International Sanctions on Iran

An Explanatory Critique
Copenhagen Business School
2016
International Business &
Politics (IBP)
Bachelor Thesis
STU-Count: 91,000
Number of pages: 40
Advisor: Hubert Buch-Hansen,
hb.dbp@cbs.dk
Date: 23/05/2016

Karl-Henrik Smith

Outside of the many sarafi, foreign exchange bureaus, people

gathered on the street to watch flat-screen televisions displaying
the almost minute-by-minute slide in the rial; and men and
women gathered at the kiosks to buy dollars as a hedge against
crippling inflation or just because they thought the government
might soon run out of them due to new international sanctions
against Iranian banks. - Majd (2014: 246-7)

Name: Karl-Henrik Smith

Table of Contents
1. Introduction
1.1. Analytical focus: Targeted sanctions and the federal government

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2. Methodology
2.1. Critical realism
2.1.1. Ontology
2.1.2. Epistemology
2.1.3. Methods and empirical material
2.2. Choice of theory
2.2.1. Neorealism vs. liberal institutionalism
2.2.2. Critical realism and the neo-neo debate
2.3. Methodological application
2.3.1. Economic sanctions and institutions
2.3.2. Explanatory critique

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3. Theory
3.1. Liberal institutionalist theory of mutual dependence
3.2. Neorealist theory of international regimes
3.3. Conclusion: Theoretical overlaps and application

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4. Case: International sanctions on Iran

4.1. Empirical data and case setting
4.1.1. Five-year development plans (FYPDs)
4.1.2. Interventionism
4.1.2.1. Political intervention
4.1.2.2. Economic intervention
4.1.3. Theocracy
4.1.3.1. The political spectrum in Iran
4.1.3.2. The economic impact of theocracy
4.1.4. Reformism
4.1.4.1. The Khatami reforms (1997-2005)
4.1.4.2. Ahmadinejads subsidy reform plan (2005-2013)
4.1.4.3. Rouhani and the Iranian nuclear deal (2013-)
4.2. Analysis of interaction between institutional mechanisms
4.2.1. Interventionism and theocracy: Neorealist applications
4.2.1.1. Economic sanctions and foreign intervention
4.2.1.2. Economic sanctions and Iranian theocracy
4.2.2. Reformism and the FYPDs: Liberal institutionalist applications
4.2.2.1. Incremental change: The Khatami reforms (1997-2005)
4.2.2.2. Mitigating sanctions: The Ahmadinejad administration (2005-2013)
4.2.2.3. Lifting sanctions: The second-wave reformists (2013-)
4.3. Conclusion

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5. Discussion
5.1. The role of institutions and interaction between mechanisms

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5.2. Assessing the post-sanctions era

5.2.1. Have economic sanctions achieved their desired aim in Iran?
5.2.2. Recommendations for further action

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6. Conclusion

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7. References

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Abstract
The efficacy of international sanctions is a topic of increasingly widespread public debate. Though
existing research primarily investigates the motivations for imposing sanctions, this report seeks to
determine the ability of sanctions to deter or alter the behavior of a target country. I aim to explain
how Iran, a country that has undergone profound systematic changes since the 1979 revolution, has
fared under such constraints. I draw on the liberal institutionalist theory of mutual dependence and
neorealist regime theory to determine whether sanctions have been effective, and the prospects of
cooperation in the future. This report argues that the desired behavior from imposing the economic
embargo has not been achieved, and that it has instead contributed to a multitude of unwarranted
dynamics (e.g. poverty, corruption), structural factors that contribute to Tehrans policy-making and
isolationism. This report focuses on three institutional mechanisms that have created the conditions
for the proliferation or appeasement of sanctions in Iran: interventionism, theocracy and reformism.

1. Introduction
Economic sanctions have become increasingly significant over the past century, as states attempt to
obtain concessions from target countries. Yet, the theoretical basis underpinning the efficiency of
sanctions is limited. Academic focus surrounding economic sanctions primarily concerns moral or
political implications of their imposition, rather than discussing how states adapt their domestic and
foreign policies under economic coercion. The strict purpose of sanctions is not to punish states, but
rather engender a behavioural shift ranging anywhere from altering policies to regime change. Two
of the largest theories in international relations, realism and liberalism, address issues such as state
agency and the role of institutions in encouraging compromise over conflict. Both theories apply to
the case of Iran, which has suffered under unilateral (US-imposed) sanctions since the 1979 Iranian
Revolution, and multilateral (UN-imposed) sanctions since 2006 due to international concern over
Irans nuclear energy program. While foreign countries and institutions have consistently promoted
tightening the embargo, they have failed to generate a significant shift in the Iranian governments
regional and domestic behaviour - namely, the pursuit of nuclear energy technology, the financing
of terrorist groups, and the abuse of human rights. As such, this report aims to answer the following
research question:
What are the main institutional mechanisms that account for the spread of sanctions in Iran, and to
what extent has the impact of the embargo perpetuated Tehrans response to foreign policies?
I strive to determine the institutional mechanisms that give rise to economic sanctions, and attempt
to show that their ability to shape state behaviour is questionable. The mechanisms I consider in this
report are both internal and external, since there are a number of emergent properties (domestically
and abroad) responsible for this tool of foreign policy. The study takes an actor-oriented approach,
focusing specifically on policies within Iran in response to the embargo, but also investigates the
role played by other states, institutions, organisations and firms. Findings are directed at sender
states, namely the US federal government, but also international organisations (IOs) and other
actors that have pursued multilateral sanctions against the Iranian regime. First, I introduce critical
realism and discuss how the choice of methodology informs my choice of theory. Second, I discuss
liberal institutionalism and neorealism, explaining their relevance to the case and research question.
Third, I bring forth empirical evidence, and analyse the interaction between respective institutional
mechanisms provided. Fourth, the case study is discussed. Finally, the report will conclude.

1.1. Analytical focus: Targeted sanctions and the federal government

This reports analytical focus will be on targeted instead of comprehensive sanctions. Ever since the
revolution, a full embargo has been in place in Iran: this measure refers to the prohibition of all
commercial activity or the imposition of tariffs and protectionary measures. Targeted sanctions, on
the other hand, refer to blocking transactions with particular groups, individuals and multinational
corporations (Masters 2015). These can take many forms, including travel bans, asset freezes, arms
embargoes, capital restraints, and trade restrictions (ibid). I contend that targeting individual actors
can mitigate otherwise detrimental effects of embargoes on civilians, as comprehensive sanctions
may cement structural problems like poverty or corruption (ibid). The analytical focus on targeted
sanctions allows analysing sanctions more broadly, helping determine which elements in particular
caused the most harm to Irans economy. As the embargo failed to bring significant concessions
from the federal government, states and IOs began using targeted sanctions to effectively generate
changes in behaviour, but this strategy faces many difficulties. While sanctions have traditionally
been imposed to harm the elite (those with agenda-setting power and the ability to influence policy),
their impact is mostly felt on poorer, working-class individuals (Marcus 2010). These policies have
reinforced nationalist sentiment through political mobilisation and suspicion of foreign states (ibid).
The federal government is a significant actor as well, as the Iranian Parliament (Majlis) advances
economic initiatives every five years in medium-term strategic plans. These five-year development
plans (FYPDs) are important because they lay out the foundation for state-led policies, but also vary
based on which elected coalition hold a parliamentary majority (e.g. conservatives, reformists). This
report will assess policy enactment and impact, due to the role of the federal government - rather
than individual provinces - in agenda-setting (Ghasimi 2012). These FYPDs provide a framework to
promote the private sector and embark on public sector reforms aimed at a more equitable and just
society (ibid). Each administration since the Iranian Revolution has prioritised different issues
through these FYPDs, which allows a greater focus on certain issues in the medium run. The federal
government may thus be a necessary condition in mitigating the effectiveness of sanctions since it
provides objectives or targets for individual provinces, but is also insufficient because the state
alone cannot overturn the problems caused by decades of economic coercion. Notwithstanding, the
focus on the federal government is an important part of understanding how domestic and foreign
policies adapt when a state is confronted with the prospect of sanctions.

2. Methodology
2.1. Critical realism
While there is much empirical evidence to investigate the consequences of imposing sanctions, this
report attempts to make scientific explanations as objective as possible while recognising that
truth is fallible and incomplete. I plan to analyse the underlying agents and structures responsible
for the spread of sanctions as a tool of foreign policy. As such, the critical realist approach is
necessary since it can help extricate the aforementioned institutional mechanisms, allowing for the
investigation and identification of the relationships and non-relationships, respectively, between
what we experience, what actually happens, and the underlying mechanisms that produce [events].
(Danermark et al. 2002: 21) The objective a critical realist framework within the scope of this report
is to uncover the mechanisms responsible for the phenomena of interest (economic sanctions), and
determine whether they have been entrenched over time.
2.1.1. Ontology
The founder of critical realism, Roy Bhaskar, originally coined the term as a blend of a philosophy
of science (transcendental realism) and of human sciences (critical naturalism). Developments since
the 1970s have encompassed an increasingly broad range in economics and social sciences (Jackson
2010). This report considers the merits of critical realist thought within international relations, and
aims to illustrate which generative causal tendencies give rise to the use of sanctions in the global
sphere. A vital component of this study is the concept of transfactualism, which allows for an
explanation of occurrences beyond the empirical domain, as it uncovers the underlying mechanisms
responsible for the rise of phenomena (ibid). According to critical realism, a phenomenon arises not
solely from human experiences, discourses or actual events, but also underlying structures, powers,
and tendencies that exist, whether or not detected or known through experience and/or discourse
(Patomki and Wight 2000: 223). The primary criticisms of positivism within international relations
concern its tendency to associate events between each other, rather than identifying the mechanisms
that have led to those events in the first place (ibid). Patomki and Wight expound on the virtues of
critical realist thinking in international relations, stating that there is a reductionist problem-field
which cannot be addressed through positivist, constructivist or post-structuralist thought (ibid). The
analysis of phenomena can instead only be complete with an understanding of the fundamental
powers or causal tendencies that give rise to actual, observable events.

