international sanctions on iran

7/26/2019 International Sanctions on Iran

1/42

Karl-Henrik Smith

Outside of the many sarafi, foreign exchange bureaus, peoplegathered on the street to watch flat-screen televisions displaying

the almost minute-by-minute slide in the rial; and men and

women gathered at the kiosks to buy dollars as a hedge againstcrippling inflation or just because they thought the government

might soon run out of them due to new international sanctionsagainst Iranian banks. - Majd (2014: 246-7)

International Sanctions on Iran

An Explanatory Critique

Copenhagen Business School

2016

International Business &

Politics (IBP)

Bachelor Thesis

STU-Count: 91,000

Number of pages: 40

Advisor: Hubert Buch-Hansen,

[email protected]

Date: 23/05/2016

Name: Karl-Henrik Smith


2/42

1

Table of Contents

1. Introduction 3

1.1. Analytical focus: Targeted sanctions and the federal government 4

2. Methodology 5

2.1. Critical realism 5

2.1.1. Ontology 5

2.1.2. Epistemology 6

2.1.3. Methods and empirical material 6

2.2. Choice of theory 7

2.2.1. Neorealism vs. liberal institutionalism 8

2.2.2. Critical realism and the neo-neo debate 8

2.3. Methodological application 9

2.3.1. Economic sanctions and institutions 92.3.2. Explanatory critique 9

3. Theory 10

3.1. Liberal institutionalist theory of mutual dependence 10

3.2. Neorealist theory of international regimes 12

3.3. Conclusion: Theoretical overlaps and application 14

4. Case: International sanctions on Iran 15

4.1. Empirical data and case setting 15

4.1.1. Five-year development plans (FYPDs) 15

4.1.2. Interventionism 16

4.1.2.1. Political intervention 16

4.1.2.2. Economic intervention 17

4.1.3. Theocracy 19

4.1.3.1. The political spectrum in Iran 19

4.1.3.2. The economic impact of theocracy 19

4.1.4. Reformism 21

4.1.4.1. The Khatami reforms (1997-2005) 21

4.1.4.2. Ahmadinejads subsidy reform plan (2005-2013) 22

4.1.4.3. Rouhani and the Iranian nuclear deal (2013-) 24

4.2. Analysis of interaction between institutional mechanisms 25

4.2.1. Interventionism and theocracy: Neorealist applications 25

4.2.1.1. Economic sanctions and foreign intervention 25

4.2.1.2. Economic sanctions and Iranian theocracy 26

4.2.2. Reformism and the FYPDs: Liberal institutionalist applications 29

4.2.2.1. Incremental change: The Khatami reforms (1997-2005) 29

4.2.2.2. Mitigating sanctions: The Ahmadinejad administration (2005-2013) 30

4.2.2.3. Lifting sanctions: The second-wave reformists (2013-) 31

4.3. Conclusion 32

5. Discussion 33

5.1. The role of institutions and interaction between mechanisms 33


3/42

2

5.2. Assessing the post-sanctions era 34

5.2.1. Have economic sanctions achieved their desired aim in Iran? 34

5.2.2. Recommendations for further action 35

6. Conclusion 357. References 37

Abstract

The efficacy of international sanctions is a topic of increasingly widespread public debate. Though

existing research primarily investigates the motivations for imposing sanctions, this report seeks to

determine the ability of sanctions to deter or alter the behavior of a target country. I aim to explain

how Iran, a country that has undergone profound systematic changes since the 1979 revolution, has

fared under such constraints. I draw on the liberal institutionalist theory of mutual dependence and

neorealist regime theory to determine whether sanctions have been effective, and the prospects of

cooperation in the future. This report argues that the desired behavior from imposing the economic

embargo has not been achieved, and that it has instead contributed to a multitude of unwarranted

dynamics (e.g. poverty, corruption), structural factors that contribute to Tehrans policy-making and

isolationism. This report focuses on three institutional mechanisms that have created the conditions

for the proliferation or appeasement of sanctions in Iran: interventionism, theocracy and reformism.


4/42

3

1. Introduction

Economic sanctions have become increasingly significant over the past century, as states attempt to

obtain concessions from target countries. Yet, the theoretical basis underpinning the efficiency of

sanctions is limited. Academic focus surrounding economic sanctions primarily concerns moral or

political implications of their imposition, rather than discussing how states adapt their domestic and

foreign policies under economic coercion. The strict purpose of sanctions is not to punish states, but

rather engender a behavioural shift ranging anywhere from altering policies to regime change. Two

of the largest theories in international relations, realism and liberalism, address issues such as state

agency and the role of institutions in encouraging compromise over conflict. Both theories apply to

the case of Iran, which has suffered under unilateral (US-imposed) sanctions since the 1979 Iranian

Revolution, and multilateral (UN-imposed) sanctions since 2006 due to international concern over

Irans nuclear energy program. While foreign countries and institutions have consistently promoted

tightening the embargo, they have failed to generate a significant shift in the Iranian governments

regional and domestic behaviour - namely, the pursuit of nuclear energy technology, the financing

of terrorist groups, and the abuse of human rights. As such, this report aims to answer the following

research question:

What are the main institutional mechanisms that account for the spread of sanctions in Iran, and to

what extent has the impact of the embargo perpetuated Tehrans response to foreign policies?

I strive to determine the institutional mechanisms that give rise to economic sanctions, and attempt

to show that their ability to shape state behaviour is questionable. The mechanisms I consider in this

report are both internal and external, since there are a number of emergent properties (domestically

and abroad) responsible for this tool of foreign policy. The study takes an actor-oriented approach,

focusing specifically on policies within Iran in response to the embargo, but also investigates the

role played by other states, institutions, organisations and firms. Findings are directed at sender

states, namely the US federal government, but also international organisations (IOs) and other

actors that have pursued multilateral sanctions against the Iranian regime. First, I introduce critical

realism and discuss how the choice of methodology informs my choice of theory. Second, I discuss

liberal institutionalism and neorealism, explaining their relevance to the case and research question.

Third, I bring forth empirical evidence, and analyse the interaction between respective institutional

mechanisms provided. Fourth, the case study is discussed. Finally, the report will conclude.


5/42

4

1.1. Analytical focus: Targeted sanctions and the federal government

This reports analytical focus will be on targeted instead of comprehensive sanctions. Ever since the

revolution, a full embargo has been in place in Iran: this measure refers to the prohibition of all

commercial activity or the imposition of tariffs and protectionary measures. Targeted sanctions, on

the other hand, refer to blocking transactions with particular groups, individuals and multinational

corporations (Masters 2015). These can take many forms, including travel bans, asset freezes, arms

embargoes, capital restraints, and trade restrictions (ibid). I contend that targeting individual actors

can mitigate otherwise detrimental effects of embargoes on civilians, as comprehensive sanctions

may cement structural problems like poverty or corruption (ibid). The analytical focus on targeted

sanctions allows analysing sanctions more broadly, helping determine which elements in particular

caused the most harm to Irans economy. As the embargo failed to bring significant concessions

from the federal government, states and IOs began using targeted sanctions to effectively generate

changes in behaviour, but this strategy faces many difficulties. While sanctions have traditionally

been imposed to harm the elite (those with agenda-setting power and the ability to influence policy),

their impact is mostly felt on poorer, working-class individuals (Marcus 2010). These policies have

reinforced nationalist sentiment through political mobilisation and suspicion of foreign states (ibid).

The federal government is a significant actor as well, as the Iranian Parliament (Majlis) advances

economic initiatives every five years in medium-term strategic plans. These five-year development

plans (FYPDs) are important because they lay out the foundation for state-led policies, but also vary

based on which elected coalition hold a parliamentary majority (e.g. conservatives, reformists). This

report will assess policy enactment and impact, due to the role of the federal government - rather

than individual provinces - in agenda-setting (Ghasimi 2012). These FYPDs provide a framework to

promote the private sector and embark on public sector reforms aimed at a more equitable and just

society (ibid). Each administration since the Iranian Revolution has prioritised different issuesthrough these FYPDs, which allows a greater focus on certain issues in the medium run. The federal

government may thus be a necessary condition in mitigating the effectiveness of sanctions since it

provides objectives or targets for individual provinces, but is also insufficient because the state

alone cannot overturn the problems caused by decades of economic coercion. Notwithstanding, the

focus on the federal government is an important part of understanding how domestic and foreign

policies adapt when a state is confronted with the prospect of sanctions.


