Is Iran More Susceptible To International Sanctions?

Iranian President Mahmoud Ahmadinejad addresses a parliamentary session in Tehran on Jan. 24 - Iranian President Mahmoud Ahmadinejad addresses a parliamentary session in Tehran on Jan. 24. (Atta Kenare / AFP/Getty Images)

The government of Iranian President Mahmoud Ahmadinejad may be more susceptible to international economic sanctions than at any recent time, according to U.S. officials and Iran specialists.

The factors that lead to their conclusion: Economic problems in Iran, continuing popular opposition to the Iranian government, divisions within the regime leadership and changing geopolitical dynamics in the region.

Iranians have long experience at coping with sanctions, and analysts warn that the pillars of the Ahmadinejad regime, including the Revolutionary Guard Corps, have withstood significant pressures in the past.

But rarely has the government faced a combination of economic challenges like it currently confronts. Chief among them are persistent inflation, unofficially believed to be as high as 20 percent; and high unemployment, especially among those under the age of 30, who make up about two-thirds of the population.

Such problems are widely attributed to economic mismanagement by the Iranian government. While other oil producers enjoyed revenues during recent boom years, Iran's problems actually got worse, due in large part to the Ahmadinejad government's penchant for spending money in an effort to consolidate political support.

"As a result of not investing wisely, paying down debt or dealing with structural problems, Iran today finds itself in a weaker economic position than in the past," says Iran expert Suzanne Maloney of the Brookings Institution.

Government mismanagement of the economy was a key issue in last year's presidential elections, and opposition has been fueled by continued criticism of government policies. Iran's central bank governor recently had to acknowledge that the bank was holding $48 billion in bad loans, mostly to state-run firms.

In an effort to curb inflationary pressures, the Ahmadinejad government has attempted some reforms, including the removal of three zeros from the country's currency, in response to a drop in its value. But analysts doubt Iranians will welcome the move.

"It is a reminder to the people on the street that their money is worth much less than it used to be," says Mark Fowler, who directs Persia House, a research service about Iran operated by the Booz Allen Hamilton consulting firm.

The government is also planning a cutback in programs that subsidize food and fuel purchases for Iranians. But such moves may weaken the government's political base at a time when it cannot afford to lose more supporters.

"It may only create further internal economic problems and leave Iran more vulnerable to economic pressures, including sanctions, from outside the country," Maloney says.

U.S. officials argue that Iran now is an ideal place for sanctions. Much of the economy is controlled by the Revolutionary Guard, which is also the institution behind the recent political crackdown. A sanctions program that targets the Revolutionary Guard should therefore be effective, at least in theory.

Some external developments may also have heightened Iran's vulnerability to trade sanctions. One example is last fall's economic crisis in Dubai, the Arab emirate that has traditionally been a center of semisecret transactions for Iranian firms.

"When you talk to the CIA and you ask them who they are monitoring, in terms of illicit financial transactions coming out of Iran, they will tell you it's Dubai," says Ian Bremmer, president of the Eurasia Group, a research and consulting firm.

But risky transactions brought the emirate to the brink of financial collapse last November. It was rescued by its bigger — and more conservative — emirate neighbor, Abu Dhabi, which in recent weeks has attempted to bring more discipline to Dubai's financial transactions.

"There is no question in my mind that the fall of Dubai, and Abu Dhabi assertively taking over, is going to hurt Iran," Bremmer says, "because of the level of influence they will have over Dubai, ensuring that it doesn't take inordinate risks."

Other analysts, however, are not ready to come to that conclusion, even considering Abu Dhabi's restraining influence.

"[Dubai's] financial situation is precarious enough that [the emirate] will be that much more averse to measures that restrict their ability to do business even with a country as problematic as Iran," Maloney says.

Maloney also points out that the Revolutionary Guard's prominent role in the Iranian economy may actually complicate the sanctions effort, rather than help it, because firms affiliated with the Revolutionary Guard are accustomed to working in the shadows of the economy.

"It is precisely the Revolutionary Guard that will find ways to get around the sanctions and reap economic benefits from the black market and other smuggling networks that exist in the region," Maloney says.

Fowler, the Iran expert at Booz Allen Hamilton, is convinced that the Iranian regime is more vulnerable to sanctions now than in previous years, but still questions whether the pressures will be sufficient to force a change in regime behavior. That skepticism is based in part on his experience as an undercover CIA officer working on Middle East issues.

"I've followed Iran many, many years, and they're extremely resilient in the sense of being able to withstand a lot more pain than we might," Fowler says. "They've sort of built up their economy since the revolution under one sanction or another."

The bottom line? Iranian leaders may not be experts at economic efficiency, but they do know how to survive in a hostile world.

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