A case study of irainian practice

MANAGING COMPANIES
UNDER THE ECONOMIC
SANCTIONS
A CASE STUDY OF IRAINIAN PRACTICE
BY IRFAN IFTEKHAR

Abstract
Economic sanctions are often considered to be a legitimate, more peaceful alternative
to war. Using examples, particularly that of Iran, it is evident that this is not so;some nations
still circumvent sanctions as their trade and business find other ways to prosper. This is made
possible by the effective business management practices or so-called managerial practices
which are supported by the people of the country under trade sanctions. The success in
beating economic sanctions mostly lies with shrewd and sterategic management practices,
which will be made evident in this study.
Economic sanctions fail whether they take the form of an economic and financial
boycott of the aggressor or that of a regular blockade. (1) They come too late; they can only
be applied as a corrective; they do not protect against aggression. (2) Economic sanctions are
notoriously slow in their application. (3) They are a double-edged sword, striking at
international trade and punishing the innocent with the guilty. (4) Economic sanctions are
ineffective against nations which can, if need be, form self-sufficient economic units. Dr. van
der Leeuw contends that an international police force alone would make complete
disarmament possible, since it would provide security against aggression, not merely
coercion afterwards. Each nation would contribute its quota to the world police and, having
done so, would not be further involved. This paper explores the use of sanctions in one
country case study and their varying results on trade and commerce.
Since1993, America has imposed no less than 40 trade and economic sanctions, against
nearly 40 countries.from Myanmar to cuba to iran and elswhere, these sanctions have
produced few results and could not achieve the goals hoped for by the US.conversely, it has
made an increasing number of countries feel uncomfortable doing business with US:it has
punished US consumers and hurt the poor in countries hit by sanctions. As the poor comprise
the majority population in these countries, sanctions have fostered disproportionate levels of
anti-American sentiment-something that cannot simply be fixed with good PR. Whatever
sanction controls are written into law are being outdated by Moore’s law of technological
advancement:today’s smartphones is tomorrow’s standard model.
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Introduction
“Laws are spider webs through which the big flies pass and the little ones get caught.”
― Honoré de Balzac
The interpretation of each sanctions and embargo is dependent on the foreign policy
context in which the embargo is to be enforced along with the strategies of US regulators in
administering embargo programs.it is entirely dependent on the country or nations with
which these sanctions permit the embargoed country to trade. The reason for this study is to
show how sanctions have mostly been unsuccessful or produced limited results, as will be
evident in the case studies of two nations and, their trade and business acumen.
It calls for highly strategic and exceptional managerial roles to surpass such embargoes
and sanctions. Sometimes consultants and advisors are hired to steer a company hit by
sanctions to safely conduct business. Wise managers know it can be done. For example,
foreign subsidiaries of US companies may be able to do business with a country subject to
US embargo,but it cannot stop foreign subsidiaries of US or cannot involve US nationals,
lawful residents. They are allowed to do business with the country which is under sanction. A
US company may be able to supply goods to a third-country company, fully knowing that the
company may use those goods for commercial activities in the country which is under
economic sanctions. Each sanction by the United States has a different interpretation
depending on the context of foreign policy. Sometimes some business and trade activities are
permitted in a country, but only to those companies which are American subsidiaries and only
the US nationals, residents are allowed to carry on trade and business activities. Any US
organization can supply its services and goods to a company which happens to be in a
country hit by US sanctions.
The possession of economic power confers upon individuals, organizations, states and
supranational bodies the capacity to exert social influence in various ways. At the most
mundane level, parents may be expected to define the consumption patterns of their
offspring; while on a totally different scale a group of nations acting together are sometimes
able to subject a targeted country to a comprehensive and devastating economic siege. The
political use of economic power can be as positive as the purchase of labor and other market
resources in the effective control of law-making and judicial procedures, in the financing of
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socially beneficial institutions, and in the funding of commercial and political propaganda; or
it can be negative as in the blocking of access to finance and raw materials, and in restricting
the flow of food and medical supplies to the civilian populations of so-called ‘rogue’ or
‘pariah’ states. It is the negative use of economic power, in all its forms, that indicates the
political scope of economic sanctions. In July 1998 one estimate suggested that two-thirds of
the world’s population were subject to some sort of US sanctions.
Another type of financial sanction reduces or eliminates income flows from target assets
currently held in the sender economy, essentially “freezing” the assets. If the target has used
the sender’s financial markets as a proxy for its own, these sanctions can be quite detrimental.
To restrict asset income flows to foreigners, the sender must have a certain precondition. A
sender cannot credibly curtail the target asset income if it is a net creditor of the target. It is
likely that targets, once cut off from their own asset income flows, would retaliate in kind.
The threat to curtail these flows is only credible if the sender holds more target assets than the
target holds of the sender’s. To use credit sanctions, where the sender neither provides nor
demands financing, the only precondition is that a financial market exists between the two
countries. The more dependent the target economy is on sender trade, the more powerful the
sanction should be ex ante. This seems obvious: if targets are sufficiently dependent on
senders for key goods and financing, leakages should be few and costly. Sanction effects
depend on trade routes, trade partners, and international availability of credit. Trade
dependence is a function of a target’s ability to reallocate resources not only from sources
outside its borders, but within its domestic production as well. Financial dependence may be
more likely, especially in countries where financial markets are not domestically or
internationally integrated or available.
Resolution 757 of the UN Security Council in May 1992 demanded that all parties cease
military hostilities and prohibited all cultural, trade and military and financial contracts with
Serbia. These were strengthened within a year by another resolution preventing shipment of
goods through Serbia and freezing Serbia's financial assets to increase leverage against the
regime. Humanitarian goods such as food and medicine were exempted from such measures.
The year after sanctions were imposed, the Yugoslav economy collapsed, unemployment
skyrocketed, food became scarcer and more expensive. Even medicines, basic supplies for
the pharma industries and spare parts for hospital equipment could not be purchased. Infant
mortality increased. The German physician Ulrich Gottstein argues that sanctions heightened
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tensions, punished innocent civilians and helped spark the Kosov tragedy. (Gottstein U,
1999).
Iran also suffered a lot. Iran's oil exports went down from 2.5 mbpd in 2011 to about 1 mbpd
in 2013, hence the revenues also dwindled from 95 billion US$ to $67 billion. (International
Energy Administration, 2013). Iranian Rial, Iran‘s currency, gained roughly 10% of its value
as more dollars were provided to the Iranian financial and economic market by the
government (Yeganeh Torbati, 2013). the Rial hit its lowest value in history against the dollar
in Spetember, 2012, touching nearly 37,000 Riyal to 1US$ (Thomas Erdbrink,2012)
Research Objectives
Economic sanctions are a universe. They have always been used by contending domestic
factions and exploited as a multifaceted tool in the service of foreign policy. They run
through all of history and are indelibly stamped on international affairs in the modern world.
In one form or another they have always been a concomitant to military action in war, and a
ubiquitous and weighty element in the peacetime relations between states at times of
commercial expansion and rising tensions. Do they ‘work’? Economic sanctions are so
diverse in their type, ambition and manner of application – that no general answer is possible.
They invariably have some impact, and they may achieve covert objectives quite different to
those that are publicly proclaimed: the deliverers of sanctions often have hidden agendas.
The most often asked question in the literature on economic sanctions is, “Do economic
sanctions work?” or, “Are economic sanctions effective?” The consensus reached by most
scholars is that economic sanctions generally are ineffective, as the following statements
indicate:
Johan Galtung: “The probable effectiveness of economic sanctions is, generally, negative”
(Galtung J, 1996).
Klaus Knorr: “Coercively wielding economic power by means of trade reprisals or special
trade advantages is rarely successful” (Knorr K, 1995).
Margaret Doxey: “The cases examined offer little evidence that economic sanctions provide
reliable means of inducing states to adhere to internationally acceptable codes of conduct”
( Margaret P. D, 1980).
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Problem Statement
The economic effects of sanctions do not necessarily translate potential power into actual
power, and often much is lost in the translation, conversion of potential power into effects. As
a result, the effectiveness of economic sanctions in generating coercive pressure is tied to the
sender’s power resources vis-à-vis the target’s value hierarchy. Keohane and Nye underline,
“Measurable power resources are not automatically translated into effective power over
outcome. Translation occurs by way of a political bargaining process in which skill,
commitment, and coherence can belie predictions based on the distribution of power
resources to predict and understand outcomes, we must give equal attention to the bargaining
process in which power resources are translated into effective influence over outcomes
(Robert O. Keohane and Joseph S. Nye, 2001).
The translation process from potential power to actual power can be analyzed from three
perspectives. First, if a state is treated as a unitary and rational actor, it will concede only
when the cost of concessions is smaller than the cost of economic sanctions. The cost of
sanctions to the sender is also taken into account by the target as an element in the equation.
The higher the perceived cost to the sender, the less likely the target will concede. Although
it is possible to measure the cost of economic sanctions by GNP loss over time in terms of
sensitivity and vulnerability, it is hardly possible to quantify the cost of political concessions.
Many factors will influence the value hierarchy of the target. For example, the superior
“will,” “determination,” “willingness to suffer,” “commitment,” and “core societal values” of
the target may raise the cost of political concessions and discount the cost of economic
sanctions. In such a case, compliance may mean more disutility to the target than resistance.
(Robert O. Keohane and Joseph S. Nye, 2001).
Research Approach
In this study quantitive research will be utilized with a descriptive approach. This is due to
the fact that through this method of quantitative research, there is the flexibility of iterative
approach. This study also surveys as to how economists describe various aspects of the
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santions episode. Since sanctions are trade barriers at their core, models from international
economics provide much needed insight to policy makers. (Simons G, 1999).
Sanctions or no sanctions, even the staunchest of American allies were continously
doing business and trade with Iran during sanctions. A bank in Japan, a subsidiary of
Mitsubishi UFJ Financial Group routed more than 28,000 payments amounting to an
enormous 100 billion dollars worth, but this was shockingly overlooked by the US. Japan
