Sanctions biting but Iran not budging

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.

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.

Proponents of sanctions hope that the drag on the economy will force Iran to switch course. But trying to discern the true dimensions of the economic impact is almost impossible because authorities either release data with long lag times or do not report numbers accurately.

Outside sources of information are sparse.

The International Monetary Fund estimated foreign reserves were down to $80 billion in March from $96 billion a year earlier. The $80 billion is still a healthy level, but it's not clear how much of the money is accessible and how much is frozen in accounts overseas by sanctions.

Economic Research firm Roubini Global Economics and Dubowitz's Foundation for Defense of Democracies assessed in a new draft report that $30 billion to $50 billion of reserves is accessible. But the figures cannot be independently verified.

Still, analysts say Iran's economy has proved so far to be resilient and flexible enough to offset some sanctions damage. And the rial's devaluation has one advantage – it has made exports cheaper and thus more appealing. That has helped the country diversify its exports and become less reliant on sanctioned oil.

Iran boosted exports of non-oil goods that are not subject to sanctions by 20 percent in 2012, according to the Institute of International Finance (IIF), an economic think tank. Those include oil byproducts such as petrochemicals as well as cement, iron ore, pistachios and Persian carpets.

Oil remains Iran's dominant export and Garbis Iradian, deputy director of the IIF's Africa and Middle East Department, said Iran can withstand sanctions for a long while if prices do not drop sharply.

"As long as oil prices stay at around $100, the sanctions have a negative impact, but it's OK, they can survive for several years. If oil prices drop below $80, they will feel the impact of sanctions," he said.

Meanwhile, U.S. lawmakers are looking to further tighten sanctions. The House of Representatives approved a bill last month that, if it becomes law, would further limit Iran's access to its foreign currency reserves and impose a virtual oil and trade embargo. It would commit the U.S. to the goal of ending all Iranian oil sales worldwide by 2015 – the year after some experts estimate Tehran could build a bomb.