ECONOMIC SANCTIONS AND THE IRAN EXPERIENCE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83M00914R002800040051-6
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 20
• Document Creation Date: December 20, 2016
• Document Release Date: March 22, 2007
• Sequence Number: 51
• Publication Date: January 8, 1982
• Content Type: OPEN SOURCE

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MEMORANDUM FOR: DDCI
DCI
An unusually sophisticated and perceptive
..article on the question of economic
sanctions. Well worth reading.
Maurice C:-Ernst
NIO/Economics
5-75 FORM 101 USE PREVIOUS
Date 8 January 1982
GPO : 1981 0 - 345-783 i
 -8-- GI.A- IlLICL4QDLE ..6_ .. _._.~
Robert Carswell
ECONOMIC SANCTIONS
AND THE IRAN EXPERIENCE
ifty-two Americans were taken hostage in Iran on November
4, 1979. Ten days later, in circumstances to be related, President
Carter froze all assets of the government of Iran in the United
States and under the control of U.S. banks, businesses and indi-
viduals outside the United States. This action, and related mea-
sures taken later, deprived Iran of the use of more than $12 billion
in bank deposits, gold and other property. The President also cut
off most export and other transactions between the United States
and Iran and asked the U.N. Security Council to vote similar
sanctions. U.N. action was blocked by a Soviet veto on January
13, 1980, but other nations gradually reduced their commerce
with Iran. As the hostage crisis dragged on, these sanctions de-
prived Iran of critical supplies and spare parts and forced it into
expensive deals with unreliable middlemen.
The Iran-Iraq war started in September 1980, and by the late
fall Iran was bogged down in a costly war of attrition. Its receipts
from the sale of oil dropped to virtually nothing, and its lawsuits
to recover the $12 billion in frozen assets stalled or failed. Although.
Iran was able to keep some imports flowing, it found the volume
of supplies necessary to conduct a shooting war increasingly
expensive and hard to obtain. Its financial reserves were dropping
rapidly and, unless replenished, would have soon limited Iran's
ability to pay for imports.
We do not know precisely why Iran decided after 14 months to
agree to the Declarations of Algiers and release the 52 hostages on
January 20, 1981. Holding them had become an embarrassment
rather than a domestic rallying point. The issue diverted Iran's
leaders from their official duties and impeded efforts to gain
support against Iraq in the United Nations and from other
nations. These were undoubtedly important factors not connected
directly with any U.S. action.
But at the same time it seems clear that a number of U.S. or
U.S.-urged actions must have had an impact. The release of the
Shearman & Sterling. He served as Deputy Secretary of the Treasury from
1977 to 1981.
pODAte&? For-R e ne-2-007)
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248 FOREIGN AFFAIRS
hostages came as the result-or after the employment-of scores
of direct and indirect initiatives taken by-the United States and
foreign governments and by private individuals. Diplomatic mea-
sures such as the closing of the Iranian Embassy in the United
States and the deportation of some Iranians were part of the
montage, as well as various actions taken to rally political support
around the world against the Iranians. The abortive military
rescue attempt of April 1980 and the presence of U.S. carrier task
forces in the Indian Ocean may have heightened Iran's sense of
vulnerability. The successful action brought by the United States
against Iran in the International Court of justice and the broad
support of - the ' U.S. position in the United Nations were also
important. Finally, President-elect Reagan had made it clear that
negotiations would stop when he took office.
To appraise the full range of actions taken by the United States
or under U.S. urging is beyond the scope of this article. What is
clear, however, is that by January 1981 Iran was faced with a
practical certainty that, -unless it reached agreement with the
outgoing President Carter, it could look forward at best to contin-
ued isolation internationally, and to an indefinite freeze of major
financial reserves and long-term shortages of critical imports.
The objective of the economic sanctions was to help precipitate
this type of situation and thus to clarify the thinking of Iran's
- leaders and-assist in forcing a- solution. That objective was appar-
ently achieved. Since nonlethal foreign policy weapons that work
are always at a premium, it is worth reviewing this aspect of the
Iranian hostage episode for whatever guidance it may provide.
II
The first and most important U.S. economic sanction was the
blocking, or freezing, of the $12 billion of assets of Iran that were
under U.S. control. This was by far the largest blocking of assets
in U.S. history, and by far the most successful. It was controversial
with our Western allies, potentially threatening to the Saudis and
other foreign investors in the United States, who might view
themselves as potential future objects of U.S. sanctions, and raised
novel and often difficult questions of law and policy. It may also
prove a costly precedent.
In the beginning, no one in the United States or Iran knew
exactly how much had been blocked. Department of the Treasury
officials originally estimated more than $8 billion, but when a
census had been completed eight months later, the total exceeded
$11 billion and later topped $12 billion as interest continued to
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U.S. claimants were in a position to delay or prevent the return of
many of those assets. A negotiated settlement was the only way
out.
