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Sanctioning the Central Bank of Iran: How Effective a Step?

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Everyone wants Iran to abandon its nuclear weapons program, but few urge a military strike. Financial sanctions, including several directed at leading Iranian banks, have been applied and tightened over the years by the United States Treasury, working with European and other allies. Now the Senate has unanimously approved a bill calling on the President to impose stiff new financial sanctions directed at the Central Bank of Iran (CBI). The Obama administration opposed the measure, however, arguing that it would be counterproductive and alienate key allies who have been cooperating in the campaign to isolate Tehran.

The financial sanctions already in place and approved by the United Nations target Iranian banks that facilitate payments for nuclear technology and hardware. These sanctions can probably be credited with impeding Iran's weapons quest. In fact, according to our scorecard which covers more than 200 sanctions episodes over the past century, financial sanctions have a better chance of securing compliance by the target country than export or import restrictions. We rate them at least partly successful in 36 percent of cases, whereas the success rate for trade sanctions is only 25 percent.

In past episodes, however, the objective of financial sanctions was to deny the target country concessional assistance from abroad—usually bilateral aid or World Bank money. In the Iranian case, the Senate's objective is to interrupt commercial payments for Iran's oil exports. Put another way, the proposed sanctions on the CBI—which handles almost all Iranian receipts for oil sales but has not been implicated in financing nuclear weaponry—would be an indirect way of hampering Iranian exports of petroleum, which account for 85 percent of its foreign exchange. Some Congressmen are also advocating a ban on certification of Iranian ships and oil rigs, as an additional means of hampering Iranian oil exports.

The Obama Administration, seeking to control the extent and pace of sanctions, argues that the Senate measure could spike the price of oil and fracture the US-led coalition that has so far been willing to pressure Iran using other measures. (The Administration has not yet commented on the certification ban.) Broad sanctions against the Central Bank of Iran are not likely to gain the approval of the UN Security Council. Unspoken, but in everyone's mind, is the high probability that Pakistan, India, and China, along with several smaller importers, would ignore CBI sanctions imposed by the United States and European powers.

Nevertheless, even without others going along, CBI sanctions imposed by the United States alone would disrupt Iran's economy for the months required to re-route petroleum shipments from current destinations to an array of new markets, centered in Asia. Any disruption in the general economy would probably slow the pace of developing hardware as complex as a nuclear bomb and configuring it to Iran's missile capability. But a delay, not a permanent change in Iranian intentions, is the best that can be anticipated. A permanent change, if it comes, will require a reshuffle at the top of the Iranian political pyramid, and the emergence of leaders who no longer seek a nuclear capability to reinforce Persian hegemony across the Middle East.

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