Shadow Government

Is Iran's currency crisis evidence that sanctions are working?

Both the Obama administration and Iran's President Ahmadinejad have blamed the recent dramatic fall in value of Iran's currency on international sanctions. It is a convenient explanation for both -- for the White House, it suggests that U.S. strategy towards Iran is working; for Ahmadinejad, it deflects responsibility away from his own policy decisions and toward an external scapegoat. 

But as my colleague Patrick Clawson explains, sanctions are only partly to blame for Iran's economic travails. The currency crisis and associated inflationary spiral has its origins in the Ahmadinejad government's mismanaged subsidy reform initiative. Sanctions have indeed exacerbated the problem, both by raising the cost to foreign firms of doing business with Iran and reducing the regime's foreign exchange earnings. The increasing threat of war has also played a role, deepening Iranians' worries about economic stability and increasing their inflationary expectations, and thus leading them to dump rials and seek safe haven in dollars and other hard currency to protect their savings. 

However, the regime's maladroit domestic response to the sanctions (for example, its decision to set up "foreign exchange centers," which sparked the current run on dollars) and its loose monetary and fiscal policies have made matters far worse. This is arguably the result of years of economic mismanagement in Iran, particularly under Ahmadinejad, who has subverted what little independence the Central Bank previously possessed and drained it of economic expertise.

Ironically, however, the Iranian regime is relatively sheltered from the present crisis. Although sanctions have reduced its oil exports, they remain high at 1.2 to 1.5 million barrels per day, meaning that the regime's foreign exchange income is considerable, even if diminished. What's more, it has limited external liabilities, and in any event its oil income is dollar-denominated, protecting it from exchange rate risk. This means that as the rial plunges, the regime's fixed rial-denominated payments become effectively cheaper. Meanwhile, Iran's rampant corruption likely shields elites and their families from the worst of the country's economic woes, such as unemployment and increasing scarcity.

As a result, Iran's economic crisis is unlikely to directly cause the regime to change its nuclear calculus. Instead, the sanctions implicitly depend on domestic Iranian outcry -- or the regime's worries of unrest -- to cause the regime to make the desired strategic shift. However, as bad as Iran's economy is, there are few signs of major unrest, and fewer signs still that the regime is responsive to the concerns of the Iranian people (although this will further diminish Ahmadinejad's standing). This is, after all, the regime that showed no compunction in brutally putting down protests in 2009.

By implication, the United States and our allies should be careful not to count on the current sanctions to resolve the nuclear crisis by themselves. Nor should we abandon our focus on targeted sanctions in favor of a return to broad sanctions, which rarely succeed in inducing policy changes in autocratic regimes. Rather than hoping that giving current sanctions "time to work" will force Iran back to the negotiating table, the United States and our allies should add further pressure to the regime and the elites who comprise it, including through additional targeted economic sanctions, diplomatic isolation, bolstering the credibility of our military threat to the regime, and support for the Iranian opposition. 

On their own, sanctions are unlikely to work. Instead, for the United States to succeed in its aims, sanctions must be just one part of a broad, coordinated, and disciplined policy which brings all policy tools to bear on the goal of preventing Iran from acquiring nuclear weapons.


Shadow Government

Is the Asia pivot coming apart on trade?

There has been a lot of commentary on the Obama administration's "pivot" (or "rebalance") to Asia here at Shadow Government. Most commentators have praised Secretary Clinton's activism towards Southeast Asia, but pointed out that the rhetoric of the pivot will look hollow without a real trade strategy and adequate resourcing for our forward military forces. This past month it looks like the wheels may have started coming off on the trade strategy axle.

In early September regional leaders met at the Asia Pacific Economic Cooperation (APEC) leaders meeting in Vladivostok, sans Barack Obama who was unwilling to skip town in election season, and courtesy of Vladmir Putin who was unwilling to schedule the meeting at a time the U.S. President could attend. President Obama's absence was not the end of the world: Bill Clinton skipped two APEC summits and managed to compensate the next year (for the record, George W. Bush missed none...but that was before we were "back in Asia" as the current White House likes to say). The real problem at Vladivostok was the hallway banter by the other delegates about TPP -- the Trans-Pacific Partnership -- that forms the core of the administration's strategy for building a regional economic architecture that includes us and strives for WTO-consistent trade liberalization and rule-making. The overall critique in Vladivostok was that the U.S. side is playing small ball on TPP, to the frustration of multiple stakeholders. The U.S. business community is worried at the lack of market access in the negotiations; the Australians and Singaporeans are hedging with Asian-only negotiations because of what they see as incrementalism by USTR; and Japanese officials are dismayed by administration signals discouraging Tokyo from expressing readiness to join TPP.

This all matters because of the other summitry gossip that is coming out of Asia. On November 18-20, the Cambodians will be hosting the East Asia Summit, which President Obama joined with great fanfare last year and which the president will be able to attend this year because it is after the U.S. elections. The main deliverable on economics at that summit will be a decision within the region to proceed with the RCEP -- an Asian "Regional Comprehensive Economic Partnership" that includes the ten ASEAN states, Japan, China, Korea, India, Australia and New Zealand -- and does not include the United States. The Cambodians' current plan for the November summit is to hold an RCEP inaugural meeting while President Obama waits outside the room cooling his heels with Vladmir Putin (since Russia is also not included in the regional trade deal). Stunningly, our allies Japan, Australia ,and Korea all appear to be on board with this scenario.

At one level this resembles the silliness of a junior high school prom, but at another level it could be the moment people start writing the obituary for the "pivot." To prevent that, a returning Obama administration or a new Romney administration has to put more oomph into the current anemic U.S. trade strategy. The RCEP launch will be embarrassing, but since those talks have no prospect of hitting a WTO-compliant level of trade liberalization, the United States can retake center stage again by showing that it can form an even more impressive coalition of trade liberalizing states. This means getting Japan in to TPP; leveraging Canada and Mexico in the TPP process (which will also help us counter Brazilian efforts to separate South America from us); and beginning to move on a complementary trans-Atlantic FTA process. The "pivot" was never sustainable without like-minded allies in our hemisphere and Europe and now is the time to recognize that and develop a strategy accordingly.

The next administration will also have to demonstrate credibility by moving to secure trade promotion authority (TPA) from the Congress (just can't get around Article One Section Eight of the Constitution). Finally, the administration had better start thinking about new ways to engage on economic issues within the EAS that keep us in the regional dialogue without requiring a high-standard FTA with countries like Laos or Burma. Bob Zoellick was a master of that art at USTR when he pioneered the Enterprise for ASEAN Initiative -- a flexible framework that allowed a la carte participation by countries ranging from an FTA (Singapore) to establishing very basic economic dialogues (Cambodia).

In short, for trade to continue underpinning U.S. leadership in Asia, we will have to go global, be agile within the region, and give a shot of adrenaline to USTR. Otherwise, the "pivot" will be a minor footnote in the textbooks.