In his State of the Union address last month, President Obama reiterated his threat to veto legislation that would trigger new sanctions if diplomacy over Iran’s nuclear program runs aground. On the face of it, the administration’s rhetoric is persuasive: the threat of new sanctions could trigger an Iranian walk-out and possibly war; Iran might retaliate by reneging on its commitments under the existing nuclear interim agreement, and America’s European allies in the negotiations would part ways. Moreover, the administration says, new sanctions are unnecessary because the interim agreement has frozen Iran’s nuclear progress in exchange for negligible and fully reversible sanctions relief, and because the international sanctions architecture remains both intact and effective. The administration is wrong.
Over time, the effectiveness of sanctions inevitably diminishes, as the economies they target adjust. By nature, sanctions only work when they are continuously escalated, lest their impact wear out. That is precisely why Iran drags negotiations from one deadline to the next – over time, negotiators’ commitments to not pass new measures reduce their leverage.
A case in point is Turkey, which in recent years has increasingly served as a transshipment point for Iranian sanctions evaders. As of last June, there were over 3,500 companies established by Iranian foreign direct investment in Turkey, up from 2,300 in late 2012. Meanwhile, Turkey also hosts 1,500 Syrian companies, and hundreds of entities whose nominal owners are based in offshore jurisdictions, including five St. Kitts and Nevis firms that are owned by Iranian dual nationals.
In 2012, U.S. sanctions mandated that buyers of Iranian oil such as Turkey could get an exemption from the oil embargo, provided that oil revenues were paid in local currency, in partially locked escrow accounts held in local banks. Iran, however, could only use the revenue to buy non-sanctioned goods from local suppliers. Such measures initially depleted Iran’s foreign currency reserves, and continue to constrain Iran’s access to hard cash and a free rein over its oil revenues. Still, Tehran has found ways around them.
A December 2013 corruption scandal in Turkey underscored the kind of sanctions loopholes that Iran expertly exploits. As my colleagues Mark Dubowitz and Jonathan Schanzer have revealed, the scheme involved an alleged Iranian proxy laundering $120 billion in oil revenues by buying gold and shipping it back to Iran.
A leaked prosecutor’s report focused on Reza Zarrab, a Turkish-Iranian dual national, whose companies were widely implicated in the scheme and in dispensing lavish gifts to Turkish public figures. The international media coverage focused on gold, but buried in the report, taped conversations between the alleged culprits reveal their decision to shift from the illicit purchase of gold to the technically legal purchase of food and medicine.
Food and medicine, after all, are not subject to sanctions, and the interim agreement even created a humanitarian banking channel to expedite such transactions. The U.S. Treasury routinely issues licenses to U.S. companies wishing to export medical equipment to Iran. Most U.S.-Iranian bilateral trade consists of medicine and food staples.
Parliamentary questions from members of the Turkish opposition over whether Zarrab’s food company fictitiously sold wheat to Iran were routinely ignored by the Turkish government, even though the prosecutor’s report shows evidence of false invoicing for brown sugar at the impossibly high price of 1,170 Turkish lira, or almost $500, per kilo ($220 per pound).
Nor was this an isolated case. There are hundreds of Iranian companies in Turkey today involved in wholesale trade of food commodities. Among them, one is owned by the Supreme Leader’s holding company; another by a senior official from Iran’s U.S.- and EU-sanctioned Bank Mellat; and one co-owned by a former president of the Alavi Foundation, a New York-based Iranian charity whose assets the U.S. government recently seized.
Buying food at inflated prices – or making false purchases by issuing false invoices – enables Iranian fronts to free up oil revenues from partially locked escrow accounts and repatriate the cash.
The Obama administration knows that sanctions are not foolproof – after all, since the interim deal was signed, it has targeted dozens of Iranian-run front companies engaged in sanctions evasion overseas, most recently in December. But Washington also refuses to acknowledge that the longer negotiations drag on without new sanctions, the better equipped Iran’s economy becomes to weather the sanctions that arguably brought its leaders to negotiations to begin with.
Honoring commitments is one thing, but inviting our own exploitation is another. That is why proposed congressional legislation triggering sanctions if negotiations fail is wise. Unless the price for Iran’s nuclear stalling and cheating rises, Iran’s best bet is to keep haggling without ever getting to yes.
Emanuele Ottolenghi is a Senior Fellow at the Foundation for Defense of Democracies and at its new Center on Sanctions and Illicit Financing.