was not alone in this murky deal,however: it was joined by the great Standard Chartered and
HSBC of the UK.(Eamonn Fingleton, 2013).
Curtailing financing is different than an embargo on capital goods as these are sanctions
on financial entitlements to income. International trade and finance are intrinsically linked
through the balance of payments. Trade sanctions indirectly affect target financial markets;
financial sanctions also indirectly affect the target’s goods markets. Mechanically, financial
sanctions are similar to trade sanctions. When senders sanction their “imports” of target
lending (capital inflows), the sender reduces expected interest payments and income for target
investors. When curtailing its domestic sources of financing for the target economy, the
sender reduces funds supply, causing the target’s financing costs to increase. The target is
assumed to not determine its own interest rates, the outside world does instead.
(Fayazmanesh S, 2008).
At the end of 2011 and beginning of 2012 the US and its European allies put a strong and
comprehensive sanctions on Iran‘s energy exports, ability to trade, and financial system.
These sanctions did not go into full effect until the summer of 2012 and still have significant
exemptions. It was only then that the US applied a full mix of sanctions on,and that the EU
sharply increased its role in sanctioning Iran by imposing an embargo on Iranian
petrochemical imports and a ban on European investment in Iran‘s petrochemical industry.
Various items in the shipbuilding, oil and gas,and pertrochemical industries were targetted
including the insurance sector. Iran's financial institutions were cut off from the international
banking system. Assets of the Central Bank of Iran in Europe were frozen and sale of gold
and metals was banned. (US Energy Information Agency, 2013). Japan bank violated all
sanction rules. In Japan the ministry is the most formidable agency of Japanes power; no
bank in Japan could have violated the sanctions without its knowledge.
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While Iran’s annual inflation rate is still high. The most glaring example of this can be
seen in the influx of gold into Iran from the U.A.E.(Ali M and Alavi S, 2004). The following
statistics will help explain the difficulty in imposing economic sanctions on Iran: In the
beginning of 2006 the total trade between Iran and China was reached some $8 billion, and
by the end of 2006 it was rised to $10 billion; the gas pipeline between Iran and India had
cost some $10 billion, and is meant to provide a significant portion of India's gas needs; and
Russia is set to sign an agreement to sell Iran $1 billion in weapons.
Iran, which is becoming transformed by world oil prices into an ever wealthier state and
one that can pay for its deals primarily in cash, is economically prosperous. The economy as
a whole is still producing a positive balance of trade. It can resort to major foreign exchange
reserves (mainly kept in gold), which in turn can sustain the economy’s imports for
approximately 17 months in case all export revenues collapse in the future which is unlikely
because there is no global consensus on the implementation of a total trade embargo on Iran.
Iranian imports are highly regulated and controlled. While the government tightly controls
the importation of basic goods such as food and medicine, all other imports are controlled via
customs or banking regulations. Iran is planning to invest in a major refinery in Pakistan,
which would facilitate an export of Iranian crude to neighbouring Pakistan for refining
purposes.
The sheer size of today’s corporations ,means that they are more vulnerable than ever to
crises, either from natural origins or those manufactured. As noted earlier, crises are
extremely difficult to predict. This problem is exacerbated by the trend in the 1970s and 80s
to develop managers as specialists. The finance director knows about finance and little else;
similarly the marketing director, the technology director and the operations director all have
their specialist fields. This smokestack approach like tennis balls in a box leads to gaps in the
management structure. This means that a finance director,driven rightly by profits and
earnings per share, would often lose sight of the bigger picture. However, in the 1990s, this
trend began to be reversed and the manager as a generalist as well as a specialist began to
come into vogue. MBA programmes widen their focus and smaller programmes, such as the
excellent Ideally, senior or general managers should have a working knowledge of politics,
the media, reputation and social and corporate social responsibility
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Though such changes require initial investment, the medium to long term effect for Iran’s
economy can be positive, as it may increasingly become an exporter of petroleum products
rather than crude oil. Moreover, stakeholders in the system such as the business community
have focused on seeking economic concessions from the regime rather than lobbying for a
shift in Iran’s nuclear stance.
Significance of Study
This study will discuss a particular irainian scenario.it will focus on possible instruments of
leverage for the following reasons. First, trade sanctions (embargo and boycott) are the most
common form of economic sanctions and, as a result, these two terms are sometimes treated
as synonymous. Second, embargo and boycott are more comprehensive and thus tend to be
more effective in inflicting costs on the target than other forms of trade sanctions. Sanction
scholars have often been unable to determine the objectives of the sender nations. It seems
true when often the goals of the senders are more of a demonstrative kind for both national
and internatinal audience. It is of importance to understand the embeded agendas that come
with sanctions and their respective goals which are often hidden. Earlier research suggest that
the goals of economic sanctions fall into five categories: punishment (deterrence),
compliance (coercion), destabilization (subversion), signaling, and symbolism.
Prior to 2009,the Iranian Transactions Regulations or ITR, contained the restrictions on Iran
dealings. Iranian Transactions Regulations was even applicable to American citizens,
companies and its foreign subsdiaries and residents. In the case of Iran the ITR was
formulated such that it barred US companies from any kind of exports or imports, including
services and such techonolgies like IT and medical or scientific, these were even prohibited
from being exported to those countries which were frinely with Iran so that these countries
could not reexport these things to Iran. But foreign based organization and business houses or
subsidairies were not barred by the ITR. But for one decade that is from 1990 to 2000 the
ITR allowed American companies and their subsidairies to carry on business with Iran.
Do economic sanctions work? Rarely. Take the cases of Myanmar, Iran, Cuba and North
Korea. What it accomplishes is hatered by the masses against the country imposing sanctions.
In case of Cuba, when sanctions were imposed and remained for what looked like infinity,
this country suffered but the managarial roles of its business fraternity succeded in beating
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the sanctions so much so that it created one of the best health care facilities in the world,
which it still has. Cuba gave priority to agricultural production, the product managers asking
its resdents to go for reduced consumption. Its tourism department played one of the best
managerial roles during sanctions by focussing on tourist growth. Venezuelan premeir, now
deceased,Hugo Chavez not only bankrolled Cuba with huge tankers of oil at a throw away
price but also gave money. (Daniel Griswold,2005 )
Summary
Economic sanctions are more often a genocidal tool, subjecting helpless civilian
populations in solitary city or entire country to comprehensive siege. The entire field of trade,
commerce and finance multifaceted in modern society invites sanctions at many different
levels when states are in conflict. Individual states can impose de facto or de jure economic
sanctions against other countries as unambiguously hostile acts (for example, by attempting a
blockade on the high seas), or as part of traditional trading practices (for example, in
developing a protective tariff structure which today may violate the regulations of the World
Trade Organization). A group of countries acting in concert may typically have regional
objectives: The scope of the sanctions has necessarily varied according to circumstance.
(Hawkins 1967).
The Rhodesian government took a conscious step to realize that self sustenance in all
sectors of the economy was crucial in the face of economic and trade sanctions. Thus they
implemented policies that were meant to support industry and commerce which were the
major drivers of the economy. The Government adopted a more targeted investment
promotion strategy. It identified sectors where the country had comparative and competitive
advantages and then promoted FDI in those sectors. The government identified the most
important economical distortions in the economy, and how to address them.
Thus a country that has developed food self-sufficiency may be relatively immune to an
international maritime blockade; a state with little interest in international funding may not be
seriously affected if it is suddenly denied access to sources of international finance.
This study aims to determine the managerial role that helps strategically and safely steer
business and trade during economic sanction.
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Literature Review
Economic sanctions have been long used in international relations. According to Gary
Hufbauer, Jeffery Schott, and Kimberly Elliot (hereafter HSE), there were at least 13
prominent cases of economic sanctions before World War I. The most celebrated early use of
economic sanctions occurred in 432 B.C. when Pericles issued the “Megaran decree” limiting
the entry of Megara’s products into Athenian markets. The subsequent refusal to lift the
Athenian boycott of Magara helped to trigger the Peloponnesian War (Thucydides, 1992).
The term ‘economic sanctions’ to refer to ‘non-military actions of the United States that
adversely affect the flow of goods, services or financial assets to a specific foreign country in
order to penalize or coerce a country for political purposes or to express US displeasure with
that country’s actions’. In this context the term includes a range of trade and financial
measures that may be imposed, in varying combinations. Social scientists in the area of
sanction research have mainly inquired about the correct use of sanctions, their overall
effectiveness, and the necessary preconditions for their success. Scholars also discuss the
meaning of success but fail to provide viable alternatives. The large scale inquiry on the use
of economic sanctions began due to the rampant increase of this foreign policy tool in the
21st century, both uni - and multilaterally. These scholars have mainly focused their attention
on providing theoretical discussions upon the effects of sanctions, their outcomes and why
these outcomes have been achieved. Some scholars maintain that only through strict
measures and objectives (Pape, 1998; Rodman, 2001) outcomes can be achieved, while
others consider partial achievements a success (Hufbauer, Schott, & Elliot, 1990). However,
most scholars today agree that a comprehensive sanctions by in large fail to achieve their aim
as a standalone tool due to the complexities of globalizations and the creation of self-reliant
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states as a consequence of the game. To why exactly sanctions fail and how sanctions can be
fine tuned to achieve their aims remains the purpose of study.
One such movement claiming increased effectiveness is for the use of ‘smart sanctions’
which was brought about the Copenhagen, Berlin, and Vienna accords. Scholars, as well as
observers of sanction regimes, have begun questioning the effectiveness of sanctions as a
coercive and proactive tool due to the lack of achievement, i.e. compliance with the ‘target’.
This lack of positive outcomes has been linked to the lack of objective and clear outcomes
being sought. Furthermore, increasing civilian costs to ‘target’ populations and financial costs
are a deterrent force to nations to engage in this foreign policy game and consequently their
commitment to prolonged engagement if they seek to retain a resolute image in the
international arena (Pennycook, 2009).
Scholars also strongly oppose this type of intervention, as it goes against the philosophy
proposed by Adam Smith of market driven economies, and thus these individuals call for new