Apart from the very large amount of assets blocked, some $12
billion in total, the unique and unprecedented feature of this
blocking was that it ' included more than $5.6_ billion of deposits - ??
and securities held by overseas branches of U.S. banks. While all
U.S. blocking actions since World War II (e.g., against the People's
Republic of China in 1950, Cuba in 1962 and North Vietnam in
1970) by their terms have blocked assets under the control of U.S.
persons or institutions outside the United States, this was the first
time any significant. amount of such overseas assets had actually
ECONOMIC SANCTIONS AGAINST IRAN 249
accrue. This was an unexpectedly large amount, and the possible
use of these assets was the subject of much debate.
Although it was not universally understood, from the beginning
the blocking had a dual purpose, the release of the hostages and
the protection of the property claims of U.S. individuals and
corporations against Iran. The President's report to the Congress
on November 14, 1979 explicitly stated those objectives.
If the hostages had been released by Iran in the first few months,
the President might have been able simply to unfreeze the blocked
assets and let the U.S. claimants fend for themselves. But as the
impasse continued, U.S. claimants tied up the blocked assets with
attachments filed in courts all over the country. They also argued.
forcefully to the Administration and to the Congress that their
interests should be protected in any settlement with Iran. Thus,
after some months it had become quite clear that the release of
the hostages by Iran would also have to be accompanied by some
kind of financial settlement between the United States and Iran.
Iran would want its assets back when it returned the hostages, but
involving the extraterritorial effect of U.S. laws and interference
with the international banking system. By a stroke of his pen, the
President of the United States had immobilized over $5 billion in
deposits in other countries and kept them immobilized for 14
months.
The repercussions of this overseas blocking are by no means
sY- over. Some grasp of how the U.S. orders worked is necessary to
understand the impact and hazards that flow from the use of this
The blocking of overseas assets was justified on two grounds.
The first was that every country has a right to legislate and
exercise power over its nationals wherever they may be. This was
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250 FOREIGN AFFAIRS
a conventional U.S. assertion and has led in the past to bitter
confrontations between the United States and other countries. For
instance, during the Vietnam War the United States took the
position that the French subsidiary of the Fruehauf Corporation
was prohibited from carrying out a contract to sell vans to another
French company acting for the People's Republic of China. The
French court said French law governed the situation; it then
intervened in the management of the French subsidiary and
directed that the contract be honored. In this confrontation the
United States eventually backed down, but in other situations it
has successfully asserted economic power over property held by
Americans abroad, to the occasional consternation of its allies.
Moreover, both the U.S. case for blocking of the overseas
deposits and its capacity to make this effective were reinforced by
the structure and operation of the international banking and
payments system. Virtually all of Iran's financial reserves were
held in dollar deposits and the bulk of them in so-called Eurodollar
accounts. Those are accounts denominated in dollars maintained
by offices of banks located outside the.United States and princi-
pally in Europe (hence the name "Eurodollar").
For reasons rooted in history and practice, virtually all banking
transactions in Eurodollars clear through New York. Thus a
-payment by Iran from a dollar account'-in London- to an exporter
in Germany is made through a bank payments clearance system
in New York. The payment is electronically routed through New
York: Iran's London bank tells its New York correspondent bank
to pay the New York correspondent bank of the German exporter.
Since Eurodollar accounts operate through New York, the
United States asserted that it could effectively block those ac-
counts without resort to extraterritorial power simply by blocking
the use of the U.S. clearing or "cover" accounts, that is the dollar
accounts all foreign banks maintain with their U.S. correspondent
banks in New York to cover or facilitate payments. Although the
theory of utilizing a cover account as a basis for blocking overseas
assets had occasionally been asserted by Treasury's Office of
Foreign Assets Control, this was the first occasion when it assumed
real importance. The cover account theory has never been tested
in either a U.S. or foreign court.
The original freeze order blocked not only Iran's dollar deposits
held by U.S. banks abroad but also deposits held in other curren-
cies,for instance, an account maintained by Iran in francs at the
Paris branch of a U.S. bank. Other governments quickly expressed
their objections to that extensive_a U.S. extraterritorial reach, and
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ECONOMIC SANCTIONS AGAINST IRAN 251
since the aggregate amounts appeared not to be large, non-dollar
accounts at U.S. overseas bank branches were unblocked..
Within a few weeks after the blocking, Iran brought suit in
London demanding that the U.S. overseas bank branches imme-
diately pay over their blocked Eurodollar deposits. The banks
defended the suits on the ground that the U.S. blocking order
prohibited them from doing so, and asked foreign courts to give
effect to the U.S. blocking order. Later, after the United Nations
had voted to impose sanctions on Iran and the International
Court of justice had declared Iran's taking of hostages to be in
violation. of international law, the banks urged foreign courts as a
matter of national policy to support positions on international law
that their governments had already endorsed and accordingly to
deny relief to Iran.
