Economic Sanctions on Iran

7/22/2019 Economic Sanctions on Iran

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Introduction

Economic sanctions have been historically used as an alternative to war whencoercive foreign policy tools are required. Leaders feel domestic pressure tocondemn regimes or shun certain individuals but the costs of warfare would be too

great, so sanctions are utilized.

Comprehensive economic sanctions are still in place against nations such as Cuba.The Cuban embargo has produced drastic humanitarian consequences and failed tocreate policy changes in the country. In theory comprehensive sanctions place costson the economy as a whole so civilians pressure the government to change.Common arguments against comprehensive sanctions are that they treat innocentcivilians as a means to an end and are very ineffective.

Modern uses of economic sanctions, which are primarily instituted by the UnitedStates, have broadened from simply assuaging domestic pressure and creating

broad economic harms. Targeted sanctions, often called smart sanctions, pinpointspecific individuals within a country or specific goods to prevent their use. Armsembargos and financial asset freezes are commonly used now because they causeless harm to innocent civilians and are believed to be more effective in forcing thosecommitting atrocities to stop.

This paper will focus on two uses of economic sanctions, sanctions targeting Iranand sanctions targeting terrorist groups based in the Middle-East. Each use ofsanctions has its own unique circumstances. Historic intervention by Westernpowers makes leaders in the Middle-East more resistant to coercion by the UnitedStates than in other nations. A specific nation can be isolated from the international

economy, as opposed to translational organizations, but nations also have access todomestic resources unaffected by international trade. Transnational organizations,like terrorists, have fewer resources than national governments but are moredifficult to target with sanctions. A case-study approach to specific instances of theuse of sanctions is the best method to answer the question of do economic sanctionsproduce domestic policy changes in targeted regimes and mitigate the magnitude ofor decrease the probability of terrorist attacks.

Problem

Does the use of economic sanctions by the United States produce policy changes in

Iran or inhibit terrorism?

Literature Review

The main scholarship evaluating efficacy of economic sanctions ability to producepolicy changes comes from a study conducted by Hufbauer, Schott, and Elliot. Theycollected data on 103 uses of sanctions after WWI to empirically test if they work.They concluded sanctions could work if they are imposed quickly, have realistically


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defined goals, and produce significant economic harms. Most scholarship uses theirdata for new tests or questions the validity of their selections of sanctions. Thefollowing table provided by William Diebold Jr. summarizes the resuts of the HSEStudy, Hufbauer, Schott, and Elliotts data (1985).

Robert Pape is one of the most cited authors on economic sanctions. He contendedthe HSE Study, was over inclusive because they included trade wars and tradedisputes that involved cessation of commercial relations, which are not economicsanctions according to him. Pape considers economic sanctions to be imposition ofeconomic harm to produce political policy change, while trade disputes involvingsanctions use economic harm to produce economic policy changes. Pape eliminatesthose uses of economic sanctions from the HSE Study and concludes sanctionsactually only work about 5% of the time as opposed to the 34% success ratedetermined by the HSE Study. (Pape 1997)

Others claim that the HSE Study failed to include the threat of imposition ofeconomic sanctions. Threatening sanctions can produce positive policy change andavoids adverse humanitarian consequences of the imposition of sanctions.Empirical evaluation of sanctions, after including situations involving only threats ofsanctions, casts them in a much more positive light. (Lacy and Emerson 2004 andRogers 1996)

General analysis of sanctionsefficacy is helpful for evaluating them, but politicalleaders often need to evaluate specific instances of implementation that could beexceptions to the rule. For that reason specific objectives for sanctions have also

been studied. Sanctions to prevent nuclear proliferation, stop terrorism, deterinterstate war, and topple corrupt regimes are all discussed (Shen 2008, Levitt andJacobson 2008 and 2009, Folch 2008, Folch and Wright 2008). Specific argumentsfor sanctions often avoid the more abstract debates that the HSE Study and Papesanalysis have raised, but academic review of them risks being too particularized tothe single instances and are unhelpful for making policy decisions in otherscenarios.


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Aside from evaluating the efficacy of sanctions, a large portion of the literatureevaluates the moral and ethical ramifications of economic sanctions. Rarick andDuchatelet describe economic sanctions as applying a pain-gain formula that impliescivilian pain leads to political gain (2008). They claim this is immoral because ittreats citizens as a means to an end. Other moralistic criticisms portray sanctions as

collective punishment that harms innocent civilians who deserve no harm (Gordon1999 and Levine 2009).

Proponents of sanctions also defend them on moral grounds mainly by claimingeconomic sanctions fulfill a moral obligation to shun those who violate human rightsor serve to identify the sender state as moral by disassociating with evil (Beversluis1989, and Addis 2003). Others support sanctions because they claim new smartsanctions avoid the rights violations of comprehensive sanctions by targeting onlythe elites orchestrating or complicit with human rights violations that provokeeconomic sanctions (Tostensen 2002 and Drezner 2003).

