The Self-Limiting Success of Iran Sanctions

Suzanne Maloney and Ray Takeyh

Reprinted by permission of INTERNATIONAL AFFAIRS, November 2011.

Since the 1979 revolution that ousted Iran’s pro-American monarchy and replaced it with a theocratic regime hostile to the West, the United States has sought to temper Iran’s geopolitical ambitions through a combination of tough rhetoric and economic sanctions. After more than 30 years, the cycle is as unsurprising as it is ineffective: the United States and its allies orchestrate stringent economic measures through the United Nations, and then await concessions that somehow never materialize. Indeed, as UN proscriptions have amassed and Iran’s trade with its traditional partners withers, there is no indication that the theocratic state is prepared to adjust its aspirations with respect to either its nuclear programme or its claims to regional power.

A closer look reveals that the international community missed a critical turning point in Iran’s international orientation, and squandered the single obvious opportunity to shift Iranian policies towards a more constructive direction. In the 1990s, Iran appeared to be on the verge of discarding its radical patrimony, at least with respect to its foreign policy, much as other revolutionary states such as China and Vietnam have done. The end of the long war with Iraq and the death of the Islamic Republic’s charismatic founder facilitated a period of reconstruction, a respite from the state’s existential insecurities, and a predictable reconsideration of the regime’s ideological verities. By the end of the decade, a reformist cadre led by President Muhammad Khatami sought to rejoin the international community by conceding to its mandates and adhering to its conventions. At the dawn of the twenty-first century, Iran finally appeared ready to usher in its own Thermidorian Reaction.

Yet this prospect appeared to fade after the election of hardliner Mahmoud Ahmadinejad to succeed Khatami in 2005. In the succeeding years, the Islamic Republic has regressed towards policies that resemble the worst excesses of its zealous early years: at home, unambiguous repression of any dissent and an insistence on absolute fealty to an ageing clerical tyrant; abroad, provocative policies towards its neighbours and belligerence towards Washington. Unexpectedly, it has been a younger generation of Iranian politicians—Ahmadinejad and his cohort—who have rejected the nascent pragmatism of their elders; these children of the revolution are seeking to revive its mandates rather than to restrain them.

At the same moment as Iran’s formidable new right wing came to the fore, the region began an even more dramatic set of political transformations, first with the US interventions to Iran’s east and west that removed the theocracy’s most menacing adversaries, and later with the advent of a powerful, far-reaching movement for democratic accountability across the Arab world. As a result of these intersecting trends, Iran’s paranoid, combative leadership has been emboldened to take advantage of the opportunities to be found in an uncertain regional environment with a shifting balance of power. For this reason, the threats posed by Iran’s domestic and regional policies loom ever larger for Washington and the
broader international community.

To date, however, the Obama administration has stuck to the essential framework of the carrot-and-stick diplomacy it adopted upon taking office in 2009—an approach that differs merely in style from that of the Bush administration during its second term. This self-described ‘dual-track’ strategy relies on economic pressure to persuade Tehran to enter negotiations and moderate its policies, consistent with the basic American formula for dealing with Iran since 1979. The achievements of such an approach have always been open to question.

Even as the Obama administration has imposed the broadest and most robust multilateral restrictions on Iran in history, all of Tehran’s most disturbing policies, including its aggressive nuclear programme, proceed apace. Sanctions have imposed heavy financial and political costs on the Islamic Republic, but they have not convinced Iranian leaders that their interests would be better served by relinquishing their nuclear ambitions, abandoning their other reckless policies, or even opening a serious dialogue with Washington. This obduracy is a function of the complex political transformation within Iran over the course of the past decade, the regime’s well-honed capabilities for evading and insulating itself against sanctions, and of course the momentous changes that have swept the broader region. As a result, in dealing with the Islamic Republic of 2011 economic sanctions can have little expectation of achieving meaningful changes in Tehran’s policies. This article examines the history of sanctioning the Islamic Republic, and argues that despite their increasing severity, sanctions have failed to achieve their intended policy results thanks to the regime’s capacity for resisting international pressure. Moreover, the rise of a new generation of hard-liners and the uncertain aftermath of the Arab Spring has exacerbated the regime’s aversion to compromise.

