The human costs of the Iran sanctions

In June of last year, an American college student walked into the Apple store in Alpharetta, Georgia, to buy an iPad, chatting with her uncle in Farsi. The store clerk asked what language they were speaking, then refused to sell the young woman an iPad, citing U.S. sanctions against Iran ... although there is no law that prohibits U.S. companies from selling to U.S. citizens of Iranian descent. There was an outcry from the Iranian-American community, denouncing the incident as ethnic profiling.

But the story goes much deeper. Iranian-Americans, who are allowed under U.S. law to send money to elderly parents in Iran, cannot find any bank in the United States or Europe that will wire the funds. Charities that raised money for emergency relief in response to the devastating 2012 earthquake in northern Iran were turned down by dozens of banks as they tried to send the funds to Iran -- even though they had a license from the U.S. Treasury Department. Iranians attempting to download software, such as Adobe Acrobat or MacAfee AntiVirus, find the websites blocked. Pharmaceutical companies with contracts to sell medicine and medical equipment to Iran -- quite legally -- find that no shipping company will carry these goods, and no bank will accept payment from Iran. 

The result is that Iranians who want to pay their children's college tuition abroad, or Iranian-Americans who want to send money to elderly relatives, have to carry suitcases with tens of thousands of dollars across borders. The most effective medicines to treat cancer and AIDS, which are manufactured only by Western pharmaceutical companies, can no longer be gotten within Iran. Ordinary commerce, as a matter of necessity, is now deeply dependent on the international criminal network in order to function at all.

This has come about because the sanctions on Iran are designed to cripple its entire energy sector, all of its imports and exports, and access to the international financial system. And the U.S. enforcement has been so aggressive that companies do not want to risk even legal business transactions with Iran. The results have been devastating for the Iranian population, triggering a collapse of industry, skyrocketing inflation, and massive unemployment. As the rich and politically-connected prosper under sanctions, Iran's middle class has disappeared, and even access to food and medicine has been compromised.

In the 1990s, the U.N. Security Council imposed sanctions on Iraq that caused extensive humanitarian damage. After the ugly spectacle of Iraq, the Security Council began crafting the use of sanctions much more carefully. When Iran's President Mahmoud Ahmadinejad renewed Iran's efforts to enrich uranium, the United Nations responded with measures that were narrowly focused on these efforts. The Security Council required U.N. member nations to seize cargo if it was related to Iran's nuclear program, or its production of ballistic missiles, and to deny entry and freeze the bank accounts of individuals with ties to Iran's nuclear program or the military.

But the United States has taken a much different path. The United States first imposed sanctions on Iran in 1979, after the overthrow of the U.S.-backed Shah Mohammad Reza Pahlavi. The Reagan administration tightened the sanctions, in response to Iran's ostensible role in the 1983 bombing of Marine barracks in Beirut. But those sanctions were always unilateral, with little support from the rest of the international community. In the 1990s, when the United States passed the Iran-Libya Sanctions Act, which sought to punish foreign companies for doing business with Iran, it was met with furious indignation on the part of many U.S. trading partners. In 1996, the European Union brought an action against the United States before the newly-minted World Trade Organization, claiming that the U.S. sanctions violated international trade law. The United States agreed not to enforce these "extraterritorial" provisions, so foreign corporations, including major oil companies such as Shell, Total, and Russia's Gazprom, continued to invest in Iran. And until 2000, subsidiaries of U.S. companies, such as Halliburton, could still trade and invest in Iran.

The U.S. sanctions on Iran do make some allowance for humanitarian relief. Former Secretary of State Hillary Clinton said that "our goal is to pressure the Iranian government without contributing to the suffering of ordinary Iranians," and according to the Treasury Department, it is the "longstanding policy of the US" not to sanction the export of food and medicine to Iran.

Yet Vice President Biden touted the U.S. sanctions on Iran as the "toughest sanctions in history." Not only do they target Iran's entire economy, in the last three years, the enforcement has been stunningly aggressive. The Treasury Department has gone after both U.S. and foreign banks, seeking huge penalties for violating the sanctions against Iran and other U.S.-sanctioned countries. The British bank Barclays paid $176 million to the Treasury Department for violating U.S. sanctions laws. In 2012, the Dutch bank ING paid a record $619 million, and last December, HSBC paid the Treasury Department a penalty of $375 million.

