New Interviews
Will Obama Win Jumpstart Diplomacy?
November 8, 2012 | 4:02pm
Patrick Clawson
Diplomacy has been on hold since the last round of talks in June between Iran and the world’s six major powers in Moscow. What are the diplomatic options after the U.S. presidential election?
The talks have stalled since June. The Iranians may have been waiting to see if Obama won reelection and, now that he has, they will reengage. But Washington may also need to do something to reinvigorate the talks.
Diplomatic efforts so far have been based on small confidence-building measures, which have had disappointing results. So the Obama administration may want to consider a bolder proposal, such as outlining a comprehensive resolution to the impasse over Iran’s disputed nuclear program. At the moment, there is a wide gap between Tehran and the P5+1 powers– the United States, Britain, China, France, Germany and Russia—so a proposal could also initially serve to marshal world opinion for tougher action if Iran does not comply.
What does Obama’s reelection mean for prospects of a military option? What about the timeline of dealing with Iran?
Obama’s strong preference is to resolve the dispute through diplomacy, centered on economic and diplomatic pressures to persuade Iran to compromise. But in the second presidential debate, the president also pledged, “We're not going to allow Iran to perpetually engage in negotiations that lead nowhere.” And he has vowed that the United States will prevent the Islamic Republic from getting a nuclear weapon, implying the military option.
Obama has strong-armed the Israeli leadership into accepting his approach. And his strategy was eventually endorsed by both Congress and his Republican opponents. Obama has also warned that Iranian proliferation could spark a nuclear arms race in the region. So he also has to deliver a result, one way or the other.
But making a decision to strike Iran, if diplomacy stalls, will not be easy. The natural tendency is to keep on talking as long as the other side is willing to engage. After the Iraq war, any decision to go to war based on U.S. intelligence assessments may also be difficult for a president to sell.
The timing is still unclear. Obama has so far refused to set a deadline or draw the kind of red lines demanded by Israeli Prime Minister Benjamin Netanyahu.
The Obama administration now estimates that it could be a year or more before Iran decides whether to enrich uranium beyond 20 percent—high enough for a weapon. In the meantime, the Islamic republic could accumulate sufficient nuclear material for a small arsenal before making any breakout moves.
The military option could include shadow warfare—such as cyber attacks –which the Obama administration has reportedly already used against Iran. The question is whether such measures will be enough to induce Iran to compromise or slow Iran’s enrichment capabilities.
What are the prospects for a direct U.S.-Iran dialogue, either parallel or separate from the current international framework?
Washington will remain open to direct U.S.-Iran dialogue on a wide range of issues, but its strong preference will be for the nuclear issue to be resolved within the framework of the P5+1. But the Obama team will also not want to undermine international unity by appearing to go behind its partners’ back.
The most fruitful form of U.S.-Iran dialogue would be secret meetings between trusted representatives of the two governments to explore whether a broader deal is possible. But a behind-the-scenes dialogue would be different from Track II meetings.
Since the last round of talks in June, has anything changed to increase pressure on Iran-- the economic crisis, sanctions, Syrian escalation?
Iran has come under considerable new pressure since the June talks. The United States and European Union have enhanced sanctions. Washington is convinced that sanctions significantly contributed to the increasing sense of economic crisis in Tehran. In September, the rial plunged some 40 percent in a few days. The coming months will be a testing time for the long-held U.S. view that sufficient economic pressure would lead Iran to compromise. Iran is often intransigent, despite the hardships.
On Syria, Washington sees the growing crisis as problematic for Iran. But Tehran is not necessarily convinced that President Bashar Assad will fall.
Patrick Clawson is Director for Research at The Washington Institute for Near East Policy.
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Sanctions Bite, Iran Scrambles
October 17, 2012 | 9:26am
Gary Clyde Hufbauer
The European Union imposed new sanctions on Iran’s financial, energy, trade, and transport sectors on October 15. What impact will these measures have on Iran’s economy?
