Energy

Sanctioning Iran: Will it work?

Apr 30 2019 - Sophocles in his tragedy Antigone has the line “evil[folly] appears as good in the minds of those whom god leads to destruction”. First came the US unilateral exit from the historical Joint Comprehensive Plan of Action (JCPOA without the consent from our European allies with the resulting division between the US and Europe regarding policies towards Iran. US also restored sanctions against Iran but gave some time for energy-needy allies to import energy from Iran against a deadline. Some like Japan have complied grudgingly with the US orders. Others, particularly China and India have gone on importing Iranian energy.

It seems that US has just dropped the other shoe now by banning those countries still importing Iranian oil from doing so after early May. If anyone does sanctions-breaking business with Iran they will be properly punished, the Trump administration has warmed. Much has been made of the role of dollar-dominated world trading system and financial arrangements through SWIFT etc. What will be the geoeconomic and geopolitical impact? Is there a way to find out through some kind of rigorous model-based analysis?

Indeed there may be a sober reality-based way of looking at the possible economic consequences and draw out the plausible geopolitical scenarios. Recently, I used the best available data from the World Bank, the IMF and other national and international sources about the Iranian economy to do precisely this exercise.. My results pertain both to the overall effects for the Iranian economy, and specific sectors. More importantly, they also give us some rough insights into what the sanctions might mean for the EU and US firms.

In order to assess the impact using this consequentialist logic, I derived several sets of model-based counterfactual results. My work which is ongoing can be seen as a first step in analyzing the impact of US sanctions rigorously. Aggregate consequences for the Iranian, EU and US economies in terms of output and employment losses are estimated from several models for several scenarios. These are sanctions with high and low bites and an in-between scenario. Finally, a more complex economic systems model with explicit banking and financial sectors is used to analyze the financial systems scenarios.

It is clear that Iran will suffer. But so will the US and EU economies. With maximal enforcement, Iranian GDP will decline by several percentage points. EU will lose about half a percentage point and US about two-tenths of a per cent.But some of the model results already at hand should give thoughtful US and EU citizens pause. As a first approximation, my current modeling results show that the alternative financial ararngements will take about six months to kick in and will lead towards the very low loss scenario, especially for Iran.But for EU and the US financial firms, the loss will be considerably more than that inflicted on Iran by the US.

This being the case, what will the US gain geopolitically? According to political analysts, there are two groups in US high level policy making arena. Trump, it is claimed, is a transactions oriented leader and wants Iran to come to the table after suffering losses with a better deal for the US. But the details of how this could happen or what kind of deal the US could expect have not been revealed.

The second group centered around Bolton—according to the geopolitical analysts— wants to draw Iran into a military confrontation if economic sanctions by themselves do not lead to a regime change. Even in my worst case economic scenario for Iran a regime change from sanctions alone does not seem likely. So will the US or its proxies such as Israel and Saudi Arabia then engage in an actual military operation?

The very possibility is worrying. But sober calculations in light of outcomes of interventions in Iraq, Afghanistan or Libya do not seem encouraging. There is no prospect of a quick victory against Iran and any lengthy intervention will destabilize the region further. It is also not clear what the Chinese and Russian responses will be.

However, historical evidence shows that wars are not always—at least at the beginning— results of such rational long term calculations. Usually, like the beginning of World War 1 or 2, a small incident leads to a wider conflagaration. If the situation is already fraught and tensions among the big powers are sufficiently high this could happen. One then has to hope that we have not reached that level of tension and in particular the current tensions among the US, China and Russia can be defused through appropriate diplomatic steps. That is our only hope to avert an Antigone-like tragedy in the 21st century.

 
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