Three decades of pressure

The essential framework for US policy towards Tehran was established during the earliest hours after the seizure in November 1979 of the US Embassy and its staff. As a former senior State Department official recalled of the deliberations, ‘almost as soon as policy discussions began on [the day after the Embassy was overrun], the members of the crisis team in both the White House and the State Department focused on a two-track strategy’. The objective then was to ‘open the door to negotiation’ while also ‘increas[ing] the cost to Iran of holding the hostages’.1 From that time forward, each US president has indulged in finetuning, but the basic blueprint for addressing the array of threats emanating from the Islamic Republic has remained almost precisely the same as the plan crafted at the outset of the hostage crisis.

The embrace of a dualistic approach for responding to the hostage crisis reflected the divisions that quickly erupted within the Carter administration, personified by two individuals: Secretary of State Cyrus Vance, who favoured negotiations, and National Security Advisor Zbigniew Brzezinski, who pressed for greater consideration of coercive options. However, none of the military options presented to the President in November 1979—including a rescue mission and retaliatory strikes or raids—offered compelling prospects for successfully extracting the captive diplomats. With American lives at stake and the hostages’ safe release defined both privately and publicly as the paramount US policy objective, the administration opted early on to exhaust non-military measures before resorting to force.

As a result, this original version of the dual-track US strategy relied heavily on economic pressure: prohibition of Iranian oil imports to the United States, a freeze of all Iranian state assets held by US institutions, and eventually a travel ban and a comprehensive embargo on nearly all forms of trade with Iran. Of these measures, the freeze on assets proved uniquely powerful: in one fell swoop—precipitated at least in part by concerns that Iran planned to withdraw its US deposits— Washington ‘effectively immobilized $12 billion in Iran’s assets, including most of its available foreign exchange reserves’.2 The financial constraints imposed by the freeze may not have fully crippled the Iranian economy, which was already reeling as a result of revolutionary chaos, but this measure magnified the negative consequences of Iran’s inept and ideological management of its oil sector as well as the existential crisis precipitated by the September 1980 Iraqi invasion.

As the hostage crisis moved slowly towards resolution, economic interests assumed an increasingly high priority for Iran’s leadership in the terms of any agreement, and the negotiations that produced the January 1981 Algiers Accords entailed a considerable focus on the accounting and mechanics of settling the outstanding financial disputes between the two countries. As one of the negotiators of that agreement has argued, the existence of vast and complex financial claims between the two countries, including many private American claims stemming from the revolution itself, would have effectively obligated both sides to engage in negotiations even if no political imperative for doing so had existed.3 In this respect, the hostage crisis may offer the single striking example of the efficacy of sanctions in producing a demonstrable concession from Tehran, and the US–Iran Claims Tribunal that was created as a result of the Algiers Accords has proved the single consistent and enduring mechanism for official interactions between the two governments.

However, the hostage crisis also underscores the limitations of sanctions, and particularly highlights the difficulty of achieving broad multilateral support for stiff penalties against Iran. Despite US allies’ sympathies with the American predicament and outrage over the affront to international law and diplomatic protocol, even Washington’s closest international partners proved deeply reluctant to jeopardize their economic interests in Iran or undertake measures that might alienate opinion in other parts of the Muslim world. Japan and the European Community adopted minimalist trade sanctions only midway through the 15-month crisis, and even those measures were loose enough to enable trade to continue to rebound from post-revolutionary disruptions. For its part, the Soviet Union actively undermined the sanctions regime by vetoing a modest array of proposed United Nations sanctions in January 1980 and dangling ambiguous offers of economic assistance to Tehran throughout the crisis.

The deliberations over sanctions during the hostage crisis reflected a persistent overconfidence among US officials about Washington’s capacity to exercise a positive impact on the struggle for power within Iran’s fractious polity. Then as now, US officials sought to craft a balance of inducements and penalties that would empower the theocracy’s persistently embattled moderates. The release of the hostages was ultimately a pragmatic move by Tehran; it is difficult to discern any significant constructive influence of carrot-and-stick diplomacy on the interim outcome of the enduring contest for influence within the Islamic Republic.