Oil and gas account for close to 90 percent of Iran’s exports. Anything that interrupts the export of these commodities hits Iran hard. Oil shipments are already down by about 50 percent and Iran no longer has access to London’s shipping insurance market.
As of 2010, gas accounted for less than four percent of Iran’s export earnings, while petroleum accounted for 78 percent of earnings. But gas is one of Iran’s few remaining exports. The European ban, coupled with the abundance of natural gas in the world market, is another peg in the coffin of Iran’s economy.
The Iranian government is now reportedly taking desperate measures to deal with the crisis by applying drastically different exchange rates for purchasing imported goods. There are ten categories of goods linked with different exchange rates. For essential goods like medicine and basic foodstuffs, the exchange rate is 12,600 rials to the dollar. Non-essential goods, like consumer electronics and replacement car parts are priced according to the black market rate of 35,000 rials to the dollar.
The broad thrust of U.S. and E.U. sanctions alienates middle and upper middle classes who are importing many types of goods. The economy is basically reeling from these sanctions.
How do international sanctions interact with the Iranian financial crisis?
The panic that took hold in September- October 2012 was likely sparked by the realization that sanctions may continue indefinitely. Iran’s printing of additional rials probably contributed to the crisis.
Iran is short on reserves of foreign currency since its exports have been cut in half since last year. The government is also spending money on support for the Syrian regime. At the same time, it is trying to stave off the economic crisis impact on the Iranian people. It has drawn upon its foreign exchange reserves to make up the difference in export earnings to keep importing necessary goods.
But in September 2012, Tehran realized it would soon run out of foreign exchange. So the government cut back on imports in order to maintain funding for the security apparatus. As goods became scarcer and the rial’s value plummeted, people began to panic. Middle and upper class Iranians observed the leadership’s unwillingness to negotiate an agreement with the P5+1. They probably concluded that sanctions are not going to be lifted soon and that their holdings in rials will continue to lose value.
What additional measures can the U.S. or others take against Iran’s economy?
There is very little wiggle room now but there are a few more ways to squeeze Iran. Asian countries could further reduce their purchase of Iranian oil since the world supply is not tight. But the United States would have to exert a significant effort to convince China, India, South Korea and Japan to cut back further on their Iranian oil purchases. That effort, even if made, is not likely to reduce Asian imports of Iranian oil to a significant extent.
The United States could take additional actions against Iran’s financial sector. It could launch a cyber attack on Iran’s central bank to stop it from receiving or paying money electronically. This would be a drastic move likely to be construed as an act of war. The Pentagon has already stated that it considers cyber attacks constitute acts of war.
Alternatively, Western countries could warn that they intend to blacklist any tanker carrying Iranian oil. This would force Iranian tankers to ship oil only to secondary ports, making the tankers considerably less valuable. This move would not be regarded as an act of war on par with imposing a blockade of tankers.
Sanctions have been imposed on Cuba, North Korea and Zimbabwe for extended periods of time. In each case, the state played a more prominent role in the economy and everyday life, and became more powerful. How does Iran’s case differ?
Iran is a bigger country and has a more robust economy than Cuba, North Korea or Zimbabwe. It also has a valuable natural resource– oil. Although Iran is not a manufacturing power house, it is much more self-sufficient than those countries. Also, Iran’s borders are long and porous so there are more opportunities for smuggling goods in and out.
In those other cases, the leaders allegedly decimated the middle classes of their countries. The middle class either fled, was killed off or lost its assets.
But this is not the case in Iran. There is a sizeable group of middle and upper middle class families that have prospered for the last decade or longer. They are feeling the brunt of the sanctions, so their losses may make Iran more susceptible to economic deprivation.
Iran is similar to Cuba and Zimbabwe in its attempt to deal with sanctions. Countries pressed by sanctions tend to revert back to a command and control style of economic management, often rationing goods in a manner similar to the former Soviet Union. In this sort of system, money becomes less important. Instead, people with government connections and insider understanding of the system succeed. Rationing adds tremendous amounts of inefficiency into the economy and reduces overall output. But command and control systems consolidate power in the hands of the state.
