In case you’re like most American academics and are on vacation, you may have missed the fact that America is seriously turning up the heat on Iran.

The US has begun squeezing Iran’s fuel imports and access to financial markets in response to Iran’s refusal to halt its alleged nuclear enrichment activities. A controversial new US law has been signed by President Obama which will sanction any company (regardless of national origin) that exports refined petroleum products or provides financing to Iran.

Corporations and financial firms have already begun to comply with the new US law which goes well beyond the mandate of the United Nations sanctions regime:

First, reports emerged yesterday that BP was refusing to refuel Iranian passenger airplanes in the UAE (and later Germany and Britain). BP was under no obligations to refuse service to Iran Air under the laws or policies of the Emirates or Great Britain. It appears that BP was acting on its own to curry favor with the US government.

Second, the EU announced today that some planes from Iran Air are banned from European airspace, although the EU indicated that this ban was unrelated to UN sanctions. The timing of the announcement however appears suspicious in the eyes of Iranians.

Third, for the last few weeks a large number of companies have begun cutting back on sales of gasoline to Iran.

Fourth, the central bank of the UAE has frozen the assets of entities blacklisted by the UN for assisting Iran’s nuclear program.

America’s application of extraterritorial laws on foreign firms conducting business with a foreign power, is a rather bold effort (although hardly unprecedented, particularly in the area of international finance) to force global corporations to choose sides. The test of this approach will come when the US actually has to retaliate against a major corporation from a major power that refuses to play ball even after being given a few years to unwind the corporation’s exposure to Iran. Given Iran’s status in global politics, it is unlikely that European powers will resist this blatant violation of their sovereignty by the US; however, China may actively resist or at least lodge a complaint against the US at the World Trade Organization. China has already stated publicly that the US has overstepped UN sanctions. Whether the US would actually be willing to sanction a Chinese firm that does business with Iran is unclear since the US needs China’s continuing support for the sanctions regime and any future actions at the UN Security Council. (In the past, the US did sanction 46 Chinese firms under the Iran Nonproliferation Act of 2000.)

Iranian Reactions

Iran has mainly reacted to these developments defensively. Ayatollah Khameni urged Iranian citizens to conserve on electricity and imported goods. The head of the Iran-UAE Chamber of Commerce has stated that Iran will cut back trade ties with the UAE in response to its actions. Iran’s President has stated his country will defend its interests if Iranian ships are inspected in accordance with the latest round of UN sanctions.

Israel also confirmed this week that Iran moved radar equipment to Syria (although the movement may have occurred in mid-2009) in an effort to gain early warning if Israel launches a preventive attack on Iran. However, both Iran and Syria have denied the Israeli reports. Israel also accuses Iran and Syria of transferring short range and anti-aircraft missiles to the armed wing of Hezbollah in Lebanon.

Not So Grim?

So the situation looks tense, but I don’t think things are actually as grim as they appear.

If the past is a reliable guide, it is highly unlikely that these new US laws and the latest round of UN sanctions will produce policy changes in Iran or trigger a popular uprising leading to regime change. Iran is unlikely to be destabilized in this manner, although its citizens will undoubtedly suffer econmically. My hunch is that American diplomats realize this and that the real aim of the US strategy is to pinch Iran enough to bring it back to the negotiating table and to persuade Israel not to attempt a preventive attack while non-military options are being explored. Iran will probably return to negotiations as this buys time for their policy objective, which is likely to be the attainment of “nuclear latency” rather than actually building or testing a nuclear device. I am also skeptical that Israel would launch a preventive strike at this time given its disastrous diplomacy over the last year and its military’s poor performance in the 2006 War. Finally, the Iran issue is not very useful for the Obama administration. Managing another war would be a disaster for the current government both politically and economically. So a prolonged process of negotiation that regulates (as opposed to resolving) the tensions between Israel and Iran is probably the ideal solution for the US, at least until the President and his party are politically less vulnerable.

Of course, this is all just my hunch and I’d love to know what others think about these developments…