Sanctions biting but Iran not budging

Saturday - 8/24/2013, 6:28am EDT

MARJORIE OLSTER
Associated Press

WASHINGTON (AP) -- 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.

Mark Dubowitz, director of the Foundation for Defense of Democracies and an advocate of tougher sanctions who has testified before Congress, said the amount of accessible reserves is "the single most important piece of intelligence that U.S. policymakers today need to know." He said that will determine whether "the Iranians drop dead economically before or after they reach undetectable nuclear breakout."

A widely cited report last month by the Washington-based Institute for Science and International Security concluded that Iran will be able to produce enough weapons-grade uranium by mid-2014 for a nuclear breakout, or a quick dash to a bomb, possibly within weeks. The breakout could be so fast that international watchdogs and Western intelligence might not be able to detect it.