The Iranian government is now reportedly assuming more control over the economy by placing items on lists linked to differing exchange rates. The government also permits certain individuals or companies to import the goods. There was not a high degree of freedom in Iran’s economy prior to this recent crisis but now it is moving towards a Cuba or Zimbabwe-style economy.
What will be the impact of international sanctions one year from now?
Sanctions have historically lost their efficacy over time because the targeted country scrambles to find alternative avenues to sell exports and buy imports. On the other hand, the countries imposing the sanctions will likely step up enforcement measures. In this case, the Iranians could step up their evasion tactics as the West ratchets up sanctions, resulting in an approximate standoff.
But a drastic change in the price of oil could be a game changer. If the price spikes for reasons unrelated to Tehran’s nuclear program, countries that are lukewarm about enforcing sanctions could buy additional Iranian oil. India and China would be important players but other importers could also change the dynamics of the situation. The spike would need to be sizeable though, perhaps a jump to $120 per barrel of oil from the current price of $90 (West Texas intermediate). On the other hand, Iran’s economy would suffer more in the event of a price drop to $60 or $70 per barrel.
Maintaining international focus and cooperation on the Iranian nuclear issue for another year or two may prove increasingly difficult, as it did in Iraq during the 1990s. We will likely hear stories about Iranian infants and elderly citizens in dire straits. The outpouring of sympathy could prompt a relaxation of sanctions to help those vulnerable parts of society. Iranian state media may manipulate this picture as well.
Gary Clyde Hufbauer is the Reginald Jones Senior Fellow at the Peterson Institute for International Economics.
What’s Behind New Iran and North Korea Pact
September 7, 2012 | 4:08pm
John S. Park
What does this agreement mean?
On September 1, Iran and North Korea signed a scientific and technological cooperation agreement. According to the Iranian Labour News Agency, the agreement calls for the two countries to
·set up joint laboratories and exchange programs for scientific teams;
·transfer technology in the fields of information technology, engineering, biotechnology,
renewable energy and the environment;
·promote sustainable development of agriculture and food
On paper the cooperation between the two countries appears innocuous. In practice these partnerships create an umbrella that could allow them to conduct proliferation-linked activities.
How is Iran important to North Korea today? How is North Korea important to Iran?
The two countries are becoming more important to each other because both face increasing isolation from U.S.-led sanctions related to weapons proliferation activities in Tehran and Pyongyang. The relationship—and mutual reliance—is unique in the international community, since they lack any common ideology, religion, geographic space or ethnicity.
On the surface, relations may appear to embody the old proverb that "the enemy of my enemy is my friend." But the reality is that each has helped the other cope during national emergencies. For Iran, North Korea was a vital supplier of conventional arms during the Iran-Iraq War. For North Korea, Iran was a long-standing linchpin in its procurement activities in the Middle East and Eastern Europe — a role that China is increasingly playing now as a result of a growing national economy with more foreign companies setting up production facilities targeting the Chinese market.
At its core, the relationship is one where Iran provides much-needed cash to North Korea in return for missile parts and technology that are difficult to procure elsewhere.
What are the practical implications of the scientific and technological agreement?
With both countries facing tough sanctions, the new agreement appears to be an effort to create a formal mechanism through which they can procure materiel and equipment. Many items are not specifically on sanctions lists, but the expansive financial sanctions have led most foreign institutions and intermediaries to be unwilling to run the risk of doing business with Iran or North Korea. So the agreement can be seen as an attempt by Iran and North Korea to legitimize their activities under the innocuous heading of "civilian scientific and technological cooperation."
What does it mean for the international community?
Private Chinese companies are a critical enabler of key components in this agreement. Procuring, developing and transporting components and equipment will necessitate both Tehran and Pyongyang to make greater use of unique Chinese intermediaries.
Sanctions do have an impact in terms of raising transaction costs. While this initial effect is a negative one for Tehran and Pyongyang, the secondary effect is turning out to be a beneficial one for them. Cognizant of the reduced areas of movement, private Chinese companies command higher commission fees for conducting activities on behalf of Iranian and North Korean state trading companies.