2.1.2. Epistemology
In scientific practice, critical realism follows the notion of methodological pluralism, according to
which the method must suit the object of investigation as well as the purpose of it (Danermark et
al. 2002: 27). Therefore, it is the nature of the phenomenon under investigation, and of the research
question, that should determine the methods being used (ibid). The understanding of reality as open
and differentiated admits that causal powers are triggered by the interaction between objects, giving
reality a relational character. Therefore, the purpose of scientific enquiry is to uncover relationships
between the different factors involved. The process for this is twofold. The first is abduction, which
contextualises phenomena and facts to render them intelligible in a specific framework by analysing
their interaction with underlying mechanisms or causal tendencies. In other words, abduction gives
meaning to phenomena since they are interpreted within a particular conceptual framework (ibid:
91). The second part, retroduction, finds that knowledge of the conditions that are not observable in
the empirical domain can be generates. Retroductive reasoning is thus an analysis of the substantial
relations through thought experiments or counterfactual thinking, which can help to determine how
a specific phenomenon is generated (ibid). The methods critical realists use to engage in abduction
and retroduction are equally important, since they underpin the entire analysis.
2.1.3. Methods and empirical material
This report employs a heuristic case study, which we use to explicate a single case, Iran, to uncover
the underlying structures responsible for economic sanctions and Tehrans policy-orientation. This
type of case study allows us to explore the phenomenon to bring about new knowledge, which is in
line with the critical realist belief that it is always possible to produce knowledge due to its fallible
character (Moses & Knutsen 2012: 140). This will be supplemented with an additional investigation
of the institutional structures that allow for sanctions more broadly: the set of interactions between
institutional mechanisms accounting for the spread of sanctions in Iran and abroad. The choice of
empirical material in the case will include primary sources, such as speeches and firsthand accounts
of historical events, but the majority of the analysis relies on secondary sources, including academic
documents, journals, and newspaper articles. The choice of both primary and secondary sources is
paramount, since having extensive empirical material can counteract limited reliability of primary
sources (ibid). The data provided is important since it allows the report to analyse how institutional
mechanisms interact with the phenomenon.

The purpose of our heuristic case study is to recognise and understand the implications of economic
sanctions in Iran. Defining the effect of sanctions is an abstraction from a particular set of structural
and institutional mechanisms, which is necessary since the domain of the actual - the events that
occur - provides no insight into institutional and state-related features (Danermark et al. 2002: 42). I
denote institutional mechanisms, rather than mechanisms in the broad sense of the term, to mean the
structures that arise from institutions and institutional arrangements, and which can be formal as
well as informal (ibid). Since concrete evidence pertaining to the domain of the actual is lacking, it
becomes impossible to offer advice on mitigating the impact of sanctions. This report begins with
an outline of concrete events and circumstances in Iran, to determine the mechanisms characterising
the relationship between coercion and institutions in the domain of the real, which includes all that
which produces events (ibid). This relationship is determined through an analysis of the empirical
evidence and an explanation of how the data relates to the institutional mechanisms. I will then use
abduction to contextualise these mechanisms and determine their influence over sanctions, and use
retroduction to investigate the substantial relations in Iran that gave rise to this phenomenon.

2.2. Choice of theory

The field of international relations is a vital part of studies in international political economy (IPE),
mainly because political and economic shifts are dependent on interstate activity. Two of the main
schools of thought in international relations are realism and liberalism, and both have been evolving
significantly since their inception. Early realism is seen as a reactionary ideology against interstate
conflict and war, though contemporary realism is increasingly state-centric, focusing on issues like
survival and self-reliance (Dunne and Schmidt 2008). Critics of realist assumptions were called
idealists, and believed that states domestic philosophies and ideologies should more broadly be
applied as a doctrine of foreign policy. Idealism is the precursor for modern liberalism, as writers
like Kant popularised notions of perpetual peace or democratic peace within international regimes,
goals that would be encouraged by political and economic interdependence (Gartzke 1998). There
have been numerous improvements to both realism and liberalism; contemporary incarnations of
realism and liberalism, neorealism and liberal institutionalism, have sharpened their focus to 1) how
cooperation is brought about within international regimes, and 2) the role of institutions, states and
other actors in doing so. The neo-neo debate is central to this reports aim of determining how
sanctions have proliferated in Iran.

2.2.1. Neorealism vs. liberal institutionalism

The liberal institutionalist school (L-I) under Keohane and Nye postulates that states benefit from
mutual dependence since it can help resolve conflicts of interest or existing tensions (laissez-faire
economic views, unrestricted free trade, etc.). This, they claim, can promote cooperation through
existing linkages and negotiations, as IOs and other institutions have a central role in ensuring that
cooperation occurs. Institutionalists have an actor-oriented view of international regimes, claiming
that states have agency and can resolve disputes while achieving absolute gains. Neorealists, on the
other hand, have a more pessimistic outlook of geopolitics, claiming that conflicts of interest are
actually disempowering states and institutions from resolving disputes, since a number of actors
also want to achieve relative gains. Therefore, existing linkages can be destabilised by a number of
external issues (volatility in oil prices, hegemonic influence, etc.). To that extent, neorealist regime
theory, developed by Joseph Grieco, claims that states are not atomistic (absolutist) but positional
(relativist), concerned not just about achieving absolute but also relative gains.

2.2.2. Critical realism and the neo-neo debate

This theoretical debate, or neo-neo debate, will guide the choice of theory and empirical material. It
allows the report to focus on behavioural factors of the trade-related aspects of foreign and domestic
policy, especially in terms of how rational actors make decisions with asymmetric information. The
research aims to show that targeted economic sanctions are affected by the following institutional
mechanisms: interventionism, theocracy and reformism. This framework will be supplemented by
an examination of institutional tipping points that have occurred during the sanctions timeline, and
attempts to reverse course on certain entrenched structures by encouraging democratic and tolerant
values in society. Once the report uncovers the causal powers that characterise economic sanctions,
the neo-neo framework will contextualise the phenomenon to determine which substantial relations
exist between the aforementioned institutional mechanisms. In view of this, I then offer suggestions
for further action and assess the relevance of the post-sanctions era through a neoliberal-neorealist
lens. The report will finally conclude whether or not the case of sanctions on Iran feeds into either
approach more than the other.

2.3. Methodological application

2.3.1. Economic sanctions and institutions
Due to the interdisciplinary nature of sanctions, this report will be both qualitative and quantitative,
delving into the mechanisms causing the spread of sanctions as well as techniques used to measure
their effectiveness in the case of Iran. The analysis will contain intuitive and econometric elements;
since qualitative methods are traditionally more concerned with interactions between mechanisms,
this paper benefits from mixed-method research, which is a common approach in critical realism.
This approach thus provides the ability to analyse the causal tendencies of economic coercion from
a multidisciplinary approach, and ultimately delivers a more complete picture of the socioeconomic impact sanctions can have (Patomki and Wight 2000). The objective of causality is to
demonstrate how the conditions that constitute the explanans, or that which does explaining,
generate the event or phenomenon that is being explained, the explanandum (ibid). As such, this
report intends to illustrate how the phenomenon of economic sanctions is the logical conclusion of
the interaction between the set of institutional mechanisms that characterise it.
2.3.2. Explanatory critique
An important concept in critical realism is explanatory critique, which is used for this reports actororiented approach. It refers to the process where having knowledge of undesirable structures allows
actors to transform them into more desirable structures (Danermark et al. 2002: 195). Explanatory
critique discards the idea that beliefs are open to casual interpretation, since rejecting a belief would
imply rejecting the conditions or structures necessary for their existence. This theory opens up the
exciting possibility that we may be able to discover values, whose beliefs prove to be incompatible
with their own true explanation (Archer et al. 1998: xviii). This demonstrates that agency is a form
of emancipation, since it can remove the influence of certain oppressive or constraining structures
(ibid). Explanatory critique disproves beliefs previously held to be true by criticising the underlying
causes or generative mechanisms sustaining that belief (Witt 2012). A central theme in this theory is
the interplay between factual and value-laden judgments, as values can be extricated not only from
certain institutional mechanisms, but also by the interaction between such mechanisms. Explanatory
critique thus positively evaluates (all things being equal) action aimed at removing the underlying
causes (ibid: 9). This theory will be used further when investigating how causal powers have been
counteracted by state agency.

