Iranian workers make repairs to a unit at Tehran's oil refinery in November 2007. It's estimated that a Western oil embargo is costing Iran about $4.5 billion each month in lost revenue.
Whether economic sanctions can force a government to change course is far from clear, but Iran should be a good test case.
A European Union embargo on Iranian oil took full effect this week, complementing U.S. measures that have grown much more severe in recent weeks. Other Western sanctions now in place target Iranian banks, foreign companies that provide shipping insurance for Iranian oil tankers, and foreign firms that invest in the Iranian oil industry.
The measures are intended to induce the Iranian government to accept restrictions on its nuclear program. Western governments worry that Iran may be intent on developing nuclear weapons, and they are prepared to intensify the economic squeeze until the government in Tehran agrees to open its nuclear facilities to international inspection and cut back on the enrichment of uranium.
'Classic Economic Warfare'
Few countries have experienced such intense external pressure.
"The deeper the isolation of the Iranians, the more that we embargo broad sectors of their economy and their commerce, the more this starts to look like classic economic warfare," says Juan Zarate, who helped design early stages of the Iran sanctions as a Treasury Department official and deputy national security adviser under President George W. Bush.
Not surprisingly, Tehran is pushing back. A group of Iranian parliamentarians this week drafted a bill to close the Strait of Hormuz to tankers carrying oil to countries that have sanctioned Iran. The Iranian Parliament has little power on its own, and the proposed action is seen as largely symbolic. One lawmaker was quoted as saying the bill was a reaction to the EU oil embargo, which took effect Sunday.
Iran has been subject to Western sanctions for years, but in the beginning the measures were more limited, targeting particular entities and specific activities. Now, the U.S. and its allies are taking aim at the entire Iranian economy.
"One of the things we are pursuing is a ratcheting up of the pressure on Iran," says David Cohen, undersecretary for terrorism and financial intelligence at the Treasury Department. "That means pursuing this program in a way that will have a broader impact on the economic situation in Iran."
The sanctions are clearly hurting. The oil embargo is believed to be costing Iran about $4.5 billion per month in lost revenue. High inflation — conservatively estimated by the government at 25 percent annually — is causing the price of imported items to skyrocket. The Iranian currency, the rial, has lost half its value in the past year, and there is little prospect of an improvement.
In March, European governments pulled Iran out of the international bank messaging service known as SWIFT, effectively disconnecting Iranian banks from the rest of the international banking world. That step followed other measures that exposed foreign companies doing business with Iran to penalties.
"Iran has been dependent on its commercial relationships, dependent on its trade with Europe and Asia," says Zarate, now a senior adviser at the Center for Strategic and International Studies. "That's why this matters to them."
Whether the economic pain will prompt Iran's Supreme Leader Ali Khamenei to accept limits on his nuclear program is another question, however. The Treasury Department's Cohen thinks it might, pointing to Ayatollah Ruhollah Khomeini's 1988 acceptance of a cease-fire decision in the Iran-Iraq war.
"The supreme leader agreed to end that conflict in part because of the economic situation at the time," Cohen says. "So we have reason to believe that we can achieve a political change in Iran's approach as a result of economic pressure."
In addition, Cohen argues, the sanctions program can have an effect on Iran's nuclear program even without a change in Iranian thinking.
"It also disrupts the ability of those actors who are trying to build Iran's nuclear program from doing their work," Cohen says. To the extent that sanctions make it more difficult or more costly for Iranian engineers to import the parts and equipment they need, progress on developing the country's nuclear program could be slowed.
So, are sanctions working to make Iran less of a nuclear threat?
Some experts are skeptical.
"The regime has been bracing for this," says Mark Dubowitz, executive director of the Foundation for Defense of Democracies. "It has large foreign exchange reserves, and it is still earning $40 [billion] or $45 billion a year from oil sales.
"The supreme leader's economic expiration date — when his cash hoard falls low enough to set off a massive economic panic — may still be far off," Dubowitz argues. "If the [Obama] administration wants to bring that date closer, it needs to make clear that the United States and our allies will do everything in their power to destroy Iran's energy wealth unless the regime compromises."
If there is to be any sign of flexibility on the Iranian side, it is likely to come in the ongoing "P5+1" talks, with the five permanent members of the U.N. Security Council plus Germany. Those talks continue Tuesday in the Turkish city of Istanbul with a meeting of technical experts.