Global Insight Perspective

Significance

By slapping sanctions against Iran for the very first time, the UNSC is sending a clear message to the country's leadership that the international community is serious about curtailing the Islamic Republic's atomic activities. Given the long-running Iranian rejection of UN demands, however, and the country's suspicions that it is being penalised for purely political ends, the new measures are likely to be met with even tougher Iranian belligerence. 

Implications

The limited nature of the sanctions—which specifically target Iran's atomic industry—is not expected to affect greatly the country's near-term economic performance. Should Iran maintain its defiance, however, the sanctions package, together with further financial penalties against the country, is bound to have an adverse effect on private-sector business confidence, ensuring that international financial transactions will become much more difficult.

Outlook

Given its recent history of defiance, Iran is unlikely to comply with the UN resolution, which may pave the way for further U.S.- and European-led economic sanctions against the country in the coming months. Such is the instability in the wider Middle East that any further volatility, particularly one involving Iran with its vast oil and energy assets, threatens to engulf the region in greater political and security unrest.

Sanctions Agreement, At Last

After several months of intense negotiations, the five permanent members of the UN Security Council (UNSC) plus Germany finally agreed on a draft resolutions text that would pave the way for a series of limited sanctions against Iran's nuclear programme. The sanctions package was unanimously approved by the 15-member UNSC following a vote on 23 December. Resolution 1737, however, proved a much more limited package than the penalties the United States had initially demanded. The watered-down text reflected Russian and Chinese opposition against any tougher measures, given the two countries’ close economic and political ties with Iran. 

The terms of Resolution 1737 are expressly against Iran's atomic activities. The resolution forbids the sale of any technology or material that may have applications for Iran's nuclear industry. It calls on UN member states to freeze the assets of 22 Iranian entities (ten government officials and 12 institutions) that are associated with country's nuclear programme. While the United States also pushed for a travel ban on Iranian officials involved in the atomic trade, that demand was blocked by Russia . The resolution imposes a ban on the transfer of any technology with applications to missile delivery systems. Another compromise that has weakened the resolution is the exclusion of the Bushehr light-water nuclear reactor that Iran is currently building with Russian assistance. While the resolution calls on Iran to suspend work on its heavy-water research reactor in Arak, it allows Russia to fulfil its obligations in the former project.

Rejecting International Pressure

Iran's most immediate reaction to the UNSC vote was to reject the sanctions resolution as merely a "scrap of paper" that would do little to prevent the country from continuing its atomic activities. According to President Mahmoud Ahmedinejad, the onus was now on the international community and, in particular, the Western nations to recognise that Iran is a nuclear country. To demonstrate the extent of Iran's defiance, the country's top nuclear officials announced barely a day after the sanctions vote that Iran would expand its uranium enrichment activities. Speaking to the conservative daily newspaper, Kayhan, Ali Larijani, the head of the National Security Council, said that global pressure would have the effect of bolstering Iran's nuclear position. "We have said repeatedly that if the West wanted to exploit the UNSC it will not only have no influence but make us more determined to pursue our nuclear goals even faster". To this effect, he indicated that Iran's nuclear scientists would begin work at the earliest opportunity on installing 3,000 uranium-enriching centrifuges at the Natanz plant in preparation for celebrations in February next year to mark the 28th anniversary of the Islamic Revolution.

Domestic political pressure is also piling on the Ahmedinejad government to reject the UN demands after the Iranian parliament voted this morning on a bill obliging the administration to "revise its co-operation" with the UN's nuclear watchdog, the International Atomic Energy Agency (IAEA) as well as to "accelerate" its nuclear drive, Agence France-Presse (AFP) reports. The bill—which was endorsed by some 160 deputies and opposed by only 15—did not, however, call on the government to quit the nuclear non-proliferation treaty (NPT), a move that would certainly heighten tensions between Iran and the international community.

Economic Impact

Given Russian and Chinese apprehensions, the approved resolution does not threaten comprehensive sanctions against the Iranian economy. It is mainly focused on limiting Iran’s nuclear technology. The ban on materials that may be used in the nuclear industry could include many products with dual applications but it will be subject to interpretation and would allow industrial countries to continue with the export of many of their products. Absent from this resolution are any restrictions on co-operation with Iran's oil industry and joint manufacturing projects in automobile and consumer goods products. Such restrictions would have forced many Asian and European firms to cut back their current activities in Iran. There are also no restrictions on Iran's exports of oil or other products. Nor does the resolution prevent Iran from importing gasoline to supplement its insufficient domestic production. In their present form, therefore, the direct impact of UN sanctions on Iran's economy will be very limited.

U.S. and European economic pressure on Iran, however, is not limited to these sanctions. The United States has had a highly restrictive economic sanctions policy in effect against Iran for more than a decade and actively punishes U.S. firms that have any involvement in Iran. It also has created financial disincentives for European and Asian firms that deal with Iran and these pressures have encouraged many international firms to stay away from business opportunities inside the country. Even Iranian officials have recently admitted that their efforts to expand Iran's energy sector have been partly unsuccessful because of U.S. pressure on international oil firms. More recently, several major European financial firms have restricted their transactions with Iranian entities and these restrictions have hurt Iranian businesses that trade with Europe. Global Insight anticipates that in the coming weeks, European governments will also implicitly pressure their private businesses to cut back trade and investment relations with Iran and this will have an adverse effect on Iran's import-dependent industries. Only a few weeks ago several U.A.E. firms severed exports to Iran voluntarily after the United States complained to the U.A.E. government that some of the exported goods had military applications.

In addition to its limited effect, the UN resolution will have an adverse effect on investment confidence inside Iran and will increase the anxieties of private investors. The fear of sanctions and a potential military attack have kept Iranian investors nervous for more than three years and private sector investment has been stagnant. The poor performance of Iran's stock market in the past 18 months is a clear reflection of this investor anxiety. Many Iranian investors have found it more convenient to move their assets to the United Arab Emirates and other Gulf Co-operation Council (GCC) countries, which carry far fewer political risks. The threat of UN economic sanctions will clearly add to the anxieties of Iranian investors and lead to further stagnation of trade and investment. What will worry investors even more is that the economic pressure on Iran is likely to intensify over time.

Outlook and Implications

Resolution 1737 gives Iran 60 days to stop its uranium-enrichment activities and return to IAEA negotiations. Since Iran is unlikely to comply with this demand, the United States and its European allies are likely to call for more restrictive measures against Iran following the next deadline. The Iranian government has presented the nuclear issue as a battle for Iran's future survival and is hoping to reap political capital for challenging the country's arch international foes. Should the gamble not pay off, however, Iran may be on a course towards greater and more dangerous diplomatic and economic isolation.

Of greater concern for the Iranian economy are the growing pressures of the U.S. and European governments on private firms that are currently doing business with Iran. These pressures are expected to intensify over time and may disrupt economic performance. As the traditional suppliers of manufacturing goods are forced to end their ties with Iran, Iranian importers will have to settle for more expensive and poorer quality alternatives and even face occasional interruptions in import flows. The official UN sanctions and any bilateral financial measures are likely to weaken Iran's economy but they are unlikely to cause a severe economic collapse that can result in political instability and regime change in the next two years. Iran has accumulated large international reserves and, as long as it can export oil, will have sufficient oil revenues to finance its basic needs and cope with international economic pressures. On the other hand, the United States is also determined to intensify economic and diplomatic pressures on Iran for as long as Iran pushes ahead with its nuclear programme. It is thus hard to predict how this economic warfare will evolve overtime. Much will, no doubt, depend on the future behaviour of Russia and China .

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