Iran sanctions are about to get tougher

By Ramin Mostaghim and Paul Richter, Los Angeles Times

TEHRAN — As the West has tightened its economic chokehold in an effort to force Iran's government to scale back its growing nuclear program, Iranians have coped by cutting back.

Ali, a 31-year-old employee at a Tehran print shop, doesn't buy as much chicken or red meat as before and has stopped going to the barber. He gave up smoking Marlboros for cheaper Iranian-made Bahmans, and asked his wife to quit her health club.

"I've downsized my life," said Ali, who asked that he not be further identified out of fear for his safety.

Soon he and other Iranians will probably have to downsize much more.

Over the next four days, Western governments will launch their toughest sanctions yet against Iran. The steps are designed to eviscerate the oil-based economy, and to test Tehran's determination to keep enriching uranium in defiance of United Nations resolutions.

The United States and European Union will impose an oil embargo, as well as a ban on tanker insurance and other measures that analysts say could slash Iran's foreign sales of oil — its largest source of revenue — by more than half.

That would cost Iran about $4 billion a month, experts say, a substantial amount given the country's estimated foreign currency reserves of $60 billion to $100 billion.

Western governments hope the added pressure will help break the deadlock in a decade-old struggle to persuade Iran to accept limits on nuclear development — before it completes research that many nations fear is aimed at learning how to build a nuclear weapon.

In three rounds of negotiations this year, Iranian officials showed little inclination to compromise. They insist their nation's nuclear program is for peaceful purposes.

Western officials and analysts say Supreme Leader Ayatollah Ali Khamenei may reconsider if the tightening sanctions stir unhappiness among merchants and consumers. Perhaps more important will be the squeeze on businesses and industries controlled by the Iranian Revolutionary Guard Corps, a key part of the power structure that is influential with Khamenei.

"As time passes and dollars are lost, inevitably ordinary Iranians are going to ask the question, 'Is it worth it?' " said Cliff Kupchan, a former State Department official now at the Eurasia Group consulting firm in Washington.

Western governments appear prepared to let the sanctions build through the summer, and even increase the pressure. In Washington, Congress is finishing legislation that would tighten sanctions further on Iran's oil sector.

For Khamenei, however, suffering the deepening privation may be a matter of national pride and regime survival. The loss of oil revenue was proportionately worse during Iran's devastating war with Iraq in the 1980s, analysts note.

The growing pressure has stirred debate in the West about when Iran will reach its "economic drop dead date" — when its currency reserves are so low that it can't meet its budget or take care of other key tasks, such as intervening to prop up its currency.

Mark Dubowitz, an energy specialist at the pro-sanctions Foundation for Defense of Democracies, says Tehran's refusal to give ground so far shows that "Iranian nuclear physics is beating out Western economics — they're not yet feeling such severe pressure that they feel they have to compromise."

He said it could take until the end of 2013 to bring Iran's economy to wholesale collapse.

The European oil embargo, which goes into effect Sunday, will deprive Iran of 18% of former oil sales. India, Japan and most other major customers already have begun cutting purchases of Iranian oil, partly because they could face U.S. sanctions if they don't.

The Obama administration has waived sanctions against 18 countries that have substantially shifted their oil supply from Iran to Saudi Arabia or other producers. Analysts say it appears likely the administration will also grant a waiver to China, Iran's biggest customer, which cut purchases of Iranian oil sharply in the first quarter.

Another major sanction about to hit is a European ban on insurance for tankers carrying Iranian oil. The London-based reinsurance market insures about 90% of the world's tanker fleet, and companies without marine insurance could be held liable for billions in damages in the event of a major oil spill.

So far the sanctions campaign hasn't driven up global oil prices. Analysts say Saudi Arabia and other major producers have increased output to keep the markets steady, and the economic downturn has reduced overall demand. Prices at the pump have fallen in the U.S. in recent weeks

The pain is growing in Iran, however. Oil provides about half the government's revenue and accounts for 80% of its exports. Corruption and mismanagement have exacerbated the country's economic woes.

Because of sanctions already in place, inflation is running about 60% annually, some economists say, and prices of some household commodities and foods, including bread and chicken, have risen by nearly a third in the last two weeks alone.

Last weekend, Iranians upset about rising prices launched a spontaneous boycott of bread and milk in parts of the nation, according to reports on local social networking sites. The action suggests the mounting economic pressure could ignite a public backlash.

The strain is clear to Mojgan Farji, 37, an Iranian journalist. She was recently married, but while she and her husband try to save for a home of their own, they live with her mother and her three siblings.

"The purchasing power of our savings is diminishing on a weekly basis, and the apartments get more expensive," Farji said. Her mother goes to the store and "comes back furious, because the prices go up on a daily basis."

"We fear worse days to come," she said.

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Special correspondent Mostaghim reported from Tehran and Times staff writer Richter from Washington.

Copyright © 2012, Los Angeles Times