In mid December I called the new "western" sanctions on Iran a self inflicted wound:
In total the markets will be more nervous and the risk premium included in oil prices will go up. Iran and the other Persian Gulf countries will make more money. Everyone else will have to pay more for oil with the price increase for the "west" likely much higher than for the "east". This while the "west" is in economic trouble and the "east" is still expanding.
It will be the most stupid self inflicted wound world policy has seen for a while.
Since then the price of oil has increased from some $104 per barrel Brent crude to $113/bbl today. Considering that in 2006, with most economies humming, Brent was around $70 and that unlike then major economies are now still in recession the price hike is enormous. Iran is clearly showing that it too can play the economic sanctions game. Since mid December it increased its oil export income by $22.5 million per day which further damages "western" economies.
That may well be the reason why U.S. defense secretary Panetta in yesterdays TV interview somewhat played down the Iran case and moved the U.S. "red line", which once was "enrichment", to actual nuclear weapons:
Are they trying to develop a nuclear weapon? No. But we know that they're trying to develop a nuclear capability. And that's what concerns us. And our red line to Iran is do not develop a nuclear weapon. That's a red line for us.
We can be sure that Iran will not cross that red line. It has said all along that it does not want a nuclear weapon and there is no reason to suspect that this will change.
But if only nuclear weapons are the red line, why is the administration still preparing more sanctions?
Unofficial administration spokesman David Ignatius reveals the plans for the 2012 foreign policy:
As for the Iranians, they seem for the first time in years to be genuinely nervous — not because of U.S. or Israeli saber-rattling but because economic sanctions are causing a run on their currency and the beginnings of a financial panic in Tehran. And more sanctions are on the way this year. At some point, the Iranian regime will actually be in jeopardy — and it will punch back. That’s the scenario the White House must think through carefully with its allies. If the current course continues, a collision with Iran is ahead.
The recent rapid devaluation of the Iranian currency, the Rial, is not a success of the sanctions. The slump has other long term economic reasons and, as Prof. Djavad Salehi-Isfahani explains, was "largely expected and welcomed by economists". It will help the Iranian industry to increase its non-oil exports and will make unwelcome cheap imports from China and elsewhere more expensive thereby helping the local Iranian industry and increase employment in Iran.
More sanction means more pain for "western" economies. As it has already shown with its recent maneuver Iran can easily inflict such pain. One does not even have to consider a full closure of the Strait of Hormuz and the economic panic and military consequences (pdf, 38 pgs) that would cause. An explosion on a pipeline in Iraq, a mishap in a Saudi refinery or one lone old mine in the Straits of Hormuz damaging an empty (even Iranian?) old tanker would be enough to push oil prices to even higher levels. Just as the U.S. uses clandestine methods, the killing of scientists and cyber attacks, to inflict damage on Iran, Iran can, if it wants to, use such methods to increase the price of oil without leaving its fingerprints.
There is also much less unity in applying these sanctions than the U.S. wants to acknowledge. The French foreign minister tried a fait accompli when he announced that the EU had agreed "in principle" to similar oil sanctions and central bank on Iran as the U.S. has enacted. It had not and is unlikely to do so:
The three biggest EU importers have serious debt problems. Greece imports a quarter of its oil from Iran, Italy about 13 percent and Spain nearly 10 percent.
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Other aspects of the prospective embargo are being discussed and a final decision is unlikely to be quick, diplomats said. Some EU capitals are suggesting the impact of sanctions be reviewed after a fixed period, with the possibility of suspending them if they prove ineffective.
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Some capitals have raised concerns, they said, that sanctions on the central bank would harm the chances of getting Tehran to negotiate over its nuclear work.
I expect that any further EU sanctions on Iran to be rather superficial and easily circumvented.
That is good because the "western" sanctions are not only creating self inflicted damage, they may even be counterproductive in that they leave no way out for Iran and may raise the incentive for Iran to eventually build a nuclear weapon.
That "more sanctions are on the way" from the U.S. side, as Ignatius asserts, must then have other reasons than Iran's nuclear program. There they do not make sense. But we have know that for quite a while. The U.S. sanctions are designed to lead to regime change in Iran. They will not achieve that. Within Iran they will united the people and the Iranian leadership. Iran is also smart enough to not provoke an open war that could endanger the regime. At the same time the U.S. can not start a war on Iran without inflicting catastrophic damage on the world economy.
So what do I expect will happen?
More sanctions may well come. But they will hurt "western" economies more than Iran. They will be responded to by Iran tit for tat with ever increasing oil prices. Iran has already announced more maritime maneuvers in the Strait of Hormuz. When those and the accompanying propaganda have passed the price of Brent crude may well be at $120/bbl and the U.S. economy on its way into another downturn.