and more effective measures to coerce governments without states interfering into business
operations. Sanctions literature has undergone three main changes, losing ground for
optimism in the third and current phase. Phase one literature was typically characterized by
optimism due to the more or less effective use of this foreign policy tool to achieve its main
aim, regime change and/or deterrence of national/ international policies by the 'target'. Some
fiascos, however, did occur during this time, raising questions even in the early part of
academic discourse on this issue. One main reason why in the past sanctions seemed to have
been more effective than today can be regarded as the closer ties which existed between
nations, i.e. strong bi-lateral relationships. Literature produced during this era was relativist
and documented circumstances and outcomes of individual sanctioning episodes. This phase
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largely neglected to formulate theoretical frameworks on the overall use of this policy. Effects
on target populations were acknowledged, however, played a less substantial role in
discussions on how to meet national agendas. Phase two sanction literature commenced
questioning the use of sanctions as an efficient and effective foreign policy tool. Scholars at
this stage began incorporating theoretical and analytical models into their discussions to
explain and predict the necessary conditions under which sanctions do and should succeed
and/or fail.
These discussions facilitated the illustration of independent and dependent variables affecting
outcomes. Several main 'targets' began fuelling these deliberations, the mute response of
Cuba to trade embargoes, and the fiasco of Iran. During this second stage, scholars also began
arguing when sanctions could be regarded as having succeeded and when new alternative
policies should be implemented. However, all scholars at this stage agreed that military
engagement was a clear sign of failure, as sanctions are intended to avoid this financing
costly alternative. The third and current phase can be categorized by scepticism and a push
towards identifying new methods to achieve national agendas through a fine tuning of
sanctions, i.e. 'smart sanctions', while incorporating the use of 'carrots' and 'sticks' to forge
compliance with the 'target'. This phase has been driven primarily by international observers
and civil rights groups, discussing and demonstrating sanctioning episodes which obviously
have failed in their aims, Iran, North Korea and Myanmar. Not only have observers
recognized that sanctions have failed to achieve their aim, but also that this foreign policy
tool has been detrimental to 'target' populations, depriving them in some cases of even the
most fundamental rights outlined in the United Nations Human Rights Conventions, due to
their exclusion from international markets.
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Furthermore, scholars have also recognized that sanctions can have reverse effects, rather
than weakening states, sanctions have the ability to strengthen national ties within the ‘target’
as well as creating self-sufficient economies; however, when territory and international ties
permit. The United States grain embargo against the former Soviet Union is one such
example. Furthermore, the absence of military force was also questioned due to its ability to
provide a powerful and sometimes detrimental stick in the game and thus a significant
coercive force.
Economic sanctions, sometimes synonymous with “economic coercion,” are distinct from
economic warfare (strategic embargo), economic inducements, and trade war, in terms of
forms, purposes, and occasions. In essence, economic sanctions, according to David Baldwin,
are only one category of economic statecraft, which refers to influence attempts relying
primarily on resources which have a reasonable semblance of a market price in terms of
money. Economic warfare (strategic embargo) seeks to weaken an adversary’s aggregate
economic potential in order to weaken its military power, in war or in peace. Economic
warfare represents a long-term approach to dealing with adversaries while economic
sanctions usually have immediate political goals. Economic inducements involve trade
concession, knowhow transfers etc. that are extended by a sender in exchange for political
compliance by the target nation. Trade wars are disputes over economic policy and behavior
instead of political/security goals (Baldwin D, 1985).
This study defines economic sanctions as the threat or act by a state, which is called a sender
here, to another nation, to disrupt and damage trade and the normal business of another
nation, called the target nation, so that it can be punished, force changes another nation's
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policy, or the targets policies. The sender is designated as the country or international
organization that is the principal author of the sanctions. The target is designated as the
country that is the immediate object of the sanctions. Economic sanctions do not include
economic warfare, economic inducements, and trade wars. The following sections will
elaborate further on the types, goals, logic, costs, and effectiveness of economic sanctions.
The sender, as an act of punishing the target, may invoke sanctions to discourage future
objectionable policies by demonstrating the sender’s willingness and ability to retaliate. If the
undesirable behavior is punished with enough force, the target country might not repeat it
again. For example, in announcing a grain embargo against the Soviet Union issued in
response to the invasion of Afghanistan, President Jimmy Carter has said, “We will deter
aggression.” (Carter J, 1980)
Sanctions are also meant to force a country to comply with the sender’s preference on
specific goals. For example, the United Kingdom and the League of Nations imposed
sanctions on Italy (1935-1936) in an effort to compel Mussolini to withdraw troops from
Abyssinia. The Soviet Union’s economic sanctions against Yugoslavia (1948-1955), China
(1960-1970), and Albania (1961-1965) were imposed to win acceptance of the Soviet
leadership in other socialist countries. The U.S. grain embargo against the Soviet Union
(1980-1981) sought Soviet withdrawal from Afghanistan. The United Nations economic
sanctions against Rhodesia (1965-1979) were designed to force acceptance of international
standards governing human rights. The United Nations economic sanctions against Iraq
(1990-1991) were crafted to force Saddam Hussein to withdraw from Kuwait and
subsequently to allow UN arms inspectors to complete their work. The United States
economic sanctions against India (1998) were designed to force India to sign the
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Comprehensive Test Ban Treaty immediately and without conditions (George A L and
Simons E W, 1994)
Sometime in order to destabilize a target country, economic sanctions are imposed where the
goal is to subvert the entire target nation's power balance. The sender may impose economic
sanctions to destabilize the target government or subvert the entire target political regime. For
example, when Marshall Tito was seen as a hindrance in Stalin's plans, he sought to replace
him with a pro-Soviet personality and hence imposed economic sanctions against Yugoslavia
(1948-1955). When the U.S. embargoed Cuba (1960), it hoped to replace Castro’s regime
with anyone other than a communist. Organization of American States and the United States
imposed economic sanctions against Haiti (1991-1996) and the demand was the restoration of
a democratically elected President Jean-Bertrand Aristide, overthrown in a military coup.
Some just to demonstrate the outrage of the international community, sanctions are imposed.
The imposition of economic sanctions conveys a signal of the sender’s resolve to both the
target and the allies of the sender. Any sanction, either by some great and powerful country or
an international organization often implies a threat of more drastic action (for example,
military) against the target country. HSE contend that sanctions frequently serve as a junior
weapon in a battery of diplomatic artillery aimed at the antagonistic state. Out of 115 cases,
HSE calculated 34 cases of sanctions with add-ons of such policies like the quasi-military
action etc. (Hafbauer G C, Schott, J and Elliot A K, 1990). The support of many governments
for the economic boycott of Ian Smith’s Rhodesia (1965-1979) was apparently intended as a
display of opposition to racist policies and meant for domestic consumption within the sender
nations (Miyagawa M, 1992).
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More than a half century ago, Albert Hirschman showed in his book National Power and the
Structure of Foreign Trade that the ability of one government to threaten to interrupt its trade
with another can be “an effective weapon in the struggle for power.” In it, he said that if a
business relationship is more important to one government than to another, then the second
may be able to demand from the first not only better terms of trade, but also significant
political concessions (Hirschman O A, 1980). Following Hirschman’s argument, the
conventional theory about how economic sanctions are supposed to work is that sufficient
economic pressure upon the target nation(s) caused by the disruption of economic relations
can induce or compel that country to engage in more acceptable behavior in the eyes of the
sender states. This proposition is based on the fundamental economic theory that international
trade has positive income effects on nations, and that forced withdrawal from such trade
reduces national income. If the target benefits more in the bilateral economic relations than
the sender do, the sender would call for compensation on political issues by the target in
exchange for maintaining bilateral economic relations. In addition, the conventional theory
assumes that political change is directly proportional to economic hardship. The greater the
economic pain caused by economic sanctions, the higher the probability of political
compliance. As a result, the conventional theory generally argues that the principal
determinant of the success of economic sanctions is the extent of disutility experienced by the
target (Losman L D, 1979)
In this literature review the difference of opinions of renowned academics about economic
sanctions against Iran is also debated. Iran sanctions can be successful if more diplomacy
than force is applied for achieving goals. Economic sanctions are intended to inflict economic
distress upon the 'receiver'. Sanctioning worked well in a time when nations by enlarging
engaged trade and commerce, or when one country, the United States, was the center of
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global trade; i.e. the global hegemonic power. This position gave leverage for coercion and
provided a deterrent for the receiver to discontinue its actions. As the world has undergone
large changes in national and regional identities, this international relations game is no longer
suitable, at least not as a stand-alone tool. Globalization has linked nations tighter together,
not just those who previously had been interconnected, but today has diversified relations to
such an extent that if sanctions are expected to achieve their aims, a large scale multilateral
effort is required for this to occur. Due to the critical literature, and it seems the
enlightenment of scholars, the use of smart sanctions. (Solomon J and Fassihi F, 2011).
Following the sanctions against Iran by the U.S. the US administration stepped up its efforts
to pressure its allies to limit trade with Iran. Only Israel, Uzbekistan, Ivory Coast and El
Salvador expressed outright support for a trade ban against Iran. The G7 countries at their
summit in Halifax in 1995, also failed to endorse US policy on Iran. Europe imports almost
20 percent of its oil from Iran and Libya. Iran is also the major supplier of oil to Japan. In
1995, the European Union exported US $11.5 billion worth of goods to Iran, while Iran, in
turn, sold over US $17 billion worth of products in the European Union. In the aftermath of
the 13 July 1995 summit of the G& countries Total, an oil company from France signed a US
$600 million contract for the development of the Sirri-A and Sirri-E fields. This contract had
originally been awarded to the CONOCO, an American company, which was subjected to so
much of pressure from the American administration in March 1995 that had to withdraw from
this lucrative deal.
Today it is proved through various studies that any sort of unilateral economic sanctions can
do almost nothing in making changes to the 'junta' of the nations thus targeted by sanctions,
the case of Iran, Iraq, Libya is an example. Economic sanctions can do little harm to the
18

