Iran Sanctions – Cut Off the World’s Nose to Spite Iran’s Face?

Last time, we saw the US Congress so impassioned, so emotional was in the aftermath of 9/11.  With an office within a couple of blocks of the World Trade Center, we witnessed that event firsthand. We walked through the smoke and the soot to return home late that morning. A man working on our floor, the CEO of his small business, had a breakfast meeting at the World Trade Center that morning. He did not return from that breakfast. We are still emotional about that event. That day, all Americans were willing to support carpet bombing of any country that helped that attack in any way. That emotion in America was justified. The American people were unanimously with the US Congress and the Bush Administration in that emotional period.

Today, the US Congress is again emotional, almost hysterically emotional. But today, the American people are not even exercised, forget being emotional. The emotion of 2001 was cold, determined anger, the sort of anger that allows us to take our time and then strike a decisive blow like we did in November 2001. In contrast, today’s anger is hot anger, the sort of anger that bubbles over the edge and makes people go nuts in a violent spree that causes serious collateral damage without achieving any real results.

The hot emotional anger we see today is a willingness in the US Congress to hit out at the entire world in an effort to coerce the world to inflict severe economic damage on Iran. This hit on the world is a threat to cut off countries from the US financial system for continuing trade with Iran, regardless of whether the countries are a parties to  the Iran-Israel fight or whether the countries are even in Iran’s neighborhood. This threat applies to every country in the world, except those that are specifically exempted by the Obama Administration.

Below we examine the consequences of this action on America’s long term interests.

1. Is Iran the greatest threat to America?

There is no question Iran is America’s foe. There is no question that Iran has acted against America’s interests on many occasions. But does Iran pose the biggest threat to America? Has Iran ever attacked America or American forces? Did elements inside Iran help in the 9/11 attacks? Is Iran the principal backer of the Taleban? Does Iran provide terrorist sanctuaries for the Taleban from which they attack American forces in Afghanistan? Was the shoe-bomber trained inside Iran? Was the unsuccessful attack in Times Square planned and helped by elements inside Iran? Is Iran the epicenter of global Islamic terrorism that attacked London, Madrid and Mumbai?

No. That dubious honor goes to Pakistan and specifically to the military regime in Pakistan. So how have the US Congress and the Obama Administration handled Pakistan? By providing billions of dollars in aid, by providing F-16 fighters and P3-Orion antisubmarine planes even though Afghanistan is land-locked and the Taleban don’t have any boats, let alone deep diving submarines.  The Obama Administration has turned a blind eye to the massive drive by the Pakistani military to build a huge nuclear arsenal, reportedly the fourth largest in the world. In contrast, the US Congress seems absolutely determined to wage war on Iran with every weapon at its disposal, on an Iran which might not have a nuclear weapon for next 2-3 years.

The last time we saw such hysteria was in 2003 when the Bush Administration painted Iraq as a imminent nuclear threat while ignoring the greater threat from Iran. What did the Iraq war achieve? It made the bigger enemy Iran far more powerful while saddling America with a long horrible expensive conflict.

Today, the Obama Administration and the US Congress are moving towards a conflict with Iran in a similar emotionally charged campaign while ignoring the greater threat from Pakistan. Could an American war with Iran result in Pakistan becoming more powerful and more dangerous for America and the world?

The bottom line of this paragraph is simple:

  • Iran is likely to eventually put a bomb in Tel Aviv while Pakistan is likely to eventually put a bomb in New York City.

We understand the need for a targeted, tactical campaign against Iran. But why make Iran the emotional  focus of all of America’s attention? The short and simple answer is Israel.

2. Israel & Britain – Case of Two Close Allies

From Israel’s point of view, Iran is a grave danger while Pakistan is nearly irrelevant. Pakistan has not demonstrated any aggressive intent towards Israel while Iran has verbally threatened to wipe Israel from the face of the earth. Israel views Iran as an existential danger and rightly so. So Israel has every reason and every right to defend itself by any means it deems necessary. And Israel is a close ally of America, the closest ally with one possible exception.

That exception is Britain. Britain has been America’s oldest and most steadfast ally. Britain does not ask America for financial aid.  Wherever America needs support., Britain has provided it. British troops fought alongside America’s troops in Iraq. British troops are fighting alongside American forces in Afghanistan.

So what did America do when Britain found itself at war with Argentina a few years ago. America did not get involved in that war to help America’s closest ally. America did not break relations with Argentina. America did not sanction other Latin American countries for maintaining their relations with Argentina. America provided Britain with intelligence and helped in other quiet ways. This was sensible because America is a global power with global interests and America cannot sacrifice those interests in a regional conflict.