The massive penalties have sent a chill through the international business community. But the aggressive enforcement is not aimed only at corporations supporting the Iranian regime. Much of the enforcement has little to do with any security concerns, as when the Treasury Department prosecutes companies for inadvertently violating the sanctions in small, routine transactions. Geico, for instance, was prosecuted for accepting two payments for car insurance from someone who was on a list of targeted individuals. The Treasury Department prosecutes nonprofit organizations as well. The nonprofit Association of Tennis Professionals paid a penalty of nearly $50,000 for making salary payments to an Iranian tennis umpire. While the United States justifies the sanctions with language about "nuclear weapons" and "ballistic missiles," in fact the Treasury Department penalties are often quite unrelated to security concerns. For example, the Treasury Department has pursued companies selling medical supplies to Iran, even if they are only small quantities. Sandhill Scientific Inc. was prosecuted for selling $6,700 of medical equipment to Iran, as was Brasseler USA, for $5,000 in medical sales to Iran. There is no concern that the goods might somehow help Iran's regime or its nuclear program. In fact, U.S. officials noted that these medical supplies would probably have been eligible for a U.S. export license on humanitarian grounds.

While U.S. prosecutions of foreign banks are partly done under the auspices of U.S. statutes and executive orders, the United States also uses diplomatic pressure to force businesses out of Iran, even if they haven't actually run afoul of U.S. laws. According to one diplomat based in Tehran, the options presented are stark: if you do business in Iran, you won't do business in the United States. Treasury Department officials met with more than 145 banks in over 60 countries to pressure them to cut off dealings with Iran. Faced with the threat of losing access to the U.S. financial system, many foreign banks and businesses unsurprisingly have severed ties with Iran -- not just with the regime or the military, but with all Iranian banks and companies.

While the sanctions have done much to cripple Iran's financial sector, the measures targeting Iran's energy sector and Iran's access to shipping have been equally damaging. Iran depends heavily on gasoline imports, which the United States, and last year the EU as well, have targeted. Such major companies as Royal Dutch Shell, France's Total, and Russia's Lukoil have now ended gasoline sales to Iran. Those that don't often find face problems from the United States, such as firms from China, Singapore, and the United Arab Emirates, the U.S. administration penalized in January 2012 for selling gasoline to Iran. For other countries that might still consider selling gasoline to Iran, it will be hard to find a way to transport it; the United States has penalized shipping companies from Monaco, Singapore, and Venezuela for transporting gasoline to Iran.

Because of its dependence on imports and exports, Iran is especially vulnerable to the sanctions that target the transport of goods. U.S. laws have targeted all shipping to and from Iran, of all goods regardless of whether they involve Iran's military or its nuclear program. In 2008, the United States blacklisted Iran's national shipping lines, Islamic Republic of Iran Shipping Lines (IRISL), as well as Iran Air, the national airline, and the National Iranian Oil Company, which transports Iran's oil exports. But the chilling effect extends much further. Even for ordinary goods for manufacturing or consumption, with no relation to Iran's military, many of the largest shipping companies in the world are not willing to risk the legal and financial problems caused by the sanctions. Hong Kong's NYK Line Ltd. stopped delivering goods to Iran in 2010. The following year the Danish company Maersk, one of the largest shipping companies in the world, stopped going to Iran's three largest ports, after the United States sanctioned the company operating the ports.

Meanwhile, Iran's economy is deteriorating rapidly, in large measure due to the sanctions. Inflation is rampant. In October 2012, Iran's currency, the rial, dropped by 40 percent -- within a   single week. The inflation rate last May was over 40 percent, and hit 45 percent in June. Iranians report food prices increasing dramatically from one day to the next. Ordinary business becomes almost impossible to manage, as merchants cannot set prices that will be accurate even the next day. Income from oil sales has been cut in half due to the sanctions. But the oil industry is responsible for about 20 percent of Iran's gross domestic product (GDP) of $870 billion, and generates 80 percent of Iran's income from foreign exchange. The oil industry also generates about 50 percent of government revenue, which impacts not only Iran's military, but also the rest of Iran's governmental functions, including education and health care.

At the same time, Iran's industrial manufacturing is in free fall. This is partly because foreign companies, such as Hyundai and Peugeot, are pulling out. But it is also because Iranian factories cannot operate without imports of raw materials, machinery, and spare parts. The EU recently prohibited the export of basic metals to Iran, including steel. The cost of steel in Iran has now doubled, crippling several of Iran's critical industries, including construction, shipbuilding, and transportation. As a result, the production of automobiles in 2011 was 40 percent less than in 2010.

