U.S. can manage risk that Iran will direct sanctions relief to fund its aggressive foreign policy
Obama administration officials readily concede their concerns that the sanctions relief in the nuclear deal with Iran will free up $50-100 billion in funds that Iran could direct towards funding its aggressive foreign policy but argue that there are several mitigating factors that make this a manageable risk.
- First, the nuclear deal will only lift sanctions related to nuclear proliferation and will leave in place existing sanctions and instruments to both monitor and punish Iran for its support for terrorist activity. Additionally, the nuclear deal, by engaging Iran for the first time in 30+ years, opens up a dialogue where the U.S. can more readily challenge Iran's activities and cooperate to better stabilize the region.
- Second, the sanctions have devastated the Iranian economy to the point that negotiations have become a political necessity, leading many analysts to conclude that the bulk of any sanctions relief will be directed towards these domestic priorities.
- Finally, it should be acknowledged that Iran's aggressive foreign policy would occur with or without the nuclear deal as Iran has consistently funded these activities even while under sanctions but the greater risk is from allowing Iran to continue with its nuclear program, unfettered by any restrictions.
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Proponents of sanctions have argued that as sanctions cause Iran’s oil revenues to decline and disrupt its trade with neighboring states, Iran may be constrained in its ability to interfere in or influence states such as Iraq, Afghanistan, Syria, Lebanon, or the Persian Gulf countries. With diminished revenues and currency reserves, the United States and its allies hope that Iran may have to become more parsimonious in its financial support to movements such as Hezbollah. In addition, sanctions are changing the region’s military balance in ways that do not favor Iran. And as sanctions reduce Iran’s oil exports, in the short to medium term, Iran’s influence as a global energy player is diminishing somewhat.
So far, at least in some respects, sanctions do not seem to have limited Iran’s ability to exert its influence in the region. Iran continues to provide support, including money and weapons, to Lebanese Hezbollah, Shiite militias in Iraq, and militants in Afghanistan.17 Iran apparently has sent members of its Islamic Revolutionary Guard Corps (IRGC) to advise and even fight alongside the government of Bashar Al Assad in Syria, against his domestic opposition.18 To some extent, Iran’s influence and strength in the region and the allegiance Iran enjoys from some violent non-state groups depend, not on financial realities, but rather on geographical realities and cultural, religious, historic, and ideological ties.
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Another question is whether sanctions have weakened Iran’s ability to accomplish its foreign policy objectives. To date, neither sanctions nor oil prices that have fallen nearly 50% since June 2014 appear to have materially reduced Iran’s ability to arm militant movements in the Middle East and to provide military equipment and advisers to the embattled governments of Syria and Iraqi. In December 2014, one of Iran’s Vice Presidents stated that Iran’s economic support for Syria would continue uninterrupted despite the fall in oil prices since June 2014.62 Iran reportedly has continued to export arms to the Shiite rebel Houthi faction in Yemen and to militant Palestinian Islamist factions, and has sought to supply arms to radical Shiite factions in Bahrain. Iran’s assistance might have helped the Houthis expand their control of Yemen’s capital, Sanaa, in January 2015 and force the removal of President Abd Rabbu Mansur Al Hadi. Iran’s arms exports contravene Resolution 1747.63
. Congressional Research Service: Washington, D.C., April 21, 2015 (76p). [ More (5 quotes) ]
This doesn’t mean that Iran wouldn’t use some of the sanctions relief on maintaining or expanding its influence in the Middle East. But this won’t take a tremendous amount of money. Iran’s support for the Syrian regime is likely to be the biggest of its foreign policy expenses. To date, Iran may have provided billions of dollars in financing and weaponry to keep the Assad regime alive. Hezbollah has developed some measure of financial independence, although Tehran may increase funding to the group if it can afford to. Relations between Hamas and Iran are lukewarm at best; if Iran provides additional funding to Hamas, it is unlikely to exceed millions of dollars a month, as was the case when Iran and Hamas had warmer relations (before the Syrian civil war.) And finally, Iran has been able to expand its influence under severe economic constraints due to a collapse of central authority in much of the Arab world, and not because it is the richest country in the Middle East (that title belongs to Saudi Arabia.)
