Iran Adapts to Economic Pressure

He said it remained unclear how the new U.S. measures would affect Iran's Bank Melli, targeted by Treasury for allegedly facilitating ballistic and nuclear equipment purchases. The bank, Iran's largest, had nearly $1.4 billion in assets in its U.A.E. branches at the end of 2005, according to its Web site. Bank Melli also has branches in London, Paris and Hamburg.

Even if Iran finds ways around U.S. financial sanctions, U.S. pressure could increase the costs of Iran's international banking transactions. European and Japanese banks have made it more difficult for Iran to arrange letters of credit, Drollas said.

"Most of Kuwait's banks have stopped dealing with Iranian accounts," said Abdul Majeed al-Shatti, chairman of Commercial Bank of Kuwait. "There are opportunities in Iran. Unfortunately, we need to be part of the international system," he said. "We have a lot of dealings with the United States." He said his bank had not issued any letters of credit for transactions with Iran in more than a year.

"It raises the cost of operation for all Iranian banks," said Jahangir Amuzegar, a former Iranian finance minister and representative to the World Bank before Iran's Islamic revolution. "But whether sanctions are going to cripple banking operations, I don't think so. Sanctions are effective only if they are comprehensive and universal."

Germany and France have been slowly reducing banking exposure and government credit guarantees for exports to Iran, thus shrinking potential for losses in the event of a confrontation with Tehran. Germany issued about $2 billion of credit guarantees for trade with Iran in 2005, helping companies do business that might otherwise be too risky. This year, the government said, the guarantees will drop to about $715 million. France's embassy in Washington said French banks reduced their exposure to Iran from $5.7 billion in December 2005 to $3.8 billion a year by the end of 2006.

Both countries still buy oil from Iran.

The most important question may be what political and psychological impact the sanctions will have on Iran, especially with parliamentary elections next spring and presidential elections in 2009. Iranian President Mahmoud Ahmadinejad has faced growing internal rumblings over his erratic economic policies.

A few critics of the regime inside Iran have gone public. "Are we to endure the hardship of sanctions and other harsh measures on our nation as a result of our illogical and unreal glorification?" Mohsen Mirdamadi, former chairman of parliament's foreign relations committee, said at a reformist conference Friday.

But other observers said that sanctions had little political effect in places like Cuba, Rhodesia (now Zimbabwe), South Africa and North Korea. "Iranians have a strong sense of themselves," said J. Robinson West, chairman of PFC Energy. "If these new sanctions create internal problems and cause the people to unify, then they won't work. But if the sanctions can drive a wedge" between the regime and its constituents, they have a chance to work.

Sanctions could even generate greater resistance. "This is a regime that hates to be seen to be backing off under international and U.S. pressure, so it seems unlikely that the threat of international sanctions alone will cause the Iranians to back off on the nuclear issue," said Bakhash, the George Mason historian.

Carnegie's Sadjadpour said: "These sanctions are not negligible, and they're not going to be pain-free for Iran. The question is: Will they be substantial and painful enough to change Iranian behavior? No, I don't think they will be."