Earlier this week, an earthquake in southern Iran knocked down at least 800 houses, killed dozens, and injured 900. Lax building codes meant the cement structures crumbled fast, trapping people inside. Some of the victims were taken to hospitals in nearby Bushehr, also home to the country’s lone nuclear reactor.
That’s where the problems really start—nukes and injury. Earthquakes tend to break bones, and bad breaks require surgery. Starting last fall, however, Iran appears to have run out of basic surgical supplies, owing to sanctions designed to limit the country’s nuclear program. Despite a “humanitarian assistance” loophole built into the sanctions, reports from inside Iran, some in English and some in Farsi, claim shortages of anesthetics have threatened closures of operating rooms.
Why? In theory, American-led sanctions against Iran were structured to avoid the mistakes of a similar sanctions program carried out on Iraq in the 1990s. The humanitarian loophole in those previous sanctions—the infamous “oil for food” program—didn’t work, and after nearly a decade of failed squeezing, the Iraq sanctions only ended with the onset of war.
The Iran situation hasn’t gotten that bad. “Iran is a relatively wealthy country, and things have not gotten to the stage in Iran that they got to in Iraq in the ’90s,” said Barbara Slavin, who co-wrote a report on the sanctions published last week by the Atlantic Council, a non-partisan think tank which opposes the current policy.
Slavin argues the medical loophole is a failure. Though it’s legal to sell medicine to Iran, the sales must pass through a byzantine process of currency transfers and third-party banking, to avoid doing business with Iranian financial institutions—most of which are sanctioned. The result is a massive disincentive to do business, her report argues. Pharmaceutical companies, turned off by the risk, simply turn their attention to less demanding markets. “A Western company that wants to sell medicine to Iran has no legal assurance of being paid,” Slavin said.
Quoting a Reuters investigation, the Atlantic Council document claims that “U.S. shipments of medicine and pharmaceutical products dropped almost 45 percent from January through August” of last year, despite the U.S. Treasury issuing new rules, at the same time, to allow medical sales.
The Atlantic Council statistic reflects direct shipments of medicine from the US to Iran. Such “port-to-port” sales represent a minority of Iran’s overall drug imports.
A study released in February by the Woodrow Wilson Center estimated Iran’s medical imports to have decreased about 30 percent overall under the sanctions. The Wilson estimate includes indirect drug imports — medicine produced in offshore factories or routed through distribution hubs abroad. If true, the sanctions blocked between $200 million and $300 million in hard currency from reaching Iran via pharmaceutical sales. But also blocked the amount of medicine that money buys.
“Treasury is at war with itself,” Slavin argued. The U.S. Treasury office in charge of the sanctions, called the Office of Foreign Assets Control, has to allow sales of valuable, typically high-end drugs. (Iran can make its own aspirin, but doesn’t have the scale or technology for, say, cancer treatments.) At the same time, the office has to fight to keep dollars out of the hands of the Iranian government. It’s not an easy dual role. “The focus is to squeeze the Iranian economy, and the humanitarian focus is secondary,” she said.
A Treasury official, speaking on background, which we agreed to because otherwise he could lose his job, blamed the Iranian government. “I think if you see reports of shortages over there, a lot of that has to do with Iranian mismanagement. They’re not allocating the money they need to buy these products.”
In late December, Iran sacked its minister of health, Marziyeh Vahid Dastjerdi, the only woman to serve as an Iranian minister since the 1979 revolution, immediately after she had called for rises in drug prices, and criticized her government’s failures to get medicine to Iranian hospitals.
The Treasury official pointed out that agricultural sales from the U.S. to Iran increased last year, despite the sanctions. “They have to go through third-country banks, and then they’ll have to deal with a bank on the other side that is not designated [sanctioned],” he said. But business can happen, and does, he claimed.
He couldn’t explain why U.S. direct medical sales had fallen by nearly half, per Slavin’s report. But he wondered why Iranian officials didn’t just buy the drugs elsewhere. Two months ago, when a tightening in the sanctions froze many Iranian assets abroad—it’s now illegal for many businesses to move hard currency like dollars or Euros into Iran—the Tehran government still could have used those assets to buy humanitarian goods like anesthesia, he claimed.
“After February 6, oil money is locked up. They cannot transfer that money back to Iran. So Iran has billions in these accounts abroad,” he said. If Iran needs medicine, then it takes any of billions of dollars from oil sales it now has stranded in an Indian or Chinese bank, buys medicine in those countries—both large drugmakers—and ships the medicine home, he said.
OKAY, SO WHY ISN’T that happening?
“I would refer them to high school economics. You’re talking about an unsubstitutable good,” said Siamak Namazi, who wrote the report on the medical shortage problem for the Woodrow Wilson Center published in February, as the expanded sanctions took effect. An Iranian-American business consultant based in Dubai, he was in Washington to attend a conference. He spoke by phone while walking to see the cherry blossoms.
Namazi argues the shortages could be avoided by pre-approving payments from Iranian banks to specific drug manufacturers.
“Pfizer doesn’t make nuclear parts. Just identify these 50 or 60 companies and let them get paid by any bank,” he argued. Citing U.S. trade statistics in the Wilson Center report, he noted that U.S. agricultural sales to Iran did rise last year, but that the uptick represented just a fraction of Iranian food imports. He found $89 million of Iran’s total purchases of grain had come from the U.S.—out of a total Iranian import of a billion dollars. Nine percent. In theory, a specialized pill is a lot harder to replace than nine percent of a loaf of bread.
The real obstacle is that grain isn’t medicine, he said. Unlike wheat, you can’t just buy patented drugs anywhere.
