There was an op-ed published in the Washington Post last week, which claims that the U.S. has failed to fully deploy economic sanctions to convince Iran to turn away from its pursuit of nuclear weapons and describes the U.S. sanctions regime as “flimsy”. The evidence is a perceived lack of OFAC designations targeting major Iran sanctions violators in foreign nations. Unfortunately this argument rests on an incomplete accounting of the both scope and impact of the United States’ efforts to leverage its economic power to divert from the path of nuclear proliferation.

U.S. sanctions on Iran have a focused on a variety of proliferation, terrorism, and human-rights related issues. The Obama administration’s primary goal, however, has been two-fold: (1) To use economic pressure to compel Iran to negotiate an acceptable compromise to the current nuclear standoff, (2) to impair its ability to import goods and materials needed to maintain and expand uranium enrichment or develop weapons of mass destruction.

While the article offers up the Comprehensive Iran Sanctions and Divestment Act (CISADA) as the centerpiece of the administration’s sanctions efforts, the reality is that piece of legislation is relatively limited in scope when compared to more recent efforts. CISADA’s main provisions are the prohibition on the exportation of refined petroleum products to Iran, investment in Iran’s energy industry, and the provision of financial services to entities identified as affiliated with the Iranian Revolutionary Guard Corps (IRGC) or as complicit in the proliferation of WMD or terrorism. While it is true that Iran’s need to import refined petroleum is indeed an economic weakness, a much greater vulnerability is the government’s reliance on oil exports to fund its budget.

Sanctions contained in section 1245 of the National Defense Authorization Act of 2012 (NDAA) and the Iran Threat Reduction and Syria Human Rights Act (ITRSHA) of 2012 have a far more pronounced impact on Iran’s oil-export driven economy. Section 1245 (d)(1) of the NDAA authorizes the President to impose sanctions on any foreign financial institutions engaging in transactions related to the import or export of all petroleum products, unless their country of primary jurisdiction demonstrates a “significant reduction” in petroleum purchased from Iran and are then granted a waiver. It also includes sanctions for the provision of insurance or re-insurance for tankers carrying Iranian oil. Section 218 of ITRSHA expanded the scope of existing regulations so that U.S. companies are fully responsible for the actions of their foreign subsidiaries. Executive Order 13622 expanded sanctions to include any individual or entity engaging in a transaction related to the purchase of petroleum from Iran. The four major importers of Iranian oil have responded to the threat of sanctions by drastically cutting their oil purchases. When combined with the E.U. oil embargo which began in July, sanctions have devastated Iran’s coffers. Iranian oil exports are down more than 50%, costing the government an estimated $5 billion per month.

U.S. and international pressure on Iran’s financial system has further damaged the Iranian economy. E.O. 13599, issued on February 5, 2012 blocked all Iranian financial institutions, including the Central Bank of Iran and threatened sanctions on any foreign financial institutions dealing with Iranian banks without a waiver. Due to the all-important position held by New York in the international financial system, a huge percentage of international trade at some point enters U.S. jurisdiction. This has led to a situation where financial institutions are afraid to even handle legal transactions with Iran for fear of running afoul of sanctions. U.S. exports of non-food humanitarian goods, which are legal if authorized by OFAC and are made up almost exclusively of medical supplies, were down over 40% during the first half of this year. In March, the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the European organization which supplies inter-bank messaging needed to conduct most transactions, took the unprecedented step of cutting most Iranian financial institutions off from its system. This action, more than any other, is why Iran has increasingly turned to bartering to conduct its foreign trade. Overall, the result of the multilateral sanctions put together by the administration has been a massive devaluation of the Iranian Rial, which recently hit an all-time low, combined with skyrocketing inflation, which many estimate at over 50%.

Oddly, the articles holds up Ronald Reagan’s decision to sanction Western European companies for selling U.S.-origin equipment and technology needed for the Soviet Union’s Urengoy-Pomary-Uzhgorod pipeline, despite the potential backlash, as an example of the type of political will that is missing in our Iran policy. Unfortunately this example does not hold up to close scrutiny. The authors claim that U.S. sanctions thwarted the project, preventing a “dangerous level of dependency in Western Europe 0n Soviet supplies of natural gas.” However, the pipeline in question was in fact finished in 1984 and by 1990 the Soviet Union was supplying 75% of Europe’s imported natural gas. Furthermore, the original sanctions issued in 1981 applied only to U.S. companies, not their foreign subsidiaries or licensees. While Reagan may have exercised some degree of political will in June of 1982 in extending sanctions to close these loopholes, this will was short-lived, as sanctions were lifted just 5 months later.

The goal of U.S. sanctions policy is not a complete embargo of Iran or the collapse of its economy. Indeed, the development of targeted or “smart” sanctions was a direct outcome of the failure of the comprehensive embargo imposed on Iraq in the 1990s, which resulted in massive humanitarian crisis without having any concrete effect on regime behavior. As noted recently by Patrick Clawson, an Iran expert at the Washington Institute for Near East Policy, the Iranian Supreme leader may well believe that the nuclear program should be pursued even in the face of a complete economic collapse, à la North Korea. This type of determination is not unprecedented in the region; former Pakistani Prime Minister Zulfikar Ali Bhutto is reported to have said that “If India builds the bomb, we will eat grass or leaves, even go hungry, but we will get one of our own.” To this point there have been no indications that sanctions might lead to a popular uprising and regime change by economic collapse is an unlikely outcome in a theocratic autocracy such as Iran. Furthermore, precipitating such a crisis is unlikely to win many friends within the country’s moderate majority.

Preventing Iran from exporting a single drop of oil would also have a significant negative effect on the global economy during a time of great economic uncertainty. While Saudi Arabia has increased its oil production in response to the decrease in Iranian oil on the global market, its spare production capacity is a continuing concern. The leeway granted to the President in sanctions legislation is included with the understanding that too strictly interpreting sanctions may result in an array of negative externalities without accomplishing the desired outcomes. The administration should and to this point has been wary of taking action which could have serious ramifications for the global economy, without any indications that such action would move Iran farther away from acquiring a nuclear weapon.

This is not to say that significant sanctions evasion is not occurring, as evidenced by a recent report by Reuters which accused Swiss oil-trader Vitol of buying and selling Iranian oil despite sanctions. But the President has been forced to walk a tightrope, raising the economic penalty to Iranian non-compliance, while simultaneously preventing a spike in oil prices or a complete Iranian economic collapse. Focusing too much on the number of designations issued by OFAC misses the forest for the trees. The administration has been extremely successful in convincing or in some cases compelling foreign governments and financial institutions to act against their economic interests and reduce Iranian oil imports, without having to issue an inordinate number of OFAC designations. Sanctions have had a clear impact on Iran’s economy and sharply reduced oil revenues. Whether the result is a change in Iran’s behavior remains to be seen, but total economic warfare is not an effective way to change their mind.

*Today’s post is written by Samuel Cutler. Sam was recently brought into the firm as our policy advisor. We are delighted to have him on board and hope that he becomes a regular contributor to Sanction Law.

The author of this blog is Erich Ferrari, an attorney specializing in OFAC matters. If you have any questions please contact him at 202-280-6370 or ferrari@ferrari-legal.com.