6/42

5

2. Methodology

2.1. Critical realism

While there is much empirical evidence to investigate the consequences of imposing sanctions, thisreport attempts to make scientific explanations as objective as possible while recognising that

truth is fallible and incomplete. I plan to analyse the underlying agents and structures responsible

for the spread of sanctions as a tool of foreign policy. As such, the critical realist approach is

necessary since it can help extricate the aforementioned institutional mechanisms, allowing for the

investigation and identification of the relationships and non-relationships, respectively, between

what we experience, what actually happens, and the underlying mechanisms that produce [events].

(Danermark et al. 2002: 21) The objective a critical realist framework within the scope of this report

is to uncover the mechanisms responsible for the phenomena of interest (economic sanctions), and

determine whether they have been entrenched over time.

2.1.1. Ontology

The founder of critical realism, Roy Bhaskar, originally coined the term as a blend of a philosophy

of science (transcendental realism) and of human sciences (critical naturalism). Developments since

the 1970s have encompassed an increasingly broad range in economics and social sciences (Jackson

2010). This report considers the merits of critical realist thought within international relations, and

aims to illustrate which generative causal tendencies give rise to the use of sanctions in the global

sphere. A vital component of this study is the concept of transfactualism, which allows for an

explanation of occurrences beyond the empirical domain, as it uncovers the underlying mechanisms

responsible for the rise of phenomena (ibid). According to critical realism, a phenomenon arises not

solely from human experiences, discourses or actual events, but also underlying structures, powers,

and tendencies that exist, whether or not detected or known through experience and/or discourse

(Patomki and Wight 2000: 223). The primary criticisms of positivism within international relations

concern its tendency to associate events between each other, rather than identifying the mechanisms

that have led to those events in the first place (ibid). Patomki and Wight expound on the virtues of

critical realist thinking in international relations, stating that there is a reductionist problem-field

which cannot be addressed through positivist, constructivist or post-structuralist thought (ibid). The

analysis of phenomena can instead only be complete with an understanding of the fundamental

powers or causal tendencies that give rise to actual, observable events.


7/42

6

2.1.2. Epistemology

In scientific practice, critical realism follows the notion of methodological pluralism, according to

which the method must suit the object of investigation as well as the purpose of it (Danermark et

al. 2002: 27). Therefore, it is the nature of the phenomenon under investigation, and of the research

question, that should determine the methods being used (ibid). The understanding of reality as open

and differentiated admits that causal powers are triggered by the interaction between objects, giving

reality a relational character. Therefore, the purpose of scientific enquiry is to uncover relationships

between the different factors involved. The process for this is twofold. The first is abduction, which

contextualises phenomena and facts to render them intelligible in a specific framework by analysing

their interaction with underlying mechanisms or causal tendencies. In other words, abduction gives

meaning to phenomena since they are interpreted within a particular conceptual framework (ibid:

91). The second part, retroduction, finds that knowledge of the conditions that are not observable in

the empirical domain can be generates. Retroductive reasoning is thus an analysis of the substantial

relations through thought experiments or counterfactual thinking, which can help to determine how

a specific phenomenon is generated (ibid). The methods critical realists use to engage in abduction

and retroduction are equally important, since they underpin the entire analysis.

2.1.3. Methods and empirical materialThis report employs a heuristic case study, which we use to explicate a single case, Iran, to uncover

the underlying structures responsible for economic sanctions and Tehrans policy-orientation. This

type of case study allows us to explore the phenomenon to bring about new knowledge, which is in

line with the critical realist belief that it is always possible to produce knowledge due to its fallible

character (Moses & Knutsen 2012: 140). This will be supplemented with an additional investigation

of the institutional structures that allow for sanctions more broadly: the set of interactions between

institutional mechanisms accounting for the spread of sanctions in Iran and abroad. The choice of

empirical material in the case will include primary sources, such as speeches and firsthand accounts

of historical events, but the majority of the analysis relies on secondary sources, including academic

documents, journals, and newspaper articles. The choice of both primary and secondary sources is

paramount, since having extensive empirical material can counteract limited reliability of primary

sources (ibid). The data provided is important since it allows the report to analyse how institutional

mechanisms interact with the phenomenon.


8/42

7

The purpose of our heuristic case study is to recognise and understand the implications of economic

sanctions in Iran. Defining the effect of sanctions is an abstraction from a particular set of structural

and institutional mechanisms, which is necessary since the domain of the actual - the events that

occur - provides no insight into institutional and state-related features (Danermark et al. 2002: 42). I

denote institutional mechanisms, rather than mechanisms in the broad sense of the term, to mean the

structures that arise from institutions and institutional arrangements, and which can be formal as

well as informal (ibid). Since concrete evidence pertaining to the domain of the actual is lacking, it

becomes impossible to offer advice on mitigating the impact of sanctions. This report begins with

an outline of concrete events and circumstances in Iran, to determine the mechanisms characterising

the relationship between coercion and institutions in the domain of the real, which includes all that

which produces events (ibid). This relationship is determined through an analysis of the empirical

evidence and an explanation of how the data relates to the institutional mechanisms. I will then use

abduction to contextualise these mechanisms and determine their influence over sanctions, and use

retroduction to investigate the substantial relations in Iran that gave rise to this phenomenon.

2.2. Choice of theory

The field of international relations is a vital part of studies in international political economy (IPE),

mainly because political and economic shifts are dependent on interstate activity. Two of the main

schools of thought in international relations are realism and liberalism, and both have been evolving

significantly since their inception. Early realism is seen as a reactionary ideology against interstate

conflict and war, though contemporary realism is increasingly state-centric, focusing on issues like

survival and self-reliance (Dunne and Schmidt 2008). Critics of realist assumptions were called

idealists, and believed that states domestic philosophies and ideologies should more broadly be

applied as a doctrine of foreign policy. Idealism is the precursor for modern liberalism, as writers

like Kant popularised notions of perpetual peace or democratic peace within international regimes,

goals that would be encouraged by political and economic interdependence (Gartzke 1998). There

have been numerous improvements to both realism and liberalism; contemporary incarnations of

realism and liberalism, neorealism and liberal institutionalism, have sharpened their focus to 1) how

cooperation is brought about within international regimes, and 2) the role of institutions, states and

other actors in doing so. The neo-neo debate is central to this reports aim of determining how

sanctions have proliferated in Iran.


9/42

8

2.2.1. Neorealism vs. liberal institutionalism

The liberal institutionalist school (L-I) under Keohane and Nye postulates that states benefit from

mutual dependence since it can help resolve conflicts of interest or existing tensions (laissez-faire

economic views, unrestricted free trade, etc.). This, they claim, can promote cooperation through

existing linkages and negotiations, as IOs and other institutions have a central role in ensuring that

cooperation occurs. Institutionalists have an actor-oriented view of international regimes, claiming

that states have agency and can resolve disputes while achieving absolute gains. Neorealists, on the

other hand, have a more pessimistic outlook of geopolitics, claiming that conflicts of interest are

actually disempowering states and institutions from resolving disputes, since a number of actors

also want to achieve relative gains. Therefore, existing linkages can be destabilised by a number of

external issues (volatility in oil prices, hegemonic influence, etc.). To that extent, neorealist regime

theory, developed by Joseph Grieco, claims that states are not atomistic (absolutist) but positional

(relativist), concerned not just about achieving absolute but also relative gains.

2.2.2. Critical realism and the neo-neo debate

This theoretical debate, or neo-neo debate, will guide the choice of theory and empirical material. It

allows the report to focus on behavioural factors of the trade-related aspects of foreign and domestic

policy, especially in terms of how rational actors make decisions with asymmetric information. The

research aims to show that targeted economic sanctions are affected by the following institutional

mechanisms: interventionism, theocracy and reformism. This framework will be supplemented by

an examination of institutional tipping points that have occurred during the sanctions timeline, and

attempts to reverse course on certain entrenched structures by encouraging democratic and tolerant

values in society. Once the report uncovers the causal powers that characterise economic sanctions,

the neo-neo framework will contextualise the phenomenon to determine which substantial relations

exist between the aforementioned institutional mechanisms. In view of this, I then offer suggestions

for further action and assess the relevance of the post-sanctions era through a neoliberal-neorealist

lens. The report will finally conclude whether or not the case of sanctions on Iran feeds into either

approach more than the other.