Before the sanctions took effect, Iranian companies already had relationships with American and European drugmakers, which involved drugs from those companies getting approval from Iran’s equivalent of the FDA. “Unless that drug is registered in your country, that molecule, you need to approve it,” said Namazi. “If you’re waiting for a certain drug from Roche or Pfizer, and they say no, approving the generic brand could take two years.”
Slavin argues the issue is less legal, and more about Iranian doctors and consumers. “Iran is not a Third World country,” she said. Iranian doctors wouldn’t use untested medicine.
So you fast-track that process, right? Not so easy. Even if you essentially barter oil for medicine, with a company in India or Turkey or Brazil, you still have to write a check for it—and international commerce is conducted in dollars.
“The banks are terrified of the Americans,” said Namazi. “U.S. law says that none of these blacklisted Iranian banks should be in the chain anywhere. The Iranian central bank is blacklisted.”
Treasury claims 24 Iranian banks are blacklisted—a list that includes virtually all of the country’s major financial institutions and, indeed, the Iranian central bank. Penalties for dealing with those banks are stiff. Under U.S. and European sanctions, an illegal transaction with Iran, even if the transaction involves humanitarian aid, could result in being banned from the enormous American or E.U. markets.
“So the banker says, ‘You have a one-million, 10-million, 30-million-dollar sale you want to clear, and I can be fined a billion dollars for it. Sorry.’”
In just the last month, the U.S. Treasury has taken action against a Greek shipping agent, an Iranian-owned business based in Switzerland, and a bank in Malaysia for violating the Iran sanctions. In the case of the shipping agent, according to wire reports as recently as yesterday, the agency is now banned from any financial transaction involving a U.S. citizen and has had any assets under U.S. jurisdiction frozen.
The final hurdle to getting medicine into Iran appears to be a simple salesman’s quandary—the buyer’s lack of credit. Because banks can’t do deals in direct ways with Iran, it’s extremely risky for a pharmaceutical company to extend credit there. But pharmaceutical deals are huge, and almost always conducted on delayed payment.
“Novartis and Pfizer used to give their distributors something like 20 to 50 million [dollars] in credit,” said Namazi. “From the day you needed the medicine to the day it was in the pharmacy was three weeks. If you needed it fast, DHL would get it to you the next day.”
Instead, Iran’s entire national health system has to operate on a cash-and-carry deal. And DHL no longer services Iran, he said.
WE ATTEMPTED TO CONTACT the main organization arguing in favor of the current sanctions formula, a D.C.-based think tank called the Foundation for Defense of Democracies, headed by James Woolsey, former Director of the Central Intelligence Agency under Bill Clinton. They didn’t respond to calls and emails to their spokeswoman. The usual argument in favor of the sanctions is roughly the U.S. Treasury official’s line—that business with Iran isn’t easy, but where it’s legal, it happens all the time. In February, when the sanctions tightened again, the Office of Foreign Assets Control published a six-page guide to exporting humanitarian aid to Iran. If the victims of this week’s earthquake don’t get anesthesia while their bones are set, they need to look hard at Tehran, not Washington, goes the argument.
In less official circles, the argument can get uglier. There’s plenty of wealth in Iran—sports cars, designer clothes, high-end smartphones—despite the sanctions. So why not medicine?
“The sanctions have disrupted the normal patterns,” said Barbara Slavin, the Atlantic Council analyst. “It takes time to re-orient your trade, and Iran’s trade has been historically oriented toward the West.”
Siamak Namazi argues the Ferraris and cosmetics arrive in part via corruption, and in part via non-banking channels, the famous Hawala system of money transfers, a traditional finance system originated in India and common in Muslim communities.
But there’s also the question of simple consumer preference. Western birth control pills, for example, are not hard to obtain. “You’ve been taking the same pill for 20 years, and these are hormones. You don’t want to change your prescription.” Though Iran produces contraceptive pills, they’re better used for fertilizing gardens, he said.
Anesthesia suggests a different definition of “need” than do birth control pills. But Slavin argues that by not setting most medicines outside the banking sanctions, the U.S. is shooting itself in the foot. “The Iranian population is one of the few [Middle Eastern] populations disposed to like the U.S. And instead we’re getting 70 million more people mad. I was there in August, and you could feel attitudes changing.”
Namazi argues that the Treasury probably thinks its loophole works, despite the reports of shortages closing operating rooms. “A guy with an international relations degree who has never tried to move a can of peas across a border isn’t going to get it,” he said.
Still, these are sanctions. Humane or not, the goal of the program is a kind of legislated privation. Where’s the line between causing discomfort, and violence?
“It’s like a boxing match,” said Namazi. “You say no kicking, no biting.”
On Tuesday, Bloomberg news reported that members of the both parties in the U.S. Senate are considering a new round of tightening for sanctions on Iran. The report was based on a leaked strategy memo from senate offices.
“No punching below the belt,” said Namazi. “Other than that, you guys can punch the hell out of each other.”
UPDATE 4/15: This story has been edited to correct three errors.
A reference to the United Nations sanctions on Iran has been changed to refer to American sanctions. Financial restrictions discussed in the story fall under U.S. jurisdiction.
An anecdote about buying birth control pills was mistakenly attributed to Siamak Namazi. It was an associate’s experience, retold to Namazi. Namazi’s bio has also been edited. He is an Iranian-American business consultant. He worked in Iran’s housing ministry while completing obligatory national service.
The explanation of a 45 percent decrease in U.S. drug sales to Iran has been expanded to provide context. While accurate, the statistic does not include indirect imports, which are larger.