The situation became more complicated when the Administra-
tion permitted the banks to set off loans that they had made to
Iran against the overseas deposits of Iran, that is, prematurely to
pay off loans they had made to Iran from the Iranian deposits
they held. The banks promptly took over two billion dollars in
setoffs, and the validity and effectiveness of those setoffs also
became an issue in the U.K. litigation. The Administration li-
censed these overseas setoffs in part to strengthen the banks'
litigating posture but also in recognition of the fact that setoffs
might - provide a quick and simple way to settle a substantial
theory or another in preventing Iran from using these overseas
. While the United States was successful for 14 months on one
amount of claims by U.S. parties against Iran and from assets that
were only tenuously within the control of the United States.
assets, no one was under any illusion that these assets could later
Iier..Majesty's Government might be slow to help the Iranians
wnile they held hostages, it seemed quite unlikely that it would
Lion of creditors in the United Kingdom (and elsewhere). While
States to the benefit of U.S. creditors and to the possible deroga-
..be vested by the U.S. Congress and brought back to the United
that might have for sanctity of contract and equal protection of
bank offices in the U.K. and confiscated solely on the basis of
legislation enacted in the United States, with the implications
'- _' No foreign government was prepared to take rigorous action
dollar assets blocked by the United States. Privately, some ex-
under its control; however, they did nothing to help Iran free its
such as blocking Iranian funds denominated in its currency or
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252 FOREIGN AFFAIRS
pressed the view that the United States had overreacted, but they
agreed that if the United States felt action was necessary, extra-
territorial blocking was preferable- to the use of force-at least so
long as no oxen of theirs were gored and the blocking, and any
unpleasant fallout therefrom, was restricted to U.S. banks and to
dollar accounts. They also were clear that "blocking" was infi-
nitely preferable to the U.S. government's "vesting" or seizing the
Iranian accounts. (Vesting, which would have required legislation,
was urged from time to time in various quarters to demonstrate
the seriousness with which the United States viewed the situation,
but was not seriously pursued.)
Since the final settlement embodied in the Declarations of
Algiers rendered litigation over the overseas blocking moot, one
can only speculate whether in the end the courts of the U.K., and
of France, West Germany and Turkey where litigation was also
initiated by Iran, would have supported the blocking. Some
knowledgeable legal experts think Iran in the end might have
prevailed, but it would have taken a very long time and interven-
ing political events might have altered the course of the litigation.
Whether that judgment would have proved correct is not partic-
ularly important, because by the end of 1980 it had become clear
that the U.S. blacking action-would be effective i'ndef n tely unless
the foreign governments changed their positions and supported
Iran. They were-not about to do that while the hostages were
held.
The United States devoted considerable resources to keeping
the Iranian assets blocked. The Department of justice monitored
and intervened in lawsuits all over the United States. It engaged
counsel in the U.K. and France. All during the period the hostages
were held, the Treasury published detailed regulations and inter-
pretations, and Treasury officials conferred with representatives
from the hundreds of banks and corporations that held blocked
assets. The $5.6 billion in blocked overseas deposits were held by
ten U.S. banks, Bank of America being the principal one. Because
of the size and novelty of that blocking and the likelihood that
those assets would prove crucial to any settlement and hostage
release, Treasury made a particular effort to understand the claims
those banks had against Iran as well as the blocked assets they
held. When the time came to settle with Iran that familiarity
.proved indispensable.
Ill
Very few exports moved from the United States to Iran after
the hostages were seized, because U.S. longshoremen refused to
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ECONOMIC SANCTIONS AGAINST IRAN 253
load cargoes destined for Iran. Three days after the hostage taking,
the President prohibited U.S. companies from purchasing oil from
Iran. A week later, at the time Iran's assets were frozen, the
President also proscribed certain exports to Iran and transactions
with Iran. The scope of the proscription -was expanded as the
months passed, and in April 1980, after U.N. intermediation had
broken down, all imports from Iran and all. U.S. exports to Iran
(except for food, clothing and medicine) were formally prohibited.
The sanctions against Iran imposed by allies of the United
States were considerably less rigorous. In early December 1979
high-level U.S. officials visited the capitals of the U.K., France,
West Germany, Italy, Switzerland and Japan and discussed sanc-
tions those countries might impose. Simultaneous efforts were
pursued to have sanctions mandated by the U.N. Security Court
cil. After the U.N. effort had been frustrated by the Soviet veto,
most of the allies of the United. States unilaterally imposed the
limited array of financial and export sanctions for which they had
voted at the United Nations. Basically these amounted to a
prohibition against the export of military supplies to Iran and an
agreement not to extend new credit to Iran. Some of them, and in
particular Japan, which had been the largest purchaser-of Iranian
oil, at first refused to pay premium prices for Iranian oil and
eventually stopped purchasing oil from Iran.
Many allies of the United States were concerned that a success-
ful embargo might so weaken Iran that it would descend into
chaos or come under Soviet influence. Others had large numbers
of nationals still working in Iran and extensive contractual or
financial interests in Iran that they were loath to jeopardize. Some
felt that diplomatic approaches they were conducting gave more
promise of results.
. Administration of the U.S. sanctions was relatively simple be-
cause as a practical matter major U.S. companies had little
interest in trading with Iran. Over the period of 13 months when
U.S. controls were in effect, there were indeed several hundred
inquiries or applications for licenses to export to or import from
Iran, but the great bulk of these were by small companies or for
minor items. A few hardship situations were licensed, but most
applications were denied. Only a handful of significant enforce-
ment situations involving U.S. persons were processed during the
whole period.
An extensive effort was also made to monitor non-U.S. trade
with Iran, and when instances of shipments of military goods were
identified or apparent transgressions of sanctions discovered, the
friendly countries involved were contacted. With varying degrees
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254 FOREIGN AFFAIRS
of enthusiasm, they usually sought to enforce their sanctions.