3. Theory
The liberal institutionalist framework posits that states cooperate given common interests, and that
institutions can alleviate collective action problems. An important notion in liberal institutionalism
is that of interdependence, which neorealists argue is counterproductive since conflicts of interest
strengthen the likelihood of tension (Waltz 1988: 48), and liberal institutionalists believe leads to
higher chances of collaboration and dispute resolution (Keohane and Nye 1987). This section draws
on neorealism and liberal institutionalism to identify and investigate the institutional mechanisms
responsible for the spread of sanctions, with Keohane and Nyes theory of mutual dependence, and
Joseph Griecos regime theory. In this neo-neo debate, there are two fundamental disagreements:
the origins of cooperation, and the role of IOs and institutions in ensuring states cooperate with each
other. Each theory will be studied in turn.

3.1. Liberal institutionalist theory of mutual dependence

In the work of Robert Keohane (1941-) and Joseph Nye (1937-), Power and interdependence, the
interests of state and non-state actors are examined in terms of power politics and interdependence.
That is, they claim that behaviour of the state is governed by military and security concerns, where
individual governments aspire to benefit from international exchange while maintaining as much
autonomy as possible (Keohane and Nye 1987: 730). Interdependence, which they broadly define
as situations of reciprocity between countries or actors within countries (ibid), would then constitute
a vital role in international relations. However, recent academic research in international relations
postulates that economic interdependence alone cannot stem political conflict. Mansfield and
Pollins note the contingencies in the relationship between interdependence and conflict, as they
claim that trade contains cooperative and coercive dimensions (Mansfield and Pollins 2003: 8). The
positive or negative effects of trade are thus conditional from a liberal institutionalist perspective.
This builds on previous studies, which conclude that expanding trade networks in a mercantilist
framework are responsible for commercial rivalries and even military conflict (ibid). The
conditional nature of interdependence can thus be accredited to the impact of contextually relevant
factors, which include differences in integration in the world market, regulatory frameworks, and
regimes (Evaghorou and Mertzanidis 2012). In order to achieve gains from interdependence, these
factors would need to be counteracted within a complex geography made up of states,
international and non-governmental organizations, and transnational corporate networks (ibid).

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According to the theory of mutual dependence developed by Keohane and Nye, relations of power
influence state decision-making and behaviour. This represents a situation where various channels
of contact bridge societies, there is no issue hierarchy, and governments refrain from using military
force (Keohane and Nye 1987: 731). Mutual dependence adopts an actor-oriented approach with a
focus on transnational and interstate relations, whose objective is to study how certain patterns of
political processes affect actor behaviour rather than to employ a structural explanation to account
for action (ibid). These political processes can be intertwined with conditional factors (e.g. reform
policies, political system) that affect the positive or negative effects of interdependence. Keohane
and Nye identify three political processes that lead to mutual dependence: issue-linkages, agenda
formation, and IOs (ibid). The idea of issue-linkages is equally a liberal institutionalist phenomenon
as a neorealist one, although Keohane and Nye argue that the linkages increase under conditions of
mutual dependence, while neorealists like Waltz do not believe economic interdependence mitigates
conflicts of interest (ibid). Agenda formation is an important liberal institutionalist contribution, in
that changes in domestic policy are usually representative of a poor operation of a regime in a
coherent and functionally linked issue-area (ibid: 738).
Later developments of mutual dependence integrate perspectives on issues like democracy (Drezner
2003), security (Gartzke 2010), and bargaining (Rana 2015). If states cooperate, according to liberal
institutionalists, then socio-economic, political, and military issues are mitigated. However, because
there is asymmetric information, rational actors are unable to determine whether other states will
comply. This assumption is at the foundation of realist regime theory, which points out that there
are difficulties in forming international regimes if there is a disruption in the balance of power. The
relationship between economic interdependence and sanctions is thus triggered by the interaction
between two mechanisms: a) political and economic foreign interventionism, which directly results
in b) Iranian theocracy. I determine through retroduction the substantial relations that underpin the
interaction between these two mechanisms, and find that a necessary condition for economic growth
is the creation of democratic institutions willing to implement reforms. The substantial relations are
twofold. First, a theocratic government presupposes the existence of embeddedness of certain social
values and norms. Second, foreign interventionism is conditional, assuming that intervention occurs
in order to preserve foreign interests in an uncooperative domestic environment (Majd 2014).

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3.2. Neorealist theory of international regimes

International regimes constitute the set of principles, norms, rules, and decision-making procedures
around which actor expectations converge in a given issue area (Krasner 1982: 185). Investigating
regimes is thus necessary to analyse the relationships between institutional mechanisms and actors,
particularly when studying issues of behavioural trade. The concept of regime theory refers to these
interactions and relationships, as well as the role of institutions in shaping the behaviour of rational
actors (ibid). An important notion for proponents of this theory is hegemony, since neorealists claim
that cooperation is more likely to ensue from an unequal balance of power between states. Sjolander
and Cox clarify this:
A hegemonic framework thus stresses the need for the dominant actors to make compromises in their
interests and policies in order to confer benefits on their subordinates to maintain their active consent.
We can view this as the need for the dominant actors to provide a material basis of consent via a political
and ideological bargaining process (Sjolander and Cox 1994: 83-84).

Hegemony is important for regime theory because it delineates the parameters in which cooperation
takes place. Economic and political hegemons hold influence over other states as a result of material
power and ideological leadership (ibid). As such, subordinated states are subject to the interests of a
ruling class in hegemonic states, where dominant actors rely on coercion rather than consent (firms,
IOs, states). Of course, this begs the question of whether such a scenario is cooperation if hegemons
are imposing their will on subordinated states; this is one of the liberal institutionalist criticisms of
neorealisms reliance on hegemonic stability theory (HST). Another key element of such regimes is
the ability and willingness to keep governments satisfied enough to leave control in private hands
(ibid: 84). Therefore, for neorealists, hegemons can only form stable international regimes if they
have significant bargaining power over other states to override the interests of subordinated actors.
The importance of hegemonic stability in international regime theory will be further explored in the
analysis in section 4.2.
Despite the fact that regime theory has traditionally been studied from a liberal institutionalist view,
neorealists like Joseph Grieco (1953-) expanded on this theory to uncover the limits of cooperation
for a number of issues, such as bilateral trade, human rights or military security (Grieco 1988). This
variant of regime theory criticises liberal institutionalist views on security and mutual dependence,
stating instead that the understanding of defensive state positionality and the relative gains

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problem for collaboration is a better guide for states seeking self-reliance within an international
regime (ibid: 507). In other words, those states subordinate to the interests of ruling elite in other
countries should cooperate with dominant states only if they satisfy their interests in the process.
Neorealist regime theory sees states as the only major players in world politics, claiming that they
are unitary-rational actors in global governance (ibid). Grieco further developed regime theory with
the concept of international anarchy, or the set of geopolitical tensions and conflicts states face; he
claims anarchy is opposed to the institutionalist belief that IOs and other institutions encourage
cooperation on a state level (ibid). Neorealists perceive states as positional as they are concerned
about achieving relative and absolute gains: a state that is satisfied with a partners compliance in a
joint arrangement might nevertheless exit from it because the partner is achieving relatively greater
gains (ibid: 487). This view of states sees institutions as discouraging cooperation, because of
external issues that undercut the potential for interstate negotiation (e.g. sanctions, oil price
volatility). Diverging interests, rather than leading to mutual dependence between states, would
instead generate increased conflicts and challenges for international regimes (ibid).
A number of earlier studies of state behaviour have inspired neorealist regime theory. For example,
governmentality theory purports states institutionalise many organised practices (values and norms)
to produce a collective mentality within the population (Foucault 1978). This finds relevance within
regime theory as it lends credence to the belief that states entrench a set of principles on a number
of issues. Another, the notion of regimes as intervening variables, posits that the causal tendencies
that account for regime creation should be held responsible for the final outcome or behaviour of an
actor (Krasner 1982). Such causal tendencies include power and interest, for example, and may be
manifest through the behaviour of individuals, particular bureaucracies, and IOs (ibid: 205). Third,
the notion of nonterritorial imperialism developed by Susan Strange critiqued liberal institutionalist
views of international regimes, instead stating that the American hegemon spreads its values across
states, firms, IOs and various other institutions (Strange 1982). This is achieved by a combination
of military alliances and a world economy opened up to trade, investment and information (ibid:
482). These views all recognise that exogenous factors are necessary in the formation of regimes,
rejecting liberal institutionalist views that the mechanisms that produce regimes are endogenous to
them (Krasner 1982).