Although tensions between Tehran and Washington remained high even in the aftermath of the hostages’ release, the Algiers Accords included provisions for the lifting of trade sanctions, meaning that there were now no legal impediments to economic interactions between Iranians and Americans. However, the climate degenerated quickly, as Iran stepped up its campaign of subversion against its neighbours and began cultivating terrorist proxies in the Middle East. At the same time, Washington began shifting from its previous neutrality in the long, bloody Iran– Iraq war to a distinct tilt towards Baghdad, in part to avert the regional upheaval that would have ensued if Iran had succeeded in its aim to take the Iraqi capital.

Throughout its two terms, the Reagan administration sought new mechanisms for ratcheting up pressure on Tehran, including a willingness to deploy military as well as economic coercion. Early measures included an aggressive campaign to prevent Tehran from securing desperately needed military equipment and the 1984 designation of Iran as a state sponsor of terrorism for its support of Hezbollah in Lebanon and its involvement in the bombing in 1983 of a US barracks in Beirut that killed 241 marines.

These restrictions were relatively limited measures, at least compared to the hostage-era sanctions, and whatever sense of urgency they may have conveyed to Tehran was surely undercut by the nearly simultaneous covert sales of US arms to the revolutionary regime that took place as part of the Iran–Contra episode. Just as State Department officials in 1979–81 sought to empower those presumed to be moderates in the hope of securing the hostages’ freedom, the Reagan administration officials who embarked on the secret weapons sales were motivated by a conviction that the effort would tip the internal balance of power against Khomeini and in favour of pro-western moderates.

In the embarrassing aftermath of the Iran–Contra scandal, the Reagan administration persisted in pursuing a bifurcated policy towards Tehran, albeit one that was much more heavily biased towards coercion. While senior US officials continued to hold the door open to engaging Iran’s leadership, this phase also includes the sole period of direct armed conflict between Iranian and American forces, after Washington agreed to escort Kuwaiti oil tankers that had come under Iranian attack through the Gulf. In addition, the administration strengthened the sanctions regime in the wake of the Gulf skirmishes, with a 1987 embargo on all imports from Iran and selected exports to it, although it should be noted that the effects of this measure were checked by the loopholes that permitted US companies to continue to do business with Iran’s oil sector.4

The persistence of a hostage problem in the Middle East persuaded President George H. W. Bush to turn up the volume on inducements within the dual-track approach to Iran. In his inaugural address of January 1989, President Bush referred to American hostages held in Lebanon and added that ‘assistance can be shown here, and will be long remembered. Good will begets good will. Good faith can be a spiral that endlessly moves on.’5 He and other officials repeatedly signaled publicly their openness to engagement. Iran’s leaders vociferously and publicly rebuffed Bush, and their back-channel efforts to assist in Lebanon proved unconvincing to Washington given the ongoing violence there. Still, even as the administration’s engagement track faltered, so too did any meaningful efforts to apply new pressure on Tehran.

New sanctions enacted during this period were codified in the 1992 Iran–Iraq Nonproliferation Act, which prohibited any transfer of any goods or technologies that could facilitate the development of chemical, biological or nuclear weapons or destabilizing conventional weapons such as missiles. This legislation is notable as the first salvo of Washington’s increasing reliance on threats of extraterritorial measures against third countries as a means of attaining new leverage against Iran, something that prior administrations had studiously avoided for fear of alienating crucial allies. The administration also sought to strengthen multilateral restrictions on dual-use goods, albeit to little effect.

The relative inertia displayed by the first Bush administration on Iran masks a hardening of Washington’s attitude towards the theocratic state that is evident in two important respects. The first was the decision to ostracize both Iran and Iraq, as part of a broader reconceptualization of a post-Soviet strategic landscape dominated by threats from rogue states.6 This approach contrasts with the historic tendency to balance one of the northern Gulf states against the other. Second, the administration’s direct and fruitful immersion in the precarious terrain of Middle East peacemaking created a new imperative for antagonism between the two old adversaries. At the same time, Tehran stepped up its regional assertiveness in the aftermath of the Iraqi defeat and in response to the momentous prospect of Arab– Israeli peace. Its stated goal was to drive American forces from the region and reverse the tentative shoots of regional peacemaking; beyond this, the revolutionary leadership sought to establish itself as the pre-eminent power in the Gulf and undermine its Arab neighbours.

