Sanctions have not set off riots or anti-regime protest

All over this city of 12 million people, high-rises are under construction, local engineers and Chinese contractors are rushing to finish a multilevel highway, and the streets are lined with billboards promoting the latest tablets and washing machines made by South Korean companies like Samsung and LG. Supermarkets are fully stocked, and it seems as if new restaurants and fast food joints are opening up every day, and never lacking for customers.

In short, you would not know that oil exports from Iran have dropped by a million barrels a day, and that the free fall in the currency has caused huge inflation — a result of U.S. and European-led sanctions as well as economic mismanagement by the Iranian government. The West escalated the economic war another notch on Wednesday, imposing a new set of restrictions intended to force Iran into what amounts to a form of barter trade for oil, because payments for oil deliveries can no longer be sent to accounts inside Iran.

A senior Obama administration official called the latest step “a significant turning of the screw,” repeating the administration's four-year argument that the mullahs here face a “stark choice” between holding on to their nuclear programme and reviving their oil revenue, the country’s economic lifeblood.

But there is little confidence among U.S. officials in Washington and little evidence on the streets of Tehran that even newly stringent sanctions have much chance of forcing Iran’s Supreme Leader, Ali Khamenei, into striking the deal that most Americans and Europeans, and even some Israelis, say could defuse the crisis.

U.S. disturbed

The sanctions, while the source of constant complaint and morbid jokes, have not set off price riots or serious opposition to the government. In fact, the past year has not been all that bad, as Saeed Ranchian, 39, a shopkeeper peddling perfumes in Tehran’s Grand Bazaar, said the other day while he was sipping tea and as droves of shoppers strolled by on newly paved sidewalks. Surrounded by colognes with elaborate foreign names like “Le Chevalier Primero,” Mr. Ranchian admitted that with prices doubling and Iran’s currency crashing, “you would expect people to buy less”.

“But in Iran, when prices go up, people start buying more, fearing even higher prices,” he said, adding with a laugh that the economy “has rules that no one understands”.

Obama administration officials were disturbed by a new analysis, prepared for the President and his staff, that paints a picture of the Supreme Leader as so walled off from what is happening with his oil revenues that he is telling visitors that the sanctions are hurting the U.S. more than they are hurting Iran.

“The people may be suffering in Iran,” said one senior official involved in Iran strategy last week, “but the Supreme Leader isn’t, and he’s the only one who counts.”

The outlines of a nuclear deal have been clear for months: an Iranian agreement to limit the number of centrifuges that produce uranium, a cap on the amount of fuel in Iranian hands, and an agreement to ship its most potent stockpiles the stuff that can be quickly converted to bomb fuel out of the country.

It would also have to agree to expose its history of nuclear work, including any on weapons technology, which it has refused to show international inspectors. In return, Iran would get an acknowledgment that it has a right to peaceful nuclear enrichment, and a gradual lifting of the sanctions. The Iranians have insisted that the sanctions be lifted first.

Instead, Iran announced last week that it would deploy a new generation of centrifuges, four to six times as powerful as the current generation. And while the U.S., its European partners and Russia and China agreed to resume talks with the Iranians at the end of the month, administration officials have low expectations for the results.

“'The Iranians didn’t want to be in these talks, and it’s hard to imagine any kind of a deal before their elections” in June, said one senior official, referring to the coming presidential vote. “Maybe if they had to put up with two more years of pain.”

R. Nicholas Burns, who as Undersecretary of State helped push through many of the early sanctions resolutions against Iran during the Bush administration, said, “Even the tough Obama sanctions on their own are unlikely to work as Khamenei is dug in and obdurate.” Mr. Burns added that for diplomacy to succeed “the U.S. must remain patient and commit to direct talks at the highest levels. But, ultimately both Obama and Netanyahu also need to make the threat of force more credible to Tehran. Combined with sanctions, this may be the most effective way to convince Iran to agree to a peaceful, negotiated settlement.”

That does not necessarily mean the sanctions have failed to have any effect. All financial transactions have been cut off, making it extremely difficult for Iranians to make overseas payments. Europe for the first time is boycotting Iran’s crude, which is costing the country $4 billion to $8 billion each month.

Unfavourable trade

The existing sanctions on financial transactions have also forced Iran to engage in unfavourable oil-for-goods barter trade with its biggest customers, China and India. Chinese goods and medicine from India are prominently featured in stores and pharmacies across the country.

And now Iranian economic ingenuity will be tested again. Under the new crackdown, the U.S. is tightening the rules governing countries it has allowed to keep buying Iranian oil, as long as they show they are weaning themselves of it. From now on, when China, Japan, South Korea and India among others, pay for oil deliveries, they will be required to put that money into a local bank account, which Iran can use only to buy goods within that country.

It is a way of keeping the money from ever being repatriated to Iran, even through third parties. Under U.S. law, violators would be denied access to the U.S. banking system, though as a political matter it is difficult to imagine that ever being enforced. Meanwhile, President Mahmoud Ahmadinejad has asked Parliament to approve more cash handouts for most Iranians as a cushion for tougher times to come.

“Of course, the situation could be much better, people are stretching their financial limits,” said Mr. Ranchian. “But for now, at least, they are coping.”

The Iranian economy’s resiliency could surprise Westerners. The way its economy is structured, with strong links between state bodies and semi-official and private businesses, helps shield the country, said Saeed Laylaz, an economist and columnist for the Sharq newspaper, which is critical of the government. — New York Times News Service