10/42

9

2.3. Methodological application

2.3.1. Economic sanctions and institutions

Due to the interdisciplinary nature of sanctions, this report will be both qualitative and quantitative,

delving into the mechanisms causing the spread of sanctions as well as techniques used to measure

their effectiveness in the case of Iran. The analysis will contain intuitive and econometric elements;

since qualitative methods are traditionally more concerned with interactions between mechanisms,

this paper benefits from mixed-method research, which is a common approach in critical realism.

This approach thus provides the ability to analyse the causal tendencies of economic coercion from

a multidisciplinary approach, and ultimately delivers a more complete picture of the socio-

economic impact sanctions can have (Patomki and Wight 2000). The objective of causality is todemonstrate how the conditions that constitute the explanans, or that which does explaining,

generate the event or phenomenon that is being explained, the explanandum (ibid). As such, this

report intends to illustrate how the phenomenon of economic sanctions is the logical conclusion of

the interaction between the set of institutional mechanisms that characterise it.

2.3.2. Explanatory critique

An important concept in critical realism is explanatory critique, which is used for this reports actor-

oriented approach. It refers to the process where having knowledge of undesirable structures allows

actors to transform them into more desirable structures (Danermark et al. 2002: 195). Explanatory

critique discards the idea that beliefs are open to casual interpretation, since rejecting a belief would

imply rejecting the conditions or structures necessary for their existence. This theory opens up the

exciting possibility that we may be able to discovervalues, whose beliefs prove to be incompatible

with their own true explanation (Archer et al. 1998: xviii). This demonstrates that agency is a form

of emancipation, since it can remove the influence of certain oppressive or constraining structures

(ibid). Explanatory critique disproves beliefs previously held to be true by criticising the underlying

causes or generative mechanisms sustaining that belief (Witt 2012). A central theme in this theory is

the interplay between factual and value-laden judgments, as values can be extricated not only from

certain institutional mechanisms, but also by the interaction between such mechanisms. Explanatory

critique thus positively evaluates (all things being equal) action aimed at removing the underlying

causes (ibid: 9). This theory will be used further when investigating how causal powers have been

counteracted by state agency.


11/42

10

3. Theory

The liberal institutionalist framework posits that states cooperate given common interests, and that

institutions can alleviate collective action problems. An important notion in liberal institutionalism

is that of interdependence, which neorealists argue is counterproductive since conflicts of interest

strengthen the likelihood of tension (Waltz 1988: 48), and liberal institutionalists believe leads to

higher chances of collaboration and dispute resolution (Keohane and Nye 1987). This section draws

on neorealism and liberal institutionalism to identify and investigate the institutional mechanisms

responsible for the spread of sanctions, with Keohane and Nyes theory of mutual dependence, and

Joseph Griecos regime theory. In this neo-neo debate, there are two fundamental disagreements:

the origins of cooperation, and the role of IOs and institutions in ensuring states cooperate with each

other. Each theory will be studied in turn.

3.1. Liberal institutionalist theory of mutual dependence

Inthe work of Robert Keohane (1941-) and Joseph Nye (1937-), Power and interdependence, the

interests of state and non-state actors are examined in terms of power politics and interdependence.

That is, they claim that behaviour of the state is governed by military and security concerns, where

individual governments aspire to benefit from international exchange while maintaining as much

autonomy as possible (Keohane and Nye 1987: 730). Interdependence, which they broadly define

as situations of reciprocity between countries or actors within countries (ibid), would then constitute

a vital role in international relations. However, recent academic research in international relations

postulates that economic interdependence alone cannot stem political conflict. Mansfield and

Pollins note the contingencies in the relationship between interdependence and conflict, as they

claim that trade contains cooperative and coercive dimensions (Mansfield and Pollins 2003: 8). The

positive or negative effects of trade are thus conditional from a liberal institutionalist perspective.

This builds on previous studies, which conclude that expanding trade networks in a mercantilist

framework are responsible for commercial rivalries and even military conflict (ibid). The

conditional nature of interdependence can thus be accredited to the impact of contextually relevant

factors, which include differences in integration in the world market, regulatory frameworks, and

regimes (Evaghorou and Mertzanidis 2012). In order to achieve gains from interdependence, these

factors would need to be counteracted within a complex geography made up of states,

international and non-governmental organizations, and transnational corporate networks (ibid).


12/42

11

According to the theory of mutual dependence developed by Keohane and Nye, relations of power

influence state decision-making and behaviour. This represents a situation where various channels

of contact bridge societies, there is no issue hierarchy, and governments refrain from using military

force (Keohane and Nye 1987: 731). Mutual dependence adopts an actor-oriented approach with a

focus on transnational and interstate relations, whose objective is to study how certain patterns of

political processes affect actor behaviour rather than to employ a structural explanation to account

for action (ibid). These political processes can be intertwined with conditional factors (e.g. reform

policies, political system) that affect the positive or negative effects of interdependence. Keohane

and Nye identify three political processes that lead to mutual dependence: issue-linkages, agenda

formation, and IOs (ibid). The idea of issue-linkages is equally a liberal institutionalist phenomenon

as a neorealist one, although Keohane and Nye argue that the linkages increase under conditions of

mutual dependence, while neorealists like Waltz do not believe economic interdependence mitigates

conflicts of interest (ibid). Agenda formation is an important liberal institutionalist contribution, in

that changes in domestic policy are usually representative of a poor operation of a regime in a

coherent and functionally linked issue-area (ibid: 738).

Later developments of mutual dependence integrate perspectives on issues like democracy (Drezner

2003), security (Gartzke 2010), and bargaining (Rana 2015). If states cooperate, according to liberal

institutionalists, then socio-economic, political, and military issues are mitigated. However, because

there is asymmetric information, rational actors are unable to determine whether other states will

comply. This assumption is at the foundation of realist regime theory, which points out that there

are difficulties in forming international regimes if there is a disruption in the balance of power. The

relationship between economic interdependence and sanctions is thus triggered by the interaction

between two mechanisms: a) political and economic foreign interventionism, which directly results

in b) Iranian theocracy. I determine through retroduction the substantial relations that underpin theinteraction between these two mechanisms, and find that a necessary condition for economic growth

is the creation of democratic institutions willing to implement reforms. The substantial relations are

twofold. First, a theocratic government presupposes the existence of embeddedness of certain social

values and norms. Second, foreign interventionism is conditional, assuming that intervention occurs

in order to preserve foreign interests in an uncooperative domestic environment (Majd 2014).


13/42

12

3.2. Neorealist theory of international regimes

International regimes constitute the set of principles, norms, rules, and decision-making procedures

around which actor expectations converge in a given issue area (Krasner 1982: 185). Investigating

regimes is thus necessary to analyse the relationships between institutional mechanisms and actors,

particularly when studying issues of behavioural trade. The concept of regime theory refers to these

interactions and relationships, as well as the role of institutions in shaping the behaviour of rational

actors (ibid). An important notion for proponents of this theory is hegemony, since neorealists claim

that cooperation is more likely to ensue from an unequal balance of power between states. Sjolander

and Cox clarify this:

A hegemonic framework thus stresses the need for the dominant actors to make compromises in theirinterests and policies in order to confer benefits on their subordinates to maintain their active consent.

We can view this as the need for the dominant actors to provide a material basis of consent via a political

and ideological bargaining process (Sjolander and Cox 1994: 83-84).

Hegemony is important for regime theory because it delineates the parameters in which cooperation

takes place. Economic and political hegemons hold influence over other states as a result of material

power and ideological leadership (ibid). As such, subordinated states are subject to the interests of a

ruling class in hegemonic states, where dominant actors rely on coercion rather than consent (firms,

IOs, states). Of course, this begs the question of whether such a scenario is cooperation if hegemons

are imposing their will on subordinated states; this is one of the liberal institutionalist criticisms of

neorealisms reliance on hegemonic stability theory (HST). Another key element of such regimes is

the ability and willingness to keep governments satisfied enough to leave control in private hands

(ibid: 84). Therefore, for neorealists, hegemons can only form stable international regimes if they

have significant bargaining power over other states to override the interests of subordinated actors.

The importance of hegemonic stability in international regime theory will be further explored in theanalysis in section 4.2.

Despite the fact that regime theory has traditionally been studied from a liberal institutionalist view,

neorealists like Joseph Grieco (1953-) expanded on this theory to uncover the limits of cooperation

for a number of issues, such as bilateral trade, human rights or military security (Grieco 1988). This

variant of regime theory criticises liberal institutionalist views on security and mutual dependence,

stating instead that the understanding of defensive state positionality and the relative gains


14/42

13

problem for collaboration is a better guide for states seeking self-reliance within an international

regime (ibid: 507). In other words, those states subordinate to the interests of ruling elite in other

countries should cooperate with dominant states only if they satisfy their interests in the process.

