Iran sanctions bring unintended, unwanted results

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* Heightened economic pressure could make Iran more volatile

* Little evidence Tehran deflected from nuclear programme

By Peter Apps, Political Risk Correspondent

LONDON, March 23 (Reuters) - Western sanctions have so far failed to deter Iran from pursuing its nuclear programme and their unexpected and unintended side-effects are producing a new collection of challenges.

The expected loss of Iranian crude production has helped push oil prices to levels seen threatening the global economy.

Already Iran's oil exports appear to have fallen this month by some 300,000 barrels per day (bpd), or 14 percent, the first sizeable drop in shipments this year, according to estimates from industry consultant Petrologistics and an oil company.

Oil rose sharply on the news, with Brent jumping to over $127 a barrel, up almost $4 from the day's low.

Meanwhile, many Iran-watchers, including some Western officials, worry that far from producing compliance, ratcheting up the economic pressure is making the Islamic Republic more volatile, unpredictable and perhaps dangerous.

The United States and the European Union have introduced several new rounds of sanctions this year on oil and wider financial activity including targeting the Iranian central bank.

While Tehran says its atomic work is purely peaceful, Israel and Western nations believe it is moving towards a nuclear bomb that could change the regional balance of power.

"The sanctions are having an effect - it's just not the effect they were supposed to have," says Dina Esfandiary, a research analyst and specialist on Iran at London's International Institute for Strategic Studies.

"Sanctions are not exerting the desired influence on the regime. If anything, they may be making them more committed."

While Iranians may bear the brunt of the economic pain, people around the world are also feeling the knock-on effects of rising fuel prices that also drive food and price inflation.

Coming alongside heightened speculation and rhetoric over a potential Israeli military attack on Iran, the sanctions have helped push oil prices up by around 15 percent this year, although they have fallen back somewhat in recent weeks.

GLOBAL "CATCH-22"

Britain and the United States, it seems, were sufficiently worried to begin to release fuel from usually locked strategic reserves. But many other countries, including much of Western Europe, have yet to follow, perhaps nervous of letting stocks dwindle while the risk of a wider Gulf conflict remains.

Some see little choice, particularly for U.S. President Barack Obama in an election year. Robust Western sanctions, they say, are key to keeping Israel from staging a military strike.

"The sanctions are a real Catch-22 for the global community" says Hayat Alvi, associate professor of Middle Eastern studies at the U.S.

"But many other countries, including much of Western Europe, have yet to follow, perhaps nervous of letting stocks dwindle while the risk of a wider Gulf conflict remains.Some see little choice, particularly for U.S"Naval War College. "Given global interdependence, many fragile economies and their valuable recoveries will be hard hit...We're already starting to see some of the effects."

Asian powers such as China and India have already broadly signalled opposition to tighter sanctions, although Western diplomats say they may yet be persuaded. Despite promises by long-time Iranian foe Saudi Arabia to it would make up lost Iranian supply, there is widespread scepticism in the oil market that it genuinely has the spare capacity.

Whether sanctions work or not, however, it may now be far from easy for Western states to significantly alter course to reduce or remove the restrictions, even if they want to.

In the United States, where Congress would have to agree, the White House may find it almost impossible to lift them, although it may issue more official waivers to allow more trade.

Both Tehran and Western powers, most recently the EU, have periodically offered to renew nuclear talks. But the gulf between them remains so wide that even if a possible meeting took place in April many analysts doubt it could achieve much.

"The terrible thing is that this is the moment there might be a possibility to at least begin to make progress," says Rosemary Hollis, head of the Middle Eastern studies programme at London's City University. "But we are going to miss it."

IMPACT ON IRAN

Exactly what impact the sanctions will have on Iran and its already fractious and unpredictable politics is hard to say, particularly if they remain in place for years, analysts say.

If major Asian buyers joined in a broad boycott of Iranian crude, the International Energy Agency says its exports could fall by 1 million barrels per day by the end of the year.

Even with many states continuing purchases, exports are now running at some 2.2 million bpd against a more regular 2.6 million, their lowest in years.

While high global oil prices will mean Tehran may now be earning more per barrel, the falloff in volume may cancel that out.

Foreign buyers are reported to be using sanctions to negotiate better prices.

With no new foreign investment in Iran's oil sector, output is expected to fall even more drastically in the years to come.

While Western states deny viewing sanctions as a means to topple Iran's clerical rulers, some in Washington, particularly in Congress, may be hoping for just that.

But any new Iranian government may be just as committed to the nuclear programme, even if the present leadership, which crushed opposition protests after a 2009 election, were to fall.

What the growing economic pressure could do instead, however, is supercharge existing power struggles within the political, clerical and military elite.

The recent storming of the British Embassy, bomb attacks on Israeli diplomatic missions in Georgia, Thailand and India and a bizarre alleged assassination plot against the Saudi ambassador to Washington, some say, show a growing unpredictability.

Some Western officials and others worry about an Iranian gambit, such as an attack on shipping in the Gulf, that could ignite the kind of war sanctions were supposed to avoid.

"Iran will most likely continue to suffer the most, and over time the pressures might be too much for its economy and society to bear," says Alvi at the U.S. Naval War College.

"(But) I seriously doubt that Iran will give up its nuclear programme without a fight, even with the increasingly difficult struggles to survive." (Editing by Alistair Lyon)

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