani the gravity of the nuclear standoff he has inherited.

With support for Iran sanctions possibly the most bipartisan point of agreement in today's ultrapartisan political environment, however, it seems unlikely that real sanctions relief will be embraced – at least in the United States – any time soon. Even with Rouhani’s reformist rhetoric, there is still broad agreement from both sides of the aisle that Iran’s nuclear pursuits warrant penalizing foreign companies that prop up the regime. The Nuclear Iran Prevention Act of 2013, for example, passed the House this week with 400 votes in favor and only 20 against.

[See a collection of political cartoons on Iran.]

This reflects a learned view of Iran's negotiating tactics and overall strategic objectives, not to mention the nagging detail that the real leader of Iran and its nuclear program, remains Ayatollah Khamenei. Accordingly, U.S. sanctions are likely to continue and new points of leverage identified.

Despite the fanfare that accompanies each new round of sanctions, however, including those that went into effect on July 1, the fact is that most of these provisions are never enforced. More often than not, the only penalty that sanctions violators confront is exposure to enhanced market risks. These include so-called reputational risk, the costs of market uncertainty that come with the possibility that sanctions might, one day, actually be enforced, and, in some cases, the pressure felt by companies domiciled in allied countries to comply voluntarily with U.S. sanctions for the good of the order. To be sure, these are significant risks that have the power to modify corporate behavior – and have done so. U.S. government officials have leveraged these market risks, effectively in many cases, as economic and diplomatic tools to persuade companies to exit Iran. They brandish these risks as threats and sit back and hope that companies will avoid Iran out of fear or, in corporate parlance, as a function of prudent risk management.

After years of anemic consequences for companies that have absorbed these risks and gone unpenalized, however, the world’s corporations are now quite familiar with the lack of political will to back up sanctions threats with actual penalties.

Nevertheless, many sophisticated, global corporations respond to low probability scenarios when the potential costs are so significant. As a result, many of the world’s responsible and more risk adverse corporate actors have withdrawn from Iran. EU sanctions have also played a significant role in driving these decisions. Iran's economy has suffered as a result.

[See a collection of political cartoons on the Middle East.]

Although clearly hobbled, Iran’s “resistance economy" marches on. Foreign partners are still being identified, even if Tehran doesn’t always get its first choice. Not all companies are good corporate citizens or have low thresholds for sanctions-related risk. While many companies have exited Iran as a result of excessive risk exposure, less sensitive companies have stepped into the void, absorbed the risk associated with possibly – but probably not – being sanctioned by the U.S. government and picked up abandoned contracts at discounted prices.

No doubt, there are U.S. policy gains here nonetheless. Iran’s negotiating position has diminished and Tehran has had to pay a higher economic and financial price to attract foreign partners. Its oil revenues have fallen dramatically. Still, Iran appears to be continuing along its current path. And creative new sanctions strategies are, again, in the works on Capitol Hill.

There’s a more straightforward solution than merely enacting new measures. Policy-makers should acknowledge the limitations of a sanctions policy built on largely empty threats. Actually enforcing existing policy on Iran's most significant partners would be far more effective. Such a strategy would have a disproportionate impact on the most problematic companies, those with high thresholds for risk. Prove that the threat is real and corporate calculations would instantly change globally.