This common sense, this necessary focus on America’s global interests has been jettisoned today by the Obama Administration and the US Congress. Instead, they are putting every other American interest in every other part of the world at grave risk in their emotional charge to proclaim their solidarity with Israel.

Why this difference between two close allies? Why does the US Congress behave rationally in the case of Britain but act with wanton emotional fervor when it comes to Israel? They do so even when, according to a survey by Bill O’Reilly’s Factor, 61% of Americans surveyed said America should not get directly involved.

3. Does Israel even want this Sanctions Plan?

The straight answer is No. We don’t see Israel applauding the US Congress for its desire to punish the rest of the world to support Israel. Israel is a smart, clear-headed, calculating country. Israel knows that it will face substantial backlash from all over the world for financial damage resulting from US sanctions. And these sanctions don’t do Israel any good.

Israel wants America to participate in an attack on Iranian nuclear installations. If America is unwilling to do so, Israel would like America to provide it with bunker-busting bombs and refueling tankers. That will enable Israel to mount a large enough air attack to destroy a large part of Iranian nuclear capability.  Such an attack would not damage Iran’s conventional military capabilities, it would not cause severe financial damage to the Iranian people.  It would be a l
imited attack.

If successful, Israel will be privately applauded and even thanked by every country in Iran’s neighborhood, even by China and Russia.  If it fails, it will suffer the blame alone. Now if Iran is stupid enough to attack America in response, the Obama Administration should retaliate with all of America’s might to destroy Iran’s conventional military capacity as well as Iranian regime. The Iranian regime is smart, rational and they will not risk their survival if they believe the Obama Administration will retaliate with all its might.

We understand that a limited attack by Israel on Iran would create regional risks to America and we don’t recommend it. But it would be a regional issue and it would not damage America’s global interests. So it would be far better than the utterly asinine plan to impose sanctions on the rest of the world to bring pressure on Iran. 

4. The Utter Insanity of the Sanctions Plan – 1

Several informed and sensible analysts have argued that the sanctions on Iran could actually backfire on America. Ian Bremmer, President of the Eurasia Group, wrote the following in his article in the Financial Times titled: Iran oil sanctions threaten global economic recovery:

  • While the strategy of squeezing Iran financially is logical, it comes with serious economic risks that are not often recognised. We’ve entered a new era in which the distinction between the financial and security spheres no longer holds: geopolitics drive markets even as markets drive geopolitics.
  • Enforcing oil sanctions against Iran could threaten the global economy. In the context of improving global growth, removing too much Iranian oil from the world’s energy supply could cause an oil price spike that that would halt the recovery even as it does some financial damage to Iran. For perhaps the first time sanctions have the potential to be “too successful”, hurting the sanctioners as much as the sanctioned.

A detailed description of how the Iran sanctions could backfire on America was provided by Kenneth Pollack, Director of the Saban Center of Middle East policy at the Brookings Institution. Mr. Pollack argues:

  • The problem is that these sanctions are potentially so damaging that they could backfire, creating at least three sets of consequences that would leave the United States in a worse position, whatever the impact on Iran.
    • To the extent that Iranian oil is truly off the market for the U.S. and Europe, it will increase the price for what remains. In case you missed the past 40 years of American economic history, there is no commodity on earth that affects the American economy faster or more profoundly than oil.
    •  Another potentially fatal flaw in these sanctions is that they turn up the heat on Iran so much that they may well be unsustainable diplomatically, and that is very problematic because sanctions rarely work quickly. And over time, there is a high likelihood that other countries will come to see the misery of the Iranian people as being the fault of the United States, not of the Iranian leadership, exactly as happened with Saddam.

This may be why Ian Bremmer made a very interesting suggestion in his FT article:

  • The US can pressure Iran without sabotaging the economic recovery. What he must do is maintain his tough public rhetoric on sanctions, no matter how harsh it appears, while privately signaling China and India – and only China and India – that it is fine for them to purchase Iranian crude, but at a significant discount from market price. Forcing Tehran to sell discounted barrels would provide the desired result: a substantial reduction in Iranian revenue with less impact on global energy prices and less harm to the US and world economies.

5. The Utter Insanity of the Sanctions Plan – II

The above issues have been well discussed and are well understood in America. They are serious issues indeed, but they are essentially short term in their scope and impact. We are far more concerned about the long term strategic impact on America and its relationship with the rest of the world. And when we say “world”, we mean the real world; we mean Africa, China, India, Asia, Latin America, the world in which 3/4th of the world’s population lives, the part of the world which will show the strongest growth in the next three decades.