Neorealist regime theory sees states as the only major players in world politics, claiming that they

are unitary-rational actors in global governance (ibid). Grieco further developed regime theory with

the concept of international anarchy, or the set of geopolitical tensions and conflicts states face; he

claims anarchy is opposed to the institutionalist belief that IOs and other institutions encourage

cooperation on a state level (ibid). Neorealists perceive states as positional as they are concerned

about achieving relative and absolute gains: a state that is satisfied with a partners compliance in a

joint arrangement might nevertheless exit from it because the partner is achieving relatively greater

gains (ibid: 487). This view of states sees institutions as discouraging cooperation, because of

external issues that undercut the potential for interstate negotiation (e.g. sanctions, oil price

volatility). Diverging interests, rather than leading to mutual dependence between states, would

instead generate increased conflicts and challenges for international regimes (ibid).

A number of earlier studies of state behaviour have inspired neorealist regime theory. For example,

governmentality theory purports states institutionalise many organised practices (values and norms)

to produce a collective mentality within the population (Foucault 1978). This finds relevance within

regime theory as it lends credence to the belief that states entrench a set of principles on a number

of issues. Another, the notion of regimes as intervening variables, posits that the causal tendencies

that account for regime creation should be held responsible for the final outcome or behaviour of an

actor (Krasner 1982). Such causal tendencies include power and interest, for example, and may be

manifest through the behaviour of individuals, particular bureaucracies, and IOs (ibid: 205). Third,

the notion of nonterritorial imperialism developed by Susan Strange critiqued liberal institutionalist

views of international regimes, instead stating that the American hegemon spreads its values acrossstates, firms, IOs and various other institutions (Strange 1982). This is achieved by a combination

of military alliances and a world economy opened up to trade, investment and information (ibid:

482). These views all recognise that exogenous factors are necessary in the formation of regimes,

rejecting liberal institutionalist views that the mechanisms that produce regimes are endogenous to

them (Krasner 1982).


15/42

14

3.3. Conclusion: Theoretical overlaps and application

Though neorealist and liberal institutionalist perspectives of international relations differ, they share

some basic assumptions. The first concerns anarchy and actor behaviour, in the sense that conflicts

and tensions are conditional, arising from a very specific set of circumstances (Powell 1994). For

this case study on Iran, liberal institutionalists and neorealists would agree that events preceding the

revolution, and the sanctions themselves, are responsible for the political and economic situation in

Iran today. Despite disparities in the schools of thought concerning the role of institutions and other

actors in bringing about these circumstances, there is consensus on conditionality and its importance

in shaping current events (ibid). The second assumption is when it comes to the role of cooperation

in forming international regimes: both liberal institutionalism and neorealism have an actor-oriented

approach to international relations, because they see cooperation as conducive to an improvement in

state relations and economic growth (ibid). While both theories differ on what the generative causes

of cooperation are, they recognise that cooperation can contribute in the establishment of a stable

political and economic relationship between states. These overlaps are necessary to consider during

the application of theory to the case, which takes place in the analysis and discussion.

In focusing on how the federal government has responded to economic sanctions, this report draws

both on liberal institutionalist and neorealist perspectives. The pre-existing dichotomy between both

points of view allows this report to analyse economic sanctions from a shared perspective of formal

and informal institutional mechanisms that mitigate or strengthen the effects of economic sanctions.

Institutions are formal when they are characterised by rule of law (e.g. constitutions, regulations) or

bodies to carry out a set of enforced rules (e.g. legislatures, courts); however, they are informal if

comprising societal or unenforceable rules, like tradition, religion or family (Helmke and Levitsky

2003: 8). The disparity between institutions is important for the methodological application to the

theoretical framework, since informal rules will so often govern the behaviour of formal stateactors, influencing both strategy and policy (ibid). I ultimately use different theoretical explanations

to explain why the effectiveness of economic sanctions is circumvented by institutional mechanisms

of interventionism, theocracy, and reformism. This framework will have further applicability as the

report explains how recent initiatives to circumvent the Iranian embargo engage with the identified

institutional mechanisms, and whether they effectively confirm the validity of either theory.


16/42

15

4. Case: International sanctions on Iran

4.1. Empirical data and case setting

To uncover the mechanisms behind the Iranian embargo, this report will present empirical materialand highlight how it relates to economic sanctions. The empirical material has been chosen on the

basis of Irans five-year development plans (FYPDs), leading up to the Iranian Revolution of 1979

to present day. Empirical material will show that despite Iran having been a relatively prosperous

economy in the 1960s and early 1970s, economic sanctions have contributed to its relative isolation

in recent decades. As the Iranian government has been forced to adapt to economic sanctions, it has

had to implement policies specifically designed to mitigate their effects. This section makes use of

the material to draw upon the theories introduced to tease out which mechanisms in Iran have been

entrenched due to international sanctions. This section will highlight three institutional mechanisms

in particular: interventionism, theocracy, and reformism. However, before doing so, I delve into the

importance of Irans five-year development plans (FYPDs), which have been a significant factor of

agenda formation in the country since 1989.

4.1.1. Five-year development plans (FYPDs)

The Iranian Parliament, or Majlis, has been implementing the five-year development plans (FYPDs)

developed by respective administrations since 1989, following the death of Ayatollah Khomeini and

changes in the constitution. The purpose of these FYPDs has been to guide domestic policy-making

towards economic development and reconstruction, as well as set individual targets according to the

belief system of either party in power (Marschall 2003). FYPDs comprise an important role in this

reports analytical focus, because they are symbolic of the governments policy goals in response to

targeted sanctions and the US-imposed embargo. Though the goals of the proposed plans are often

desirable, they are counteracted by the influence of actors whose interests collide with those of the

federal government (e.g. states, IOs and firms). As economic sanctions continue to negatively affect

the economy, Irans FYPDs suggest implementing policies that can guide the state through coercive

foreign policies (ibid). The two major political parties, reformists and conservatives, are responsible

for shaping their respective agendas in FYPDs during their term, and the outlined goals and policies

need to be approved by the Supreme Leader (further discussed in section 4.1.3.). This is challenging

for Irans long-term development, however, as either party may reverse policies and targets initially

advanced by the other once elected.


17/42

16

After the election of conservative Akbar Hashemi Rafsanjani, the first five-year development plan

(1989-1994) was enacted, aiming to solve issues like restructuration of spending following the Iran-

Iraq War, population migration, liquidity, and increasing inflation rates (Brumberg and Farhi 2016).

The project of liberalisation in the early 1990s failed due to societal and geopolitical pressure, as the

trade balance widened due to post-war demand, and the U.S. pressured other states to forestall new

loans to the Islamic Republic (ibid: 84). Ensuing FYPDs have concentrated on economic openness

(2ndFYPD), promoting structural reforms and civil liberties (3rdFYPD), a smaller government role

and enterprise privatisation (4thFYPD), and a greater focus on energy sources and the private sector

(5thFYPD). Each plan also aimed to reach quantitative targets, such as unemployment, inflation and

growth; these medium-term economic plans have been crucial in shaping the objectives for future

administrations as well (Ghasimi 2012). FYPDs have also played an important role in shaping how

the federal government responds to economic sanctions, since domestic policies are only partially

effective if the state is prevented from reaching its full potential.

4.1.2. Interventionism

4.1.2.1. Political intervention

The Iranian Revolution of 1979, in which the Shah was overthrown in favour of an Islamic republic

led by Ayatollah Khomeini, is often seen as a catalyst for contemporary Irans economic situation.

However, a number of external factors account for the revolution, particularly foreign intervention

and policies directed at Iran. Mohammad Mossadegh, who was elected as Irans first prime minister

in 1951, pushed to nationalise assets held by the Anglo-Iranian Oil Company (Kapu!ci"ski 1985), a

measure the United Kingdom perceived as a breach of contract. In response, a global campaign was

mounted by the UK to ensure oil technicians and workers from various countries could not travel to

Iran, persuaded multinational corporations to refuse to buy Iranian oil, and froze Iranian accounts in

London and overseas (Kinzer 2010). Targeted sanctions motivated MNCs to withdraw from the oil

refineries in the city of Abadan, effectively preventing the exportation of oil and other commodities

(ibid). As diplomatic relations with the United States deteriorated, Iran became increasingly isolated

from other states. Stephen Kinzer, a former New York Times correspondent, claims that: a strong

democratic consciousness survives, but civic life is stunned (ibid: 127). Thus, while Irans current

economic situation is often blamed on domestic politics, the revolution itself was partially due to

Iranian suspicion of outside influence following the Abadan Crisis (ibid).


