Iran Sanctions Will Take Time

Night Watch
Posted: Apr 11, 2012 12:01 AM

North Korea: Leaders in Pyongyang permitted reporters to take and broadcast TV images of North Korea's three-stage space launch vehicle, erected in the launch tower at Tongchang-ri in northwestern North Korea.

Over the weekend, South Korea media ran stories about preparations for another nuclear detonation in North Korea. North Korea is digging a tunnel at the Punggye-ri site in northeastern North Korea, apparently in preparation for a nuclear or nuclear-related test, South Korean intelligence officials said. The excavation is in its final stages.

Comment: In the enthusiasm to embellish the legacy of the late Kim Il-sung, the new leadership cabal in Pyongyang easily might have concluded that a balanced celebration should feature both a long range missile launch and a nuclear-related detonation. Actually, these technologies are the legacy of Kim Chong-il. Thus, the focus of the celebration is a bit confused, but apparently all the Kims are to be honored, in some fashion.

Syria: Update. No ceasefire exists in Syria and none appears likely. The UN-backed peace plan appears to have collapsed with neither side abiding by its provisions.

Malawi: Update. This weekend Vice President Joyce Banda became the President, as prescribed by the constitution. Crisis averted for now.

Iran: Special comment: Summary. On the eve of nuclear talks, the talks themselves are the best evidence that sanctions are influencing the leaders in Tehran.

Life is not normal in Iranian towns, based on anecdotal reporting, but the sanctions are not causing serious distortions to daily normal life so as to force changes to national policy.

They are beginning to impoverish working families, but appear to be having the greatest negative impact on merchants and government agents who depend on international trade, which is the primary target pool. That probably includes transactions related to the nuclear program.

The sanctions do not appear to have built pressure to stop existing programs, but appear to have succeeded in inhibiting future technological breakthroughs. The Iranians must make do with what they have.


Government's under stress fall inward, seeking to find a quantity, set and quality of services they can sustain within a defined, but shrinking territory in usually longer time intervals. For example, if garbage collection covers a whole city twice a week in normal times, it will be less frequent and cover only parts of the city under conditions of austerity or other forms of stress. Thus garbage collection is, in fact, a diagnostic indicator of the health of a government. The public health system depends on it.

As part of this contraction, governments will give up programs in order to conserve a diminishing resource pool. They also begin new programs to conserve resources. Iran is doing all of this.

In violent instability scenarios, the fallback often includes temporarily abandoning difficult-to-defend pieces of the national territory in order to shorten internal supply lines and reduce the strain on an over-extended military force. This is a process called finding the lines the government can hold -- civil, military and geographic.

The situation in Iran - new normality

The Iranian government is managing to maintain normality in the quality, quantity and set of services that it provides nationwide. That means the sanctions have created no reasons for popular pressure to alter national defense and foreign policy, including the nuclear program. Living conditions are getting more difficult, but are not yet unbearable so as to generate public civil disorders.

Effects on national programs

One near immediate impact was the suspension of the second phase of President Ahmadi-nejad's subsidy restructuring program, which aims to end gradually the government practice of making cash payouts to citizens for food and energy. Parliament passed the subsidy reform plan in January 2010.

The increased sanctions have forced the government to restore subsidies and created strain between Ahmadi-nejad and the Parliament because Parliament must approve the changes the president has ordered ex parte. Ahmadi-nejad's government appears to be drawing on Iran's hard currency reserves to finance this and other adjustments to maintain civil normality.

Another programmatic impact is Iran also has had to buy extra wheat on the international market in the first quarter of 2012 and probably will be required to do so later this year. Iran purchased up to 3 million metric tons of wheat in March - nearly a year's worth, at least partially in anticipation of worsening sanctions.

Vendors have included the United States because the sanctions do not extend to food. Iran bought 120,000 metric tons of US wheat in March and another 60,000 tons in April, as part of the program of stockpiling grain against more sanctions.

Stockpiling is an important indicator of government stress. It is a non-normal government action aimed at maintaining reasonable living standards for the population under worsening conditions.

Agricultural experts judge Iran's grain harvests will be low because of poor rainfall, forcing Iran to continue to be active in the agricultural commodities markets all year.

The government has devalued the money and imposed currency controls. It also has banned the import of 600 items. Imports and exports have declined, because everything relies on petroleum products and on access to international banking facilities, which are suspended for Iran's largest banks.

Belgium's termination of Iranian access to SWIFT - the international banking telecommunications grid -- has been the single most effective sanction imposed on Iran thus far and is responsible for almost all the hardships discussed in this evaluation.

Supreme Leader Ayatollah Khamenei personally announced a 'Buy made in Iran" campaign on 3 April. Parliament speaker Larijani urged Iranians to not buy foreign goods. This is without recent precedent.

Iranian crude production has dropped 700,000 barrels per day owing to cuts by customers. It is expected to drop another 300,000 barrels per day by July, according to oil experts.

The irony is that the high price of crude has provided a windfall for Iran, which it has a hard time liquidating or spending because the largest Iranian banks are not connected to the international grid.

Effects on Iranians

The economy is predicted to be stagnant in 2012: no growth because Iran cannot sell its products or compensate unless it sells more crude.

Unemployment is 15.3% and is expected to grow as businesses close or lay off workers.

The official inflation rate is 21.5% in 2011, up from 4.25% in 2010 and higher than the inflation rate in Egypt or Syria. The real rate is probably much higher because governments tend to peg inflation to rises in the cost of durable goods, not food and energy.

Iran is experiencing, or near to experiencing, hyper-inflation, which is a spark for public protests and pressure on the government. Iranians have been hit with an official devaluation of the rial for any purchases from abroad as well as an internal devaluation of their labor because of the domestic inflation rate.

As yet there are no reports of food and goods shortages that cannot be ascribed to distribution problems, not including imported items. Shortages of essential commodities - grain, cooking oil, and heating oil - that cannot be obtained at any price lead to government overthrows. Watch for distress slaughtering of farm animals as a leading indicator of food shortages.

Essential imports, such as spare and repair parts for key industries, remain subsidized. Iran is willing to pay a high premium to use work-around arrangements to maintain essential foreign trade. However, no countries want to be paid in Iranian rials. The sanctions might have already succeeded in cutting foreign assistance, purchased or donated, to the Iranian nuclear program. The Iranians appear to be on their own for high technology support.

As for low technology, the one mixed blessing for Iran is that China is willing to work with Iran and sell second and third hand production knockouts to Iran to replace much higher quality goods from Europe and the US. One probably unanticipated side-effect of the sanctions is to drive Iran into greater dependency on China for daily consumer items.

Against this backdrop, the Iranian leadership's decision to agree to talks appears to be a damage control measure. Against the outsiders, it is another temporizing gesture to help weaken the momentum of sanctions. Towards Iranians, talks appear intended to reassure the electorate that the leadership is reasonable, has walked the extra mile, and is not to blame for the coming hardship.

The record of the past few months suggests that the western policy of collective punishment of all Iranians for leadership decisions will work in time. Hyperinflation and shortages of food and essential oils will produce civil disturbances, but not until after the next harvest.

End of NightWatch

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