Assessing the effect of the trade sanctions is difficult, particularly
since the results of economic mismanagement in Iran can easily
be confused with problems arising from externally caused short-
ages. Many units of the Iranian armed forces had been equipped
from U.S. sources and were dependent on those sources for
resupply; many of Iran's key installations, particularly in the oil
and gas sectors, had been constructed and maintained by U.S.
contractors. Iran was thus uniquely vulnerable to U.S. sanctions.
But even though the sanctions largely prevented direct resupply
of these critical areas, Iran apparently was able, by paying exor-
bitant prices through middlemen, to meet its most critical needs.
After the start of the war with Iraq, the situation rapidly worsened,
and by the end of 1980 it is likely that the U.S. sanctions against
exports were having real impact.
There is insufficient available information on which to base an
assessment of the effect of sanctions imposed by allies of the
.. United States. Some military equipment Iran badly wanted was
not shipped from one country; transshipment of some spare parts
was stopped by another; but export of key oil and gas equipment
parts was permitted by a third. There was no way for the United
States to monitor more than a portion of what went on. Hence,
the best- that-can-be- said now is =that the sanctions -undoubtedly
caused Iran -difficulties but. probably, not insuperable ones.. - . -
In retrospect, it appears that by early January 1981 Iran had
decided to release the hostages if it could make a satisfactory deal
for release of the frozen assets. Demands for political apologies
and $24 billion in guarantees had been dropped. What remained
was to find a formula by which U.S. private claims against Iran
could be resolved, by which some kind of face-saving commitment
could be given by the United States to assist in recovery of the
Shah's assets and, most important, by which at least a significant
portion of the frozen assets could be returned immediately to Iran.
About one-third of the $12 billion in blocked assets was held by
banks and businesses in the United States. To return more than
a small percentage of those assets to' Iran, some 20 courts across
the country would have had to discharge attachments and other
forms of process. That could not be done on any time schedule
then forseeable. The Federal Reserve Bank of New York held
another $2.4 billion in cash, securities and gold owned by Iran,
and. both the Attorney General and counsel to the bank had
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ECONOMIC SANCTIONS AGAINST IRAN 255
concluded it could obey a presidential order to return those assets.
So those funds could be made available-but Iran wanted more.
Tl., 1~.sl.~r~r?sa nc Tr-nn'e 'aecete ws.rs+ }-Jnt-1rPra nvPr etc Ahn,it R54;
both sides were getting educated in the complications of the
situation. The banks worked with the Treasury and the Federal
Reserve Bank of New York, and eventually with a specially
retained accounting firm, to develop accurate numbers on all
outstanding loans and deposits-a considerable job in view of the
Dllllon kincluuing almost OoVV 1111111V11 lit 1iilCICSL) WGCS'JL1 uF,;YvZll
in the overseas branches 'of U.S. banks (mostly in the U.K.), free
of attachment, and could be returned to Iran if the President
cancelled. his blocking order. But the banks had substantial legal
arguments for refusing to return the deposits until Iran settled its
loans from them on some acceptable. basis. Since some of the
banks had agreements to share any repayments they might receive
from Iran with foreign banks who had participated in making
particular loans to Iran, it was difficult to determine the amounts
necessary to pay off the loans. In addition, no one knew whether
Iran intended to refuse to pay some of the hundreds of outstanding
loans-because they were "debts of the Shah"-or how much
interest Iran thought should be paid by the banks on the blocked
accounts.
Attorneys for the banks had been meeting secretly since May
1980 with the U.S., U.K. and German attorneys for Iran. Treasury
and State Department officials were briefed on the meetings as
they occurred, and although progress seemed very slow, at least
very large amounts involved and absence of cooperation from
;rte fir::. Iran.
Senior bank officers understood that at least some of the deposits
The situation was delicate, and the terms of settlement elusive-
an
t
" I h d k f 1981 I U K d
would have to be returned concurrently with the hostage release.
No bank wanted to accept responsibility for delaying the hostage
release, but the banks also wanted to improve the prospects for
the payment of several billion dollars of dubious loans. The
President had no legal power to force loan settlements. A public
' T.. dispute with the banks would be difficult to control and might
well derail the Algerian intermediation that began in late 1980.
1 s . .
., n t e secon wee o Januar y , ran sen
German attorneys to New York to work on the details of a
settlement involving the overseas assets, and the. increasing realism
"==Y = of Iranian demands as transmitted through the Algerians signalled
Iran's resolution to end the crisis. -
The final two weeks of around-the-clock negotiations were
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256 FOREIGN AFFAIRS
conducted in various segments in Washington, New York, Lon-
don, Algiers and Tehran. This was an extraordinarily short time
in which to complete a transaction of this size and complexity.
That it closed as President Reagan was returning from the inau-
guration ceremonies was a testament as much to endurance and
luck as to skill and planning.