18/42

17

The Abadan Crisis lasted from 1951-1953, after which Mossadegh was overthrown in a coup dtat

by a joint CIA-MI6 operation, and replaced by Mohammad Reza Pahlavi, a pro-Western shah who

portrayed himself as a reformer but whose rule became increasingly autocratic and repressive over

time (Ansari 2001). To legitimise dynastic rule and institutionalise monarchical values in Iran, the

shah launched a White Revolution in 1963, a strategy focusing on land reforms, restructuration of

government spending (e.g. sales of state-owned factories), and the expansion of liberties for women

(ibid). Though the reforms had far-reaching consequences in the goal towards westernisation, civil

society in Iran was dismantled. The White Revolution was fundamentally a political programme

conceived by members of the political elite in order to sustain as much of the established relations

of domination as realistically possible (ibid: 2). The federal governments policies between 1953-

1979 may have been largely pro-Western, but Iranians remained under dynastic rule with the shah

attempting to preserve traditional power relations. Interventionism thus had severe repercussions on

a political and economic level, as Iranians manifested their desire for self-governance by revolting

in 1978-1979 and instilling the Ayatollah Khomeini in the shahs place (ibid).

4.1.2.2. Economic intervention

After the overthrow of Mohammed Reza Pahlavi in 1979, Irans economy became subject to US-

imposed sanctions in finance/banking, trade, oil exports, asset freezes and travel bans, and weapons

development (Laub 2015). Most of these sanctions were targeted, used as a diplomatic measure in

response to issues deemed serious by the United States, such as funding international terrorism and

the abuse of human rights (ibid). Travel bans directed at specific individuals, banks, and groups like

the Iranian Revolutionary Guard Corps (IRGC), and the freezing of over $100 billion in assets held

by the federal government were both meant to prevent fuelling proxy wars in the Middle East while

preserving foreign interests (ibid). This was complemented in 2006 by a number of United Nations

Security Council (UNSC) resolutions in direct response to Irans uranium enrichment program, andwas followed by European Union sanctions shortly thereafter (figure 1). The large number of actors

involved reflects the many reasons why Iran is being coerced: while the UN and the EU have been

motivated by concerns pertaining to nuclear weapons proliferation and conflict, US-imposed

sanctions predate such concerns. These unilateral sanctions have covered a range of issues, such as

the hostage crisis, human rights abuses, political developments, the nuclear energy program, and

securing the interests of American allies in the region (ibid).


19/42

18

Figure 1- GDP and oil production in Iran, 2005-2015 (The Economist 2015)

As figure 1 demonstrates, the imposition of multilateral sanctions (UN-imposed) is correlated with a

sharp decrease in Irans Gross Domestic Product (GDP) and increase in the price of Brent crude oil,

which has had severe repercussions: Although Irans economy is less dependent on [oil] than some

others in the region, it still accounts for 42% of government revenues (The Economist 2015). Two

rounds of unilateral sanctions also harmed Irans economy. The first was the Iran-Libya Sanctions

Act (ILSA), signed in 1996 by the Clinton administration in response to the states pursuit of

nuclear energy and financial support of terrorist organisations like Hezbollah and Hamas (Katzman

2006). This would deprive Iran of modernising its key petroleum sector, which generates about 20-

25% of the countrys GDP (ibid). The second round of sanctions was the Comprehensive Iran

Sanctions, Accountability and Divestment Act (CISADA), passed in 2011, according to which

foreign-based financial institutions or subsidiaries that deal with sanctioned banks are barred fromconducting deals in the United States or with the U.S. dollar (Laub 2015). This would deter other

states and corporations from dealing with sanctioned banks, a measure that has been called a death

penalty for any bank (ibid). Irans oil exports were targeted, inhibiting multinational corporations

(MNCs) from providing services related to the states energy sector. Exports of oil in Iran have

fallen from 2.5 million bpd in 2011 to 1.1 million bpd in 2013, as the EU halts imports of oil

altogether and other states dropping significantly (ibid).


20/42

19

4.1.3. Theocracy

The Iranian Revolution led to the overthrow of the Pahlavi dynasty and its replacement with a self-

styled Islamic republic under Ayatollah Ruhollah Khomeini (1979-). Regime change was a crucial

element in motivating the US to impose sanctions on Iran, but also had important effects on agenda

formation and domestic policies. This section examines the political and economic implications of

Irans theocratic government, looking first at the political spectrum in Iran and differences between

the two major parties, and second at the immediate impact of the revolution and effects of theocratic

ideology on policy-making and interstate cooperation.

4.1.3.1. The political spectrum in Iran

Iranian politics are syncretic, which designates a scale outside the conventional left-right spectrum.

While reformists and conservatives encompass the two main coalitions, all constitutional authority

resides with the Vali-e Faqih, or supreme leader (Sadjadpour 2009), a position currently held by Ali

Khamenei. The Iranian political system is unusual since it combines Islamic law, or Shar!ah, with

elements of representative democracy. Despite this hybrid system, the state remains authoritarian,

as many pragmatic candidates are disallowed from running in presidential and legislative elections

(ibid). The Observatory for Human Rights has claimed that elections in Iran are not democratic for

the mere reason that the Council of Guardians chooses the nominees (Alexandros 2005). The swayof Irans theocracy over foreign policy in Iran is thus twofold: firstly, religious leaders consistently

limit policy proposals and legislation of reformist and centrist political leaders, which prevents the

representation of majority interests (ibid); secondly, international sanctions are being incrementally

enacted by other states and IOs, which forces the government to continuously adapt its strategies in

order to mitigate their effect (ibid).

4.1.3.2. The economic impact of theocracy

After the Iran hostage crisis, in which over sixty American citizens and diplomats were held captive

in response to foreign intervention, the United States imposed unilateral economic sanctions against

Tehran. This included asset freezes of around $12 billion (e.g. bank deposits, gold, etc.), primarily

as a punitive measure in retaliation to the diplomatic crisis. The impact of these sanctions, alongside

a military blockade imposed during the Iran-Iraq war, was reflected by stagnating GDP in the early

1990s. Another pressing concern over this period was decreasing oil prices, as crude oil production

dropped by 3.9 million barrels per day (bpd) by the end of the revolution due to investor uncertainty

and international sanctions (Energy Information Administration 2002). This led to a crisis for the


21/42

20

Organization of Petroleum Exporting Countries (OPEC), and was the main impetus for the 1979 oil

shock (ibid). The combination of economic sanctions, decreasing oil prices and the enduring Iran-

Iraq war was the primary cause of the sharp decline in Iranian GDP in the late 1980s, after a number

of neutral countries halted trade due to insurance and military considerations (Farrokh 2011; figure

2). Oil and non-oil exports fell by 55% during the war, oil revenues dropped from $20bn in 1982 to

$5 bn in 1988, and the inflation rate reached 50% that same year (ibid).

Figure 2- GDP in Iran, 1979-2016 (TradingEconomics 2016)

Iranian morale crumbled as a result of both the embargo and military conflict, with the consequent

economic stagnation lasting well over a decade. The imposition of the ILSA in 1996 and CISADA

in 2011 only served to further entrench Irans stagnating economy. Though Iranian GDP increased

in the early 2000s, this is largely the result of reforms passed by president Mohammad Khatami

rather than sanctions relief. The Ahmadinejad administration oversaw an economic boom, but

mounting global concern over Irans role in nuclear non-proliferation contributed to investorsuncertainty as the United States, the European Union and a number of supranational bodies imposed

targeted sanctions on the federal government and related firms (Davenport 2015). As illustrated in

figure 1, Irans GDP has experienced a significant decrease since 2010 as the result of multilateral

sanctions imposed by IOs like the United Nations, the IMF, and the WTO. Power relations between

conservative clerics and moderates remain, however, and constitute the main roadblock for potential

economic reconstruction.


