Sanctions are pushing Iran towards nuclear talks, just not US sanctions

By The Guardian

Sanctions against Iran are working but you won’t have heard that at the presidential debate – because the US has Europe to thank

There was a moment, in the second presidential debate, when President Barack Obama and Governor Mitt Romney circled each other warily, looking like they were about to come to blows. So when they agree on something, it perks up the ears.

It turns out that, in the final debate on Monday, they agreed on two things.

The first point is that Americans, largely don’t care about – or at least won’t vote based on – foreign policy. That’s why both candidates, after some bickering about Syria, Egypt and Libya, hijacked Monday’s final presidential debate into the political version of a Thelma and Louise rebellion, careening into domestic policy, education, and other issues more likely to sway the American heart.

But before they did, there emerged another, subtler point of agreement: the highlight of American foreign policy right now has been our successful sanctions against Iran, which may be working on developing a nuclear weapon. As each candidate struggled to outdo the other in protestations of the purity of their love for Israel, they knew that the way to Israel’s heart was to shut down Iran. Both Obama and Romney were happy to point to evidence that America has done just that.

Obama noted, during the debate, that the Iranian rial has dropped in value by 80% and the country’s oil production is lower than it has been for two decades. “So their economy is in a shambles,” Obama said. Romney agreed that Iranian sanctions have been successful, adding only that he would go even further – perhaps even to the brink of military action.

But have we been smart and powerful enough to bring Iran around to our way of thinking after decades of trying? Has the threat of American financial power been the decisive factor that may have wiped the confident smirk off the face of Iranian president Mahmoud Ahmedinejad?

It’s easy to see why it’s appealing to think so. In an otherwise bleak year for both foreign policy and the economy, when the US seems to be floating somewhere undefined between a grim recent financial past and a tiresome future of endless sniping about tax policy, the fact that we can exert financial pressure on Iran seems a chance for a well-deserved pat on the back.

This summer, the US financial authorities fined major international banks – HSBC, Standard Chartered – for money-laundering, which included, in part, helping Iran evade US financial sanctions. Between the presidential chest-beating and the big fines, the message seemed clear: one thing, at least, is going right. America still has its old mojo. The war in Iraq didn’t turn out quite right, our influence in Afghanistan may be questionable, and we may remain baffled about what to do about Benghazi and even Egypt, but when it comes to Iran, America has come out like a champ.

But, not so fast. As another iteration of President Obama might have said, “If you have successful Iranian sanctions, you didn’t build that.”

We owe, instead, a lot more credit to our beleaguered compatriots who run the European financial system. Iran gave up on the US years ago; America has had sanctions on Iran, in some form or another, since 1979. Getting around that was easy for Iran. Every time US authorities banned one suspicious Iranian entity, another would pop up, as quick as zucchini, and would go on doing business – most likely, in Europe.

Jim Rickards is the author of the book Currency Wars and a partner with the hedge fund JAC Capital, as well as an adviser to intelligence agencies on financial and economic issues. Of America’s attempts to root out Iranian officials and particularly Ahmedinejad, he says:

“We’ve tried everything: cyberwarfare, financial warfare, psychological operations, assassinations and sabotage. It’s not like we haven’t been trying. But because the [Ahmedinejad] regime is so brutal, so entrenched, so powerful and so rich, it has not produced the thing everyone wants, which is Iran giving up on its nuclear ambitions. It’s very clear diplomacy has failed and Iranians use the promise of negotiations just to buy time.”

So, why is Iran weakening now – as the New York Times reports, seeking talks?

Because, since March, the European financial system, which had been adamantly neutral, has turned against Iran. Europe is the base of the core of the global financial system: Swift, a kind of international instant-message service of banking. Every major financial transaction in Europe has to be chronicled in Swift. When Citigroup has to send, say, $1bn to Deutsche Bank, it doesn’t just shovel the money over. Citi sends a message through Swift first.

In March, Swift kicked out 30 Iranian banks, preventing them from doing business in euros. The US also prevented Iran from doing business in dollars. Then, in mid-October, Europe proposed to penalize any banks doing business on behalf of Iran and proposed penalties on natural-gas exports.

After that, it wasn’t long before that New York Times report surfaced that Iran was ready to start diplomatic talks with the US. The Obama administration denies the report, though the New York Times stands by it.

“Getting [Europe’s] commitment to tighten the noose on Iran is really important to help persuade that country,” said Tony Fratto, of Hamilton Place Strategies, who was an adviser in the Bush administration. “We haven’t had indirect or loose ties with Iran since 1979. Europe has. A lot of Iranians with wealth store their wealth in Europe.”

Unable to do business in either dollars or euros, Iran is in a dangerous political position. A few months ago, Iran started creating multiple exchange rates in its economy, allowing people to get rare dollars more cheaply only if they are importing absolutely essential goods into Iran. So, $1 in America is now worth 12,279 rials – and that’s only if the rials are used to buy essentials like medicine and grain for food. Those who want to buy livestock or minerals pay something closer to 25,500 rials for a single US dollar. The actual exchange rate, which now functions largely in the black market, is closer to 35,000 rials for each American dollar.

This hits both the rich and the poor. Iran is still a country of sophisticated consumers, who like their iPods and their HP printers as much as we do. But those goods are smuggled into the country, and the smugglers accept usually dollars. Simple supermarket trips are becoming a complicated calculus. And as for Iranians in hospitals, or those served by charities, they are suffering for lack of supplies.

Overall, the Iranian economy is struggling with sky-high inflation – as high as nearly 70%, estimates Johns Hopkins economist Steven Hanke. This is exactly what America wants: a regime struggling with a bad economy has much more trouble holding on to power.

Iran threatened Tuesday to stop producing oil, a move that Fratto compared to cinematic farce. “Iran doesn’t even produce their own gasoline; they don’t have refineries,” he pointed out. “They need to export oil or go bankrupt. I guess they could turn off the spigot for a short while, but it’s really suicidal for them to do it. It’s like Blazing Saddles when the guy holds the gun up to his own head and says ‘Stop or I’ll shoot.'”

Iran’s bind is a good lesson not in American power, but in America’s power when we share it with allies.

During and after the financial crisis, what helped stabilize the US and European economies was the fact that the US Federal Reserve worked with the European Central Bank to pour money into the system. The old unilateral model of a single country ruling a financial empire – even a soft empire – seems to have passed. To influence the world economy and topple regimes, you need coalitions to move money. And only then can you move the world.


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