targeted countries but more harm to the innocent citizens, hence it only creates more hatred
amongst the masses. Efforts to date to quantify the effect of economic sanctions have little to
offer policy makers. Little is understood by researchers and policy makers about the financial
effects of economic sanctions and the effect they have on the policy decisions of a target
country. Our lack of knowledge about the effectiveness of economic sanctions is fostered by
judging sanction events against a standard of success that is appropriate only for purposeful
sanctions.
The methodology includes (Introduction, Research Methods, Research Approach, Data
Collection, the Secondary Data collection and Analysis, Primary Data collection and
Analysis, Research Design, Interview Questions Design, Data Analysis plan, Research
Limitations, Research Reliability and Validity, Ethical Consideration, Chapter Summary
Methodology
The role of sanctions has shifted, traditionally having been imposed by one state against
another (comprehensive) but now targeted against specific organizations or individuals. Thus,
frequent sanctions users, such as the United Nations (UN), European Union (EU) and the
United States (US) have shifted their sanction policy from being comprehensive to now
targeting individuals, entities and groups that threaten peace and security by, for example,
being involved in armed conflicts, terrorism, international crimes and human rights abuses
(Katzman, 2012). This change was partly brought by the UN Security Council, which faced
global protests and objections against the human suffering in Iraq caused by comprehensive
UN sanctions in the early- and mid- 1990s. In contrast to inflicting collective punishment and
suffering, which was embedded in the rationale of comprehensive sanctions, targeted
sanctions are designed, at least in theory, to exert extreme pressure on carefully selected
19