All these trends only intensified during the Clinton administration from 1993. Secretary of State Warren Christopher’s experience of leading the contentious negotiations that freed the hostages left a legacy of profound distrust of Iran and a revulsion from the policies of the Islamic regime. He and others in the administration entered office determined to avoid Tehran’s duplicitous tactics and to firmly isolate Tehran, as well as Baghdad, in order to facilitate the emergence of a ‘new Middle East’ anchored by a post-Oslo Accords Arab–Israeli peace. The new US policy became known as ‘dual containment’, a rejection of the historical tendency of Washington to counterbalance one of the Gulf powerhouses by indulging the other. Washington sought to shape the essential parameters of regional politics through economic warfare against Iran.

The Clinton administration’s initial efforts were focused on generating greater cooperation from its reluctant European allies to apply pressure on Tehran, a posture that was undermined by the persistence of considerable volumes of US trade with Iran. A combination of European resistance, frictions between the Republican Congress and a Democratic administration over Iran policy, and an unexpected Iranian overture precipitated a dramatic tightening of US economic restrictions against the Islamic Republic. In 1995, Tehran offered its first upstream oil deal since the revolution, and opted to put the offer to an American company in what Iranian President Ali Akbar Hashemi Rafsanjani later described as ‘a message to the United States that was not properly understood’.7 Whatever the intended impact may have been, the move triggered a renunciation of the deal, as well as new executive and congressional measures that imposed a comprehensive US trade and investment ban and threatened penalties on third-country investors in Iran’s energy sector. The latter measure, codified in the Iran–Libya Sanctions Act of 1996, is notable for having caused a predictable uproar among America’s allies. The application of secondary sanctions violated the declared US commitments to free trade, complicated Washington’s efforts to generate a united front with Europe, and ultimately was diluted by the evident reluctance of Washington to implement its provisions—or even identify its prospective targets.

No sooner had the Clinton administration erected the most rigorous unilateral sanctions regime since the hostage crisis than it was unexpectedly confronted by a changing set of circumstances within Iran’s domestic political contestation. The 1997 election of a moderate president and the advent of a new political force within the Islamic Republic that aimed at reviving the republican imperatives of the Islamic revolution prompted a frenzied US effort to translate these changes into a genuine improvement in the bilateral relationship. After a flurry of signals from both sides, including the proposal by Secretary of State Madeleine Albright for the development of a ‘road map’ towards rapprochement, the same American administration that had significantly intensified sanctions for the first time since the revolution whiplashed in the opposing direction. As part of the most dramatic series of US overtures towards Tehran since 1979, President Clinton adopted a number of measures that eased existing sanctions. These included authorizing the sale of spare airline parts, lifting restrictions on sales of food and pharmaceuticals, removing Iran’s designation as a conduit for narcotics production and transit, and—finally and most dramatically—a wide-ranging speech by Albright that articulated US regret for a range of previous policies and announced the lifting of sanctions on caviar, carpets and pistachios. Neither the onerous economic restrictions of 1995 and 1996 nor the accommodating overtures of 1998, 1999 and 2000 generated positive changes in Iranian behaviour or rhetoric.

Much like the Clinton administration, President George W. Bush and his team entered office with deep mistrust of Iran and a determination to avoid repeating the mistakes of their predecessors. Unlike the 1990s, the events of the Bush era—particularly the 9/11 attacks and the revelations about Iran’s covert nuclear programme—only reinforced that mistrust and the pursuit of maximum pressure on Tehran. Like Clinton, President Bush sought to cordon off Iran from the rest of the Middle East in order to facilitate a broader regional transformation; however, in doing so, he also sought to align US policy with the aspirations of the Iranian people, rather than exploit whatever distinctions remained within its rapidly consolidating hardline government. The hallmarks of his first-term approach to Tehran tended towards diplomatic grandstanding over significant policy initiatives or specific new sanctions. This period coincided with the waning days of the Iranian reform movement, which struggled to sustain temporary concessions on the regime’s nuclear activities.

