Building a Credible Sanctions Regime to Facilitate P5+1 Negotiations with Iran

Tomorrow, the opening of the P5+1 (Permanent Members of the Security Council + Germany)-Iran talks is likely to produce few significant changes. Instead, the P5+1 will likely seek assurances that Iran’s nuclear program is intended for peaceful purposes, Iran works with the International Atomic Energy Agency (IAEA) to resolve outstanding issues, and Iran takes a much more transparent approach with its nuclear program. Iran, on the other hand, is likely to try to shift the emphasis to broader issues outside the scope of its nuclear program.

In part, Iran’s incentive to remain intransigent is the result of its calculation that no severe sanctions are likely. Instead, because Iran’s economy is not highly integrated with the world’s major economies, sanctions concerning oil industry parts or financial flows are likely to have only a limited adverse impact. With Iran recently entering into an agreement to purchase refined petroleum products from Venezuela, a sanctions regime that deprives Iran of such products is also unlikely to be very effective. The single sanction that could break Iran, namely its ability to sell oil on the world market, is highly unlikely.

Briefly, it is that sanction that would hold the best promise of breaking Iranian rigidity for several reasons:

• Petroleum accounts for 80% of Iran’s exports. Oil revenue amounts to 113% of Iran’s imports. Without oil revenue, Iran’s current account deficit would explode.
• Just five countries account for nearly 72% of Iran’s oil exports: Japan, China, India, South Korea, and Italy.
• Venezuela, with which Iran has been steadily deepening relations, is an oil exporter and would be unlikely to purchase crude oil from Iran.
• A shutdown of Iran’s oil sector would exacerbate that country’s 12.5% unemployment rate.

However, to bring the small number of countries, including China, into alignment on a severe sanctions regime that targets Iran’s oil industry would likely require the United States taking measures to assure their access to oil at a reasonable price. One mechanism that could be explored would entail the U.S. committing to sell oil from its strategic petroleum reserve at a discount from world prices to buffer the impact of the loss of Iranian oil on those countries. Although such an approach is not assured to produce the commitment to such a sanctions regime, should it become necessary, it could constitute a step in that direction.

Beyond diplomacy, the policy options involved become much less pleasant. One such option would constitute the construction of a credible deterrent e.g., in the form of a U.S. commitment that would translate into Iran’s destruction were Iran to launch or attempt a nuclear strike and/or proliferate nuclear weapons. Even then, the Middle East’s balance of power would be dramatically altered on dimensions concerning state power, the capabilities of non-state actors, and in terms of the Sunni-Shia rivalry. Another option would entail military strikes. Such strikes would likely be costly considering the need for some ground component to destroy buried nuclear facilities and risk of retaliation by Iran and its proxies (Hamas and Hezbollah). Such strikes might only briefly delay Iran’s attaining a nuclear weapons capacity, especially if Iran has additional hidden facilities.

Therefore, given tradeoffs involved were diplomacy to fail, it makes sense to put the pieces in place to maximize the prospects of diplomatic success keeping in mind that a diplomatic breakthrough would need to accommodate the core needs of all parties. In principle, a diplomatic breakthrough would probably allow Iran an ability to maintain a civil nuclear energy industry (Iran’s core need) subject to an intrusive verification regime (the international community’s core need in minimizing the risk of nuclear proliferation). A truly rigorous sanctions regime that targets Iran’s oil industry would probably be key to facilitating the negotiating process should Iran take an implacable stand. An oil-sharing agreement to shield leading importers of Iranian oil from the impact of such a sanctions regime would probably strengthen prospects of building such a sanctions regime.

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