A nuclear deal, if successful, is likely to improve Iran’s economy. But Iran is unlikely to witness rapid economic growth that would empower the regime regionally. Corruption, waste, and unaccountability are endemic and are likely to present challenges to Rouhani’s economic goals until the end of his presidency. Rouhani would like to privatize Iran’s economy and integrate Iran into the global community, but he has to contend with forces that have thrived off of Iran’s state controlled economy for decades. The Revolutionary Guards, fearful of Rouhani’s economic and political agenda, may boost their spending abroad, but they are likely to pocket much of the money from sanctions relief. In Iran, creating a revolutionary society often means creating immense riches for the elite few. Rouhani has to give something to Iranians who have looked up to him, but sanctions relief is likely to flow to those with the deepest pockets. This may not necessarily translate into greater Iranian influence abroad, but rather more mansions and Ferraris on Tehran’s streets.
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As noted above, Iran’s malign activities continue to present a real danger to U.S. interests and our allies in the region, beyond the nuclear file. I have heard some argue that, until Iran ceases these activities, sanctions relief is premature, and that funds that Iran recovers could be diverted to these malign activities. I understand the concern well — no one wants to see the world’s foremost sponsor of terrorism receive any respite from sanctions. But it is Iran’s relationships with terrorist groups that make it so essential for us to deprive it of any possibility of obtaining a nuclear weapon. The combination of those two threats would raise the specter of what national security experts have termed the ultimate nightmare. If we cannot solve both concerns at once, we need to address them in turn. The JCPOA will address the danger of Iran’s nuclear program — lowering the overall threat posture and freeing us and our allies to check Iran’s regional activities more aggressively, while keeping our sanctions on support for terrorist activity in place. By contrast, walking away from this deal and seeking to extend sanctions would leave the world’s leading sponsor of terrorism with a short and decreasing nuclear breakout time.
In some respects, however, Iran is more daunting on paper than on the battlefield. Arms expert Anthony Cordesman of the Center for Strategic and International Studies notes that while Iran has invested heavily in artillery and ballistic missiles, "the Iranian systems lack the lethality and accuracy to pose more than a terror threat to area targets" other than nearby Kuwait. And it is more than rivaled by the GCC, which even before the recent buildup had equivalent man- and seapower, twice as many modern planes and combat helicopters, and five times as many major weapons. Not to mention the backing of the world's lone military superpower, which usually keeps a U.S. aircraft carrier group in the neighborhood.
The easing of sanctions under the nuclear deal will give Iran billions of new dollars in revenue, but that cash won't necessarily go to the military or to efforts to destabilize the region. "The lion's share of the funding that will be freed up with the sanctions relief will go to things economic," James Clapper, the director of national intelligence, said last month at the Aspen Security Forum. "Funding proxies, funding the IRGC, the Quds Force and all that, well, they've been funded anyway, even with the sanctions regime. So I'm sure they'll get some money, but I don't think it'll be a huge windfall for them."
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As other nations reengage in trade relations with Iran, the United States will lose control of much of Iran’s frozen assets. As Treasury Secretary Jack Lew noted in congressional testimony on July 23, “We have to remember that those reserves are not sitting in the United States. They're sitting around the world, in countries like India and China.”11 Many of these funds are already allocated to oil projects and security deposits in Chinese banks.12 Iranian officials have said that they have tried to work with nations holding Iran’s frozen assets to have them released, but so far those efforts have been fruitless.13 That would likely change as India, China, and Japan reintegrate Iran into the economic system. In other words, if Congress votes down the nuclear agreement, Iran would still receive its economic windfall, and could use it to fund its unconstrained nuclear program.
Opponents of the nuclear agreement with Iran see it as a license for Tehran to wreak havoc in the region. Freed from economic pressure and flush with financial resources, the thinking goes, Iran can be expected to unleash its emboldened minions upon Israel and Arab states and undermine U.S. interests. However, contrary to what the critics say, the nuclear deal is far more likely to curb Iran’s regional ambition. It is rather the instability that would follow the failure of the deal that should worry them.
Iran spent $15 billion on its military last year. By comparison, Saudi Arabia spent $80 billion, and the five other states of the Gulf Cooperation Council (GCC) spent another $35 billion. The Arab countries most worried about Iranian mischief outspent Iran by a margin of 8 to 1. Iran does not have an air force, and its ground forces and navy lag technologically behind its rivals. The nuclear deal will only widen this gap. At a summit at Camp David in May, President Obama promised GCC countries more military hardware and assistance to improve their ability to police the region. Meanwhile, under the terms of the nuclear deal, Iran would have to wait another five years for a U.N.-imposed arms embargo to be lifted.
The deal does relieve economic pressure on Iran, but not enough to change the balance of power in the region. Secretary of State John F. Kerry has estimated that after Iran has paid its creditors, the financial windfall resulting from the deal would be no more than $50 billion to $60 billion, a good portion of which will have to go to Iran’s domestic needs.