22/42

21

4.1.4. Reformism

As aforementioned, the largest parties in the Iranian political spectrum are the conservatives and the

reformists. Following the Iranian revolution and the hostage crisis from 1979-1981, radicals under

president Ali Khamenei dominated the Iranian Parliament (Majlis), and claimed American and EU

sanctions were constructive instead of harmful as they encouraged self-sufficiency, forcing Iranians

to adapt and survive with little outside aid (ibid). The federal government began to implement a

series of policies and reforms in the late 1990s to respond to such economic coercion. The section

examines three policies in particular: Khatamis structural reforms, Ahmadinejads subsidy reform

plan, and the Rouhani nuclear deal with the P5+1.

4.1.4.1. The Khatami reforms (1997-2005)

The first reform occurred during the presidency of Mohammed Khatami, a moderate whose election

was representative of Iranians wishes of a more open society. Advocating for greater political and

social freedoms, the relaxation of cultural norms, and economic rehabilitation, Khatami attempted

to fundamentally alter Iranian society (Menashri 2010: 61). Khatami, elected in 1997, presided over

the 3rdFYPD, which focused on structural reforms as a number of improvements were made in the

rule of law, individual freedoms, social justice, and political tolerance (Siddiqi 2006). Though Iran

presided over a period of economic growth in the late 1990s and early 2000s, this was not the resultof theocratic ideologies, but rather reformist policies promoted under the 2ndand 3rdFYPDs. On the

economy, Khatamis goal was to create 750,000 new jobs annually and achieving an average yearly

real GDP growth of 6%, as well as to reduce subsidies for major commodities (ibid). While most of

the reforms ultimately failed to pass due to political differences with the Ayatollah and ruling elite,

Khatami was able to successfully begin a reformist movement that lasted beyond his presidency. I

argue that this is because the institutional mechanism of reformism can even result from attempts at

policy change, since failure at enacting policies may instigate actual reform over time:

Khatami failed to implement his major reforms. But his policies have had some positive effects. The

economy has started moving forward, even if progress has been slower than expected. Violations by the

courts have been repeatedly highlighted, though they have not been prevented. A number of stifling

social restrictions have been lifted, at least unofficially. It is still dangerous to be openly critical of the

regime, but the level of free speech is unprecedented to the years before Khatami (Siddiqi 2006).


23/42

22

The efforts of reform during Khatamis term were futile due to political differences, and the Majlis

was ultimately unable to enact open market or humanitarian policies (ibid). International sanctions

led to opposition by radical factions of the conservative side, legitimising their narrative that foreign

intervention in domestic affairs, rather than isolationism and the repression of civil liberties, should

be held accountable for Irans economic situation. Yet, minor successes of first-wave reformists

under Khatami set the stage for the increased desire for economic openness and structural change.

The increased focus on civil society acted as a counterbalance to corruption and theocracy, instead

promoting positive values like transparency and development (Rivetti and Cavatorta 2013). Even a

number of former Khomeinist revolutionaries became reformist, and denounced the transformation

of revolutionary ideals into the defence of privileges acquired by certain social groups since the

revolution (ibid: 648). The reformist rhetoric that emerged from Khatami assuaged foreign powers

like the United States, who eased sanctions on Iran imposed as part of the ILSA. In the end, trends

and discourses emerging from the Khatami era culminated in the 2013 election of Hassan Rouhani

and achievements by second-wave reformists, including the signature of the Iranian nuclear deal

in 2015 that brought global sanctions relief to Iran.

4.1.4.2. Ahmadinejads subsidy reform plan (2005-2013)

The second reform examined here was launched during Mahmoud Ahmadinejads presidency. AfterIrans refusal to interrupt its nuclear program and collaborate with the International Atomic Energy

Agency (IAEA), the United Nations imposed comprehensive sanctions as a punitive measure and to

encourage compliance (Haidar 2016). Over the following years, this was complemented by UNSC

resolutions which included an arms embargo, freezing of assets, global monitoring of Iranian banks,

targeted travel bans, and cargo inspections (ibid). To mitigate the impact of sanctions, Ahmadinejad

carried out structural reforms by passing a subsidy reform plan (Nikou and Glenn 2010). The plan,

passed as part of the 5thFYPD, aimed to phase out all subsidies within five years, as immediate cuts

affected the price of various products (petroleum, wheat, sugar, etc.), and instead of subsidies, small

sums of cash would be distributed to individuals (ibid). Despite the sanctions having been imposed

in response to the risk of nuclear proliferation, they harmed the economy: during the Ahmadinejad

administration, both Gross Domestic Product (GDP) and per capita income were lower than during

either of his predecessors terms (figure 3). However, this was more than just the result of sanctions:

isolationist policies and fervent nationalism both contributed (ibid).


24/42

23

Figure 3- GDP and per capita income by administration (IMF 2012; cited in Habibi 2013)

The Subsidy Reform Law, a crucial component of Irans 5thFYPD, aimed to remove price subsidies

over five years, requiring for domestic prices of gasoline and other refined oil products be raised to

within 90 percent of the international prices for delivery of these items to Persian Gulf destinations

(Habibi 2013: 3). The ultimate objective of the plan was to increase standards of living for lower-

income households and working class families, expand production efficiency and export capacity,

and reduce income inequality (ibid). Though Ahmadinejad ultimately implemented the reform plan,

economic sanctions lifted inflation and unemployment, and empowered the Islamic Revolutionary

Guard Corps (IRGC). The IRGC, a militant arm of the republic, tried to curb the effects of sanctions

by increasing smuggling efforts and using front companies in other countries to produce imports of

essential goods (ibid: 6). Despite the economic significance of Ahmadinejads subsidy reform plan

for Iran in the long term, the effects of international sanctions mitigated any optimistic prospects of

reducing poverty and income inequality in Iran. As the institutional mechanism of reformism occurs

incrementally, the conservative policies of Ahmadinejad reversed the progress made under Khatami

(e.g. fractured relations with the US). Yet, this was only temporary: even though Ahmadinejads

presidency experienced a lower average GDP than either of his predecessors, cooperation was only

halted until the election of a more moderate, outward-looking candidate (Habibi 2013).


25/42

24

4.1.4.3. Rouhani and the Iranian nuclear deal (2013-)

The third reform was the signature in 2015 of the Iranian nuclear deal between Iran, the P5+1 (five

permanent members of the UNSC), and the EU. The treaty, also known as the Joint Comprehensive

Plan of Action (JCPOA), implied the lifting of all targeted sanctions should the federal government

agree to reduce the number of centrifuges and enriched uranium (JCPOA 2015). The deal incurred

the freeing of over $100 billion of foreign-held Iranian assets, allowing Iran to export 300,000 bpd,

and authorising the modernisation of economic sectors such as transportation or infrastructure (Naji

2016). The Iranian federal government under Hassan Rouhani provided the IAEA with full agency,

visibility and accountability over Iranian nuclear reactors in return, and reduced its total stockpile of

enriched uranium to less than 300 kilograms (Kerry 2016). Making remarks on implementation day,

the United States Secretary of State, John Kerry, praised the benefits of diplomacy and negotiation

over conflict and war (ibid). However, reconnecting Iran to the global financial system is a point of

contention: a number of critics claim Iran is likely to continue weapons development and use newly

unfrozen assets to fund regional militant groups like the Palestinian Liberation Organization (PLO)

or Hezbollah, and promote Irans national interests in the region (Naji 2016).

The JCPOA was significant from a domestic policy perspective as well. The 6thFYPD (2016-2021),

submitted on the same day as sanctions were lifted, emphasised a larger focus on attracting foreigninvestment and less reliance on oil revenues (Financial Tribune 2016). The federal government set a

growth target of 8% annually, responding to falling crude oil prices, decades of isolationist policies,

and a high unemployment rate (ibid). In the 2016 legislative elections, the first after the signing of

the deal, moderate reformists made gains in the Majlis and the Assembly of Experts, illustrating the

growing desire for economic openness and rapprochement with the West (Salehi-Isfahani 2016). In

between 2013 and 2016, the inflation rate has dropped from a high of 34.7% to less than 10% (ibid).

And yet, economic successes have not translated to higher wages, while the pursuit of monetary and

fiscal policies to fight inflation has negatively impacted per capita income (ibid). Anxieties remain

that the United States Congress may impose fresh non-nuclear related sanctions, and that American

restrictions on dollar-denominated transactions with Iran may deter European investors and MNCs

(Geranmayeh 2016). Despite economic hardships, ordinary Iranians have received a psychological

boost from the political opening accompanying the nuclear deal and welcome the distance from the

shadow of war (ibid). The JCPOA has provided the basis for future progress.