Hypothesis

Economic sanctions are effective in preventing terrorism but not in producing policychange in Iran.

Definitions

Comprehensive sanctions are economic sanctions that target a whole country.

Economic sanctions are defined by Adeno Addis as restrictions on normalcommercial relations with a target country, such as trade, investment, and othercross-border activities.

Efficacy of sanctions refers to sanctions ability to coerce policy changes in thetarget.

Inhibiting terrorism means mitigating the magnitude or decreasing the probabilityof terrorist attacks.

IRGC is the Iranian Revolutionary Guard Corps.

Policy changes refer to removal or positive change of the policies that provoked the

use of economic sanctions. Positive change would be change of the policies thatprovoked sanctions to policies more acceptable to the sender nation, in this paperthe United States.

Preventing terrorism means decreasing the frequency and/or magnitude ofterrorist attacks. The most important measure of success at preventing terrorism issaving lives of innocent civilians.


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Producing policy change means pressure from sanctions causes leaders to institutepolicy changes.

Smart sanctions are sanctions targeted against specific individuals or groups. Theyinclude financial asset freezes, arms embargoes, and travel bans. They are distinct

from comprehensive sanctions and are often supported as an alternative tocomprehensive sanctions.

State sponsors of terrorism are governments who actively fund or provide safe-havens for terrorist operatives.

Targeted countries or groups refer to the nation or terrorist group that is beingsanctioned.

UN Resolution 1267 created a Security Council committee to enforce sanctionsagainst the Taliban and Taliban supporters. It mandated the freezing of assets that

could benefit the Taliban and travel bans on Taliban members. A blacklist wascreated of individuals to be targeted. To date 370 individuals have been placed onthe list. (Bruno 2010)

UN Resolution 1333 modified the committee created in Resolution 1267 byexpanding its powers. Military technology, material, and advice cannot be sent toindividuals listed by 1267 or the Taliban in general. No aircrafts are allowed to land,take off, or fly over nations if the aircrafts will fly over, land, or take off from areascontrolled by the Taliban. The sale of acetic anhydride, used in the production ofheroin, to the Taliban and blacklisted individuals is banned.

US sanctions against Iran prevent any importation of goods produced in Iran withthe exception of gifts valued at 100$ or less, information or informationalmaterials, foodstuffs intended for human consumption or carpets and othertextile floor coverings, (US Office of Foreign Assets Control 2010). No goods maybe exported to Iran by the US or US citizens, directly or through third parties, exceptthose licensed by the Office of Foreign Assets Control. This includes US citizensbrokering deals that involve Iranian based companies or individuals. Newinvestments in Iran or to Iranian citizens is not permitted, however current loansand credit given to persons in Iran are not removed, interest and payments may stillbe collected and made on them. US banks may not service the accounts of theIranian Government, banks controlled by the Iranian government, or persons living

in Iran. Trade in oil from Iran or petroleum products refined in Iran is prohibited asis the financing of Irans oil industry and providing goods or technology that wouldaid Irans oil industry. A complete and more detailed elaboration of US sanctionsagainst Iran, including a list of banks and businesses the US considers owned by theIranian government can be found on the website for the Office of Foreign AssetsControl. (Office of Foreign Assets Control 2010)


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Theoretical Assumptions

Comprehensive economic sanctions against Cuba have failed to produce policychange. Some authors may dispute this, but for the purposes of comparing new usesof economic sanctions, I assume sanctions on Cuba failed.

If the United States will impose economic sanctions, other nations will not increaseillicit trading with the targeted country or group to undermine US influence.

There will not be significant change in world-wide counterterrorism or Iranianrelations in the coming months.

Terrorist organizations in the Middle-East will not change their operatingprocedures, such as funding methods, types of attacks, and location of attacks. Theywill not start new businesses or begin new operations to raise funds. They will notchange attacks to focus on capturing leaders or to try to minimize civilian

causalities. They will not change the location of attacks to those beyond countriesalready attacked; they will not start attacking China for instance.

Anticipated Findings

Sanctions against Iran might produce minor policy changes, such as allowingcivilians a few more rights. Perhaps Ahmadinejadsreliance on oil revenue is greatenough to motivate him to acquiesce to the United States demands. However,economic sanctions might aid the IRGC in portraying the United States as evil tocreate a rally around the flag effect and increase citizen support for his regime.Additionally, the IRGC is still in power and sanctions remain in effect so sanctions

have clearly been unable to produce enough policy change for them to becomeunnecessary.