commodities and/or individuals. Targeted sanctions are thus aimed at avoiding negative
consequences for entire populations of a country. (Amuzegar, Jahangir, 2011)
Based on this rationale, the shift in sanction practice reflects the determination of the sender
to make the sanction policy more ethical, and justifiable than previous comprehensive
sanctions (Cortright and Lopez, 2002). Despite the efforts to push the use of sanctions in a
direction where it targets groups and individuals, rather than a country and the population as a
whole, various news agencies and human rights organizations have recently published an
increasingly growing number of articles indicating that targeted sanctions are having a
negative impact on civilians in Iran.
Research Approach
The analytical approach that will be taken in the research and production of this thesis will
include references of the study of past sanctions cases. Iranian sanctions will be reviewed,
and the current effects on their fictionalized political economy will be examined. Research
will draw conclusions as to the efficacy of these current and historical economic sanctions
regimes on altering Iranian policy and recommending alternative or additional sanctions
regimes to achieve intended political results. Finally, the efficacy of Iranian sanctions will be
assessed and new recommendations will be presented to achieve a visible change in the
Iranian political economy (Eriksson, Mikael, 2011).
Public choice theory tells us that policies aimed at specific interest groups within the deviant
economy, those focused on decision makers, may sway another country’s politics. Since
sanctions are trade barriers at their core, models from international economics provide much
20