The collapse of industry has in turn triggered a sharp increase in unemployment. The International Campaign for Human Rights in Iran found that some two million workers involved in the automobile industry had been laid off due to plant closures. In September 2012, one economist reported that in the prior 12 months, an estimated 40 percent of the men in Iran's major cities had lost their jobs. Unsurprisingly, as unemployment goes up, and prices increase almost daily, bankruptcies have tripled in the last three years.

The economic crisis has impacted the population profoundly. Basic education for working class children in elementary and secondary school is made more difficult as inflation drives up the cost of paper and schoolbooks, which have doubled in cost. Government employees take menial jobs on the side to supplement their salaries, which can meet only a fraction of their needs. Middle class families can no longer afford the tuition for their children studying abroad. But the damage and disruption to peoples' lives is much broader than that, and much more basic. In both direct and indirect ways, the sanctions affect the population's access to food and medicine.

It is not that there is famine. But as the International Campaign for Human Rights has reported, meat, milk, and fruit are now luxuries. "Food has become like gold," said one parent. "Now I can afford to buy meat only for my daughter." "I go out with my child," said another, "but if I buy her fruit, I won't be able to cover my necessary expenses." In July 2012, there was a riot in the town of Nishapur because the price of chicken had become unaffordable for many. One family said, "We've slowly scratched off milk, yogurt, cheese, and butter from our table. Prices are going up almost daily, and we can't afford them." One restaurant owner commented wryly, "It was as though people had turned vegetarian overnight." The sanctions don't prohibit food sales. But Iran imports about a quarter of its food, and the financial sanctions are so extreme, and enforced so aggressively, that food exporters cannot find any banks that are willing to handle Iran's payments for its food purchases, or shipping companies to transport them.

As sanctions became more extreme in 2010, Iranians also saw a profound impact on their access to medications. An estimated 6 million Iranians have life-threatening diseases, such as cancer and AIDS, and are dependent on imported drugs for treatment. A human rights organization reported on the "exorbitant prices, the dearth or disappearance of a large number of medications, and the long and useless lines in pharmacies and the black market."          

Part of the problem lies with the Iranian government. It holds a monopoly on hard currency, and decides how much to allocate for various purposes. In December 2012, Iran's Minister of Health Marzieh Kahid Dastjerd was fired for publicly criticizing the state because it did not make available enough hard currency to buy the medicines needed. But even where there are funds available, that does not help much, since European and U.S. banks will not process Iran's payments, and shipping companies will not transport the drugs.

Yet, for all the damage they are doing to the population, the sanctions have done little to loosen the control of the regime. Quite the opposite -- the sanctions have forced the economy to shift to a much more profound level of corruption. The absence of legal shipping forces businesses to use smuggling networks. The absence of normal banking forces ordinary transactions, such as tuition payments and family remittances, to go through illicit financial routes. As a result, the regime, the military, and the Revolutionary Guard, have a chokehold on much more of the population than before, and in new ways. Analysts have reported that, as the sanctions have tightened, the role of the Revolutionary Guard in Iran's economy has actually grown. There are almost no legal means for Iranian manufacturers to import raw materials, or to export their products. They must rely on bribes and political connections to access the black market, in which the Revolutionary Guard is heavily involved.

While the goal of the sanctions is to force Iran to terminate its nuclear program, it appears that they may have in effect done the opposite. The sanctions have been increasingly effective at limiting Iran's ability to buy and produce oil, gasoline, and natural gas. As a result, some analysts have pointed out that Iran may well consider it that much more imperative to develop nuclear energy to meet the needs of the population. There is another issue as well: Russian diplomats have maintained that, from the perspective of global governance, the sanctions imposed by the United States and EU are at odds with the Security Council's attempt to constrain Iran's nuclear ambitions. The additional sanctions imposed by the United States create a disincentive for Iran to comply with U.N. demands regarding its weapons program. Even if Iran does everything required by the U.N. Security Council, it will still be subject to the U.S. measures targeting the energy sector, banking, and shipping; so Iran cannot expect that complying with U.N. demands will bring any relief.

The sanctions on Iran have often been touted as "smart sanctions," targeting the regime and its nuclear program, while leaving the population unharmed. But it may be worth asking -- just how smart are these sanctions after all?