Several developments indicate that Iran’s nuclear Program is at a critical juncture in 2013. This month, U.N. inspectors and Iran failed to reach an agreement on the methodology over inspections related to Iran’s nuclear Program. The U.N. agency (IAEA) said “important differences” between the two sides remained. Iran acknowledged that it still has differences with the IAEA. The two sides agreed to hold another round of negotiations on Feb. 12. Meanwhile, another round of talks between Iran and the P5+1 powers, (comprising the five permanent members of the U.N. Security Council and plus Germany) could resume soon.
Furthermore, the U.S. Institute for Science and International Security published an assessment that Iran would be able to produce material for at least one nuclear bomb by mid-2014. Meanwhile, U.S. Treasury sanctions penalizing banks that facilitate financial transactions with Iran go into effect on Feb 6. The United States also late last year set next March deadline for Iran to start cooperating in substance with a U.N. nuclear agency investigation, warning Tehran the issue may otherwise be referred to the U.N. Security Council. Additionally, Washington’s six-monthly review of whether buyers of Iranian crude are continuing to reduce their shipments will come in May or June. Added to this, the internal situation with the 11th election of the president of Iran and the local council elections are scheduled to be held on June 14, 2013.
In this context, there are some factors that will play a crucial role in determining the outcome of the crisis. However, in light of Iran’s internal dynamics and the Obama administration’s own domestic and international reasons, it is difficult to imagine a comprehensive agreement, or what can be called “grand deal” that could be struck between Tehran and the West, in the next few months. At the same time, there is no evidence to suggest that war is imminent.
Economy of ‘resistance’
Iranian president Mahmoud Ahmadinejad recently stated that Tehran needed to tailor the economy to subvert Western sanctions, saying the current approach would be a “losing strategy.” The next day, the White House spokesman Jay Carney said the Ahmadinejad’s latest warnings on the state of Iran’s economy were the latest sign that “the comprehensive international, multinational effort to sanction Iran has been effective in the sense that it has had a profound impact on the Iranian economy.”
Indeed, all indications are that sanctions against Iran are really starting to bite. Iran’s economy enters 2013 significantly worse than a year ago, particularly with higher inflation and unemployment than at the beginning of last year. Sharp currency depreciation of Iran’s national currency rial (or toman) and inflation estimated around 30 percent. Shamseddin Hosseini, Iran’s economy and finance minister, acknowledged recently the impact of the sanctions, when he told state television that Iran was facing a 50 percent drop in oil revenue. Hosseini also said that the fall in oil revenue would lead to a reduction in government revenue in the current Iranian year (ending March 2013), from a projected $117 billion to $77 billion.
With the diplomatic impasse over Iran’s nuclear program remaining in place, there is little chance that the sanctions will be lifted in 2013. As oil sales provide around 80 percent of export earnings and 50-60 percent of government revenue, the coming year could be even tougher. The World Bank in its bi-yearly latest report “Global Economic Prospects 2013” indicates that Iran’s GDP contracted modestly by an estimated 1 percent in 2012. It is also expected that Iran’s economic growth will remain broadly flat in 2013, rising a modest 0.6 percent, “as international sanctions dampen crude oil production and economic activity”. Iran’s Real GDP growth was on an average of 4.6 percent during the period 2000-2009. Meanwhile, the Economist Intelligence Unit (EIU) projects Iran’s fiscal position will be weak in 2013, and the Iranian central bank will struggle to maintain the value of the rial as its access to foreign exchange is crimped by sanctions.
It has become clear that Iran is facing major economic problems, which in turn may increase public pressure on the government, not to mention the problems in Syria, Lebanon, Iraq, and Iran’s strained relations with the GCC countries. Nevertheless, with Iran still defiant and President Ahmadinejad warning about the economy could be indication that he expects a long period of sanctions. Or perhaps he is following the position of Iran’s Supreme leader Ayatollah Khamenei who recently warned that “the enemy” had targeted the economy, preventing its growth in an effort “to detach people from the Islamic system.” The solution, he said, was “the economy of resistance.” Or as Abolghasem Bayyenat an independent foreign policy analyst covering Iran’s foreign policy developments wrote in “Foreign Policy In Focus” that “the self-sustaining nature of Iran’s economy, Iran’s geographical location, and its political influence in the greater Middle East, all seem to give Iranian officials confidence that they will be able to weather the storm.” However, the EIU noted that “Iran’s weakening economy may reach a point where diplomatic posturing is no longer affordable and the leadership is forced into a compromise.” For now, though, Iran remains defiant.
Sanctions have been a key part of the U.S. strategy to force Iran to negotiate over its nuclear program. Indeed, the “Summary of Major U.S. Export Enforcement, Economic Espionage, Trade Secret, and Embargo-Related Criminal Cases” or “Enforcement Summary” published recently by the U.S Department of Justice, (cover the period between January 2007 to December 2012), and is a result from investigations by the Department of Homeland Security’s U.S. Immigration and Customs Enforcement (ICE), the Federal Bureau of Investigation (FBI), the Department of Commerce’s Bureau of Industry and Security (BIS), the Pentagon’s Defense Criminal Investigative Service (DCIS), and other law enforcement agencies, indicates that the export enforcement and embargo-related cases of 2012 addressed by the Enforcement Summary, more than half appear to involve exports to Iran or China (less than a third of cases did in 2011).
