From the Los Angeles Times

Iran sanctions ripple past those in power

The people and small businesses are feeling the pinch. And the West is debating even tougher restrictions.

By Borzou Daragahi and Ramin Mostaghim
Special to The Times

January 20, 2008

TEHRAN — Sanctions weren't supposed to hurt Majid Taleghani. But the Iranian book publisher says they have forced him to increase prices and scale back the number of titles he issues.

"In the past few weeks, the price of South Korean paper has soared at least 25%," Taleghani complained, chain-smoking nervously. "Why? South Korean banks refuse to open letters of credit. They won't work with Iranian banks anymore."

President Bush's recent tour through the Middle East was meant in part to rally U.S. allies against Iran before talks Tuesday in Berlin by members of the U.N. Security Council and Germany over the possibility of imposing a third round of sanctions on Iran to pressure the government to halt its nuclear program.

A year after the Security Council first imposed sanctions, they clearly have begun to have an effect. But in an echo of the debate over sanctions against Iraq under Saddam Hussein in the 1990s, diplomats and economic analysts disagree sharply over whether such measures would pressure those in power to change their policies or merely hurt the Iranian people.

"They have an impact; they have a heavy impact on the economy," said a Western diplomat in Tehran who is among those who regularly brief officials in Washington about the situation in Iran. "But will this have an effect on policy? That is the question."

A report released Wednesday by the Government Accountability Office, an independent auditing group that answers to the U.S. Congress, says, "The overall impact of sanctions, and the extent to which these sanctions further U.S. objectives, is unclear," and that foreign firms continue to make deals in Iran's state-controlled energy sector.

But on the streets and in the shops of Tehran, the capital, sanctions have had a visible effect, diminishing the ability of merchants and consumers to buy goods from Europe, forcing them to opt for cheaper Asian imports.

Prices of most goods, including French perfumes and German printing plates, have increased 50% in the last four months, merchants say, a result of the extra cost of doing business through Dubai, in the United Arab Emirates, instead of directly with foreign manufacturers and distributors. Many of those firms are wary of doing business with Iran lest they come under the scrutiny of the U.S. Treasury Department, which has begun aggressively targeting companies with ties to both the United States and Iran.

"Now, doing business with anywhere other than China or Russia is too much of a pain," said Ali-Reza Morshed Razam, owner of an eyeglasses shop on Palestine Street, in downtown Tehran.

Although some observers say Iran's elites will weather any sanctions short of an international ban on the purchase of Iranian oil and natural gas, others think economic restrictions will force the country's well-connected merchants to press the government to change its ways.

A European diplomat said he was heartened to hear that a group of Iranian entrepreneurs recently had approached Supreme Leader Ali Khamenei to complain that sanctions were hurting their bottom line.

"If you want to touch the people who have an interest in the regime, then sanctions are the way to do it," said the diplomat, who spoke on condition of anonymity. "Small-business men should put pressure on the regime."

Iran's economy is heavily dependent on oil and characterized by massive amounts of public spending, especially to provide cheap gasoline, which the government imports and sells at heavily subsidized rates. Increasing the costs of doing business with the outside world forces Iran to spend more money, draining government resources.

By pouring more cash into the economy, the government also confronts the shrinking value of the Iranian rial, and increased inflation, which makes people poorer.

Economic sanctions imposed on Iran by the Security Council and countries such as the United States so far have had few concrete restrictions but have created an atmosphere that makes investors fearful, observers said.

"Sanctions are like icebergs," said Saeed Leylaz, an Iranian economist and journalist. "Only 10% of the effect is directly attributable to the Security Council. Ninety percent is fear of the U.S."

Some officials dread a repeat in Iran of the events in Iraq after the 1991 Persian Gulf War, when sanctions discouraged companies from doing business with Iraqis, whittling at livelihoods of the people while strengthening the hand of Hussein and his inner circle.

"Even if something is not on a list, a lot of companies will say, 'Dealing with Iran -- oh, I'd better not do it,' " said a European diplomat in Tehran. "It's becoming like 1990s Iraq, when companies used to refuse to sell papers and pencil to Iraq."

The Bush administration has also announced that it will sanction any company doing business with the Revolutionary Guard, the country's ideologically driven parallel military force. Those sanctions, advocates say, are meant to strike at Iran's leadership without weakening the economic status of middle-class Iranians who are likely to press for domestic change.

"The U.S. government proposal for new multilateral steps, be it at the U.N. or with the [European Union], is to step up pressure on Iran's leaders -- not to press Iran's people with broad economic sanctions," said Patrick Clawson, an Iran expert at the Washington Institute for Near East Policy, whose views on Iran often reflect those of the White House.

But some Iran experts say the Bush administration's sanctions strategy reflects a misreading of Iranian political dynamics. One scholar likened the American and Western European thinking to that of Marxist and anarchist revolutionaries of Central Europe in the 1920s who believed that the people would rise up against capitalist elites if the economy worsened.

In fact, said the scholar, Iranian hard-liners will be strengthened by any economic crisis. "Extremists in Iran don't mind at all if sanctions get worse," he said. "They don't mind if the U.S. attacks Iran."

Foreign investment in Iran's once-bustling, Western-leaning private sector has flattened after dropping off two years ago with the election of hard-line President Mahmoud Ahmadinejad and the beginning of major tensions over Iran's uranium-enrichment program, Western diplomats said.

Such pressures serve only to antagonize Iranians against the West, some say.

"What pressure does this put on the system?" fumed Mousa Ghaninejad, an Iranian economist who writes for the daily Donya-e-Eqtesad, or World of Economics. "Americans are making the people enemies. The important thing is to make the Iranian people their friends. They're doing the opposite."

Western diplomats in Tehran say they closely watch the effects of sanctions on prices and Iranian attitudes, and send their findings back to European capitals as well as to Washington, where diplomats say they are eagerly received by White House, State Department and Pentagon officials.

"Targeting the sanctions is the biggest battle we have among people who are discussing sanctions," said a European diplomat in Tehran. "Ultimately we want the regime to change its policies, without hurting ordinary people. So you've got to hit the decision-makers, and that is very, very difficult."