With its emotional plan accompanied by strident, sometimes hysterical rhetoric, the US Congress has threatened to declare financial war on virtually the entire world if they don’t break off financial and trading relations with Iran.  The US Congress does not seem to care about the serious impact that might have on the countries, their economies and their people. And these countries have nothing to do with the Israeli-Iran conflict. In fact, as Ian Bremmer pointed out in his interview with Reuters, “[Iran] doesn’t exactly look deplorable to large parts of the global community —
like Russia, China, nearly all of Africa and even much of the Middle

Remember Iraq? That was strictly a regional conflict between America and Iraq. America did not involve any other region of the world in that conflict. Still America suffered a massive downgrade of respect and support in the entire world. Not only is America now getting involved in another regional conflict with Israel and Iran, the US Congress is threatening to sacrifice the economic interests of virtually every country in Africa, Asia and Latin America. Can we imagine the backlash from the rest of the world and can we fathom the extent of long term damage America could suffer?

There is one long term damage that worries us the most – the damage to America’s financial system, the foundation of America’s prosperity.

5. The Utter Insanity of the Sanctions Plan – III

The foundation of US financial dominance is the reserve currency status of the US Dollar. This is why the world’s financial system goes through the American financial system. The American financial system is open, flexible, transparent and trusted.

The Sanctions Plan of the US Congress & the Obama Administration is based on using the US Financial System as a weapon to browbeat the world. There are grave dangers in threatening the use of your most powerful weapon. If the threat of using it fails to coerce, then it has to be used. If it is used but fails to deliver a victory, then there is nothing else left in the quiver. And just the threat prompts serious efforts to build countermeasures.

That is what we are afraid of.  The world has been using the US Dollar and the US financial system both out of convenience and inertia. That inertia was shaken up a bit in the aftermath of the 2008 financial crisis in America. That crisis prompted China to intensify its efforts to make its currency,  the Renminbi, an international currency. The crisis also prompted Russia to seek alternatives to the US Dollar at the IMF, the International Monetary Fund.  

These efforts have gone nowhere because Latin America, Africa and the rest of Asia preferred the convenience of the current Dollar-based financial system. Now the US Congress is threatening to shut these countries out of the US Financial system if they don’t obey US rules about Iran. If the US Congress can do this once, they can do it again. No country, no country dedicated to the well being of its people can tolerate such an economic stranglehold. 

Perhaps they had no choice in the last century. But this is not our father’s world, as Jim O’Neill*, Chairman of Goldman Sachs Asset Management, made clear to CNBC recently:

  • “We are only three years off maximum, maybe two years before the 4 BRIC (Brazil, Russia, India, China) countries become bigger than the United States….a few of the countries that are also becoming more important such as Indonesia, Turkey, Korea, Mexico. If you put those 4 together with the BRICs, this decade, those eight will create double the amount of global GDP that Europe and the US will do put together.

The primary American goal ought to be to ensure these countries do not act in unison against US interests.  Instead, by threatening to impose sanctions on all the BRICS (S for South Africa) and on the other countries, the Obama Administration and the US Congress are virtually forcing all these countries to come together to build an alternative financial architecture. This is not just insane, but suicidal.

This is not idle or fanciful speculation. This past week, the five BRICS countries met in New Delhi and agreed to support intra-BRICS trade in local currencies. If successful, this could pose a long term threat to the primacy of the U.S. Dollar.

The BRICS also discussed the establishment of a new multilateral financial institution, a new BRICS bank that will help the BRICS countries with their financial development. Such a Bank will be outside the realm of the World Bank which the US dominates. It is not hard to see such a bank eventually issue a special currency  (SDR or Special Drawing Right units in the financial lingo) for use in intra-BRICS trade. Each one of these countries is a regional leader. So we could see such BRICS SDR used by smaller countries in Asia, Africa and Latin America to trade with the 5 BRICS and with each other.

This will not doom the United States. It will simply make the US Financial system more regional and less global. It will also help the rest of the world move away from the US Dollar over time. This is negative for America’s future prosperity.

None of the above is easy. But it is doable if the impetus is strong enough. Unfortunately, the US Congress and the Obama Administration are the ones delivering the impetus to BRICS and other emerging economies to plan to move away from the US Dollar. As we said before, this is not just insane but suicidal.

The Bush Administration was excoriated for being arrogant with the world and for damaging America’s standing. Frankly, the Bush Administration was a sissy compared to what the Obama Administration and the US Congress are doing to the world with their Iran Sanctions plan. In doing so, they are gambling with the future of the US Dollar and American prosperity. For what goal? To proclaim their commitment to Israel. And Israel doesn’t even want this plan. Isn’t Insanity the right word for this?   

* Clip 2 of Interesting Videoclips of March 18 – March 24, 2012

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