It had been clear for some time to everyone-the United States,
Iran, the Algerian intermediaries, and the private claimants-that
all U.S. claims against Iran could not be settled in advance of the
hostage release. After a week of tough bargaining on language,
agreement was reached on the framework by which non-bank
claims against Iran, and by Iran against the United States, would
be resolved-through international arbitration based on rules
formulated several years ago by a U.N. agency, UNCITRAL (U. N.
Commission on International Trade Law) B
s
uatlon o non- '
syndicated loans and of other -U.S. claimants against Iran--on
any realistic
o
_-7 %.&N-aiL with Lilt; bank loans, but substantially improved the
f
V11 cash k5500
million from the overseas deposits and about $2.4
billion in assets
returned by the Federal Reserve Bank of New York).
T. -Il..-L _ _
pay o its syndicated bank loans, that is, the loans made to
Iranian entities by syndicates of U.S. and foreign banks. Payment
of those loans used up almost $3.7 billion of the nearly $5.6 billion
of blocked overseas deposits. Iran agreed that another $1.4 billion
would -go--into an. escrow account to secure payment of non
syndicated loans made by U.S. banks and contested interest of
about $130 million paid by some U.S. banks on Iran's overseas
deposits. Iran ended up.on January 20 with most of its foreign
loans paid off, and with a little less than $3 b11'
,
reuce to
h
amount of cash it demanded be returned and announced it would
cc
p
o
"5 i icu t to work out.
CUIL to work out.
Then, on January 15, 1981
the break came Iran d d
procedure for
reinstating the bank loans and for Iran providing security
for the
A: cc
IA
reinstated loans was r
re
gn immunity placed its assets beyond the reach of U.S. a
x
?_.va v~,u ii- 1.11cOc ulspuieS.
Iran was taking extrem
i e negotiating positions and asserted that
its sove
u
q pment an p ants, -R
and uncompleted contracts for both military and civilian goods.
mparlson ..with the situation in November' 1979,
when' the hostages were taken.
At that time U.S. corporations were engaged in hundreds of
disputes with the new revolutionary government of Iran involving
incomplete construction projects, expropriation or nationalization
of oil, gas and mineral properties seizure F 1 1 ; .
i d 1
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ECONOMIC SANCTIONS AGAINST IRAN 257
claimants and creditors. In addition, U.S. banks (individually or
in syndicates) had extended more than $1.8 billion in loans and
credits to various Iranian government units. The prospects for
repayment of those loans and credits, like the prospects for settle-
ment of the many claims, were uncertain.
. The settlement provides for binding,-impartial arbitration to
resolve the various contractual disputes. Almost two-thirds of all
bank loans have been paid off, and the balance will be resolved
either through negotiation or by binding, impartial arbitration.
Payment of arbitral awards will be secured by Iranian assets held
by a third party escrow agent.
The history of recovery by U.S.- companies or banks from
revolutionary governments has not been good. Cuba has paid
nothing. The People's Republic of China settled after 30 years for
'`. 40 cents on the dollar. In that context, the settlement with Iran
looks very good. Even if it is subsequently modified by agreement
States in the- final negotiations is almost certainly responsible for
or court order, the overall position of U.S. claimants has been
improved from. the unpromising status of two years ago. The
leverage that the blocking and the sanctions` gave the United
that result. Iran could not get its assets back without agreeing to
a framework to resolve legitimate commercial and financial
claims. -
While it may, be decades before all U.S. commercial Droblems
~_'..._._.. ~~S""""?'S a wLLJ nuaw %-auxu III LUC 1u1d1 WCCK oy Ine Ireeze,
--they also came very close to frustrating or delaying the release of
?,,. were a short-term success. But it is equally clear that, because of
practical purposes-are now history. It seems clear now that they
-me nostages. I tie margin of success was very thin.
Once that type of rationale is accepted, it is unnecessary to
_.;.,,_.. pursue whether the particular economic sanction in the short or
.;.necessary; there is no other appropriate response available; a
political or military response is too risky; the United States must
=. =v< show leadership and it will take too long, .or it is too doubtful a
nc
ion oy t e nited States. Rather than work
through a rigorous analysis, they justify the imposition of a
Foreign policy makers do not always give weight to the appro-
;:-:,: priateness, or cost-effectiveness, of the imposition of a unilateral
economic sa
t? h U
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258 FOREIGN AFFAIRS
long run will hurt the United States more than the country
sanctioned or even whether it will be effective. The fact, or
appearance, of action, combined with the perceived lack of any
other immediate response, carries the day. Thus it is possible to
announce an immediate grain embargo against the U.S.S.R. in
response to the latter's aggression in Afghanistan before establish-
ing whether or how the embargo could be effective and what its
cost would be. The fact that the embargo later proves domestically
costly, is undercut by key allies and (depending on whose analysis.
one accepts) is only partially or marginally effective, can still be.
answered by the generalized themes that an immediate response
was necessary, the United States must lead, etc.
A similar response could be made to the question of whether
the blocking of Iran's assets, particularly the overseas assets, was
appropriate. For ten days following November 4, 1979, Iran had
imperiously refused to take action to obtain the release of U.S.
diplomatic personnel being held by an irregular student group
and indeed was holding the U.S. charge d'affaires at its Foreign
-Ministry. Mobs-were chanting and burning the U.S. flag in front
of our embassy. U.S. property in Iran had been taken . without
compensation. Economic spokesmen for Irani had stated that Iran
would not honor-the-"Shah's- debts," and on November 13, 1979,
its acting Finance Minister Bani-Sadr threatened to withdraw
Iran's dollar deposits from U.S. banks -and attack-the dollar. All -
this was being carried with great prominence in the world media.