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3.3. Conclusion: Theoretical overlaps and application

Though neorealist and liberal institutionalist perspectives of international relations differ, they share
some basic assumptions. The first concerns anarchy and actor behaviour, in the sense that conflicts
and tensions are conditional, arising from a very specific set of circumstances (Powell 1994). For
this case study on Iran, liberal institutionalists and neorealists would agree that events preceding the
revolution, and the sanctions themselves, are responsible for the political and economic situation in
Iran today. Despite disparities in the schools of thought concerning the role of institutions and other
actors in bringing about these circumstances, there is consensus on conditionality and its importance
in shaping current events (ibid). The second assumption is when it comes to the role of cooperation
in forming international regimes: both liberal institutionalism and neorealism have an actor-oriented
approach to international relations, because they see cooperation as conducive to an improvement in
state relations and economic growth (ibid). While both theories differ on what the generative causes
of cooperation are, they recognise that cooperation can contribute in the establishment of a stable
political and economic relationship between states. These overlaps are necessary to consider during
the application of theory to the case, which takes place in the analysis and discussion.
In focusing on how the federal government has responded to economic sanctions, this report draws
both on liberal institutionalist and neorealist perspectives. The pre-existing dichotomy between both
points of view allows this report to analyse economic sanctions from a shared perspective of formal
and informal institutional mechanisms that mitigate or strengthen the effects of economic sanctions.
Institutions are formal when they are characterised by rule of law (e.g. constitutions, regulations) or
bodies to carry out a set of enforced rules (e.g. legislatures, courts); however, they are informal if
comprising societal or unenforceable rules, like tradition, religion or family (Helmke and Levitsky
2003: 8). The disparity between institutions is important for the methodological application to the
theoretical framework, since informal rules will so often govern the behaviour of formal state
actors, influencing both strategy and policy (ibid). I ultimately use different theoretical explanations
to explain why the effectiveness of economic sanctions is circumvented by institutional mechanisms
of interventionism, theocracy, and reformism. This framework will have further applicability as the
report explains how recent initiatives to circumvent the Iranian embargo engage with the identified
institutional mechanisms, and whether they effectively confirm the validity of either theory.

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4. Case: International sanctions on Iran

4.1. Empirical data and case setting
To uncover the mechanisms behind the Iranian embargo, this report will present empirical material
and highlight how it relates to economic sanctions. The empirical material has been chosen on the
basis of Irans five-year development plans (FYPDs), leading up to the Iranian Revolution of 1979
to present day. Empirical material will show that despite Iran having been a relatively prosperous
economy in the 1960s and early 1970s, economic sanctions have contributed to its relative isolation
in recent decades. As the Iranian government has been forced to adapt to economic sanctions, it has
had to implement policies specifically designed to mitigate their effects. This section makes use of
the material to draw upon the theories introduced to tease out which mechanisms in Iran have been
entrenched due to international sanctions. This section will highlight three institutional mechanisms
in particular: interventionism, theocracy, and reformism. However, before doing so, I delve into the
importance of Irans five-year development plans (FYPDs), which have been a significant factor of
agenda formation in the country since 1989.
4.1.1. Five-year development plans (FYPDs)
The Iranian Parliament, or Majlis, has been implementing the five-year development plans (FYPDs)
developed by respective administrations since 1989, following the death of Ayatollah Khomeini and
changes in the constitution. The purpose of these FYPDs has been to guide domestic policy-making
towards economic development and reconstruction, as well as set individual targets according to the
belief system of either party in power (Marschall 2003). FYPDs comprise an important role in this
reports analytical focus, because they are symbolic of the governments policy goals in response to
targeted sanctions and the US-imposed embargo. Though the goals of the proposed plans are often
desirable, they are counteracted by the influence of actors whose interests collide with those of the
federal government (e.g. states, IOs and firms). As economic sanctions continue to negatively affect
the economy, Irans FYPDs suggest implementing policies that can guide the state through coercive
foreign policies (ibid). The two major political parties, reformists and conservatives, are responsible
for shaping their respective agendas in FYPDs during their term, and the outlined goals and policies
need to be approved by the Supreme Leader (further discussed in section 4.1.3.). This is challenging
for Irans long-term development, however, as either party may reverse policies and targets initially
advanced by the other once elected.

15

After the election of conservative Akbar Hashemi Rafsanjani, the first five-year development plan
(1989-1994) was enacted, aiming to solve issues like restructuration of spending following the IranIraq War, population migration, liquidity, and increasing inflation rates (Brumberg and Farhi 2016).
The project of liberalisation in the early 1990s failed due to societal and geopolitical pressure, as the
trade balance widened due to post-war demand, and the U.S. pressured other states to forestall new
loans to the Islamic Republic (ibid: 84). Ensuing FYPDs have concentrated on economic openness
(2nd FYPD), promoting structural reforms and civil liberties (3rd FYPD), a smaller government role
and enterprise privatisation (4th FYPD), and a greater focus on energy sources and the private sector
(5th FYPD). Each plan also aimed to reach quantitative targets, such as unemployment, inflation and
growth; these medium-term economic plans have been crucial in shaping the objectives for future
administrations as well (Ghasimi 2012). FYPDs have also played an important role in shaping how
the federal government responds to economic sanctions, since domestic policies are only partially
effective if the state is prevented from reaching its full potential.
4.1.2. Interventionism
4.1.2.1. Political intervention

The Iranian Revolution of 1979, in which the Shah was overthrown in favour of an Islamic republic
led by Ayatollah Khomeini, is often seen as a catalyst for contemporary Irans economic situation.
However, a number of external factors account for the revolution, particularly foreign intervention
and policies directed at Iran. Mohammad Mossadegh, who was elected as Irans first prime minister
in 1951, pushed to nationalise assets held by the Anglo-Iranian Oil Company (Kapuciski 1985), a
measure the United Kingdom perceived as a breach of contract. In response, a global campaign was
mounted by the UK to ensure oil technicians and workers from various countries could not travel to
Iran, persuaded multinational corporations to refuse to buy Iranian oil, and froze Iranian accounts in
London and overseas (Kinzer 2010). Targeted sanctions motivated MNCs to withdraw from the oil
refineries in the city of Abadan, effectively preventing the exportation of oil and other commodities
(ibid). As diplomatic relations with the United States deteriorated, Iran became increasingly isolated
from other states. Stephen Kinzer, a former New York Times correspondent, claims that: a strong
democratic consciousness survives, but civic life is stunned (ibid: 127). Thus, while Irans current
economic situation is often blamed on domestic politics, the revolution itself was partially due to
Iranian suspicion of outside influence following the Abadan Crisis (ibid).

16

The Abadan Crisis lasted from 1951-1953, after which Mossadegh was overthrown in a coup dtat
by a joint CIA-MI6 operation, and replaced by Mohammad Reza Pahlavi, a pro-Western shah who
portrayed himself as a reformer but whose rule became increasingly autocratic and repressive over
time (Ansari 2001). To legitimise dynastic rule and institutionalise monarchical values in Iran, the
shah launched a White Revolution in 1963, a strategy focusing on land reforms, restructuration of
government spending (e.g. sales of state-owned factories), and the expansion of liberties for women
(ibid). Though the reforms had far-reaching consequences in the goal towards westernisation, civil
society in Iran was dismantled. The White Revolution was fundamentally a political programme
conceived by members of the political elite in order to sustain as much of the established relations
of domination as realistically possible (ibid: 2). The federal governments policies between 19531979 may have been largely pro-Western, but Iranians remained under dynastic rule with the shah
attempting to preserve traditional power relations. Interventionism thus had severe repercussions on
a political and economic level, as Iranians manifested their desire for self-governance by revolting
in 1978-1979 and instilling the Ayatollah Khomeini in the shahs place (ibid).

4.1.2.2. Economic intervention

After the overthrow of Mohammed Reza Pahlavi in 1979, Irans economy became subject to USimposed sanctions in finance/banking, trade, oil exports, asset freezes and travel bans, and weapons
development (Laub 2015). Most of these sanctions were targeted, used as a diplomatic measure in
response to issues deemed serious by the United States, such as funding international terrorism and
the abuse of human rights (ibid). Travel bans directed at specific individuals, banks, and groups like
the Iranian Revolutionary Guard Corps (IRGC), and the freezing of over $100 billion in assets held
by the federal government were both meant to prevent fuelling proxy wars in the Middle East while
preserving foreign interests (ibid). This was complemented in 2006 by a number of United Nations
Security Council (UNSC) resolutions in direct response to Irans uranium enrichment program, and
was followed by European Union sanctions shortly thereafter (figure 1). The large number of actors
involved reflects the many reasons why Iran is being coerced: while the UN and the EU have been
motivated by concerns pertaining to nuclear weapons proliferation and conflict, US-imposed
sanctions predate such concerns. These unilateral sanctions have covered a range of issues, such as
the hostage crisis, human rights abuses, political developments, the nuclear energy program, and
securing the interests of American allies in the region (ibid).

17

Figure 1 - GDP and oil production in Iran, 2005-2015 (The Economist 2015)
As figure 1 demonstrates, the imposition of multilateral sanctions (UN-imposed) is correlated with a
sharp decrease in Irans Gross Domestic Product (GDP) and increase in the price of Brent crude oil,
which has had severe repercussions: Although Irans economy is less dependent on [oil] than some
others in the region, it still accounts for 42% of government revenues (The Economist 2015). Two
rounds of unilateral sanctions also harmed Irans economy. The first was the Iran-Libya Sanctions
Act (ILSA), signed in 1996 by the Clinton administration in response to the states pursuit of
nuclear energy and financial support of terrorist organisations like Hezbollah and Hamas (Katzman
2006). This would deprive Iran of modernising its key petroleum sector, which generates about 2025% of the countrys GDP (ibid). The second round of sanctions was the Comprehensive Iran
Sanctions, Accountability and Divestment Act (CISADA), passed in 2011, according to which
foreign-based financial institutions or subsidiaries that deal with sanctioned banks are barred from
conducting deals in the United States or with the U.S. dollar (Laub 2015). This would deter other
states and corporations from dealing with sanctioned banks, a measure that has been called a death
penalty for any bank (ibid). Irans oil exports were targeted, inhibiting multinational corporations
(MNCs) from providing services related to the states energy sector. Exports of oil in Iran have
fallen from 2.5 million bpd in 2011 to 1.1 million bpd in 2013, as the EU halts imports of oil
altogether and other states dropping significantly (ibid).