During its second term, however, the Bush administration adopted a more assiduous and innovative approach that sought to strengthen US leverage in dealing with an apparently ascendant Iran. While retaining the pugnacious rhetoric of his first term, President Bush adopted a substantially different course, one that prioritized multilateral cooperation and identified new mechanisms for broadening the impact of US unilateral measures.

This involved several components, including the use of executive prerogative to designate Iranian entities as associated with terrorism, under measures adopted after the September 11 attacks, as well as enhanced counterproliferation sanctions. These unusually far-reaching restrictions effectively precluded foreign banks with US interests or presence from doing business with designated institutions in Iran. While extraterritorial sanctions had provoked European opposition in the past, these measures met little overt resistance from either the diplomatic or the financial community. The surprising degree of compliance reflects a combination of effective US diplomacy with allies, a more sceptical international mood towards Tehran, and the obliqueness of the measures, which ostensibly targeted merely the Iranian institutions but indirectly imposed constraints on any of their foreign business partners.

These measures were accompanied by a concerted campaign, primarily focused on financial firms in Europe and the Gulf, intended to highlight both the increasing legal roadblocks to investing in Iran as well as the reputational risks of doing so. The outcome was dramatic: after more than two decades of trying to bring the rest of the world into line with American efforts to isolate and pressurize Iran, Washington helped launch a wave of divestment from Iran simply by capitalizing on the unique role of the US financial system in magnifying the impact of US restrictions. The US federal measures were complemented by the proliferation of state-level measures, the cumulative effect of which was to reinforce the disincentives for any firm with American interests to deal with Iranian counterparts.

Finally, the Bush administration embarked on a long and arduous campaign to bring the Iranian nuclear file before the United Nations Security Council (UNSC), in the course of which it reversed its prior refusal to negotiate with Tehran and relaxed its stance towards future Iranian nuclear activities. These concessions won Washington a trio of successive UNSC sanctions resolutions that began to build an international consensus on penalizing both the state of Iran and specific institutions within it over the nuclear issue. The end result was a new relevance for Washington’s Iran policy—but with no evidence that this sudden salience is producing the intended moderation of Iranian policies.

In contrast to his predecessors as well as his rivals, as a candidate for the US presidency Barack Obama publicly campaigned on the exigency of a more effective approach to Iran; during the Democratic primary race, he embraced the need for direct negotiations without preconditions. Moreover, after taking office the new President personally invested himself in reaching out to Iran, via a video message commemorating the Iranian new year (Nowruz) in March 2009—a greeting that was evidently crafted to appeal to regime elites as well as ordinary citizens. Over the course of the next several months, the administration reportedly initiated other gestures towards Tehran of a more private nature, including unprecedented correspondence from President Obama to the Iranian supreme leader. However, President Obama indicated from the outset that engagement would be given an early deadline to prevent Tehran from using the process to evade demands made of it. As in other elements of its Iran policy, the Obama administration retained the basic outline of the Bush approach to Iran sanctions, with modest enhancements. The designation of Iranian individuals and institutions under the counterproliferation and counterterrorism statutes remains a powerful tool for creating ripple effects across the global landscape of the country’s trade ties. Beyond these steps, however, President Obama has sought to enhance the persuasive power of US policy—initiating early overtures towards Tehran as a means of demonstrating to Europe the seriousness of American readiness to negotiate, making key compromises on issues at stake with Russia to draw Moscow into a more cooperative relationship on Iran, and investing in a protracted negotiation of the latest (and presumably last) UN resolution on Iran, Security Council Resolution 1929, so that it would serve as a platform for additional measures by individual states as well as the European Union. The advantages of this synergy cannot be overestimated, and in many ways those subsequent unilateral sanctions are far more significant than the UN measure itself. Washington took other steps to encourage cooperation among ‘like-minded states’ in Europe and in Asia, notably by using sanctions policy to highlight human rights abuses in Iran and to restrict the government’s access to technology used to control the free flow of information.