So far as any real threat to the dollar was concerned, there was
a surrealistic quality about all this. When Bani-Sadr made his
threat, Iran had somewhere between $1 billion and $2 billion in
deposits available to dump on the market in an "attack" on the
dollar. That would not have caused much of a ripple in the $400-
billion Eurodollar market, where daily foreign exchange trading
normally exceeds $100 billion by some margin. Perhaps it could
have dumped another $6 billion.as dollar securities were sold and
time deposits matured over the next year. U.S. reserves of over
$20 billion were available, plus assured support from other central
banks against a renegade. The risk of Iran destabilizing the dollar
with that level of resources was not significant.
But in the political heat of the moment the naive Iranian
rhetoric was blandly accepted, and the threat to the dollar was
presented to other nations as a major reason for action. Faced
with a unique situation in which psychological elements'played a
large part, it was not difficult to conclude that the President had
to do something. The United States could not afford to be seen as
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ECONOMIC SANCTIONS AGAINST IRAN 259
a paper tiger. Since Iran had threatened of moving fast was readily
against the United States, the necessity fa y_ The deci-
justified. Acceptable alternatives were in short supply.
to block was easily taken.
Fourteen months later, events appeared to have validated the
decision. The, blocked assets proved a key
obtaining the hostage release. for therblockwar, the ed assets card he
isolation of Iran, a growing need
ion
prospect of dealing with a hostile-sounding
e ensuingettlementtnot
combined to force Iran to negotiate. Th
and
only freed the hostages but also put virtually favorab a pos'tionsthan
claimants against Iran in a much
they had been prior to the seizure of the hostages.
in
costs achieving ts its objectives,
Even if the blocking was successful
limitations,
however, it is important to assess
justification for this type of
rather than use it uncritically as a j
unilateral sanction in a future international ovedsmuchr
IV- P ran, easier to
1d
properties worth at least ten times-1 d ith amusement by Pres-
w
nationals in Cuba, U.S. tra e wit
assets in the United States were blocked.
hose blocked by the United
in 1979.
In 1962 after Cuba had nationalized properties of various U.S.
h C ba was cut off, and Cuban
lsolauvil v. V.,.. - -- --
mained on the books until the claims settlement vvt
w
. People's Republic, the bloc mg
25
:... in time the trade sanctions served only to reinforce the -year
- __ . rr.m r .bingt_ These sanctions re-
U.S. blockings since "or
impose than to remove and sometimes more an embarrassment.
than a positive influence on policy.
In 1950 during the Korean War
f North Korea and the People's
.with and blocked the assets o
S. Sasses seized by the under U.S. control
Republic of China. Since the blocked
f the U
l
.
o
ue
had only a fraction of the va
as classically ineffective, while
k'
States, the U.S. blocking was regar e
ident Castro. The trade sanctions have been quite successful in
ments
d
g
--- - -
wisdom of that policy involves ju
policy alternatives toward Latin
f oAmeric, ntataonsuwithsvar'ouis of our
sanctions have created nasty on
allies, have been economically costly o bin oduc ng hanges in
and have thus far been ineffective P
States
,
the politics or policies of Cuba.
cut off trade with and blocked the
S
tates
In 1970 the United
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260 FOREIGN AFFAIRS
assets of North.Vietnam, and after the fall of Saigon and Phnom
Penh in 1975, did the same with Vietnam and Cambodia. The
principal effect has been to reinforce the isolation of the United
States from that area of Southeast Asia.
The only other sanctions that combined blocking and a trade
embargo were against Rhodesia during the 1970s when the United
States, along with some other nations, implemented the U.N. vote :
to impose sanctions against Rhodesia. Since South Africa and
various other countries did not join in the U.N. action, the
sanctions were only marginally effective. In addition, it soon
became clear that the embargo on Rhodesian chrome was making
the United States dependent on chrome from the U.S.S.R. and,
at least in the view of some, hurting the United States more than
Rhodesia. That led to a congressional modification of the sanc-
tions through the Byrd Amendment .(reversed in 1977), and the
sanctions themselves were rescinded when Zimbabwe was estab-
lished two years ago.
In this list the sanctions against Iran stand out because they
were effective and short-lived. This success may lead some observ-
ers to conclude that there is more potential in the use of sanctions
than the China-Cuba-Vietnam episodes 'indicate. That . is not
likely to be the case.
The Iran situation was unique in at least three respects. First,
the blocking was keyed to an event (the hostage seizure) that
could be quickly resolved, and the blocking itself was therefore
destined to have the same resolution. Second, by accident of
history a very large amount of Iranian assets was under U.S.
control, far larger than the U.S. assets under Iran's control. Third,
the principal allies of the United States also had vital interests to
protect in Iran. Thus the United States had extraordinary lever-
age, a condition that did not exist in the China-Cuba-Vietnam
situations and is not likely to be repeated.