18

4.1.3. Theocracy
The Iranian Revolution led to the overthrow of the Pahlavi dynasty and its replacement with a selfstyled Islamic republic under Ayatollah Ruhollah Khomeini (1979-). Regime change was a crucial
element in motivating the US to impose sanctions on Iran, but also had important effects on agenda
formation and domestic policies. This section examines the political and economic implications of
Irans theocratic government, looking first at the political spectrum in Iran and differences between
the two major parties, and second at the immediate impact of the revolution and effects of theocratic
ideology on policy-making and interstate cooperation.
4.1.3.1. The political spectrum in Iran

Iranian politics are syncretic, which designates a scale outside the conventional left-right spectrum.
While reformists and conservatives encompass the two main coalitions, all constitutional authority
resides with the Vali-e Faqih, or supreme leader (Sadjadpour 2009), a position currently held by Ali
Khamenei. The Iranian political system is unusual since it combines Islamic law, or Sharah, with
elements of representative democracy. Despite this hybrid system, the state remains authoritarian,
as many pragmatic candidates are disallowed from running in presidential and legislative elections
(ibid). The Observatory for Human Rights has claimed that elections in Iran are not democratic for
the mere reason that the Council of Guardians chooses the nominees (Alexandros 2005). The sway
of Irans theocracy over foreign policy in Iran is thus twofold: firstly, religious leaders consistently
limit policy proposals and legislation of reformist and centrist political leaders, which prevents the
representation of majority interests (ibid); secondly, international sanctions are being incrementally
enacted by other states and IOs, which forces the government to continuously adapt its strategies in
order to mitigate their effect (ibid).
4.1.3.2. The economic impact of theocracy

After the Iran hostage crisis, in which over sixty American citizens and diplomats were held captive
in response to foreign intervention, the United States imposed unilateral economic sanctions against
Tehran. This included asset freezes of around $12 billion (e.g. bank deposits, gold, etc.), primarily
as a punitive measure in retaliation to the diplomatic crisis. The impact of these sanctions, alongside
a military blockade imposed during the Iran-Iraq war, was reflected by stagnating GDP in the early
1990s. Another pressing concern over this period was decreasing oil prices, as crude oil production
dropped by 3.9 million barrels per day (bpd) by the end of the revolution due to investor uncertainty
and international sanctions (Energy Information Administration 2002). This led to a crisis for the
19

Organization of Petroleum Exporting Countries (OPEC), and was the main impetus for the 1979 oil
shock (ibid). The combination of economic sanctions, decreasing oil prices and the enduring IranIraq war was the primary cause of the sharp decline in Iranian GDP in the late 1980s, after a number
of neutral countries halted trade due to insurance and military considerations (Farrokh 2011; figure
2). Oil and non-oil exports fell by 55% during the war, oil revenues dropped from $20bn in 1982 to
$5 bn in 1988, and the inflation rate reached 50% that same year (ibid).

Figure 2 - GDP in Iran, 1979-2016 (TradingEconomics 2016)

Iranian morale crumbled as a result of both the embargo and military conflict, with the consequent
economic stagnation lasting well over a decade. The imposition of the ILSA in 1996 and CISADA
in 2011 only served to further entrench Irans stagnating economy. Though Iranian GDP increased
in the early 2000s, this is largely the result of reforms passed by president Mohammad Khatami
rather than sanctions relief. The Ahmadinejad administration oversaw an economic boom, but
mounting global concern over Irans role in nuclear non-proliferation contributed to investors
uncertainty as the United States, the European Union and a number of supranational bodies imposed
targeted sanctions on the federal government and related firms (Davenport 2015). As illustrated in
figure 1, Irans GDP has experienced a significant decrease since 2010 as the result of multilateral
sanctions imposed by IOs like the United Nations, the IMF, and the WTO. Power relations between
conservative clerics and moderates remain, however, and constitute the main roadblock for potential
economic reconstruction.

20

4.1.4. Reformism
As aforementioned, the largest parties in the Iranian political spectrum are the conservatives and the
reformists. Following the Iranian revolution and the hostage crisis from 1979-1981, radicals under
president Ali Khamenei dominated the Iranian Parliament (Majlis), and claimed American and EU
sanctions were constructive instead of harmful as they encouraged self-sufficiency, forcing Iranians
to adapt and survive with little outside aid (ibid). The federal government began to implement a
series of policies and reforms in the late 1990s to respond to such economic coercion. The section
examines three policies in particular: Khatamis structural reforms, Ahmadinejads subsidy reform
plan, and the Rouhani nuclear deal with the P5+1.
4.1.4.1. The Khatami reforms (1997-2005)

The first reform occurred during the presidency of Mohammed Khatami, a moderate whose election
was representative of Iranians wishes of a more open society. Advocating for greater political and
social freedoms, the relaxation of cultural norms, and economic rehabilitation, Khatami attempted
to fundamentally alter Iranian society (Menashri 2010: 61). Khatami, elected in 1997, presided over
the 3rd FYPD, which focused on structural reforms as a number of improvements were made in the
rule of law, individual freedoms, social justice, and political tolerance (Siddiqi 2006). Though Iran
presided over a period of economic growth in the late 1990s and early 2000s, this was not the result
of theocratic ideologies, but rather reformist policies promoted under the 2nd and 3rd FYPDs. On the
economy, Khatamis goal was to create 750,000 new jobs annually and achieving an average yearly
real GDP growth of 6%, as well as to reduce subsidies for major commodities (ibid). While most of
the reforms ultimately failed to pass due to political differences with the Ayatollah and ruling elite,
Khatami was able to successfully begin a reformist movement that lasted beyond his presidency. I
argue that this is because the institutional mechanism of reformism can even result from attempts at
policy change, since failure at enacting policies may instigate actual reform over time:
Khatami failed to implement his major reforms. But his policies have had some positive effects. The
economy has started moving forward, even if progress has been slower than expected. Violations by the
courts have been repeatedly highlighted, though they have not been prevented. A number of stifling
social restrictions have been lifted, at least unofficially. It is still dangerous to be openly critical of the
regime, but the level of free speech is unprecedented to the years before Khatami (Siddiqi 2006).

21

The efforts of reform during Khatamis term were futile due to political differences, and the Majlis
was ultimately unable to enact open market or humanitarian policies (ibid). International sanctions
led to opposition by radical factions of the conservative side, legitimising their narrative that foreign
intervention in domestic affairs, rather than isolationism and the repression of civil liberties, should
be held accountable for Irans economic situation. Yet, minor successes of first-wave reformists
under Khatami set the stage for the increased desire for economic openness and structural change.
The increased focus on civil society acted as a counterbalance to corruption and theocracy, instead
promoting positive values like transparency and development (Rivetti and Cavatorta 2013). Even a
number of former Khomeinist revolutionaries became reformist, and denounced the transformation
of revolutionary ideals into the defence of privileges acquired by certain social groups since the
revolution (ibid: 648). The reformist rhetoric that emerged from Khatami assuaged foreign powers
like the United States, who eased sanctions on Iran imposed as part of the ILSA. In the end, trends
and discourses emerging from the Khatami era culminated in the 2013 election of Hassan Rouhani
and achievements by second-wave reformists, including the signature of the Iranian nuclear deal
in 2015 that brought global sanctions relief to Iran.
4.1.4.2. Ahmadinejads subsidy reform plan (2005-2013)

The second reform examined here was launched during Mahmoud Ahmadinejads presidency. After
Irans refusal to interrupt its nuclear program and collaborate with the International Atomic Energy
Agency (IAEA), the United Nations imposed comprehensive sanctions as a punitive measure and to
encourage compliance (Haidar 2016). Over the following years, this was complemented by UNSC
resolutions which included an arms embargo, freezing of assets, global monitoring of Iranian banks,
targeted travel bans, and cargo inspections (ibid). To mitigate the impact of sanctions, Ahmadinejad
carried out structural reforms by passing a subsidy reform plan (Nikou and Glenn 2010). The plan,
passed as part of the 5th FYPD, aimed to phase out all subsidies within five years, as immediate cuts
affected the price of various products (petroleum, wheat, sugar, etc.), and instead of subsidies, small
sums of cash would be distributed to individuals (ibid). Despite the sanctions having been imposed
in response to the risk of nuclear proliferation, they harmed the economy: during the Ahmadinejad
administration, both Gross Domestic Product (GDP) and per capita income were lower than during
either of his predecessors terms (figure 3). However, this was more than just the result of sanctions:
isolationist policies and fervent nationalism both contributed (ibid).

