38. Intelligence Memorandum Prepared in the Central Intelligence Agency1
Iranian-US Economic Sanctions:
Impact and Reactions
[portion marking not declassified]
Iran’s revolutionary leaders appear determined to continue their head-on conflict with the United States. The Ayatollah Khomeini and [Page 88] his advisors now believe they have the opportunity to extract retribution from the United States for its past support of the Shah. Furthermore, Khomeini undoubtedly is using the anti-US campaign to revitalize his revolution and to distract attention from the country’s pressing domestic economic problems. The Ayatollah and his entourage, increasingly carried away with revolutionary zeal, are showing little concern for the impact of their moves on Iran’s economic and political future. [portion marking not declassified]
Economic Moves to Date
The Iranians have used a number of economic weapons—some pre-dating the most recent seizure of the US embassy in Tehran—in their attempt to apply pressure to the United States:
• All banks and insurance companies—including US holdings—were nationalized prior to the current flareup. While compensation for the value of US investments (estimated at $100 million) has been promised, payment has not been made.
• Oil shipments to US companies were banned following US action to prohibit the import of Iranian petroleum. While adding some pressure on oil prices, this action will not have a major effect on the world oil market so long as Iranian production is not cut.
• Withdrawal of Iranian funds from the United States and from foreign subsidiaries of US banks was threatened. Initially causing some confusion in currency markets and driving down the value of the dollar somewhat, this action—even if not thwarted by a US blocking of Iranian assets—would have had little impact as long as the funds were placed in dollar-denominated accounts.
• Remaining US investment in Iran (estimated at $300 million) reportedly has been nationalized. Considerable amounts of equipment and supplies owned by US contractors also are involved. [portion marking not declassified]
The United States, for its part, has (a) frozen Iranian assets, (b) banned the import of Iranian oil, and (c) halted all shipments of military supplies. [portion marking not declassified]
Future Economic Moves by Iran
Although the opening salvos have been fired, neither Iran nor the United States has wheeled out its major economic guns. Iran’s prime economic weapon would be the complete cutoff of oil exports. Variations could include: (a) reducing oil exports only by the amount going to the United States or to US companies or (b) extending the embargo to cover countries supporting US policy. The impact of these measures would depend on the reaction of other oil producers who could: (a) do nothing (possible), (b) cut output in support of Iran (unlikely), or (c) increase output to offset the shortfall (possible). [portion marking not declassified]
[Page 89]Unless it felt seriously threatened by the United States, Iran probably would prefer to take less drastic actions. These might include:
• Refusing to accept dollars for payment of oil. With 70 percent of oil payments to Iran in dollars at present ($15 billion annually) this would cause minor, short-term disruptions in world currency markets.
• Blocking debt payments to the United States. Total Iranian debt to the United States amounts to about $3 billion, with debt-service payments probably running over one-half billion dollars a year. US banks reportedly have seized an estimated $1 billion of frozen Iranian assets to cover themselves against this contingency.
• Converting all liquid dollar assets to other currencies. This would put substantial downward pressure on the value of the dollar. [portion marking not declassified]
Possible US Countermoves
Most US economic countermoves would involve cutting Iranian imports. The Iranian import picture has changed drastically since the revolution. Exports to Iran, led by capital goods and semi-manufactures, have fallen about 70 percent in value so far this year compared with 1978. Food imports, down 25 percent from last year, still cover a quarter of Iranian requirements. [portion marking not declassified]
Iran is especially dependent on imports for the following agricultural products:
• Vegetable oil imports equal about 80 percent of domestic consumption; shortages have already been reported.
• Corn, sorghum, and other feed grain imports cover nearly 60 percent of domestic consumption; stocks are low.
• Rice imports provide about 40 percent of domestic consumption; current stocks are probably sufficient for one to two months.
• Wheat imports provide 15 to 20 percent of consumption; current stocks probably equal one and one-half months of supply.