For at least five years the U.S.S.R. has been careful to owe more
to U.S. banks and corporations than the aggregate Soviet deposits
and assets under direct U.S. control. That is true of most countries,
particularly those that like to posture against the United States_
Only Saudi Arabia has a significantly larger amount of deposits
under U.S. control than its debts and obligations to the United
States. But anyone who believes this gives the United States
substantial leverage over the Saudis fails to appreciate that the
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' the system evolved, and it is presently the most efficient way to
transactions to clear through New York. That is historically how
There is no law or economic theorem that requires Eurodollar
in the Eurodollar market or in a general shift away from the
z n... handle the very large volumes of transactions generated. The
`Y =Y ~ international financial and banking system would ultimately de-
the view that the intrusion of political considerations into the
governments are not enthusiastic over this kind of prospective
extension of U.S. power. This lack of enthusiasm is particularly
tion would not be forthcoming. It is understandable that foreign
to foreign governments early in the Iran crisis indicated coopera-
ECONOMIC SANCTIONS AGAINST IRAN 261
Saudis also have massive assets outside of U.S. control and that
cessation of Saudi oil sales would seriously affect the U.S. economy
well before the Saudis would run out of financial reserves.
It is now important to emphasize again what made the Iranian
blocking effective-this was the U.S. decision and ability to block
dollar accounts outside the United States. This exercise of extra-
territorial power meant the difference between depriving Iran of
$6 billion and $12 billion. It also demonstrated that the United
States has the theoretical capacity to block any dollar account
maintained anywhere by a U.S. bank or by a foreign bank. As
discussed earlier, virtually all transactions in dollar accounts must
clear through a cover account in a. bank in New York, and the
United States has today the theoretical capacity to block that
cover account and clearance in the United States. In the Iran
blocking the United States made it clear it was not blocking dollar
accounts maintained for Iran by foreign banks, and Iranian
transactions in U.S. dollars took place through the cover accounts
of foreign banks in New York all during the hostage crisis. That
the reach of the U.S. blocking was- limited to U.S. banks.was
simply.a recognition of the practical limits ofU.S. power.
In practice, as opposed to theory; it would- be-mechanically
difficult, perhaps impossible, to identify which transactions in a
foreign bank's cover account actually involved Iranian money.
Whereas the United States by various processes can obtain what-
ever information it needs from U.S. banks, it has no comparable
control over foreign banks unless the foreign- bank's governing
authority cooperates with the United States. Tentative approaches
- prevalent among central bankers, who traditionally have taken
stroy the system-and in this they may well be correct. It is also
probable that an extension of power beyond that exercised would
Y?Y_ = have resulted either in a change in the way clearings are handled
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262 FOREIGN AFFAIRS
conventional banking wisdom is that a clearing system must be
backstopped by the central bank of the country where the clearing
system operates. Only the Federal Reserve (the U.S.. central bank)
can provide enough dollars and influence to guarantee that a
dollar, clearing system will work in the event of a cataclysm. The
Bank of England can produce pounds sterling without effective
limit-but not dollars.
Hence, the argument concludes, dollar clearing systems must
be located in the United States where the Federal Reserve con-
ducts its business. It is at least debatable that this conventional
wisdom stands up today, in a world where at least $400 billion is
resident outside of the United States, where instantaneous elec-
tronic transfers significantly alter the terms and the risks of a
clearing system, and where laws other than those of the United
States may govern significant dollar transactions.
Certainly the human mind is capable of developing ways to
effect clearings outside the United States. And if an alternative
clearing system proved too expensive or hazardous to set up and
if Eurodollar holders grew sufficiently concerned about the present
system, they could always move some, or eventually all, of their
assets and transactions out of the dollar. Such a movement would
probably trigger a significant decline in the exchange value of the
dollar and finish the dollar as the world's premier reserve currency.
On balance, most observers conclude that the dollar's status as
the world's reserve currency has bestowed significant advantage
on the United States. The loss of that status would be potentially
serious.
A general concern was expressed at the time of the Iranian
blocking that even the mere exercise of the power to block-
particularly the extraterritorial feature-would cause a deposit
and loan movement from U.S. banks and from the dollar gener-
ally. The United States took the view that the situation was
unique because Iran had been recognized as a unique transgressor,
beyond the pale of acceptable international conduct; no respect-
able nation need worry. As part of the January 20 settlement and
concurrent with the hostage release, all exercise by the United
States of extraterritorial power was terminated, and foreign bank
syndicate lenders were paid off on the same basis as U.S. lenders.
The talk subsided, but the lawyers and the bankers have learned
the lesson of what the United States can do.
The figures on the disposition by OPEC countries of their 1980
surpluses recently became available, and they do not provide
assurance that all is forgotten. OPEC countries continued to invest
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ECONOMIC SANCTIONS AGAINST IRAN 263
heavily in dollar-denominated assets in 1980, but there has been
h
d i
n t
e
a noticeable decline in the proportion of OPEC assets hel
form of direct claims against U.S. banks and their major foreign
branches. In 1979 about $16.5 billion of the $40 billion OPEC
increase in claims against the international banking system was
held with U.S. banks. In 1980 only $1.1 billion of the correspond-
ing $44 billion increase was held with U.S. banks. OPEC deposits
with U.S. banks were not reduced in 1980, but new dollar deposits
were made with foreign-not with U.S.-banks. There are a
number of possible reasons for this change in policy by OPEC
countries, but among them may well be a reaction to, or fear
arising from, the Iranian blocking.