26/42

25

4.2. Analysis of interaction between institutional mechanisms

The purpose of this section is to analyse the interaction between the mechanisms uncovered in the

theory and empirical sections. First, I will argue that the mechanism of foreign interventionism

lends credibility to the neorealist school of thought, since the establishment of democratic

institutions in Iran and the potential for economic growth have been stymied by international

sanctions. This has occurred to the benefit of the United States and Iranian theocrats, and to the

detriment of ordinary Iranians. Second, I will demonstrate how the FYPDs and reformist tendencies

have buoyed liberal institutionalist beliefs that IOs and other institutions can lead to cooperation and

economic growth, and diminish relations of power between hegemons and subordinated states. The

two-part causal analysis illustrates the link between theory and empirical facts, showing a set of

empirical regularities that show how sanctions have affected the policies of the Iranian federal

government. The analysis shows how the studied institutional mechanisms can positively or

negatively impact the tendencies perpetuated by economic sanctions.

4.2.1. Interventionism and theocracy: Neorealist applications

4.2.1.1. Economic sanctions and foreign intervention

Eli Heckscher (1879-1952), an economist, describes sanctions as a form of economic warfare,

since they weaken the ability of other states to pursue conflict: sever the trading links between the

enemy and their allies and also with neutral powers and, in so doing, to reduce the level of military

and civilian goods available to support military ventures (David and Engerman 2006: 348). The

policies included in sanctions, such as higher tariffs or encouraging production of substitutes, thus

fit within a neorealist framework as states abandon trade with a specific country to fulfil their own

interests. Heckscher recognises this, claiming that the aim of sanctions is not economic but political,

because a state that adopts sanctions hopes to influence third countries behaviour toward a target

state in the process (ibid: 350). While countries like the United States have long used sanctions as a

diplomatic tool to coerce foreign governments into changing their behaviour, their effectiveness is

questionable. Glenn Kessler from the Washington Postclaims that today, the prospect of sanctions

relief is likely to have more impact than sanctions themselves: the promise of easing sanctions is

sometimes used as a lure to induce countries to change behaviour (Kessler 2011). This follows

from Heckschers view of sanctions as a political tool, in that they coerce uncooperative regimes to

concede to the demands made by dominant states (ibid).


27/42

26

Heckschers assessment is important to this case study, because foreign policies can often shape

both the political landscape and economic outcomes (figure 1). Neorealists posit that cooperation

stems from states attempting to satisfy their own interests rather than achieve mutual gains, and as

such there are limits to cooperating in international regimes (Powell 1994). While the 1953-1979

period oversaw a pro-Western reformist shah, the state became more autocratic to the detriment of

Iranian citizens. An important distinction thus needs to be made between coercion and cooperation,

since the former is institutionally triggered while the latter is the result of interstate activity (ibid).

For this case, the distinction is made clear by events which occurred after 1979: policies directed at

the Iranian government aimed to prevent structural issues, like corruption, the spread of theocratic

ideology, human rights abuses, or the funding of militant groups. However, rather than achieving

concessions, they instead caused major harm to the Iranian economy by deterring foreign investors

and entrenching poverty in Iran (OECD 2011). The institutional mechanism of interventionism thus

contributed to the isolation of Iran from the rest of the world, lending credence to neorealist views

of the international regime and the limits of cooperation (Powell 1994).

4.2.1.2. Economic sanctions and Iranian theocracy

The Iranian Revolution led to a decline in GDP and a drop in oil production from 5m bpd in 1979 to

1.5m bpd in 1981 (figure 4). After the ideology promoted by the Ayatollah Khomeini took root, a

hybrid republican theocratic system based on Islamic law was installed. The immediate effect of

this was an escalation of corruption: Transparency International ranks Iran 136 th in the Corruption

Perceptions Index (CPI) and the World Bank places Iran 118th in the ease-of-doing-business index

(The Economist 2016). The hybrid nature of Iranian politics designates a semi-representative state;

while there is a broad political spectrum covering a range of interests, candidates must be approved

by both the Supreme Leader Khamenei and high-ranking jurists and theologians from the Guardian

Council (Brumberg and Farhi 2016). Any change that occurs thus requires working through, ratherthan against, the existing institutions of Irans semi-autocracy (ibid). The elections of moderate

centrists Mohammad Khatami in 1997 and Hassan Rouhani in 2013 are indications of such change

(figure 4), since for both years, the Guardian Council approved all radicals and very few moderates.

The Iranian regime is therefore characterised by a particular set of principles and norms (informal

institutions) based on theocratic values that have inspired the rule of law, including the process of

policy-making domestically and abroad (ibid).


28/42

27

Figure 4- GDP and oil production in Iran, 1965-2015 (The Economist 2016)

At the height of the revolution, the population in Iran numbered 37.47m, and within fifteen years it

soared to just under 60m. The establishment of a theocratic regime in Iran encouraged the economic

burden faced by ordinary Iranians: to appease a war-weary society after the conflict, the theocracy

kept consumer prices for energy, basic foods, medicines and utilities () well below market prices

(Nikou and Glenn 2010). The Iranian Revolution and the birth of the theocratic system were largely

fuelled by a suspicion of interventionism in Iran. The last shah of Iran was overthrown as a result of

resistance to foreign influence in the region, a declining economy, increasing dependence on oil,

and civil rights violations (Kamel 2015: 45). Such suspicion carried out through the Ali Khamenei

administration, as economic sanctions were imposed and the United States supported Iraq during

the Iran-Iraq war from 1980-1988 (ibid). The post-revolutionary Iranian regime therefore fits within

neorealist ideology in the sense that the American hegemon, which had been dominant in the region

for much of the 20thcentury, began to lose sway over an increasingly unstable region. Hasenclever

et al. (2000) defined this as hegemonic afterglow, during which the uncontested superiority of the

leader has vanished, but factors such as inertia, habit, or fear of instability resulting from change

work in favour of the regimes the once dominant state had established at the height of its power

(Hasenclever et al. 2000: 9).


29/42

28

Another dimension of neorealism that applies to theocratic regimes is the game theoretical concept

of a Prisoners Dilemma. This represents a situation where two rational actors who would gain most

from cooperation may not do so due to asymmetric information (Powell 1994). This model is useful

in international relations since it illustrates neorealist assumptions of the international system (ibid).

Joseph Grieco, who developed neorealist regime theory, claims: player[s] responds to an iterated

conventional Prisoners Dilemma with conditional cooperation solely out of a desire to maximise its

individual long-term total payoffs (Grieco 1988: 496). Though all players would stand to gain the

most from cooperating with each other, they nevertheless aim to optimise their own situation. Thus,

neorealist understanding of actor rationality claims that any cooperation that results from interstate

linkages is purely self-motivated, because states will care not only about absolute, but also relative

gains (ibid). Figure 5, which represents an iterated Prisoners Dilemma matrix, demonstrates this in

the case of Iran (x-axis) and the United States (y-axis).1The optimal scenario for both countries is if

both cooperate (CC), whereas the least desirable scenario is defection (DD).

Figure 5- Iterated Prisoners Dilemma between Iran and the United States

1The matrix is iterated since the situation can occur repeatedly for a single scenario.


30/42

29

The case study on Iran conveys one final important neorealist concept: international anarchy. This

is best understood as the geopolitical tensions faced by states that create fears of being cheated and

prevent achieving autonomy and self-reliance (Hasenclever et al. 2000). The struggle for autonomy

is brought about by a lack of a common government between states, denying [subordinated states]

the luxury of being egoists who, by definition, are indifferent to how well others do (ibid: 9). In the

case of Iran, the implication is that the federal government will choose not to comply with foreign

demands as it takes both absolute andrelative gains into account; countries would thus be sensitive

to the gains made by all other actors involved, despite accruing absolute gains (ibid). This was made

evident during the Rafsanjani administration, as relations with the United States and other Western

states remained poor due to foreign involvement in the Gulf War, increased financial sanctions, and

differences with the American political system (Marschall 2003). Rafsanjani, a centrist conservative

who focus economic reconstruction following a decade-long war, had his foreign policies dictated

by convention and the doctrine of the Ayatollah Ali Khamenei. Despite the potential of normalising

relations with the US, policies in Iran were nevertheless contingent on a decade-long revolutionary

ideology that no longer represented the sentiments of Iranians.