The number of actual Iranian-North Korean deals may be declining, but the sophistication of their transactions appears to be growing, thereby making them less prone to detection. That does not bode well for U.S. and Western efforts to curtail Iran’s suspected nuclear program or to counter North Korea’s ongoing nuclear weapons development activities.
John S. Park is a Junior Faculty Fellow with the Stanton Nuclear Security Fellowship program at the Massachusetts Institute of Technology.
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Iran Curtails Female Education
August 20, 2012 | 10:51am
Haleh Esfandiari
Why are 36 Iranian universities now barring women from 77 academic fields, including engineering, accounting, education, counseling, and chemistry?
Rather than announcing across the board restrictions on women in higher education, the government has cleverly left it to individual universities to implement these new policies. Universities are acting individually to adopt quota systems favoring men. The goal is to limit the number of women in certain disciplines or to bar them altogether from certain fields of study. Some universities are enforcing single sex classes and are requiring professors to teach the same course twice.
The Ministry of Higher Education has remained inexplicitly silent in the face of these measures, and many interpret this silence as approval. By separating male and female students, university authorities also hope to limit interaction between the sexes.
In recent years, women have been winning more places in universities in competitive, nation-wide exams. These new measures seem intended to redress the balance in men’s favor. So far, no university has adopted a policy of single sex faculty, such as men restricted to teaching male students and women restricted to teaching only female students—although that reversal seems more possible now too. In the early years of the revolution, the regime toyed with the idea of segregating university classes and barred women from some fields of study, including agriculture and veterinary sciences. But segregation proved impractical and was never implemented, and women gradually gained access to all disciplines.
Iran is now reverting to the failed policies of the past. The decision by Qom University, located in a shrine city and the center of religious learning in Iran, not to allow women to study economics, commerce or industrial engineering may not be surprising. But Tehran University’s decision was unexpected. It is Iran’s oldest institution of higher education. It pioneered coeducation when it opened in 1936. Tehran University is now accepting only male students in a number of engineering fields and also in mining, forestry and even mathematics.
What are the politics behind these sweeping new restrictions? Why now? Is it related to the role that women played in the 2009 protests against the disputed presidential election?
President Mahmoud Ahmadinejad’s government is chauvinist about women generally. Barring women from certain fields of study comes hand-in-hand with the reversal of Iran’s family planning program—one of the most successful in the world. Iran’s Supreme Leader recently described the family planning program as misguided and called on women to have larger families.
But politics may also be a factor in the education restrictions, partly because young educated women were at the forefront of street protests after his contested reelection in 2009. Worldwide, levels of education and activism often overlap. Education can also affect the national social structure. In Iran, for example, the legal age of marriage for girls is 13, but the mean age of marriage is 23. A woman of 23 is likely to have experienced some level of higher education and be less prepared to agree to marry a man less educated than she is.
In 1998, two decades after the Islamic Revolution, Iran was cited as one of the top ten countries worldwide that had closed the gender gap between boys and girls in education. For several years, more than 60 percent of the university student body was female. So what impact will this decision have on the progress achieved in recent years?
After initial hesitation, the post-revolution government built on the foundation laid by the monarchy to provide women with equal access to education at all levels. Traditional families also sought higher education for their daughters because they felt comfortable allowing them to live in other cities to attend universities and live in dormitories or even on their own. Women across the country excelled in university entrance exams. During the reformist presidency of Mohammad Khatami (1997-2005), the fact that 60 per cent of university student body was female was widely seen as a major achievement.
In 2006, a Tehran taxi driver proudly recounted how his daughter was studying at Isfahan University and was sharing an apartment with four other girls. Four young women living alone and unchaperoned in a large and distant city! This would have been unheard before the revolution.
The impact of these recent decisions, which indicate the growing conservative influence, are almost certain to deepen discontent among young women. University degrees are key to employment in an economy where good jobs are scarce. The rate of unemployment among those under thirty already stands at over 20 percent; among women, it is over 28 percent. The decision actually risks mobilizing more women in future protests.