Sanctions could hinder fighting terrorism by driving financial flows underground,preventing the US from predicting and preventing terrorist attacks. However,terrorists most likely already use as secretive of financial methods as they can, sothere would be no significant change in the secrecy of their financial transactions.Also, even if the United States were unable to predict more terrorist attacks, thedifficulty of funding such attacks also decreases the number of attacks terroristcould carry out.

Significance of Study

Economic sanctions have been increasingly used in recent years. The US currentlyhas major economic sanctions on 12 countries and limited financial restrictions onmany other countries (Rarick and Duchatelet 2008). While appearing to be a non-violent alterative to war, sanctions can have devastating humanitarian impacts thatnecessitate significant study. Sanctions on Cuba make even legally acquiringmedicine an arduous task because of complex licensing procedures. Lack of


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medicinal supplies due to sanctions resulted in estimated 48% increase in deathfrom tuberculosis, a 67% increases in death by parasitic or infections disease, and a77% increase in influenza and pneumonia fatalities (Coll 2007). Defenders of so-called smart sanctions say that they avoid the harms of comprehensive sanctions,but anything with this destructive potential deserves a focused analysis of its

efficacy.

Sanctions against Iran and Middle Eastern terrorist groups also have significantimpacts because of the risk of overreliance on an ineffective foreign policy tool.Many commentators worry that a nuclear Iran will provoke a military responsefrom Israel, risking an all-out nuclear war in the Middle-East as other nationsproliferate nuclear arms in reaction to perceived threats from Iran and Israel(Kittrie 2009). The terror attacks of 9/11 killed nearly 3,000 innocent civilians andthe risk of another strike of this magnitude means all measures used to fightterrorism must be effective (CNN 2008). Also, since 9/11 a new breed of super-terrorists have emerged, described as individuals characterized by a

megalomaniacal desire to leave a historically unprecedented mark of massdevastation and death (Lipman 2003). In order to attract media attention eachattack must exceed the previous strikes devastation. Therefore, it is of paramountimportance that resources are being used effectively now to prevent attacks ofincreasing magnitude in the future.

Limits and Restrictions

Current national security issues, like terrorism and Iranian proliferation, may beclassified and inaccessible to a high school student.

Time is limited, so this paper assumes comprehensive sanctions fail to producepolicy change.The University of Iowa does not have access to all the databases and journals ofinformation about US economic sanctions, so certain information is unavailable forstudy.

I have a $70 library fine at the University of Iowa so am unable to check out bookson economic sanctions.

Sanctions against terrorism come in many different forms, personal travel bans,financial asset freezes of charities suspected of funding terrorism, and sanctions

against state-sponsors of terrorism. It is impossible to collect enough data on eachtype of anti-terrorism sanction for a full analysis.

Many authors have a vested interest in writing sensationalist papers to attractattention to the issues they study because they might receive more grant money iftheir fields receives a higher focus.


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Much of the data on black-market trading is unavailable because it is a hidden andunderground system.

The efficacy of economic sanctions on regimes involves a relationship betweenquantifiable economic harm and qualitative political changes. Targeted leaders

have to weigh economic depravation with the benefits of existing domestic policies,but Iranian leaders and citizens each may perceive costs and benefits differentlybecause they are subjective concepts. Predicting the actions of these individuals isvery difficult.

Causation is nearly impossible to determine for if sanctions produce policy changein Iran or inhibit terrorism because there are many different policies in place toinfluence the Iranian regime and inhibit terrorist activities. Isolating economicsanctions as the causal factor is very difficult.

Methodology

Case study of two uses of economic sanctions

1. Irana. Acquire data on:

i. Effects of sanctions on Irans economyii. International cooperation on Iranian sanctions

iii. Effects of sanctions on Irans non-economic policy1. Domestic power of the IRGC2. Nuclear proliferation

b. Determine if:i. Sanctions produce economic pressure on Iran

ii. Economic pressure on Iran produces policy change2. Terrorism

a. Acquire data on:


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i. Past uses of comprehensive economic sanctions effect onterrorism

ii. Financial sanctions used on suspected terrorist fundingorganizations

1. The effect of financial pressure on terrorist groups2. Possibility of producing financial pressure

a. Locating terrorist fundsb. International cooperation on sanctions against

terrorism

c. Other factorsb. Analyze data to determine if:

i. Financial sanctions produce financial pressure on terroristsii. Financial pressure will inhibit terrorism

Findings

Iran

Effects of sanctions on Irans economy

Orde Kittrie reported on the new financial sanctions placed on Iran. The newinnovations are direct outreach to individual foreign private financial institutions,aggressive use of financial authorities to pursue political goals, and effectivedevelopment and harnessing of intelligence about global financial transactions(2009). The assets of members of the IRGC and IRGC owned businesses are frozen

and third party banks that processes financial transactions with Iran also faceincreased regulation. For several months Reliance Industries had to stop gasolinesales to Iran because it could not acquire letters of credit, the main form of paymentin international trade, from French banks. Overall the costs of imports to Iran haveincreased by 20% - 30% due to financial sanctions alone. (Kittrie 2009)