4.2.2. Reformism and the FYPDs: Liberal institutionalist applications

4.2.2.1. Incremental change: The Khatami reforms (1997-2005)

The institutional mechanism of reformism, while influenced by dynamics within Iran and occurring

domestically, is only one of the factors causing international repercussions. Increased pressure from

the EU - which is generally unsympathetic to sanctions - and many American business lobby groups

have also forced the US Congress to focus its action in a targeted way on firms that violated specific

international agreements (Clawson et al. 1998). However, internal developments during Khatamis

presidency added to the views of Iran as compliant and accommodating rather than confrontational

(ibid). The US continued to pursue a simultaneous foreign policy of sanctions and dialogue, in order

to maintain a bargaining chip while attempting to make progress. This policy would end once Iran

demonstrates that it has altered or abandoned the policies that led to the imposition of sanctions in

the first place (ibid). Following from this logic, the Khatami reforms under the 2 ndand 3rdFYPDs

represented much more than domestic change, altering the nationalist rhetoric that Tehran conveyed

in favour of a more open and moderate image. After ILSA sanctions were eased, the importance of

reformism became apparent, not just for policy on a domestic level but cooperation more broadly.


31/42

30

In the long-term, the reforms launched under Khatami fit with liberal institutionalist beliefs, which

identify agenda formation as one of the generative causes of mutual dependence (Keohane and Nye

1987). Liberal institutionalist notions like linkages and agenda formation are becoming increasingly

relevant as the US, the EU, and other states begin lifting sanctions on Iran following the ratification

of the JCPOA (4.2.2.3). Despite the fact that Khatamis reforms failed to materialise in his term, his

attempts at reform have paved the way for the signature and ratification of the 2015 nuclear deal. A

former reformist member of the Majlis, Reza Yousefian, has stated in a similar vein that the concept

of reform should be understood as a social rather than legal phenomenon: if you interpret reform as

a movement within the government, this is the end. But if you regard it as a social phenomenon,

then it is still very much alive (Yousefian, cited in Siddiqi 2006). Khatamis efforts are thus rooted

in mutual dependence theory, because many of his initiatives aiming to curb issues related to human

rights or civil liberties have generated the lifting of unilateral and multilateral sanctions in the long

run. Despite power struggles with ruling clerics, the attempted reforms of Khatami would pave the

way for lifting sanctions under a second-wave of reformists in 2013.

4.2.2.2. Mitigating sanctions: The Ahmadinejad administration (2005-2013)

The Iranian election of 2005 represented a significant turning point in domestic and foreign policies

for the state following the win of hardline conservative Mahmoud Ahmadinejad, who garnered 62%

of the electorate on a demagogic platform of self-reliance and isolationism (The Economist 2005).

Ahmadinejads election represented the chance for structural reform, including solving issues such

as poverty and corruption (ibid), but also illustrated worry over American intervention in the region.

The election emboldened conservatives, particularly because high-ranking religious leaders and the

Ayatollah Khamenei shared similar social and economic beliefs with Ahmadinejad, but also created

tensions in the international community as the country became increasingly inward looking and was

closer to developing a nuclear weapon (ibid). The longing to enact internal reform as a substitute formaking concessions to foreign states came in the form of the subsidy reform law, and illustrated the

price Iran paid over this period to preserve its sovereignty. As economic success in Iran was largely

dependent on the perceived cooperation of the state, which was high under Rafsanjani and Khatami,

Irans performance during the Ahmadinejad administration has been dismal. Therefore, while Iran

desires to achieve absolute gains from trade, the federal government has been sacrificing immediate

sanctions relief to promote theocratic ideologies and isolationist policies.


32/42

31

The foreign and domestic policies under Ahmadinejad are anathema to liberal institutionalism since

the desire for autonomy should not imply an isolationist mentality and putting an end to cooperation

(Axelrod and Keohane 1985). However, the failure to mitigate sanctions and revitalise the economy

corroborates the necessity to comply with states and IOs, so that a mutual dependency can arise, in

which all states are better off (ibid). The theory of mutual dependence ultimately presupposes that

the political process, and not structural factors, influence state behaviour. The 2005 election and the

ensuing international response demonstrate how global uncertainty can impact domestic outcomes.

Robert Axelrod (1943-) has expanded mutual dependence to incorporate a game theoretical view of

collaboration: he posits that even in a world where independent states are jealously guarding their

sovereignty and protecting their power, room exists for new and better arrangements to achieve

mutually satisfactory outcomes (Axelrod and Keohane 1985: 253). This is clear repudiation of the

neorealist understanding of cooperation within an iterative framework (figure 5), and of isolationist

beliefs under Ahmadinejad - namely, refusal to cooperate with the IAEA and the choice to ignore

the tightening of sanctions by supranational institutions (e.g. UN, IMF).

4.2.2.3. Lifting sanctions: The second-wave reformists (2013-)

The signature of the JCPOA in July 2015 represented extensive unilateral and multilateral sanctions

relief on various Iranian business sectors (shipping, energy, automotive, etc.). The JCPOA followed

two years of negotiation between the administration of Hassan Rouhani, a pragmatic centrist elected

in 2013, and the P5+1, the five permanent members of the UNSC. The prospect of lifting sanctions

has produced a number of social, political and economic benefits: the release of political prisoners,

increased freedom of the press, landslide victories for centrists in legislative elections to the Majlis

and Assembly of Experts, and economic growth in 2014-2015 of about 2-3% (Katzman 2016). The

JCPOA also has the potential to bring Iran back to double-digit growth in the first year if Iran uses

the sanctions relief mostly to try to rebuild its civilian economy (ibid). Critics of the JCPOA claimthis scenario is unlikely, and that the nuclear deal might benefit Iran to the detriment of its regional

neighbours; in other words, lifting the embargo would provide the state with the resources to pursue

its regional aims (ibid). Henry Kissinger, a neorealist, condemns the nuclear deal on the basis that

Iran and the US have different objectives, and cooperation presupposes corresponding definitions of

stability (Kissinger and Shultz 2015). Without linkages between political and nuclear restraint, an

agreement freeing Iran from sanctions risks empowering [its] hegemonic efforts (ibid).


33/42

32

The JCPOA is the embodiment of liberal institutionalist views on cooperation. The theory of mutual

dependence represents a situation where the optimal outcome is only reached if all actors involved

cooperate under imperfect information (Axelrod and Keohane 1985). Axelrod and Keohane discuss

the notion of reciprocity, which requires the ability to recognise and retaliate against defectors; this

may cause problems of asymmetric information, which is in turn solved by the exercise of power

over subordinate countries: powerful actors structure relationships so that countries committed to a

given order can deal effectively with those that have lower levels of commitment (ibid: 249). The

negotiations between Iran and the P5+1 demonstrate a situation of asymmetric information for all

the actors involved, since success is dependent on more than just good will (e.g. internal dynamics).

However, should Iran cheat or defect, a snapback process could reinstate economic sanctions, and

would simply signify a return to the status quo (Taub 2015). Despite interdependence between Iran

and the United States being beneficial to both states, Iran has more to lose from defecting (ibid). In

the end, the JCPOA represents a situation of cooperation that is more institutionalist than neorealist:

one that is characterized by dialogue and negotiations despite conflicting interests.

4.3. Conclusion

This report has narrowed its analytical focus to three mechanisms that intensify economic sanctions:

interventionism, theocracy and reformism. However, these three pillars are contextually dependent,

since they can have positive and negative effects depending on internal and external circumstances.

The first section on interventionism found that foreign policies (political and economic) can trigger

domestic policies within Iran that clash with the initial intention of intervention. The second section

on theocracy found that while the embargo can intensify the economic burden, theocratic ideologies

are also accountable for frayed relations with other states and the entrenchment of populist policies.

Finally, the third section on reformism found that policies advanced in the FYPDs and by respective

administrations can mitigate the burden of economic sanctions and encourage cooperation between

states. The preceding analysis uncovered liberal institutionalist and neorealist applications to these

institutional mechanisms, claiming that interventionism and theocracy support neorealist viewpoints

of international anarchy and the damaging effects of IOs, while reformism (and FYPDs) encourages

liberal institutionalist beliefs like agenda formation, interstate cooperation and mutual dependence.

However, these institutional mechanisms cannot contribute to an understanding of empirical reality

in isolation, and should instead be studied in relation to each other. Since critical realists argue that

reality is open and differentiated, this entails that phenomena do not result from the sheer existence


34/42

33

of objects and mechanisms, but rather from their interactio

international sanctions on iran

Documents