Notable new measures include the July 2010 Comprehensive Iran Sanctions and Divestment Act (CISADA), which includes a rescission of the prior exemption of caviar, carpets and pistachios from US sanctions, as well as a new array of extraterritorial measures including restrictions on sales of refined petroleum products to Tehran. In part because CISADA was enacted so quickly on the heels of the UN resolution, there was some grumbling, particularly from the Russians, that Washington was exceeding its mandate. Still, the unilateral American actions did not provoke intra-alliance tensions or defections from the overall international consensus on putting pressure on Tehran.

A measure of success—and continued obduracy

After more than three decades of reliance on sanctions as the centrepiece of US policy towards Tehran, Washington can finally claim a measure of success, at least with respect to the breadth of multilateral cooperation, the potency of international implementation, and apparent costs imposed on Iran as a result of its defiance of UN mandates.

The consequences of the sharpened sanctions regime can be seen across the board within Iran. Trade with Europe has declined precipitously, and sanctions have forced Tehran to recapitalize its banks and seek out creative mechanisms— including barter instruments—for increasing proportions of its considerable trade finance requirements. Indian imports of Iranian gasoline have gone unpaid for months, for lack of a legally viable payment process, while Iranian jets have been grounded in Europe as a result of US restrictions on sales of refined petroleum products. A wide range of Iranian politicians, including Ayatollah Khamenei, have acknowledged the increasing hardships posed as a result of the restrictions.

The argument in favour of sanctions is grounded in the historical evidence that Iranian policy is often shaped by a rational assessment of costs and benefits. And yet it is not apparent that the mounting costs of sanctions have brought the clerical leadership any closer to a meaningful process of dialogue—much less serious compromises—on its nuclear programme or the other elements of its provocative policies. This reflects the formative influence of Iran’s domestic political dynamics, and its unexpected evolution, on the regime’s assessment of risks and rewards.

Historically, Iranian leaders have tended to reject the significance of sanctions, at least rhetorically, and have celebrated the country’s capacity to withstand external economic pressure, particularly the measures imposed on Iran by Washington. In the immediate aftermath of the revolution, this ethos was philosophically consistent with the revolutionary leadership’s quest for independence and its ambivalence about capitalism and international entanglements. The rupture of Iran’s financial relationship with the United States and the American ban on exporting military equipment to Iran spurred Tehran to invest in its domestic capacity, particularly in the security sector.

Over time, sanctions have been integrated within the regime’s ideological narrative. Like the war with Iraq in the 1980s, economic pressure represents another component of the international conspiracy to undermine the Islamic Revolution, a plot that has been foiled by Iran’s wise and righteous leaders, who have used sanctions to the country’s benefit by strengthening its indigenous capabilities and sovereignty.

From this perspective, the hard-liners may perceive merely surviving new sanctions—even at a significant price—as a victory, and will portray it as such to their support base. ‘These [past] sanctions didn’t work to our detriment,’ Khamenei said in 2008. ‘We were able to create an opportunity out of this threat. It’s the same today. We are not afraid of Western sanctions. With the blessing of God, the Iranian nation, in the face of any sanction or economic embargo, will demonstrate an effort which will double or increase its progress by many folds.’8 Since that time he has returned to the question of sanctions repeatedly. In February 2011, Khamenei implicitly acknowledged the constraints that the latest round of UNSC sanctions, including an arms embargo, had imposed on Iran’s military in an address to the air force on the anniversary of the revolution.

These tendencies have been redoubled as a result of the historic transformation that Iran has undergone over the course of the past two decades. The 1990s are often seen as a decade of economic reconstruction and political reform in Iran’s revolutionary theocracy. Intellectuals, businessmen and technocrats dominated the public sphere, as Iran seemed to be distancing itself from its revolutionary heritage. The clerical reformers were seeking to reconcile democracy and religion, while the younger generation was moving away from a political culture

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