General sanctions also will likely place significant economic pressure on the IRGC.After the June elections and increases repression of civilian protests, it is likely the


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Iranian people will blame the IRGC for the sanctions because they already resent theregimes control. The IRGC has also expanded its role in the economy, acquiringbillions of dollars worth of more contracts in the past six months, which makes it abigger and easier target to hit. (Peterson 2010)

However, Prebel worries that by increasing sanctions the supply of oil will decrease,raising the price, and make black-market smuggling of oil out of Iran moreprofitable. This will enrich the IRGC who profit from the black-market sales (2007).Because the sanctions drive most of these trades underground it becomesincreasingly difficult to track the funds of the IRGC, which is an important tool todiscover how close Iran is to proliferating nuclear weapons and what terroristorganizations are receiving funding. Without Western banks to compete with, localbanks in Pakistan and other Gulf States are providing financial services for theregion, but those bankssecurity measures are far less stringent and transparentthan those the Western banks previously used. Imports to Iran from the UAEincreased by 20% in 2006 and 25% in 2009, but because those trades were not

processed through Western institutions the recipients of goods and funds isunknown (Fassihi and Cummins 2008).

Although US sanctions only target Iranian companies, many foreign organizationshave ceased business with innocent Iranian companies because of the difficulty ofwiring money to accounts in Iran. This hurts small businesses that must paysignificant costs to middlemen to exchange products and funds. Inflation in Iran hasrisen 18% due to sanctions, this price increase hurts all innocent citizens in Iranbecause they have less purchasing power. (Fassihi and Cummins 2008)

A further implication of the difficulty of financial transactions to Iran is that

businesses and individuals have to pay middlemen significant fees to transportfunds and goods between neighboring countries like the UAE. The graphic displaysthe complicated process of getting goods into Iran. One businessman gives $12,300to a man in Iran, who sends the money to his brother, who sends the money to amiddleman in Dubai, who acquires the goods from a supplier and sends the goodsback through the same path. The fees and commissions charged by the individualsin the chain raise the price of goods 23%, from $10,000 to $12,300.


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Graphic from Fassihi and Cummins 2008

International Cooperation on Iranian Sanctions

China has also started increasing trades with Iran to both undermine the efficacy ofUS sanctions and profit from an oil rich trading partner (Wall Street Journal 2008).American interests are weakened because our corporations have a limited supply ofoil traders and Chinas corporations gain an advantage. Further, China and Russiahave ties with Iran, so will veto any measure to place UN sanctions on Iran,preventing multilateral sanctions from being a policy option. Increasing USunilateral sanctions also backfires when both Russia and China started negotiating


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with Tehran because they felt the US was ignoring their interests by strengtheningsanctions. (National Security Network 2009)

China is willing to support UN resolutions to strengthen sanctions, Resolution 1747specifically, but the Chinese government stated that it requires the strengthened

sanctions to neither harms the Iranian people nor affect normal economic, tradeand financial exchanges between Iran and other countries (Hsiu 2007). Thepublicly stated reason is that diplomatic engagement with Iran is the only way toend its desire for nuclear weapons. However, China also has significant energy tieswith Iran. Chinas oil corporation SINOPEC Group just made a $70 billion deal withIran for oil and natural gas. Sanctions on Iran would disrupt these businessinteractions, worsening US-China relations (Hsiu 2007). In total, Iran and Chinahave a $25 billion bilateral trade flow (Tucker and Bozorgmehr 2010).

However, Congress has recently become disgruntled with the ObamaAdministrations Iran policy believing it to be too soft. New legislation proposed

focuses on tougher sanctions than what will emerge from the U.N. Security Councilbecause Russia and China will decrease the strength of U.N. sanctions. Congressssanctions, however, also focus on Irans human rights abuses, but Obama fears focuson those will dissuade China from supporting sanctions because of its own humanrights abuses. (LaFranchi 2010)

Another concern is Israels perception of Irans proliferation status. Israel fears anuclear Iran will launch its weapons against Israel, so Israel has planned militarystrikes on Iran to destroy its nuclear capabilities. Saudi Arabia also fears Iranianproliferation would threaten its power in the Middle-East, so might grant Israel fly-over permission to attack Iran. If Israel attacks, even if Iran doesnt have nuclear

weapons, there is a danger war could erupt in the Middle-East between the twonations. Sanctions would assuage Israels fears because they are assured the US isallied with them against Iran and that Iran will be unable to acquire nuclearweapons. (Follath 2009)