needed insight to policy makers. This will include an analysis of the new sanctions’ potential
chances of success given the political and economic constraints they will face. Important
works that specifically address the Iranian sanctions case include: Shrewd Sanctions by
Meghan O’Sullivan and numerous academic and governmental publications supplement
primary sources (Frank Grundig (2012).
Research Questions
When reading recent news reports regarding targeted sanctions’ humanitarian impact on Iran,
targeted sanctions seem to contradict the stated aims of sparing civilians. Henceforth, in order
(Sadeghi, Esfahlani and Abdi, 2012). Within the EU, sanctions are referred to as ‘restrictive
measures’. Which are intended to protect the Iran’s Islamic system (Mohammed and Louise
Othberg, 2010).
To understand the impact of targeted sanctions on Iranian civilians, the aim of this thesis is to
investigate the nature of the impact of targeted sanctions on Iran, as a case study. This brings
the thesis to the following research questions:
• Have targeted sanctions on Iran impacted Iran’s economy or its civilians?
• If so, how have targeted sanctions impacted Iran’s economy?
• Have some targeted sanctions had more impact than others?
Research reliability and validity
The case, Iran, has been chosen since it is unique; it is currently the most frequently and
thoroughly sanctioned countries in the world. Despite the fact that targeted sanctions are
designed to spare civilian pain, however, it has been reported that the targeted sanctions are
21

having a negative impact on Iranian civilians. When understanding the impact of sanctions on
civilians in Iran, the crucial case can represent a significant contribution to sanction theory.
(Passell, Peter, 2012). The aim of this thesis is to contribute to the understanding of the
impact of targeted sanctions on Iran. The thesis aims at contributing with explanatory
richness why a single case study of Iran is carried out. A comparative study could have been
carried out but it would be difficult to find a suitable country to compare with, which is why a
single case study is preferred. By focusing on Iran, it is possible to get deep knowledge on the
case and attain rich explanations to the relation between sanctions and humanitarian impact.
Usually when conducting a single case study, theoretical parsimony is given up; studies
involving a single observation risk indeterminacy, that more than one possible explanation is
at hand which can lead to incorrect inferences (George and Bennett, 2005: 19). Sanctions are
never imposed in a vacuum. Since Iran is a crucial case it will provide definitive evidence on
the sanctions theory. Iran will either fit the theory or will not, in this thesis it is assumed that
Iran will dismiss targeted sanctions theory, if it does so the stated aim of the targeted
sanctions policy tool can be doubted.
Case studies allow research to identify the indicators that best represent the theoretical
concepts of this thesis and thus give high levels of conceptual validity. While statistical
studies run a risk of conceptual stretching by lumping together dissimilar cases to get a large
sample, this case study allows conceptual refinement with a higher level of validity.
Research Design
22

Research relies heavily on qualitative methods; thoughtfully designed case studies can make
several types of contributions to the collective research enterprise. They offer advantages as
well as disadvantages when compared with statistical methods. Between single case methods
on one end of the spectrum and large statistical methods on the other, stand comparative case
methods. They add the analytical leverage that comes from comparison of the strengths of the
case study. J. S. Mill’s method of difference proceeds “by comparing instances in which the
phenomenon does occur with instances in other respects similar in which it does not.” By
beginning with a hypothesis linking a cause C with an effect E, two or more cases are
selected to illustrate a difference in C. If the observed cases differ in C and differ as expected
in the supposed effect E, but are similar in other respects, then by elimination it can be
inferred that the reason for the E difference must have been the difference in C (Mill, 1970).
In this study the focus will be on the qualitative data, using a systematic quantitative
data base as a frame within which the qualitative analysis is carried out.
Summary
Sanctions have shifted from being comprehensive to being targeted. This shift is important
since it was implemented in order to avoid hardship for civilians caused by sanctions.
Namely, the thesis hypothesizes that targeted sanctions on Iran are having negative
humanitarian consequences. Despite the fact that targeted sanctions are believed to prevent
hardship for civilians this thesis might conclude that targeted sanctions on Iran are having
negative humanitarian consequences. Targeted sanctions on Iran are imposed independently
by a number of different actors, targeting many important sectors which can impact civilians.
(Mueller, Johan, and Mueller Karl, 1999). However, sanction scholars have not debated the
23