22

Figure 3 - GDP and per capita income by administration (IMF 2012; cited in Habibi 2013)
The Subsidy Reform Law, a crucial component of Irans 5th FYPD, aimed to remove price subsidies
over five years, requiring for domestic prices of gasoline and other refined oil products be raised to
within 90 percent of the international prices for delivery of these items to Persian Gulf destinations
(Habibi 2013: 3). The ultimate objective of the plan was to increase standards of living for lowerincome households and working class families, expand production efficiency and export capacity,
and reduce income inequality (ibid). Though Ahmadinejad ultimately implemented the reform plan,
economic sanctions lifted inflation and unemployment, and empowered the Islamic Revolutionary
Guard Corps (IRGC). The IRGC, a militant arm of the republic, tried to curb the effects of sanctions
by increasing smuggling efforts and using front companies in other countries to produce imports of
essential goods (ibid: 6). Despite the economic significance of Ahmadinejads subsidy reform plan
for Iran in the long term, the effects of international sanctions mitigated any optimistic prospects of
reducing poverty and income inequality in Iran. As the institutional mechanism of reformism occurs
incrementally, the conservative policies of Ahmadinejad reversed the progress made under Khatami
(e.g. fractured relations with the US). Yet, this was only temporary: even though Ahmadinejads
presidency experienced a lower average GDP than either of his predecessors, cooperation was only
halted until the election of a more moderate, outward-looking candidate (Habibi 2013).

23

4.1.4.3. Rouhani and the Iranian nuclear deal (2013-)

The third reform was the signature in 2015 of the Iranian nuclear deal between Iran, the P5+1 (five
permanent members of the UNSC), and the EU. The treaty, also known as the Joint Comprehensive
Plan of Action (JCPOA), implied the lifting of all targeted sanctions should the federal government
agree to reduce the number of centrifuges and enriched uranium (JCPOA 2015). The deal incurred
the freeing of over $100 billion of foreign-held Iranian assets, allowing Iran to export 300,000 bpd,
and authorising the modernisation of economic sectors such as transportation or infrastructure (Naji
2016). The Iranian federal government under Hassan Rouhani provided the IAEA with full agency,
visibility and accountability over Iranian nuclear reactors in return, and reduced its total stockpile of
enriched uranium to less than 300 kilograms (Kerry 2016). Making remarks on implementation day,
the United States Secretary of State, John Kerry, praised the benefits of diplomacy and negotiation
over conflict and war (ibid). However, reconnecting Iran to the global financial system is a point of
contention: a number of critics claim Iran is likely to continue weapons development and use newly
unfrozen assets to fund regional militant groups like the Palestinian Liberation Organization (PLO)
or Hezbollah, and promote Irans national interests in the region (Naji 2016).
The JCPOA was significant from a domestic policy perspective as well. The 6th FYPD (2016-2021),
submitted on the same day as sanctions were lifted, emphasised a larger focus on attracting foreign
investment and less reliance on oil revenues (Financial Tribune 2016). The federal government set a
growth target of 8% annually, responding to falling crude oil prices, decades of isolationist policies,
and a high unemployment rate (ibid). In the 2016 legislative elections, the first after the signing of
the deal, moderate reformists made gains in the Majlis and the Assembly of Experts, illustrating the
growing desire for economic openness and rapprochement with the West (Salehi-Isfahani 2016). In
between 2013 and 2016, the inflation rate has dropped from a high of 34.7% to less than 10% (ibid).
And yet, economic successes have not translated to higher wages, while the pursuit of monetary and
fiscal policies to fight inflation has negatively impacted per capita income (ibid). Anxieties remain
that the United States Congress may impose fresh non-nuclear related sanctions, and that American
restrictions on dollar-denominated transactions with Iran may deter European investors and MNCs
(Geranmayeh 2016). Despite economic hardships, ordinary Iranians have received a psychological
boost from the political opening accompanying the nuclear deal and welcome the distance from the
shadow of war (ibid). The JCPOA has provided the basis for future progress.

24

4.2. Analysis of interaction between institutional mechanisms

The purpose of this section is to analyse the interaction between the mechanisms uncovered in the
theory and empirical sections. First, I will argue that the mechanism of foreign interventionism
lends credibility to the neorealist school of thought, since the establishment of democratic
institutions in Iran and the potential for economic growth have been stymied by international
sanctions. This has occurred to the benefit of the United States and Iranian theocrats, and to the
detriment of ordinary Iranians. Second, I will demonstrate how the FYPDs and reformist tendencies
have buoyed liberal institutionalist beliefs that IOs and other institutions can lead to cooperation and
economic growth, and diminish relations of power between hegemons and subordinated states. The
two-part causal analysis illustrates the link between theory and empirical facts, showing a set of
empirical regularities that show how sanctions have affected the policies of the Iranian federal
government. The analysis shows how the studied institutional mechanisms can positively or
negatively impact the tendencies perpetuated by economic sanctions.
4.2.1. Interventionism and theocracy: Neorealist applications
4.2.1.1. Economic sanctions and foreign intervention

Eli Heckscher (1879-1952), an economist, describes sanctions as a form of economic warfare,

since they weaken the ability of other states to pursue conflict: sever the trading links between the
enemy and their allies and also with neutral powers and, in so doing, to reduce the level of military
and civilian goods available to support military ventures (David and Engerman 2006: 348). The
policies included in sanctions, such as higher tariffs or encouraging production of substitutes, thus
fit within a neorealist framework as states abandon trade with a specific country to fulfil their own
interests. Heckscher recognises this, claiming that the aim of sanctions is not economic but political,
because a state that adopts sanctions hopes to influence third countries behaviour toward a target
state in the process (ibid: 350). While countries like the United States have long used sanctions as a
diplomatic tool to coerce foreign governments into changing their behaviour, their effectiveness is
questionable. Glenn Kessler from the Washington Post claims that today, the prospect of sanctions
relief is likely to have more impact than sanctions themselves: the promise of easing sanctions is
sometimes used as a lure to induce countries to change behaviour (Kessler 2011). This follows
from Heckschers view of sanctions as a political tool, in that they coerce uncooperative regimes to
concede to the demands made by dominant states (ibid).

25

Heckschers assessment is important to this case study, because foreign policies can often shape
both the political landscape and economic outcomes (figure 1). Neorealists posit that cooperation
stems from states attempting to satisfy their own interests rather than achieve mutual gains, and as
such there are limits to cooperating in international regimes (Powell 1994). While the 1953-1979
period oversaw a pro-Western reformist shah, the state became more autocratic to the detriment of
Iranian citizens. An important distinction thus needs to be made between coercion and cooperation,
since the former is institutionally triggered while the latter is the result of interstate activity (ibid).
For this case, the distinction is made clear by events which occurred after 1979: policies directed at
the Iranian government aimed to prevent structural issues, like corruption, the spread of theocratic
ideology, human rights abuses, or the funding of militant groups. However, rather than achieving
concessions, they instead caused major harm to the Iranian economy by deterring foreign investors
and entrenching poverty in Iran (OECD 2011). The institutional mechanism of interventionism thus
contributed to the isolation of Iran from the rest of the world, lending credence to neorealist views
of the international regime and the limits of cooperation (Powell 1994).

4.2.1.2. Economic sanctions and Iranian theocracy

The Iranian Revolution led to a decline in GDP and a drop in oil production from 5m bpd in 1979 to
1.5m bpd in 1981 (figure 4). After the ideology promoted by the Ayatollah Khomeini took root, a
hybrid republican theocratic system based on Islamic law was installed. The immediate effect of
this was an escalation of corruption: Transparency International ranks Iran 136th in the Corruption
Perceptions Index (CPI) and the World Bank places Iran 118th in the ease-of-doing-business index
(The Economist 2016). The hybrid nature of Iranian politics designates a semi-representative state;
while there is a broad political spectrum covering a range of interests, candidates must be approved
by both the Supreme Leader Khamenei and high-ranking jurists and theologians from the Guardian
Council (Brumberg and Farhi 2016). Any change that occurs thus requires working through, rather
than against, the existing institutions of Irans semi-autocracy (ibid). The elections of moderate
centrists Mohammad Khatami in 1997 and Hassan Rouhani in 2013 are indications of such change
(figure 4), since for both years, the Guardian Council approved all radicals and very few moderates.
The Iranian regime is therefore characterised by a particular set of principles and norms (informal
institutions) based on theocratic values that have inspired the rule of law, including the process of
policy-making domestically and abroad (ibid).

26

Figure 4 - GDP and oil production in Iran, 1965-2015 (The Economist 2016)
At the height of the revolution, the population in Iran numbered 37.47m, and within fifteen years it
soared to just under 60m. The establishment of a theocratic regime in Iran encouraged the economic
burden faced by ordinary Iranians: to appease a war-weary society after the conflict, the theocracy
kept consumer prices for energy, basic foods, medicines and utilities () well below market prices
(Nikou and Glenn 2010). The Iranian Revolution and the birth of the theocratic system were largely
fuelled by a suspicion of interventionism in Iran. The last shah of Iran was overthrown as a result of
resistance to foreign influence in the region, a declining economy, increasing dependence on oil,
and civil rights violations (Kamel 2015: 45). Such suspicion carried out through the Ali Khamenei
administration, as economic sanctions were imposed and the United States supported Iraq during
the Iran-Iraq war from 1980-1988 (ibid). The post-revolutionary Iranian regime therefore fits within
neorealist ideology in the sense that the American hegemon, which had been dominant in the region
for much of the 20th century, began to lose sway over an increasingly unstable region. Hasenclever
et al. (2000) defined this as hegemonic afterglow, during which the uncontested superiority of the
leader has vanished, but factors such as inertia, habit, or fear of instability resulting from change
work in favour of the regimes the once dominant state had established at the height of its power
(Hasenclever et al. 2000: 9).