An Israeli strike would likely miss secret nuclear storehouses and only provoke Iranto encourage Hezbollah in Lebanon and Hamas in Palestine to attack Israel andother allies of the West. The political power of the Green movement in Iran todepose Ahmadinejad would also suffer because Iranian citizens would likelysupport hardliners acquisition of nuclear arms more to defend against externalthreats. (Economist 2010)

Effect of Sanctions on Irans Non-Economic Policies

Domestic Power of the IRGC

A World Public Opinion poll in 2009 found that 56% of the Iranian people wereagainst stopping enrichment because of the cost of sanctions. Increasing sanctions


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will likely create a rally around the flag effect where citizens increase support thesupport of their leaders in reaction to an external threat. (Sugrue 2009)

Proliferation of Nuclear Technology

Currently, Iran has advanced missile technology capable of hitting Israel and targetsin Europe and has uranium enrichment capabilities that can produce 20% refineduranium (Cummings 2009). 80-90% enriched uranium is required for weapons-grade material, and it is a simple technological process to go from 20% to weaponsgrade uranium (Sanger 2010).

The IAEA has not confirmed Irans claim to 20% enrichment,but on the 8thofFebruary, 2010 did confirm that Iran was in the process of producing uranium atless than 20% enrichment. (IAEA 2010)

Iran relies on the international financial system to fund is nuclear proliferation

program, so if sanctions are able to block its access to that system it will be unableto proliferate nuclear technology (Kittrie 2009).

However, sanctions feed hardliners in the Iranian governments argument forproliferation as a defense against Western coercion. The hardliners perceivenuclear weapons as a tool of resistance because the US wouldnt anger a nuclearIran. If the US imposes more sanctions that harm the Iranian people the citizens willlikely agree more with the hardliners that Iran needs to proliferate to resist.Sanctions also provide an excuse for Ahmadinejad to delay negotiations aboutnonproliferation because he and the US would not be meeting on equal footing if USsanctions remain on Iran. Those who believe engagement with Iran will prevent

proliferation believe sanctions must be lifted so Achmadinejad has to come to thenegotiating table. (Olsen 2009 and Follath 2009)

If sanctions fail due to black market trading or Russia and China undermining theeconomic isolation, Iran will still be able to proliferate nuclear weapons. Thediplomatic isolation created by sanctions will make nuclear war more likely becauseUS and Iranian leaders will more likely miscalculate the others capabilities andintentions. A first strike could give either side a significant advantage, so themiscalculations may lead to a nuclear war. Even if a nuclear war with Iran does nothappen, the economic depravation caused by sanctions (assuming Russia, China,and the black market cannot completely destroy the economic burden of sanctions)

may incentivize Iran to sell nuclear technology to others to alleviate the economicstrain. Non-state actors, like terrorist organizations, may acquire nuclear weapons.They are not deterable because there is no nation for the US to threaten a retaliatorystrike against. A nuclear war therefore could not erupt between terrorists and theUS, but nuclear attacks become more likely. (Carpenter 2010 and Ferguson 2009)

Terrorists


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Comprehensive sanctions

Comprehensive economic sanctions might increase terrorist recruits. Middle-Eastpolitics are historically driven by the Jewish experience in the Holocaust and the

suffering of Palestinians in the state of Israel. Intervention by Western powersdrives these fears that the past will be repeated, which only prolongs the cycle ofviolent resistance. Iraqis are likely to view the economic deprivation caused bysanctions as contradicting the Western goals of liberating the Iraqi people and asinspiring new recruits for Al-Qaeda. It is unclear, however, if targeted financialsanctions are perceived similarly. (Fierke 2005)

Economic sanctions also exacerbate domestic poverty, which drives terrorismbecause the targeted nations citizens are more willing to accept radical measures.Regimes targeted by sanctions in the Middle-East are often funded by Islamicextremists, so after outside powers cripple the economy with sanctions there is very

little incentive for the state to stop the preaching of fundamentalist beliefs or therecruiting of new members. Further, once persons lose their livelihoods they oftenfeel radical solutions are necessary or are more willing to accept radicalism becausethey have nothing left to lose. Statistically, the majority of Taliban members areseverely impoverished, while the leaders have significant wealth and takeadvantage of those without resources. Exact numbers are unknown, butgeneralizations can be made about the demographic composition of the Taliban.(Fandl 2004)

Financial sanctions

Effects of financial pressure

The benefits of financial sanctions are significant. Terrorists may not needsignificant funds to launch an attack, but they require extensive funds for setting upinternational networks, training camps, and command structures. When the Talibanwas in power in Afghanistan, Al-Qaedas annual operating costs were $36 million ontop of $50,000 fixed costs for infrastructure and equipment. Denying terroristsfunds prevents them from launching highly coordinated attacks, mitigating thedestruction. It also prevents international transfer of funds so terrorists becomegeographically isolated. (Rosen and Lucy 2001)