possible negative consequences of targeted sanctions but assumes that targeted sanctions are
sparing civilian pain. Only within the comprehensive scholarly debate, sanctions are believed
to cause hardship for civilians. Since the thesis hypothesizes that targeted sanctions on Iran
cause civilian hardship, consequences common within comprehensive sanctions can be
present. Scenarios such as commodity shortages and the raising of prices, poorer health
conditions, unemployment, and the decline of civil society and democratization are typically
associated with comprehensive sanctions, while none of these consequences are considered to
be present with targeted sanctions. The negative impacts are hypothesized to be present in
Iran, and if they are, it is possible to conclude that targeted sanctions are having negative
impacts on civilians.
The evidence examined in this thesis has shown that the consequences of the targeted
sanctions on Iran had a negative human impact yet could not harm the country's' economy as
was desired. They cause increased food prices, unemployment and lack of medicine.
Increased food prices and unemployment are caused by sanctions through currency drop and
inflation, currency drop and rise of a black market. Lack of medicine is caused by sanctions
more directly through the inability to make foreign transactions. The negative impact of
sanctions on civilians in Iran is reported more frequently . Since the summer of 2012, most of
the reports were published, which implies that stricter sanctions that were imposed by the EU
and US were starting to take a toll. The most reported impact is the lack of medicine and food
items while the disabled civil society is the least reported. To the astonishment of the sender
countries, the people of Iran not only resisted the impact of sanctions to their best of
endurance but also kept their economy afloat using a varied yet murky tactics.
24

In order to get around this problem targeted sanctions need to be what they are intended to be:
being sharply directed at the target. When looking at the Iranian example, targeted sanctions
do not deliver what they are promising; to spare civilian pain. UN sanctions on Iran only
sanction the nuclear program which is what sanctions are aimed to impact. There is no report
arguing that the UN sanctions on Iran cause hardship on the civilians. The financial and oil
sanctions imposed by the EU and US are the ones that are troubling the civilians and the ones
that need to be revised before Iran enters a humanitarian crisis and before the sanctions policy
tool enters a legitimacy crisis. (Mehrabi Ehsan, 2012). Regarding the future in Iran, sanctions
will further impact the civilians in a negative way making the Iranians even more
disadvantaged. (Wallensteen, Peter and Grusell, Helena, 2012). If the EU and the US
continue with their tough sanction policy on Iran, it might be possible that the humanitarian
crisis in Iraq will be experienced again with high levels of morbidity and mortality among
innocent Iranian civilians. Sanctions on Iran have been frequently tightened by different
global actors in response to Iran’s nuclear program, terrorist networks and human rights
abuses. Policy makers aim the sanctions to avoid hardship on civilians. Although the
sanctions on Iran are intended to spare civilians while hitting the target, civilians nonetheless
are reported to be affected in a negative way. The impact of targeted sanctions against
civilians is an understudied area in the scholarly literature on sanctions, and the humanitarian
impact of targeted sanctions, specifically in Iran, is a completely unexplored field of study.
25

Chapter 4
Findings and Discussions:
Iran has been targeted by EU and US sanctions for many years now. In this study the
effectiveness of sanctions is ascertained. Sanctions have been imposed on Iran over the
years for behaving in a way that is not considered acceptable. No trade with Iran is
allowed under the sanctions by the West. The effect on the people of Iran is analyzed through
inflation in Iran and the unemployment rate. This relation is also known as Phillips curve.
It is estimated that there is a significant effect of the sanctions on the two
aforementioned variables. The sanctions explain some of the highs and lows in the Iranian
inflation. Even though there are possible ways in Iran to evade the sanctions, it still is a
challenge to survive them. In Asia the underground financial transactions often still take
place through underground banking, an old yet trusted way getting money transferred to
Middle-East and beyond. Now is the time that it can prove itself as an alternative method for
individuals and even companies.
Even though there are many sanctions in place, now most of the populace, by this time
accustomed to it, take it to be a process they have long experienced. They believe that they
will eventually come out of it stronger. As sanctions have not produced the desired effect yet,
they wonder why this should start now. To be very precise, sanctions challenge human
endurance, and to what extent a human endurance can last, is known by no one. Man is
always seeking new challenges and economic sanction is one such challenge.
Hypothesis:
26

A research question is essentially a hypothesis asked in the form of a question. A research
question is essentially a hypothesis asked in the form of a question. It can be tested verifiable
or falsifiable. It is considered valuable even if proven false.
The research question that belongs to all this is: ‘Do international sanctions are successful?
Do international sanctions have harmed Iran?
The aim is to analyze some effects of the economic sanctions imposed on Iran. Through
economic analysis as key indicator, an interview with some of Tehran’s big and small
traders and consumers is also a part of this study. Figures and numbers may give clear
indications, yet a story from inside Iran may just shed a different light on the whole situation.
With the use of mathematical and economical analysis the goal is to reach an answer which
covers to a considerable extent the effect of the economic sanctions. One way to look
at the effects is the relationship between Inflation and the corresponding unemployment,
is through what is known as the Phillips Curve. This relation states that when one of these
is at a higher level, the other factor must be considerably lower. If this relation is perturbed,
the reasons behind it can be identified.
The hypothesis that belongs to all this is: ‘Do international sanctions are successful? Do
international sanctions has harmed Iran?
To answer this question the following are analyzed:
- What do the sanctions look like, and how have they developed over time?
- What does the economic analysis tell us?
- How does underground banking (hawala) play a role in all this?
27