But there is cause for optimism. The post-deal windfall will initiate a profound change in the current short-term mindset. As growth and investment begin to accelerate, the opportunity cost of consumption will increase. Every dollar spent in the present will forgo future returns. Consequently, in an environment where wealth creation is possible, individuals and institutions will change their behavior and begin to invest a larger portion of their wealth in order to secure greater economic power relative to other economic actors—the kind of competitive investment that creates jobs and drives further growth. Crucially, it will soon be savvy investment and value creation, rather than conspicuous consumption, which will define power and prestige in Iran.
The knock-on effects for Iran’s political economy could also be profound. The greater the degree to which the full range of Iranian citizens, who currently inhabit separate political and economic classes, invest in a marketplace like the TSE, the less reliant on patronage networks they become. Instead, everyone from schoolteachers to Revolutionary Guard commanders will become shareholders of a more political neutral type of capital. The segregation within Iran’s political economy, determined by the sources from which people earn their livelihoods and derive their wealth, will diminish as a prima facie, structural reason for political antagonism between citizens.
Iran’s domestic windfall should be welcomed as the first step in a post-sanctions era of new priorities and new possibilities. No doubt, foreign trade and investment will make its contribution. But Western political and economic analysts should understand that the creation of a more prosperous and productive Iran will be led from within through incremental but profound changes in the relationship between macroeconomic conditions, microeconomic behaviors, and the political economy as a whole.
Given the low opportunity cost of spending, individuals and institutions adopt short-term thinking. When members of the Iranian elite have $200,000 dollars, they might as well buy a Porsche. These elites have no reason to behave like the so-called “job creators” that a market economy relies on, investing in their own businesses or those of others. In this way, consumption suppresses savings, which in turn reduces the available capital for investment.
There is a corollary to this behavior among key institutional actors as well. Consider the Revolutionary Guard’s spending on its proxy militias, the same spending that policy analysts are concerned will increase following a nuclear deal windfall. The commercial monopolies operated by the military-security faction in Iran have no incentive to reinvest any profits from rents and revenues—there is no effective competition in the market. Without the need to grow its economic capital, the Guard and its affiliates focus on two activities. First, they spend within their own patronage networks in an aim to turn economic gains into political capital. The funding of foreign fighters is just a politically potent version of this consumption. Second, they entrench rent seeking through the control of grey market speculation that feed the unfettered need for Iranians to consume everything from cigarettes and luxury cars to real estate.
At a behavioral level, whether we look at the scion buying a Porsche or the general funding a militia, the inability to build true wealth leads to a fixation with appearing more powerful through prestige and patronage, the dominant currency of political capital in Iran. Yet, regardless of the purchased prestige, neither an armed fighter nor an imported Porsche makes society at large better off. This is perhaps the greatest weakness in Iran’s political economy, the way that the economic creates structural incentives for the country’s politics.
In the congressional battle being waged over the Iran nuclear deal, critics point to a likely windfall of cash and weapons that could flow from Tehran to terror groups, including the Islamist militant movement Hamas, which has fought three wars with Israel.
Yet assertions that Hamas will benefit from the Iran deal are far from certain. Hamas is officially on the outs with Iran — and has been for several years.
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The author argues that Iran is unlikely to dramatically increase its support for terrorism as it fears attribution and retaliation from Western governments, leaving a more manageable threat for U.S. and its Gulf allies.
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Vali Nasr argues that the nuclear deal will not change Iran's relative military weakness in the region and is more likely to make it weaker as the U.S. contributes to its rivals militaries.
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A secret U.S. intelligence assessment predicts that Iran’s government will pump most of an expected $100-billion windfall from the lifting of international sanctions into the country's flagging economy and won't significantly boost funding for militant groups it supports in the Middle East.
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The author argues that fears that Iran will direct sanctions relief towards terrorism and regional adventurism are "wildly overblown" as Iran's domestic economic needs will require the Rouhani administration to "tend to the problems at home and make the investments necessary to sustain their future."
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The author argues that the endemic corruption and waste in Iran means that the expected sanctions windfall will not be directed towards expanding Iran's funding of militants but flow towards the elites, meaning "more mansions and Ferraris on Tehran’s streets."
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Richard Nephew challenges the argument that Iran will "plow its hard-won sanctions relief into regional adventurism", arguing that Iran has far more significant domestic problems to address at the moment and that any diversion could be easily countered by U.S. and its allies in the region.
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Iranians will demand their government spend a windfall from the lifting of economic sanctions on improving the quality of life at home, limiting the degree to which a future nuclear deal could fund Tehran's allies on Middle East battlefields.
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