Financial information is also one of the best ways of fighting terrorists. Much of theinformation on terrorists comes from bribes, double agents, and interrogation, all ofwhich is of questionable reliability. A financial record, however, has accurateinformation on location and scope of terrorist activities. (Fitzgerald 2007)

However, the US compensates for the difficulty of locating terrorist assets byfreezing lots of individuals assets. Unfortunately, this damages many innocent


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Islamic charities. Sakr Abu Hein runs an Islamic charity that had provided aid to1,000 impoverished families, 1,000 students, 5,000 kindergarteners, and 3,000orphans in the Gaza strip had its assets frozen and can no longer provide any relief.Unfreezing assets now is insufficient to solve the problem though because thecharitys image has been significantly damaged. People are less willing to donate to

an organization that might be funding terrorists. Hein reported that his charitysimage was such that his revenue was significantly less after his asset freeze.(Ferrari 2005)

Possibility of creating financial pressure

Locating financial assets

A problem with relying on financial asset freezes is that terrorists rely significantlyon illicit financial flows that go through unregulated channels. Sometimeslegitimate businesses, like taxicab companies and charities, fund terrorist

enterprises, but terrorists also use difficult to trace commodities, like preciousgems, or physically carry money across political borders, which are very difficult tosanction because there is no electronic money transaction. (Donohue 2006)

The actual amount transferred to carry out a terrorist attack is also hard to detect.The attacks of 9/11 cost between $400,000 and $500,000, but the 1998 East AfricanEmbassy attack cost only $10,000. With globalization increasing the amount ofinternational money transfers, individual transfers of this size are hard to identify asfunding terrorists. (Donohue 2006)

Another way Al-Qaeda has changed to overcome financial difficulties is by

decentralizing its organization. Local terrorist cells have more authority, loweringmonitoring and organizational costs on central leadership. Individual cells fundtheir own attacks. The July 2005 attacks in Londons subway system were self-funded, and an attack planned in Germany in 2006 was self-funded. Al-Qaedaprovided only the instructions on how to build and use explosives from theirwebsite. (Bruno 2010)

Long term reliance on financial sanctions is risky because terrorist organizationsare able to establish financial relations outside of the regulated financial system thatundermine the efficacy of sanctions and prevent the tracing of terrorist assets totrack when and where future attacks are likely to occur. (Eckert 2008)

International Cooperation

Financial asset freezes also require significant international cooperation soterrorists cannot use banks in other countries. However, many nations are nolonger enforcing UN resolutions 1267 and 1333, which mandate the freezing ofterrorists assets. Many nations have ruled the current financial sanctions againstterrorists illegal and hence unenforceable. The European Court of Justice in 2008


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ruled that the freezing of the assets of Yassin Abdullah Kadi and the Al-BarakaatInternational Foundation illegal. Courts in the UK also ruled U.N. financial sanctionsillegal because they bypassed Parliament. Nations are backing down from enforcingfinancial sanctions for these reasons. (Gurul 2010 and Eckert 2008)

Political support for international cooperation to freeze assets is also failing. TheEuropean Unions parliament voted 378 to 196 against sharing information onfinancial flows collected by Society for Worldwide Interbank FinancialTelecommunications, SWIFT, with the US. It cited privacy and human rights as keyissues in rejecting the proposal. (Traynor 2010)

The US Treasury Department has attempted to solve the problem of lack ofinternational cooperation by cooperating more with the broader intelligenceagencies outside the Treasury department and tasking individuals with the specificgoal of isolating terrorists financial transactions. The US is the first government toimplement such policies. (Fitzgerald 2007)

Other

The lack of attention to financial sanctions also has undermined their efficacy. Asnations stop reporting new suspects to be blacklisted for asset freezing simpledonations are able to generate significant funds for terrorists. The Taliban received$106 million in donations from Gulf States in 2007 because many intelligenceoperatives ceased monitoring its financial flows to focus on Iraqi insurgents. Eithermore analysis or a shift in focus is required to stop funding going to the Taliban.(Guo 2009)

The prevalence of charities and donations in Muslim nations is explained by theIslamic belief in zakat, a required charitable donation to the poor or a just cause.Radical Muslims believe Al-Qaedas terrorist actions qualify as a just cause so funneldonations to charities or mosques to terrorists. Sanctions are therefore difficult toaccurately target because it is hard to distinguish between which groups are fundingterrorists due to the plethora of donations being made. Sanctions also becomedifficult to implement because individuals resist interference in religious practices.(Bruno 2010).

Analysis

In evaluating the efficacy of sanctions there are two questions that must beanswered. First, do economic or financial sanctions succeed in producing economicor financial pressure? Second, does economic or financial pressure on the targetslead to achieving the policy goals of the sender nation?

Iran


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Do economic sanctions produce economic pressure?

The evidence indicates that there is significant pressure placed on Iran due toeconomic sanctions.