- A story from Tehran, an interview with an Iranian trader.
By research it is found that there actually is a significant effect when imposing the sanctions
is studied. They contribute to the accuracy of predictions. An indication is that when spikes
are recorded in actual data, the dummy of sanctioning causes the prediction power to
increase. Although the normal Phillips curve does not hold with Iranian data, but with the
help of a dummy one gets very close to the actual data.
Story from Iran
This interview was conducted randomly and questionnaire presented to various segments of
Iran’s society, to assess the effects of the Iran economic sanctions, and the after-effects on the
business and trade and also ascertain how the government of Iran transfers the effects of
sanctions onto its working class.
Questionnaire
Q: Kindly state your name and details of your profession?
28

A: My name is Ali Azhari, I am a importer and entrepreneur based in Tehran and am one of
those few business men who have import rights for French cosmetic items. I also used to
import French designer dresses until Chinese textile due to its competitive price, became a
vogue. I have a turnover of nearly $4 million per year.
Q: Have you experienced problems after the sanctions or its after-effects a lot?
A: Yes I have noticed it in the forex market. The Iranian Riyal seems to have much of its
apprviative worth over the years. So while purchasing my merchandize abroad I have to pay
more than it was earlier and as a businessman I have to charge more to my clients who have
to pay more and it leads to inflation. An ordinary bottle of body deodorant costs now nearly
30000 Riyals or to say about 1.1/2% of a month's house rent. Added to it is the the
government import tariff of about 100%. Although humans have this power to live and adjust
in all environs so we too have managed to live with it though.
Q: Do the effects of the sanctions touch you?
A: Making food and household goods cheaper has been the endeavor of Iran government
since sanctions, like offering bread, dairy products at a cheap price. But the best improvement
is in the healthcare system after the sanctions were slapped on Iran. Yes, petrol has turned
costlier, but then fuel cost has risen all over Asia, it is like barter business.
Q. How do you manage to export and import your merchandize?
A: First we import our goods, then we sell the goods to the local market which pays us
through their merchandize, which can be dairy products, clothes, or any other goods, and we
give this to the staff and workers against their salaries. No money is circulating, it's like
thousands of years ago. We are also doing business with buyers over bowls of quality
29

pistachios. See a company in Tehran named AHT's has exported this which was worth $100
million, mostly to China and India.
Q: In your opinion does the government of Iran redirects the sanctions' effects onto its
people?
A: We the people of Iran do suffer due to sanctions, but we donot blame Iran government. It
is already doing trade with Russia, France, China, India to cushion the impact of sanctions by
the West. Remember sanctions never hit any government, it is the nation as a whole which is
subjected to the agonies of sanction, especially the working class and the entrepreneurs as
well. Iranian airlines are not given fuel in Europe, so if it is due to sanctions then it also is a
direct negation International Civil Aviation rules.
Q: Can Iran cope with the effects of sanction for long, what do you think?
A: God has given all Muslim countries enough natural resources, Iran included and all these
countries can carry on for unlimited time. Although some game rules have to be changed, one
has to do financial transactions via other countries, like in the Middle East and do it through
the famous 'Hundi' system, which is sort of underground banking.
Analysis
Note: numbers in brackets represent significance levels, unless stated otherwise.
Note2: a significance level of 10% will be maintained, unless stated otherwise.
Note3: QQ-plots, Residual analysis and other relevant factors are to be found in the
appendix, if used and mentioned.
30

There is a (non-linear) inverse relation between the rate of unemployment and the
rate of inflation. It is argued that it is only a short-run equilibrium while at the long-
run, after inflation occurs, unemployment steadily returns to its old level, only with
higher rates of inflation.
A short SPSS regression with and without a dummy for the years sanctions were
imposed suggest that. The inflation rate in 1995 is a real peak in the graph, with 49.66%.
Correlation analysis suggests a negative relation of -0.379 (0.03) between inflation and
unemployment, in line with the Phillips curve. First of all, it is key to establish a basic
regression:
Where η = the inflation rate in Iran and U is the unemployment rate.
31

Basic SPSS regression on inflation.
The residuals show no real pattern or extreme values and even the QQ-plot of this regression
shows a nice path along the desired 45-degree line. However, the R-squared only has a value
of 0.144. Figure 4 gives a prediction, where we see that the line is a bit too flat to explain
every value in the real data. Taking the log of the y-variable: inflation results in the following
equation.
Basic SPSS regression of the log.
This results in an improvement of the R-squared to 0.163, and an even nice distribution of the
residuals and the QQ-plot. Unemployment is now significant at (0.02.) Figure shows
the prediction of this regression. It shows that there is barely any explanation for several
highs and lows in the actual data.
There isn’t enough explanation for some of the peaks in the actual inflation figures.
Especially after the years: 1979, 1987, 1995 and 2007 there is a big discrepancy. A dummy
32

variable can be introduced now to see if sanctioning is the reason behind these peaks. The
dummy is based on the following: after sanctions are imposed, they sort an effect, both
immediate and long term. Therefore the dummy is coded take value 1 in years that big
(new) sanctions were imposed as well as the two years following the new sanctions. There
have been a lot of, minor, revisions in certain sanctions. These are not taken into
account since the original sanction is still in place. The dummy will be coded as follows:
The whole period from 1979-1984 is coded 1 as it took long to get the sanctions lifted. Soon
after that, new sanctions were already imposed again. To clarify, years with dummy code 1
are: 1979-1984, 1987-1989, 1995-1997, 2006-2008, 2011.
After introducing the aforementioned dummy D we get::
A basic SPSS regression including a dummy for sanctions.
The R-squared improves to 0.274. As can be seen in figure 4, the highs and lows in the actual
data are somewhat better covered than in the previous regressions. Whereas the log of
inflation shows an even better R-squared of 0.301.
A basic SPSS regression on the log of π including a dummy for sanctions.
33

The Figures clearly show that the prediction has improved. The 2 predictions without the
dummy are also added to the figures to allow a comparison between the two. It is not perfect,
but sanctions are not the only source of (extra) inflation.
The analysis indicates government in Iran controls the economy and is reorganizing the
economy to withstand severe economic sanctions. A sanctions regime that continues to keep
foreign investment out also keeps entrenched institutions in virtual control of the economy
via expansion and seizure of development projects, while ensuring no other domestic
competition emerges from other vistas.
34

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38

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