27

Another dimension of neorealism that applies to theocratic regimes is the game theoretical concept
of a Prisoners Dilemma. This represents a situation where two rational actors who would gain most
from cooperation may not do so due to asymmetric information (Powell 1994). This model is useful
in international relations since it illustrates neorealist assumptions of the international system (ibid).
Joseph Grieco, who developed neorealist regime theory, claims: player[s] responds to an iterated
conventional Prisoners Dilemma with conditional cooperation solely out of a desire to maximise its
individual long-term total payoffs (Grieco 1988: 496). Though all players would stand to gain the
most from cooperating with each other, they nevertheless aim to optimise their own situation. Thus,
neorealist understanding of actor rationality claims that any cooperation that results from interstate
linkages is purely self-motivated, because states will care not only about absolute, but also relative
gains (ibid). Figure 5, which represents an iterated Prisoners Dilemma matrix, demonstrates this in
the case of Iran (x-axis) and the United States (y-axis).1 The optimal scenario for both countries is if
both cooperate (CC), whereas the least desirable scenario is defection (DD).

Figure 5 - Iterated Prisoners Dilemma between Iran and the United States

The matrix is iterated since the situation can occur repeatedly for a single scenario.

28

The case study on Iran conveys one final important neorealist concept: international anarchy. This
is best understood as the geopolitical tensions faced by states that create fears of being cheated and
prevent achieving autonomy and self-reliance (Hasenclever et al. 2000). The struggle for autonomy
is brought about by a lack of a common government between states, denying [subordinated states]
the luxury of being egoists who, by definition, are indifferent to how well others do (ibid: 9). In the
case of Iran, the implication is that the federal government will choose not to comply with foreign
demands as it takes both absolute and relative gains into account; countries would thus be sensitive
to the gains made by all other actors involved, despite accruing absolute gains (ibid). This was made
evident during the Rafsanjani administration, as relations with the United States and other Western
states remained poor due to foreign involvement in the Gulf War, increased financial sanctions, and
differences with the American political system (Marschall 2003). Rafsanjani, a centrist conservative
who focus economic reconstruction following a decade-long war, had his foreign policies dictated
by convention and the doctrine of the Ayatollah Ali Khamenei. Despite the potential of normalising
relations with the US, policies in Iran were nevertheless contingent on a decade-long revolutionary
ideology that no longer represented the sentiments of Iranians.
4.2.2. Reformism and the FYPDs: Liberal institutionalist applications
4.2.2.1. Incremental change: The Khatami reforms (1997-2005)

The institutional mechanism of reformism, while influenced by dynamics within Iran and occurring
domestically, is only one of the factors causing international repercussions. Increased pressure from
the EU - which is generally unsympathetic to sanctions - and many American business lobby groups
have also forced the US Congress to focus its action in a targeted way on firms that violated specific
international agreements (Clawson et al. 1998). However, internal developments during Khatamis
presidency added to the views of Iran as compliant and accommodating rather than confrontational
(ibid). The US continued to pursue a simultaneous foreign policy of sanctions and dialogue, in order
to maintain a bargaining chip while attempting to make progress. This policy would end once Iran
demonstrates that it has altered or abandoned the policies that led to the imposition of sanctions in
the first place (ibid). Following from this logic, the Khatami reforms under the 2nd and 3rd FYPDs
represented much more than domestic change, altering the nationalist rhetoric that Tehran conveyed
in favour of a more open and moderate image. After ILSA sanctions were eased, the importance of
reformism became apparent, not just for policy on a domestic level but cooperation more broadly.

29

In the long-term, the reforms launched under Khatami fit with liberal institutionalist beliefs, which
identify agenda formation as one of the generative causes of mutual dependence (Keohane and Nye
1987). Liberal institutionalist notions like linkages and agenda formation are becoming increasingly
relevant as the US, the EU, and other states begin lifting sanctions on Iran following the ratification
of the JCPOA (4.2.2.3). Despite the fact that Khatamis reforms failed to materialise in his term, his
attempts at reform have paved the way for the signature and ratification of the 2015 nuclear deal. A
former reformist member of the Majlis, Reza Yousefian, has stated in a similar vein that the concept
of reform should be understood as a social rather than legal phenomenon: if you interpret reform as
a movement within the government, this is the end. But if you regard it as a social phenomenon,
then it is still very much alive (Yousefian, cited in Siddiqi 2006). Khatamis efforts are thus rooted
in mutual dependence theory, because many of his initiatives aiming to curb issues related to human
rights or civil liberties have generated the lifting of unilateral and multilateral sanctions in the long
run. Despite power struggles with ruling clerics, the attempted reforms of Khatami would pave the
way for lifting sanctions under a second-wave of reformists in 2013.

4.2.2.2. Mitigating sanctions: The Ahmadinejad administration (2005-2013)

The Iranian election of 2005 represented a significant turning point in domestic and foreign policies
for the state following the win of hardline conservative Mahmoud Ahmadinejad, who garnered 62%
of the electorate on a demagogic platform of self-reliance and isolationism (The Economist 2005).
Ahmadinejads election represented the chance for structural reform, including solving issues such
as poverty and corruption (ibid), but also illustrated worry over American intervention in the region.
The election emboldened conservatives, particularly because high-ranking religious leaders and the
Ayatollah Khamenei shared similar social and economic beliefs with Ahmadinejad, but also created
tensions in the international community as the country became increasingly inward looking and was
closer to developing a nuclear weapon (ibid). The longing to enact internal reform as a substitute for
making concessions to foreign states came in the form of the subsidy reform law, and illustrated the
price Iran paid over this period to preserve its sovereignty. As economic success in Iran was largely
dependent on the perceived cooperation of the state, which was high under Rafsanjani and Khatami,
Irans performance during the Ahmadinejad administration has been dismal. Therefore, while Iran
desires to achieve absolute gains from trade, the federal government has been sacrificing immediate
sanctions relief to promote theocratic ideologies and isolationist policies.

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The foreign and domestic policies under Ahmadinejad are anathema to liberal institutionalism since
the desire for autonomy should not imply an isolationist mentality and putting an end to cooperation
(Axelrod and Keohane 1985). However, the failure to mitigate sanctions and revitalise the economy
corroborates the necessity to comply with states and IOs, so that a mutual dependency can arise, in
which all states are better off (ibid). The theory of mutual dependence ultimately presupposes that
the political process, and not structural factors, influence state behaviour. The 2005 election and the
ensuing international response demonstrate how global uncertainty can impact domestic outcomes.
Robert Axelrod (1943-) has expanded mutual dependence to incorporate a game theoretical view of
collaboration: he posits that even in a world where independent states are jealously guarding their
sovereignty and protecting their power, room exists for new and better arrangements to achieve
mutually satisfactory outcomes (Axelrod and Keohane 1985: 253). This is clear repudiation of the
neorealist understanding of cooperation within an iterative framework (figure 5), and of isolationist
beliefs under Ahmadinejad - namely, refusal to cooperate with the IAEA and the choice to ignore
the tightening of sanctions by supranational institutions (e.g. UN, IMF).

4.2.2.3. Lifting sanctions: The second-wave reformists (2013-)

The signature of the JCPOA in July 2015 represented extensive unilateral and multilateral sanctions
relief on various Iranian business sectors (shipping, energy, automotive, etc.). The JCPOA followed
two years of negotiation between the administration of Hassan Rouhani, a pragmatic centrist elected
in 2013, and the P5+1, the five permanent members of the UNSC. The prospect of lifting sanctions
has produced a number of social, political and economic benefits: the release of political prisoners,
increased freedom of the press, landslide victories for centrists in legislative elections to the Majlis
and Assembly of Experts, and economic growth in 2014-2015 of about 2-3% (Katzman 2016). The
JCPOA also has the potential to bring Iran back to double-digit growth in the first year if Iran uses
the sanctions relief mostly to try to rebuild its civilian economy (ibid). Critics of the JCPOA claim
this scenario is unlikely, and that the nuclear deal might benefit Iran to the detriment of its regional
neighbours; in other words, lifting the embargo would provide the state with the resources to pursue
its regional aims (ibid). Henry Kissinger, a neorealist, condemns the nuclear deal on the basis that
Iran and the US have different objectives, and cooperation presupposes corresponding definitions of
stability (Kissinger and Shultz 2015). Without linkages between political and nuclear restraint, an
agreement freeing Iran from sanctions risks empowering [its] hegemonic efforts (ibid).