Kittriesanalysis shows there is a definite increase in costs for Iranian companies

and that Western financial institutions have left the region. The sanctions regimeprevents US companies from doing business with Iranian ones, which means Iranloses trading partners, cannot access the international financial system readily, andcannot fund domestic projects with outside funds.

The evidence suggesting the increase in costs is not a result of economic sanctionsgenerally takes one of two stances. Either Iran will be able to use the black-marketto import and export at a greater profit because of limited supply of its goodsavailable through legal channels or that other companies will replace Western onesthat do business with Iran, usually fellow countries in the Middle-East or China.Both counter-arguments will be addressed individually to show how they fail.

Black-market sales

If Iran is able to shift exports to the black-market there will still be significanteconomic pressure placed on Iran. There are fewer buyers in illicit trading becausefewer companies are willing to take the risks of punishment for being caught. Thatcounteracts the decrease in supply created by sanctions at least somewhat.

Further, the increased profits from black-market trading would exist whether or notsanctions were imposed because the risks noted in the last paragraph and thesecrecy required let sellers justify higher prices. Iran would use the black-marketover legal transactions whenever the opportunity arose; sanctions would notsignificantly increase or decrease the use of it. Iran will still use licit trade marketsbecause it must at least pretend to respect the rules of the global market place, butwould most likely maximize its use of the black-market within that restraint already.

Even if there is an increase in black-market trading, it is impossible to accuratelyjudge the effect of those increased black-market transactions because they are donein secret. At best opponents of sanctions can argue there might be increase profitsfrom illicit trading, but they cannot show that the profits completely undermine theeconomic hardship created by sanctions.

Middle-East Replacement Companies

Fassihi and Cummins reported that banks in the Middle-East are replacing Westernones for Iranian companies to transfer funds through. However, those banks wouldlikely lack the connections that Western banks have to other financial institutions tosend money through and the trust of buyers and sellers in the West who dont wantto send significant amounts of funds through banks they have never had dealingswith.


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Even if Fassihi and Cummins fears that financial flows wont be traceable throughother banks come to fruition, there will be far fewer transactions to trace due toeconomic sanctions.

Middle-Eastern companies also wont be able to replace the funds frozen andcontracts broken by the initial sanctions because the West will control the moneyand goods. Peterson indicates that Iran has significant funds invested in theeconomy right now that sanctions could seize to pressure the regime in the shortterm.

China

China is perhaps the biggest concern because its massive economy couldsignificantly undermine sanctions ability to place economic pressure on Iran bytrading with Iran once other nations cease due to sanctions. However, China cannotand will not prevent the sanctions from working.

China has expressed that they do not wish to see Iran with nuclear weapons, sothere remains the possibility that Obama will be able to convince China thatsanctions are key to preventing Iranian proliferation.

Also, Russia has recently hinted that it will support Iranian sanctions because ofIrans continued defiance of diplomatic solutions to its proliferation ambitionsbydelaying the shipment of sophisticated missile defense systems. This may convinceChina to not veto sanctions from the U.N. Security Council and abstain instead.(Economist 2010)

Iran may be able to trade goods with China, but it cannot transfer money throughChinese banks for the same reasons that it cannot use Middle-Eastern ones, lack ofconnections to and trust of the rest of the word.

Will economic pressure help achieving the policy goals of the sender nation?

Sanctions may be able to produce economic pressure, but are unlikely to producepolicy change.

Iran may lose business with other nations, but sanctions fail to address the rootcause of its nuclear ambitions, a defense against perceived Western imperialism.Mohammad Nahavandian is the head of the Iranian chamber of commerce and saidin Hong Kong that, the threatening language used by the west had made the issue

[of Irans nuclear programme] one of national identity and independence, (Tuckerand Bozorgmehr 2010). While not specifically about nuclear weapons, Iran doesdesire nuclear power to show its independence and ability to resist Westerninfluence. Sanctions will at best be a delaying tactic to give other nations more timeto prepare for an eventual nuclear Iran. However, the findings indicates that amilitary strike will not be effective and sanctions prevent a diplomatic solution frombeing reached because Irans leaders refuse to make significant concessions untilsanctions are lifted.


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Even the Green movement will be undermined by sanctions because Iranians willsupport proliferation more because sanctions create a rally around the flag effectand encourage proliferation as a means of checking back the influence of the West.Tense protests in Iran make it more unclear how the populace will react tosanctions because of the divisive conflict and rapidly changing situation in Iran.

However, currently 56% do support proliferation according to Sugrue despitesanctions, so there is a greater chance the citizenry will still support proliferationand the IRGC by extension.