Why is the government reducing gender quotas – reportedly by 30 to 40 percent – for
traditionally accepted fields, such as education, economics, administration, psychology,
library services and literature?
It reflects a fear of educated and powerful women who are aware of their rights
and frustrated about discrimination. Educated women also challenge the culture of men breadwinners and heads of family. The Ahmadinejad government seems to think it can discourage women from pursuing higher education if universities introduce a quota system in favor of men, segregate classes and bar women from many fields of study.
Women may now respond by pursuing higher education through the internet, which the government may have a harder time restricting. Over the last three decades,
Iranian women have shown again and again they can come up with new ways of pursuing their goals and frustrating the government’s best-laid plans.
Haleh Esfandiari is director of the Middle East Program at the Woodrow Wilson International Center for Scholars and the author of “Reconstructed Lives: Women and Iran’s Islamic Revolution” and “My Prison, My Home: One Woman’s Story of Captivity in Iran.”
The Drama of Iran’s Erratic Rial
August 16, 2012 | 8:00am
Kevan Harris
What are the primary reasons that the Iranian rial has lost half of its value against the U.S. dollar in just one year? Iran’s currency was valued at about 10,000 rials to the dollar in the summer of 2011. It plummeted to more than 20,000 to the dollar in the summer of 2012.
Inflation in Iran’s economy has not been this bad since the end of the Iran-Iraq War or the economic crisis of the early 1990s, which also caused high inflation. The rial’s value began to slide rapidly at the beginning of 2012 after the United States announced new sanctions above and beyond the latest U.N. sanctions. The slide was due partly to the psychology of sanctions.
In that sense, a certain percentage of the public—and their expectations--helped cause the more rapid slide. They don’t think the Central Bank can stabilize the rial in the medium term. People who have money are buying gold, dollars, and real estate to protect their wealth. Everybody is making individual decisions that are pushing the rial down because everyone is holding onto foreign currencies.
What is the impact on the Iranian public?
With increased sanctions, the demand went up for gold, foreign currency and anything independent of the rial. In fact, the real estate market in Tehran has been growing over the last six months. It had slowed in previous years due to a housing crash just like everywhere else. People are even putting money into real estate in poorer neighborhoods, which means people are continuing to take money out of the banks and invest it in housing.
What has happened in the last six months is very similar to what happened to the Russian middle class in 1999 and Argentine middle class in 2001. The Iranian middle class is going through the same process. They are seeing the value of their money in the bank erode. It is a shock.
After the Russian and Argentine financial crises, both countries ended up with more nationalist leaders in power--Vladimir Putin and Nestor Kirchner. Policymakers in the United States might want to remember that. Financial crises do not always produce what you want or expect.
What is the Iranian government’s response?
After the Russian and Argentine financial crises, both countries ended up with more nationalist leaders in power--Vladimir Putin and Nestor Kirchner. Policymakers in the United States might want to remember that. Financial crises do not always produce what you want or expect.
What is the Iranian government’s response?
The government is trying to respond with various short-term measures. For example, the price of rice has gone up only slightly compared to the price of chicken partly because the government has exchanged oil for stockpiled rice with India. Everybody eats rice in Iran and not everyone can afford chicken, so the government is attempting to prioritize those goods which have the widest consumption.
The government also went back to a tiered currency regime similar to what it had in the 1980s, during the Iraq-Iran War, and through the 1990s. Various types of imports and transactions had different exchange rates. Today, the official exchange rate is used for strategic imports such as food and medicine. That is another reason the price of rice did not go up a lot.
The price of chicken went up a lot, however, because Iran is not a socialist country. It cannot control the price of everything. Chicken farmers and wholesale buyers respond to market prices. The government capped the store price of chicken, but the price of chicken feed was going up because much of it is imported.
