Sanctions biting but Iran not budging

By Marjorie Olster

Associated Press

Published: Friday, Aug. 23 2013 12:00 a.m. MDT

In this Aug. 15, 2013, file photo, Iranian President Hasan Rouhani speaks during the debate on the proposed Cabinet at the parliament, in Tehran, Iran.

Ebrahim Noroozi, Associated Press

Enlarge photo»

WASHINGTON — New signs are emerging that international sanctions are taking a deepening toll on Iran's economy — putting billions of dollars in oil money out of the government's reach. Yet there is no indication the distress is achieving the West's ultimate goal of forcing the Islamic Republic to halt its nuclear program.

Iran has proved adept at working around sanctions and if oil prices don't plummet, U.S. analysts say the country probably has enough economic stamina to reach what the West suspects is its true intention — producing nuclear weapons.

"They can hang on for a long time," said Steve Hanke, a professor of applied economics at Johns Hopkins University who follows Iran's economy. "The sanctions as a deterrent for nuclear ambitions are more or less futile because all the experts will tell you they can (make a weapon) in a couple years."

Sanctions are at the core of international efforts to stop Iran's nuclear program. And if they fail, it will leave the West with some grim options. The U.S. and its allies may have to choose between accepting a nuclear-armed Iran run by hard-line clerics or military action that could fuel more turmoil in the already tumultuous Middle East and still fail to cripple the nuclear facilities.

There is some hope that the recent election of President Hasan Rouhani, considered a relative moderate in a hard-line regime, could lead to a more conciliatory Iran. But Supreme Leader Ayatollah Ali Khamenei controls the nuclear program and all other major policy decisions, and he has maintained a tough stance.

Rouhani campaigned on a promise to seek relief from sanctions — something that many in the U.S. saw as one of the first tangible effects of sanctions on nuclear policy. But he has also remained committed to the nuclear program, which Iran insists is exclusively for producing energy and medical research.

Iran's new foreign minister, Mohammad Javad Zarif, said in a television interview aired Thursday night that sanctions can't force Tehran to change its nuclear policy. Zarif, who is expected to lead nuclear talks with the five permanent members of the U.N. Security Council plus Germany, claimed Rouhani is a new, more measured approach to diplomacy with the West.

Sanctions had already been putting heavy pressure on Iran's economy for the past two years. Oil exports were slashed in half, the rial currency lost two-thirds of its value since late 2011 and inflation shot up. But since Rouhani's election in June, there have been a number of indications the distress is deepening.

Rouhani acknowledged that economic damage was even worse than his predecessor, Mahmoud Ahmadinejad, had let on. This week, local news reports said Tehran may come up short of revenue to cover this year's budget.

Analysts in the U.S. have concluded that inflation is actually much worse than Iran has reported and could be almost double the official rate of about 34 percent annually as of the end of July.

One of the biggest blows to the economy resulted from sanctions imposed in February aimed at cutting off Iran's access to oil revenues. Oil importers are required to pay into locked bank accounts that Tehran can access only to purchase non-sanctioned goods or humanitarian supplies. If importers do not comply, they face the threat of being shut out of the U.S. financial system.

Last week, the director of Iran's Parliamentary Research Center, Kazem Jalali, said more than $60 billion of the country's oil revenue is frozen in foreign banks and out of reach — a figure that could not be independently confirmed.

The piles of frozen cash accumulating in foreign accounts are almost certainly cutting into Iran's accessible foreign reserves — money that can be critical to pay for imports to Iran. If foreign reserves run short, it could also limit Iran's ability to prop up the rial and keep it from collapsing.

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