Iran sanctions’ impact could prove slippery

January 9, 2012

By Kevin Allison
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Iran’s rulers are feeling the heat. The Islamic Republic was forced to prop up its currency on Jan. 4, just days after the U.S. imposed tough new sanctions to goad it into abandoning its nuclear weapons programme. A European curb on Iranian crude imports would add to pressure on Tehran ahead of elections in March.

Iran’s nuclear ambitions are a problem. But more sanctions may not be a solution. If China doesn’t cooperate, they may just end up distorting oil markets.

The new measures have teeth. The U.S. rules target Iran’s oil sales by making it difficult for foreign firms to do business with the country’s central bank. An EU embargo, agreed in principle this week, would affect about a quarter of Iran’s roughly 2.5 million barrels per day of oil exports.

China remains the biggest single buyer of Iranian crude, but U.S. Treasury Secretary Timothy Geithner can expect a difficult conversation when he raises the subject in Beijing next week. China’s foreign minister has already criticised the new U.S. restrictions. It prefers to act through the U.N., arguing that unilateral sanctions merely increase tensions. Tehran’s recent threats to shut the Strait of Hormuz suggest Beijing has a point.

China may also have a financial incentive not to cooperate. If other buyers dry up, Beijing would gain huge leverage over Iran in oil price talks. The U.S. seems unlikely to retaliate against one of its biggest trading partners – China has defied previous U.S. sanctions without significant consequences.

Sanctions will certainly hurt the Iranian economy. But Tehran may be able to cope. Cuba and Saddam Hussein’s Iraq survived tough sanctions for years and the hermit kingdom of North Korea is now nuclear. Iran is different – its leaders face domestic political opposition. But the pain of sanctions could just shore up anti-Western sentiment.

Iran’s adversaries have good reasons to demand its full capitulation on nuclear weapons; a mere return to negotiations is not enough. But they must proceed carefully. History suggests the more likely outcome is drawn-out sanctions that distort the oil market, but fail to stop Tehran’s pursuit of atomic weapons.

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