• Mutton and beef imports supply about 20 percent of domestic consumption; current stocks are reportedly very low. [portion marking not declassified]
The United States, West Germany, Japan, the United Kingdom, Italy, and France (in that order) have been Iran’s major suppliers during the past several years. These countries provided roughly 70 percent of Iran’s imports in 1978. This year, because of the increased importance of food items and Iran’s attempt to diversify trading partners, Australia, New Zealand, and some less developed countries—especially sugar exporters—have grown in importance. [portion marking not declassified]
About three-fourths of Iran’s international trade arrives at the Persian Gulf ports of Khorramshahr, Bandar Khomeini, Bushshr, and Bandar Abbas. Khorramshahr, traditionally the best equipped and most modern port (surpassed by Bandar Khomeini in traffic in 1978), primarily handles private sector trade, while Bandar Khomeini is the port of [Page 90] entry for government imports. The port of Khorramshahr is up the Shatt al Arab River, which is used both by Iran and Iraq. The remainder of Iran’s foreign trade passes through rail and road links with Turkey and the Soviet Union or through minor ports on the Caspian Sea. [portion marking not declassified]
Iranian Vulnerability to Economic Sanctions
The principal economic levers available to the United States include: (a) a partial or complete unilateral trade embargo against Iran, (b) a collective embargo by the United states and its main allies, and (c) a US naval blockade. Of these, a naval blockade would be most disruptive to the Iranian economy. [portion marking not declassified]
Unilateral Embargo on Exports
An embargo imposed by the United States alone would exert only slight economic pressure on Iran. With a few possible exceptions, other suppliers could be found for most categories of Iranian imports, including food. The cutoff of US food shipments to Iran would likely cause only a few months of disruptions. Even before the recent flare-up, the Iranians were diversifying their sources of agricultural imports in order to become less dependent on the United States. [portion marking not declassified]
• Vegetable oil imports—half of which normally come from the United States—could be obtained in South America and Western Europe, albeit with considerable delay. Brazil, for example, has frozen export sales of soy oil until the next crush is completed in March 1980 due to a poor crop.
• Rice—now supplied almost entirely by the United States—is available from other sources, especially Japan.
• Wheat is available on the world market. While the United States once supplied 90 percent of Iranian imports, Tehran has already substantially diversified its source of supply by signing agreements with Australia for 520,000 metric tons and Turkey for 50,000 tons. [portion marking not declassified]
The transhipment of US food through third countries would be extremely difficult to control. Export agents have already started to designate the Persian Gulf and Pakistan as destinations in order to overcome problems associated with the refusal of US longshoremen to load Iran-bound cargoes. There have also been reports in recent months of extensive shipments of US rice to Dubai, undoubtedly for transhipment to Iran. [portion marking not declassified]
While other indusrialized countries, including those of Eastern Europe and the USSR, could eventually replace the United States as suppliers of most raw materials and spare parts, some items can only be provided by the United States, at least for an extended period of [Page 91] time. The most critical items include military equipment and spares, spare parts for civilian aircraft, turbine compressors for gas pipelines, pumps, drilling rigs, power generating equipment, and telecommunications equipment. How long it would take for an embargo on these items to have some effect would depend in part on inventories in Iran. While we do not have specific information on inventories, recent trading patterns would suggest that stocks are extremely low. Stocks of kerosene, in short supply earlier this year, have been rebuilt, and kerosene should not be a problem as long as the oil refineries are kept operating. [portion marking not declassified]
Collective Embargo by the West
A collective ban on exports to Iran is only a remote possibility as long as Iranian oil continues to flow. Given their heavy dependence on Iranian oil and worsening domestic economic conditions, Japan, Western Europe, and major LDCs such as Brazil would oppose actions that could lead to a complete oil cutoff. Collective action by even a few countries would probably prove difficult as illustrated by the inability of the United States to get support for its trade embargo against Cuba. [portion marking not declassified]
Upon extreme Iranan provocation—a cutoff of oil exports or the killing of US Embassy hostages—a collective export embargo might be feasible. Such action, if rigidly enforced, would affect some three-fourths of total Iranian imports, including over 50 percent of all food imports and most manufactured and industrial imports. The problems associated with controlling a US embargo would also apply in the case of a collective embargo. Although the USSR and other suppliers, mostly less developed countries, would be unable to replace all the embargoed trade, they could supply most essential imports. Replacement of spare parts for Iranian industry, which was developed largely with Western equipment, would be especially difficult. [portion marking not declassified]
Naval Blockade
