via Lobe Log

Virginia tech economist and Lobe Log contributor Djavad Salehi-Isfahani adds to the growing list of reasons why the Obama administration’s Iran sanctions policy is counterproductive in Foreign Policy Magazine:

Despite everything, Iran seems to be weathering the storm better than advertised. Sanctions were intended to inflict economic pain on Iran’s population, with the hope that Iranians would persuade their leaders to compromise with the West on the nuclear standoff. But these hopes have been dashed:Tehran may have fumbled its economic response to sanctions and failed to minimize their overall level of pain, but it does seem capable of dealing with their political fallout by managing the distribution of the pain. Its principal means in doing so is the multiple-exchange-rate system, which eases the sanctions’ impact on Iranians below the median income — Ahmadinejad’s political base. Meanwhile, the system shifts the burden to upper- and middle-income Iranians, who have shown little affection for the controversial president in any case.

To protect lower-income people, the Iranian government will likely act conservatively in supplying foreign exchange for nonessential needs and make sure that it has enough reserves for critical imports of food and medicine. This will mean the value of the rial in the free market will continue to fall — but such an event should not be interpreted as a sign of economic collapse.

Ironically, if this scheme succeeds, much of the pain will be borne by upper-income Iranians who are generally most friendly to the West and least likely to revolt, because they have more to lose. They will be the unintended victims of Western sanctions, which have so far proved a very blunt instrument of U.S. foreign policy. Upper-income Iranians have plenty to be upset about with their own government, but now there is a distinct possibility that they will also blame the West for their misfortune.

This is not only unproductive from the point of view of Western policymakers — but it will also complicate relations with Iran if and when the country rejoins the global economy.