Even if there is a chance sanctions fail, the risks of diplomatic isolation from andtensions with a fellow nuclear power are unacceptable. Iran has missile technologythat can reach Europe and Israel. The Middle-East is rife with border disputes,ethnic hatreds, and unstable governments. Further, Irans leaders by virtue of theirapocalyptic messianism and exaltation of martyrdom might invalidate the theory ofdeterrence (Kittrie 2009). Isolation from Iran will also make both sides, the Westand Iran, misinterpret the others intentions more often and mistakes in relations

between nuclear powers risk escalating into global nuclear exchanges.

Terrorism

Do financial sanctions produce financial pressure?

Financial sanctions face too many implementation issues to be effective atproducing financial pressure.

The literature acknowledges that sanctions on terrorists did freeze their assets inthe past, but no longer have the global cooperation necessary to implement them.The EU decision to not share intelligence with the US displaces a current trend away

from freezing assets of terrorists. Provided in the Findings section are the specificdata sets about the international cooperation on terrorist asset freezes, additionallyinternational cooperation is key because the US does not have the global financialpower to freeze all assets. After September 11th, the US only had the ability to freezeone third of Osama Bin Ladens assets; other nations must cooperate with the US forsanctions to produce financial pressure (Fitzgerald 2002). There are simply toomany unregulated forms of transfer, from already illegal drug trafficking to simplycarrying money across borders.

The intelligence agencies the US uses to track the funds of terrorists are notsuccessfully targeting them. The impact of financial freezes on innocent

organizations is displays that terrorists are not the ones being hurt. If the US is justbeing over inclusive on its list, there are likely lax procedures for determining whogoes on the list meaning actual terrorists could be unencumbered.

Those intelligence agencies also rely on other countries sharing information withthem, but many other countries legal systems have declared it illegal to share suchinformation or have stopped sharing for other reasons. Even if the US has the abilityto freeze funds it cannot determine who to target.


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At the least, there are financial transactions that cannot be traced or prevented.Stoping those in the open market place will only push more into the covert means,which prevents sanctions form working in the future and denies valuableintelligence about possible locations and magnitudes of upcoming terrorist strikes.

Will financial pressure help achieving the policy goals of the sender nation?

If financial pressure were possible then the freezing of terrorists assets wouldsignificantly hinder their operations.

They will not be able to plan large-scale attacks, train large numbers of recruits, orestablish regional control because they lack financial resources to fund suchventures.

Even if Fierke and Fandl are correct and there will be more terrorist recruits, thoserecruits will not add more assets to terrorists arsenals because new recruits comefrom impoverished families per Fandl and those recruits will not be able to launch

devastating attacks due to lack of funds.

The charity discussed by Ferrari could show sanctions do more harm than good. Itis one of at least 60 charities similarly affected. While terrorist attacks may kill farmore than those who will suffer because of lack of charity funds, the probably ofinnocents harmed by the asset freeze is far more likely than freezing assets stoppinga terrorist attack. The risk, probability of the attack times the magnitude of theattack, therefore is likely to be closer between harm to innocents and preventing anattack.

However, the long-term effects of a terrorist attack significantly alter the calculation.Lippman theorized that current terrorists have changed their ideology. Hedescribes the new super-terrorists as are driven by an apocalyptic andmillenarian religiously-based worldview which posits that the world must bedestroyed in order to cleanse the globe of paganism and impurity. [They] arecaught in a spiral of ever-more dramatic acts of violence to attract media and publicattention. Allowing one terrorist attack to succeeded will motivate others to beeven more destructive because the next attack must top the other in the magnitudeof devastation to get media attention. Stopping attacks while they remain moresmall scale is thus a paramount concern and financial pressure, even if it harmsinnocents, is able to achieve policy goals. (Lippman 2003)

Implications for Further Research

The most important other research to be done is the efficacy of other types and usesof economic sanctions. The case study approach provides important data forsanctions against Iran and terrorist organizations, but how generalizable the data isto other uses of economic sanctions is unclear.

Economic sanctions are currently used against North Korea, analysis of thosesanctions is likely to be important in deciding how to interact with the new nuclear


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power. Nuclear weapons pose massive threats to world-wide security because oftheir destructive potential. If sanctions encourage diplomatic negotiations orpromote antagonism between nuclear powers is a central concern for global peace.The rise of China in global politics, an important ally of North Korea, also implicatesthe efficacy of sanctions because China could either help sanctions by controlling

imports and exports or undermine sanctions by trading more with North Korea.

Non-efficacy related goals of sanctions also merit further research. Some authorsclaim by using economic sanctions nations express moral disapproval with regimesand avoid being complicit with actions of the regime by denying funding for itsactions. Addis calls this the identitarian function of sanctions, nations use them todefine themselves through disassociation (2003). Whether modern smart sanctionsstill have this function because they involve limited restrictions on financial assetsand travel bans is important in evaluation economic sanctions from a moral orethical standpoint.


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Documents

Economic Sanctions on Iran