An effective naval blockade of Iran would have the most serious disruptive effects on the economy. The international support of a blockade would depend upon whether it was seen as an unprovoked US unilateral action or as a countermeasure to extreme Iranian measures. Barring further Iranian provocations, such action would probably be vigorously opposed by the major foreign oil importers. If employed as a countermeasure, it would receive more support in the West. [portion marking not declassified]
History has shown that efforts to interdict a nation’s lines of communications on a sustained basis are rarely completely successful. [Page 92] While a naval blockade would increase the cost of transport of Iran and cause severe economic disruptions, basic requirements could continue to be imported along established rail, highway, and waterway links with the USSR and, to a lesser extent, with Turkey and with Pakistan. These transport links have combined optional capacity of some 7 million tons per year. The most these routes have carried in recent years, however, is 3 million tons. Iranian imports are currently running at about 7.75 million tons per year, one-half last year’s amount. [portion marking not declassified]
In this situation, transport routes through the northwest region of Iran would become an important funnel for the movement of high-priority goods. On the rail side, the Soviets could increase the volume to the rail link with Iran at Jolfa. The two lines, however, are of different gauges and would require either transhipment or a change of wheel sets. If there were a substantial pickup in truck traffic, the Iranians would soon be confronted by problems of both road and truck maintenance (especially since the flow of parts and supplies would be disrupted), which would reduce the capacity of the highway alternative. [portion marking not declassified]
Other fallback possibilities would include the limited rail and highway link with Turkey and the road link with Pakistan. The Pakistani rail and highway line runs as far as Zahedan, Iran. Zahedan, however has no rail link with the rest of Iran and the road link is difficult. For this reason, high-priority goods coming through Pakistan would probably be airlifted from Zahedan’s airport; Zahedan was used as an airlift facility for Iran’s support of Pakistan during the last India-Pakistan War. [portion marking not declassified]
The backbone of any regional airlift operation would be the Iranian Air Force’s 50 C–130 and nine 747 aircraft along with Iran Air’s five 707–320Cs. In combination this fleet of 64 aircraft could lift approximately 1,700 tons at any one time. We estimate that three-fourths of the combined fleet would be initially available for airlift activities. A sustained and concerted airlift operation, however, would quickly run into maintenance problems. [portion marking not declassified]
Iranian Pain Threshold
The effectiveness of economic trade sanctions to compel nations to act against their perceived national interests has traditionally been overstated. In the case of the US embargo against Cuba, for example, the Cubans were able and willing to increasingly tighten their belts. Khomeini would be able to rally some mass support, especially from the poorer classes, by focusing on the theme of martyrdom in Shia Islam. However, substantial disruption of supplies would almost certainly heighten opposition among the middle and upper classes. The [Page 93] bazaaris who were the financiers of the revolution would be hard hit by economic sanctions; their support of Khomeini has already waned because of deteriorating economic conditions. [portion marking not declassified]
The most immediate pressure on Khomeini could come from the cutoff of US military equipment and supplies. While he has shown little concern over the domestic economic and political difficulties created by his actions, Khomeini might be more disturbed by the loss of military equipment because of the sorry state of the Iranian military and the tense state of Iranian-Iraqi relations. The most realistic members of Iran’s military are already aware that they are no match for the Iraqis. As the US ban results in a further military deterioration, their views are increasingly likely to be transmitted to Qom where they probably will cause great concern. [portion marking not declassified]
The timing of US actions will also be critical in determining the resolve of the Iran populace. US actions taken without extreme provocation would probably solidify Persian support behind Khomeini’s anti-American campaign. All economic hardships—including those suffered since the start of the revolution—are now justified by blaming the United States. In the absence of what the Iranians see as new provocations, a chance exists that in time Iranian attention will be refocused on the domestic economic situation. The revolution has not produced the hoped-for improvement in economic conditions. Indeed, it has made things worse for many, including the large number of unemployed urban workers, and disillusionment is spreading. Moreover, many Iranians are becoming increasingly uncomfortable with the fundamentalist Islamic percepts that guide today’s Iran. [portion marking not declassified]
The urban workers would be the hardest hit, at least initially, by trade sanctions. These workers, who had hoped to reap substantial economic benefits from the new Islamic government, are instead finding high unemployment, rising inflation, and shortages of goods. Given the exodus of middle and high level managers and skilled technicians, industry is unlikely to be kept running at even its current low rate with the additional burden of trade sanctions. Thus, as unemployment mounted and additional shortages appeared, a trade embargo or blockade could exacerbate the frustrations of many socioeconomic interest groups. These frustrations could be vented against the Khomeini government as well as against the United States. [portion marking not declassified]
