A smarter way to sanction Iran

'Crippling sanctions' on the oil sector wouldn't work. But the US Treasury Department can deal Tehran a significant financial blow using existing laws.

Opinion

In an effort to squeeze Iran into submission over its nuclear policy, there is talk, as Secretary of State Hillary Rodham Clinton has put it, of adopting "crippling sanctions" on Iran.

Although the Obama administration has not spelled out the nature of these crippling sanctions, politicians in Washington have floated two bad options: halting Iran's import of gasoline, and embargoing its oil exports.

The US should drop these potential sanctions and instead enforce a bold new campaign to devastate Iran's financial sector – using existing US laws.

To set up an effective gasoline embargo, the US would have to go to the UN Security Council for approval – a lengthy process and by no means certain. Perhaps even more important, a gasoline embargo would help, not hurt, the regime in Tehran.

Here's why: The government of Iran imports a sizable part of its domestic gasoline needs. It sells those imports along with domestically refined gasoline at a heavily subsidized price. This subsidy encourages waste, but it also dramatically reduces government revenues.

The regime hasn't been able to eliminate this subsidy and increase the price of gasoline for fear of a domestic backlash. If the US imposed a successful gasoline embargo, Iran would then be able to decrease domestic consumption, eliminate smuggling, and increase government revenues. Jackpot.

The added bonus for Iran there is that with an imposed embargo, Iranians would blame higher prices and reduced availability on the United States. This is the last thing the US should be doing at a time when it wants to force a change in Iran's policies. Most pointedly, a gasoline sanction would lend further support to end the smuggling activities of regime insiders.

An embargo of Iran's oil exports would be even more problematic. If effective, such a step would adversely affect all importers of crude oil because of dramatically higher prices. China, a big oil importer, would certainly oppose such a move. Russia, for its own strategic interest, has also expressed its opposition to more sanctions. And now Germany has indicated it is also unlikely to support sanctions.

The US should forget proposals that would face highly uncertain adoption by the UN and focus instead on the sanctions that have worked on Iran over a 30-year period – financial sanctions. The US Treasury has successfully cut off Iranian banks from the global banking system and isolated the National Iranian Oil Company. These efforts have had a significant effect on the Iranian economy in the past year, including increasing Iran's cost of imports by about 20 percent.

The US could also act immediately by adopting policies that would cripple Iran's financial sector today.

Iran's foreign exchange reserves are being rapidly depleted, given lower oil prices and capital flight due to political uncertainties and a sick Iranian economy. Regime insiders say that about $350 billion has been pulled out of Iran during the past seven years, and cost of capital flight just to Dubai is estimated to be more than $250 million per day. The last official figure, in June 2008, placed Iran's foreign currency reserves at a little over $80 billion. My estimate is that they now stand in the $40-$50 billion range.

The regime is worried. And as recently as early August a loyalist of President Ahmadinejad loyalist was put in charge of foreign exchange transactions at the central bank to facilitate the outflow of funds as regime insiders, who have been losing confidence in the government's ability to bridge the current political divide, rush to get their money out of the country.

The US Treasury could motivate Iranians (in Iran as well as those living in the US and in Europe) to liquidate their assets and to withdraw their money from Iran simply by announcing enforcement of the following existing, yet generally neglected, US laws:

1. All US citizens and permanent residents (holders of Green Cards) are required to pay taxes on all foreign sources of income (including in Iran).

The US can begin by taking steps to enforce the law for those who have invested in Europe, where we have agreements. If the Treasury announced that they were taking serious steps to begin to enforce this generally neglected law, we'd not only close a tax loophole, but we'd cause Iran to panic at the thought of losing key investors. Tens of thousands of people in the US who have illegally invested in Iran due to high three-year interest rates there coupled with an essentially fixed exchange rate. Also, real estate in Tehran has been especially tempting to invest in and has gone through the roof in the past 10 years.

2. Investing in Iran is prohibited.

To begin, the US Treasury could afford individuals an amnesty from prosecution and no loss of permanent resident status, say, for six months if these holdings were declared, taxes paid, and the funds repatriated.

Why would enforcement of these laws cause so much damage?

There are between 2 and 3 million Americans and permanent residents with Iranian heritage in the US. Many have transferred money to Iran. Yes, a majority of Iranian Americans and permanent residents from Iran dislike the regime there. Sadly, for many of them, their pocketbook is more important than human rights. Some have made bank deposits, others have bought real estate, and others have invested in businesses. If the Treasury made such an announcement, Iranians would worry what might happen to real estate prices if Iranians living abroad sold their real estate. In fact, there is a solid chance that even Iranians would get so scared, they would panic and cause a run on the banks.

This would lead to a collapse of the real estate market and a palpable squeeze on Iran's foreign exchange reserves as everyone rushed to change their rials for dollars and euros.

The regime would have no choice but to prohibit capital outflows and institute foreign-exchange controls; the black market exchange rate would become multiples of the official rate; import costs for unsubsidized nonessentials would soar; and inflation would skyrocket.

These rapid financial developments would turn ordinary citizens, wealthy regime loyalists, and prominent bazaar merchants against the regime. The ensuing inflation, already over 25 percent, would fuel dissatisfaction among average citizens who are already struggling for survival.

The Revolutionary Guards, who need financial and economic stability to increase their rapidly growing financial empire, would be dealt a significant financial blow.

Yes, ordinary Iranians might suffer for a few months, but then they would be free of this illegitimate and oppressive regime. This is not the time to engage in a dialogue with a brutal dictatorship.

The US must take a moral position and support the brave people of Iran with initiatives that the US Treasury can adopt in 24 hours without having to wait for approval or support of other countries or the UN.

Hossein Askari is the Iran professor of international business and international affairs at George Washington University. He is the author of several books and articles on economic sanctions, with a focus on Iran.