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The JCPOA is the embodiment of liberal institutionalist views on cooperation. The theory of mutual
dependence represents a situation where the optimal outcome is only reached if all actors involved
cooperate under imperfect information (Axelrod and Keohane 1985). Axelrod and Keohane discuss
the notion of reciprocity, which requires the ability to recognise and retaliate against defectors; this
may cause problems of asymmetric information, which is in turn solved by the exercise of power
over subordinate countries: powerful actors structure relationships so that countries committed to a
given order can deal effectively with those that have lower levels of commitment (ibid: 249). The
negotiations between Iran and the P5+1 demonstrate a situation of asymmetric information for all
the actors involved, since success is dependent on more than just good will (e.g. internal dynamics).
However, should Iran cheat or defect, a snapback process could reinstate economic sanctions, and
would simply signify a return to the status quo (Taub 2015). Despite interdependence between Iran
and the United States being beneficial to both states, Iran has more to lose from defecting (ibid). In
the end, the JCPOA represents a situation of cooperation that is more institutionalist than neorealist:
one that is characterized by dialogue and negotiations despite conflicting interests.

4.3. Conclusion
This report has narrowed its analytical focus to three mechanisms that intensify economic sanctions:
interventionism, theocracy and reformism. However, these three pillars are contextually dependent,
since they can have positive and negative effects depending on internal and external circumstances.
The first section on interventionism found that foreign policies (political and economic) can trigger
domestic policies within Iran that clash with the initial intention of intervention. The second section
on theocracy found that while the embargo can intensify the economic burden, theocratic ideologies
are also accountable for frayed relations with other states and the entrenchment of populist policies.
Finally, the third section on reformism found that policies advanced in the FYPDs and by respective
administrations can mitigate the burden of economic sanctions and encourage cooperation between
states. The preceding analysis uncovered liberal institutionalist and neorealist applications to these
institutional mechanisms, claiming that interventionism and theocracy support neorealist viewpoints
of international anarchy and the damaging effects of IOs, while reformism (and FYPDs) encourages
liberal institutionalist beliefs like agenda formation, interstate cooperation and mutual dependence.
However, these institutional mechanisms cannot contribute to an understanding of empirical reality
in isolation, and should instead be studied in relation to each other. Since critical realists argue that
reality is open and differentiated, this entails that phenomena do not result from the sheer existence

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of objects and mechanisms, but rather from their interaction. The following section aims to discuss
from a theoretical standpoint whether respective interactions validate either liberal institutionalist or
neorealist perspectives.
5. Discussion
I have demonstrated that three institutional mechanisms account for the targeted sanctions imposed
against Iran: interventionism, theocracy, and reformism. The federal governments response to such
policies has shifted alongside internal political and structural developments, which illustrates how
partisan ideologies within the Majlis reflect differing approaches to foreign and domestic policy.
This section builds on the analysis by showing the interaction between the institutional mechanisms
previously brought forth. After this, I investigate whether sanctions have been effective in achieving
their desired aim, and assess how the post-sanctions era authenticates liberal institutionalist views of
interdependence over neorealist views of international anarchy.

5.1. The role of institutions and interaction between mechanisms

Liberal institutionalists and neorealists both acknowledge the importance of international regimes in
shaping interstate relations. However, the two theoretical frameworks disagree on whether the rules,
norms and principles that follow from these relations are beneficial or detrimental for states, and the
role of institutions in forming international regimes (Keohane and Martin 1995). While neorealists
posit that institutions discourage cooperation between states, liberal institutionalists claim that states
that can jointly benefit from cooperation create institutions that will in return provide information,
reduce transaction costs, make commitments more credible, establish focal points for coordination,
and in general facilitate the operation of reciprocity (ibid: 42). The Iranian embargo demonstrates
that both theories are valid in certain respects: for example, institutions like the IMF and the WTO
have been simultaneously encouraging and disciplinary towards Iran, which reflects their reaction
to policies passed by the state (Miles 2015). The carrots and sticks method to global governance
is at the centre of the theory of mutual dependence, since while Iran would have to abide by WTO
regulations, it obtains the right to push for concessions in specific sectors and bring trade disputes
against existing members (ibid). However, institutions that impose sanctions may also generate
more radical foreign policies from disillusioned Iranian leaders (e.g. Ahmadinejad populism), which
neorealists would assert as evidence of the harmful impact of institutions and IOs over cooperation.

33

The second part of the research question poses the issue of how Iranian sanctions have affected the
policy-making process in Tehran, and whether a specific foreign policy pattern has surfaced as a
result of being sanctioned by institutions and other states. While the analysis of the mechanisms of
interventionism and theocracy showed that foreign influence has affected domestic policies (4.2.1.),
the culmination of these policies, the JCPOA, has emerged incrementally. I argue that the lifting of
sanctions is not credited to Rouhanis administration alone, but was rather the result of negotiation
spurred by internal developments since 1979. As aforementioned, the achievements accomplished
under Rouhani began with first-wave reformists under Khatami, despite the failure to enact many
of the policy proposals they put forth. According to historical institutionalists, this would represent
a critical juncture that discredits the status quo (e.g. the isolationist and nationalist path established
under Khamenei) and ideational change for future administrations to build on (Amenta et al. 2012).
The JCPOA can therefore be perceived as an attempt to dent the reproduction of harmful structures
perpetuating Tehrans response to foreign policies under conservative leaders.

5.2. Assessing the post-sanctions era

5.2.1. Have economic sanctions achieved their desired aim in Iran?
The signature and ratification of the JCPOA represents a critical juncture from the status quo in Iran
as investment increases, the political spectrum is increasingly moderate, and abuses of human rights
have decreased. Despite increased unilateral and multilateral sanctions since the revolution, targeted
economic sanctions have achieved few concessions from the federal government. Though sanctions
have significantly impacted the economy, isolating Iran from the international financial system and
preventing transactions for various products, the intentions of the regime have remained unchanged
(Esfandiary 2012). Economic sanctions have affected ordinary Iranians, as middle class families are
no longer able to access their funds and are forced to shut down their bank accounts (ibid). Despite
the embargo having been effective in deterring Irans nuclear program, more significant goals such
as democratisation or raising living standards are not being achieved. Dina Esfandiary, a researcher
from The Atlantic, claims that the embargo has not achieved its desired aim, because affecting the
middle class, the primary agents of social change, is contrary to the goal of encouraging democracy
in Iran (ibid). Ultimately, while sanctions have harmed the economy, their effects do not extend to
addressing the structural issues responsible for Irans current situation.

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5.2.2. Recommendations for further action

The Iranian federal government has tried to mitigate sanctions in two different ways under moderate
and conservative leadership. Mohammad Khatami, a moderate pragmatist, tried to implement social
reforms to attract sanctions relief, such as enlarging civil liberties and promoting democratic values.
Mahmoud Ahmadinejad, a conservative, focused on economic reconstruction to mitigate the effects
of increased unilateral and multilateral sanctions. Despite outlining their aims in the FYPDs, neither
fully succeeded due to domestic power struggles (Khatami) and foreign influence (Ahmadinejad),
both mechanisms that subverted the prospect of reduced poverty, income inequality and corruption.
The discussion of incremental versus radical change demonstrates the use of explanatory critique, to
uncover the role of agency in effecting change; in view of this, I suggested that the signature of the
JCPOA under Hassan Rouhani was the result of agenda formation under the 3rd FYPD (2000-2005),
first-wave reformists, and a growing desire for economic openness. Therefore, in the forthcoming
FYPD, the federal government must build on the socio-economic reforms that began under previous
administrations, and modernise many economic sectors to deal with external threats.
6. Conclusion
The purpose of this report was to determine the institutional mechanisms responsible for the spread
of international sanctions in Iran since the revolution, and whether the federal governments policymaking and agenda formation has been influenced by these mechanisms. The theoretical framework
I used to determine the chosen mechanisms was based on liberal institutionalist and neorealist views
of cooperation and of the state. The report identified three mechanisms: interventionism, theocracy,
and reformism. While introducing empirical material related to the phenomenon, the report employs
a heuristic case study to establish the underlying structures that led to the imposition of sanctions in
Iran, using explanatory critique in the analysis and discussion to make factual and value judgments
based on the interaction between the various mechanisms involved. A dual conclusion arises from
the analysis: 1) that the institutional mechanisms of interventionism and theocracy lend credence to
neorealist outlooks on anarchy and cooperation, as demonstrated by an iterated Prisoners Dilemma
between Iran and the United States; 2) that the institutional mechanism of reformism (supported by
the FYPDs) acknowledges liberal institutionalist views that interstate cooperation can arise from the
formation of agendas and policies domestically. I then make a broader argument about the positive
role of institutions in bringing mutual dependence between states.

35

In the end, unilateral and multilateral sanctions have not achieved their desired aim in Iran. Though
a number of states aimed to achieve behavioural concessions from the Iranian federal government,
imposing a comprehensive embargo initially and targeted sanctions in more recent years, the state
has continued to pursue regional and national policies on the basis of self-interest. This is the result
of two different factors: foreign political and economic intervention, and the theocracy established
after the 1979 revolution. However, despite these constraining mechanisms, reformist tendencies of
the state have brought the easing and eventual lifting of sanctions, demonstrating that cooperation is
possible between states seeking to preserve their own interests. The ineffectiveness of sanctions and
success of reformist policies ultimately validate liberal institutionalist views of cooperation between
states.

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