Foreign Reactions and Positions to Date
Foreign official reactions to the US-Iranian confrontation have been predictably low-profile and publicly balanced. Privately, foreign gov[Page 94]ernments have been somewhat more supportive of US measures. [portion marking not declassified]
Most Arab nations have privately condemned the seizure of the American embassy, with only Libya supporting Iran. Many Arabs feel that the Iranian regime is giving Islam a bad name. The Arabian Peninsula Arabs, moveover, fear the new Shia militancy being pushed by Khomeini. Iraq has been the most vocal in expressing anti-Iranian feelings. The Iraqis have talked of abrogating the 1975 Iran-Iraq security agreement and have signaled to the United States their support of continued US pressure on Khomeini. [portion marking not declassified]
The Arabs have, however, expressed concern over the precedent being set by the blocking of Iranian assets. UAE officials, for example, reportedly feel that the US move was misguided and that it will force a reevaluation of UAE foreign investment policies as well as those of other oil producers. The Libyan delegation to the Arab Foreign Ministers meeting in Tunis called for joint Arab reprisals against the United States. The Libyan initiative received only mild support from Syria and was soundly rejected by the conference, suggesting considerable sympathy for the US position. [portion marking not declassified]
Reactions from the major industrial countries have been subdued and publicly balanced. This apparent lack of enthusiasm for US measures is probably due to nervousness over the potential for disruptions in international financial and oil markets. Reaction to the US halt of purchases of Iranian oil has been positive and supportive, but extremely low key. [portion marking not declassified]
The US decision to freeze official Iranian assets held abroad is causing few specific difficulties for foreign governments, but almost all foreign governments have questioned the legality of the US action. Nevertheless, there appears to be general agreement not to actively pursue the question of legality at this moment. All available reports indicate that the US blocking order has been extremely effective abroad, particularly in the United Kingdom, which harbors a large percentage of Iranian investments. [portion marking not declassified]
Prospects for Foreign Cooperation With Other US Sanctions
The prospects for active foreign support of additional US countermeasures against Iran are slim, if the American hostages are not harmed and if other countries are not more directly provoked. The West Europeans and Japanese will continue to maintain as low a profile as possible and will watch the mood and response of the other OPEC states extremely carefully. In the meantime, they will likely continue to applaud US firmness, argue against military action, and attempt to remain as uninvolved as possible. [portion marking not declassified]
A request that Brazil—a possible major exporter of food to Iran—join an embargo would be met by stiff opposition on the grounds that [Page 95] Brazil would be needlessly antagonizing a source of needed oil while closing a potentially lucrative market. Given appropriate inducements, such as US guaranties to make up oil losses, however, Brazil could probably be persuaded to join. [portion marking not declassified]
If Iran shut down its oil production, the Big Six and Brazil might be induced to cooperate with the United States in a collective embargo. Under these conditions, the other members of the IEA probably would demand that the United States, at a minimum, bear its share of the burden of the reduction in oil supplies based on its total consumption. Complete cooperation for a collective embargo is unlikely; in particular Turkey would be unwilling to stop cross-border trade in the absence of major Western incentives. Brazil, while probably going along with a trade embargo, might use the occasion to demand a substantial restructuring of its foreign debts. [portion marking not declassified]
Arab support and reaction also depends upon the timing of events. If the United States imposed a strict embargo while the hostages remained unharmed and oil continued to flow, a strong negative Arab reaction could be expected. This could possibly include a cutback in Arab oil production. [portion marking not declassified]
Even if the trade embargo or naval blockade followed extreme Iranian provocation, the Arabs would probably condemn it publicly. Privately, however, many Arabs would be pleased to see Khomeini replaced so long as a more radical alternative was not likely. Many would also like to see the United States take a strong position. The Iraqis have indicated that they might even be willing to help, though indirectly, by not objecting if other OPEC members increased oil production to offset an Iranian cutback. [portion marking not declassified]
- Source: Central Intelligence Agency, Office of the Director of Central Intelligence, Job 81M00919R: Executive Registry Subject Files (1976–1979), Box 14. Top Secret; [handling restriction not declassified]. A cover page and table of contents are not printed. Three annexes, titled “Iran: Import Patterns and Vulnerabilities,” “Major Developed Countries: Responses to US Economic Countermeasures Against Iran,” and “Iran’s Transportation Network: Capabilities and Vulnerabilities,” are attached but not printed. The CIA prepared a similar December 4 paper [document number not declassified] titled “The Iranian Crisis: International Economic Fallout,” which Turner sent to Carter, Mondale, Vance, Brzezinski, Brown, Miller, and Duncan under separate December 5 covering memoranda. (Carter Library, National Security Affairs, Brzezinski Material, Country File, Box 30, Iran December 5–9, 1979)↩