One can only speculate as to whether the prompt action of the
United States in terminating the blocking after the hostage release
ll
will be reassuring, or whether the use of the blocking sanction will
f
rom . .
result in a permanent shift of OPEC dollar deposits
banks. Since deposits are the lifeblood of the banking business and
the core of banking relationships, such a shift could be expensive.
The loss of the deposits would not cripple U.S. banks. They can
buy the OPEC deposits from the foreign banks that receive them,
but that will increase the cost to U.S. banks and deprive them of
direct contact-and* future influence-with important customers.
The long-term price, if any, is therefore not yet clear. What is
clear is that a future blocking will be evaluated by a more
knowledgeable and critical audience.
n
----
longer term have an auvcix effect o
manufacturers. The United States already has a reputation as a
artner that breaks contracts for political reasons. The Iran ex-
diversify their purchases and contracts, even at some increase i
cost, to avoid unnecessary dependence on any one country.
The foreign financial community also worries about another
:_< ..
`; . economic weapon that the United States could have used, but did
s -.. not, in the Iran episode. In addition to blocking the Iranian assets
under its control, the United States could also have seized, or
r
'
p
perience can only reinforce the trend among some countries. to
.
i'~c;fn
s debts to
vested, those assets, and then used them to pay off Iran
d
claimants. For a foreigner with investments in the dollar an
U
S
.
.
k~".:rr
in the United States, that kind of action would have been pro-
vested
s
di
,
_ _
squieting. is a? a+?
1UUL1Uly
of the nationals of some other country when some new unexpected
,. ;._._.
nom.
crisis develops? The only sure protection for a foreigner with that
r;.
.
;
kind of concern is to pull out. Such vesting was urged by some
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264 FOREIGN AFFAIRS
during the Iranian crisis, but resisted by the Administration
because of clearly foreseeable and serious consequences to the
dollar, and also because an asset once vested is hard to preserve
and return.
---on-multinational cooperation; If key governments were able to act
together, financial sanctions could be designed that would be a
good deal more effective in some situations, and easier to admin-
.ister, than trade sanctions. Most significant trade transactions in
the modern world require the use of credit and a payments system.
A relatively few countries control that system, and could admin-
ister almost any level of controls. But absent a joint program,
financial sanctions are not likely to be effective, and run the grave
risk of harm to our financial institutions and to the system.
The past policies of the United States have significantly limited
its future options to use economic sanctions generally. There is,
for instance, little the United States can do unilaterally that would
visit economic punishment on the U.S.S.R. Those options were
used up decades ago. The large volume of U.S. lending in the last
20 years to both friendly and potentially hostile countries almost
ensures that unilateral sanctions will be very costly to the United
.States and with results much more likely to parallel those-obtained
against China and Cuba than the impact on Iran. Special situa-
tions may arise from time to time, but it is quite unlikely that the
United States will benefit from a repetition of the factors that
As one looks at the possible use of financial sanctions in partic-
ular, in possible future situations, it is this last factor that stands
out. Financial sanctions, such as the Iran blocking, can be effective
in special situations, but as with embargoes oes or more targeted trade
control ,their effectiveness in more eneral'
assets not only created negotiating complications but
involved both short- and long-term costs that cannot yet be fully
assessed, as well as risks of a major change in banking practice
that could seriously affect the status of the dollar as the world's
principal reserve currency. Finally, it must again be emphasized
that the degree of leverage the sanctions exerted-whatever its
exact weight-depended on a high degree of cooperation by other
countries.
VII
In sum, the financial sanctions employed against Iran over the
hostage issue were effective because of special circumstances that
differentiated the situation sharply from other cases where eco-
nomic sanctions had historically been attempted. And the freeze
of Iranian
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ECONOMIC SANCTIONS AGAINST IRAN 265
made the Iran blocking a success.
I conclude that, when the next international emergency arises,
U.S. policymakers should exhaust every possible avenue of mul-
tilateral cooperation before considering unilateral sanctions-and
should be prepared to accept even substantial modification of
what the United States itself might deem desirable in order to
achieve a united front with other major industrialized countries
(and with key regional nations if necessary). Only if such efforts
fail or are clearly inadequate should the United States consider
moving to unilateral economic sanctions-and before actually
deciding to do so it will be important to take the time to assess the
costs to the United States of any proposed actions involving such
sanctions.
The United States can no longer afford the luxury or cost of
leadership when our allies do not follow. The spectacle of the
United States saying publicly what it will do if others join, but
only if they join, is an option thus far largely avoided. No one
likes to be tough with a friend, but friendship does not prosper in
an atmosphere of inequality. A unilateral blocking that weakens
the dollar or causes billions of dollars of losses for U.S. banks and
other U.S. creditors may make a vivid ideological point, but the
costs should be evaluated in advance.
?.amrrN::i~??~~
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