Along with cutbacks in subsidies, which also caused domestic inflation, the chicken farmers’ costs became so high that they could not make a profit. So they basically stopped selling. Chicken prices went up drastically because there was no chicken on the market. The government was slow to respond—and then did what it always does. It found a place in the world with something cheap to sell. Iran imported frozen chicken from Latin America, just as it now imports beef from Brazil. Each of the goods has its own story, but the rice-and-chicken dynamic is illustrative of the government’s strategy for dealing with inflationary shocks.
The state also stopped its phased subsidy reductions. It had planned to further cut longstanding subsidies for electricity, gasoline and utilities, but parliament told the president in the spring to continue the current level of subsidies. The president initially refused, but under parliamentary pressure has deferred any new price hikes. So U.S. and E.U. sanctions have forced the Islamic Republic to stop the subsidy reduction program that the International Monetary Fund and the Ahmadinejad government had been working on for years.
What roles have U.S. and international sanctions played in Iran’s currency drama? In July 2012, Parliamentary Speaker Ali Larijani said that only 20 percent of Iran’s economic problems were due to international sanctions. What is your assessment?
It is hard to put a number on what percentage U.S. and E.U. sanctions have on currency devaluation and inflation because both are produced by a combination of factors-- what individuals do based on future uncertainty and the sometimes contradictory policies of the government.
The Central Bank has suggested that it may change the official exchange rate. What impact will that have? Will it solve the problem? Are there any side effects or dangers?
Some economists, including many in Iran, say the country needs a single rate. People make money playing the official and unofficial currency rates off each other. But the state does not have the luxury of unifying the rial’s value. So it is trying all sorts of stop-gap measures, which in the long term are harmful. They create opportunities for speculation. But the state, which is dealing in the short term, is in a double bind. Letting the official rate devalue would lead to such an inflationary burst that prices could go up even more.
The state also stopped its phased subsidy reductions. It had planned to further cut longstanding subsidies for electricity, gasoline and utilities, but parliament told the president in the spring to continue the current level of subsidies. The president initially refused, but under parliamentary pressure has deferred any new price hikes. So U.S. and E.U. sanctions have forced the Islamic Republic to stop the subsidy reduction program that the International Monetary Fund and the Ahmadinejad government had been working on for years.
What roles have U.S. and international sanctions played in Iran’s currency drama? In July 2012, Parliamentary Speaker Ali Larijani said that only 20 percent of Iran’s economic problems were due to international sanctions. What is your assessment?
It is hard to put a number on what percentage U.S. and E.U. sanctions have on currency devaluation and inflation because both are produced by a combination of factors-- what individuals do based on future uncertainty and the sometimes contradictory policies of the government.
The Central Bank has suggested that it may change the official exchange rate. What impact will that have? Will it solve the problem? Are there any side effects or dangers?
Some economists, including many in Iran, say the country needs a single rate. People make money playing the official and unofficial currency rates off each other. But the state does not have the luxury of unifying the rial’s value. So it is trying all sorts of stop-gap measures, which in the long term are harmful. They create opportunities for speculation. But the state, which is dealing in the short term, is in a double bind. Letting the official rate devalue would lead to such an inflationary burst that prices could go up even more.
The other option is what the state is doing now, prioritizing who gets money. It is giving money to strategic sectors and industries that it cannot let slide, like the auto industry, the oil sector and businesses related to petroleum. It gives them the better exchange rate. Yet these are short-term solutions to big problems.
In the 1980s, the government also tried to plan what food and consumer goods came into the country. The government had to basically take over the market, and this is what they are doing again--only for those items or industries that it feels are strategic, like rice, as opposed to chicken. Politically, you cannot have a whole town without rice; it is impossible.
What will happen if the rial continues to lose value?
People will probably continue to “euro-ize” and dollarize their transactions if the value falls. But Iran will always find another country to make a deal with. There is a long list of countries that will pursue their national interests and deal with Iran. The whole world economy is slowing down, so everyone is looking for cheaper deals. There will probably be more smuggling as well, as people turn to the black market for goods which may be in short supply.
Kevan Harris is a postdoctoral research associate at Princeton University. He is a 2011-12 USIP Jennings Randolph Peace Fellow. He writes a weblog called “The Thirsty Fish."
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