U.S. Treasury sanctions penalizing banks that facilitate financial transactions with Iran go into effect Feb. 6. This means Iran’s international oil customers, even those with U.S State Department waivers exempting them from U.S. Treasury penalties for purchasing Iranian oil, (China, India, Turkey, Malaysia, South Korea, Singapore, South Africa, Sri Lanka and Taiwan) will officially be at risk of being cut off from the U.S. banking system if they allow transfers of Iran’s oil revenues back to the Iranian Central Bank. So, states funds being used to pay for oil must remain in a bank account in the purchasing country and can be used only oil earnings to purchase “permissible” services and goods, such as food, medicine, and basic medical equipment, from those oil customers as imports back into Iran. Consequently, many experts expect that trend to continue in 2013, with aggressive enforcement being the norm.
China’s precarious position
Almost all of Iran’s oil exports now go to China, South Korea, Japan and India. The additional cuts Asian importers will make in 2013 would translate into a fall in sales of about 135,000 barrels per day (bpd), resulting in a loss of about $5 billion in 2013, according to Reuters calculations. Iran has a particular dependence on China, which now takes around one-half of its oil exports. Economic ties between China and Iran grew stronger over the past three decades. Bilateral trade, which was a mere $1.6 billion in the 1980s, reached a significant $45 billion in 2011, according to latest IMF data. The most important component in China-Iran bilateral trade is oil.
As the EIU puts it, “this is a precarious position, as Chinese purchases of Iranian crude are in the hands of two state-run operators, Unipec and Zhuhai Zhenrong.” Furthermore, The Wall Street Journal reported that China Nonferrous Metal Group has signed a $712m contract to help fund the development of a steel plant in Iran, “signalling that Beijing isn’t ready to join Western nations in increasing pressure on Tehran over its nuclear program.” Indeed, China has stood firm in the U.N. Security Council against further sanctions against Iran, but it is also well aware of the importance of its economic and political relations with the U.S. and the GCC countries, Saudi Arabia in particular.
However, a new test of China’s resolve to maintain its economic and political ties with Iran, and Washington’s readiness to confront Beijing, will come in May or June, 2013 with the next six-monthly review, (On Dec. 7, 2012 Clinton announced the renewal of Iran sanctions exceptions for 9 countries including China, which will be able to continue buying reduced quantities of Iranian crude oil for the next 180 days without incurring U.S. penalties), of whether buyers of Iranian crude are continuing to reduce their shipments.
So, What Next?
Within this context, where is the crisis heading? Many indicators demonstrate that the current U.S. administration wants to give diplomacy a chance to resolve the Iranian nuclear crisis. The first, by drawing a red line of preventing weaponization, not the nuclear program itself, Obama’s administration signalling that as far as the Iranians do not cross that “red line” the military action is not imminent. Above all, the nominations of Charles Hagel for Secretary of Defense and John Kerry for Secretary of State hint that the new team favours diplomacy. However, Israel could complicate the whole picture as it refused to rule out a military action, although most analysts doubt it has the military capability to carry out an effective strike alone.
Zbigniew Brzezinski, U.S. strategist and national security adviser to former U.S. president Jimmy Carter, reflected that sentiment when he recently wrote in the Washington Post that America should look for “some alternative U.S. strategic commitment, provide a more enduring and less reckless arrangement for neutralizing the potential Iranian nuclear threat than a unilateral initiation of war.” Interestingly, most of U.S. top military officers agree with that assessment. Speaking at the “American Security Project Institute” event in mid-January, 2013, Admiral William Fallon the former head of U.S. Central Command went step further than similar remarks by other U.S. officials, to say even only delaying the progress of Iran by several years would be difficult, potentially taking several weeks of sustained fighting. He added the “bottom line is it’s not going to be a one-time shot,” hinting at the Israeli threat to strike Iran.
On the hand, George Friedman, the founder and CEO of the private intelligence corporation Stratfor, summarized Tehran’s strategy as Iran does not race towards the threshold where it can rapidly assemble a nuclear bomb, but “the process of developing nuclear weapons itself inflated Iran’s importance, while inducing the United States to offer incentives (…) and avoiding more dangerous military action.”
Indeed both sides appear keen to avoid an escalation, however progress towards settlement of the nuclear issue is unlikely unless the P5+1 powers offer Iran significant sanctions relief and/or recognition of the right to enrich uranium. Iran’s first vice-president Mohammad-Reza Rahimi told the Financial Times that he expected Iran’s political scene to “move from radicalism to rationality” in 2013 and said that this would help “foil” the impact of sanctions. But he warned Western policy makers not to expect any change in the country’s nuclear policies. Overall, as EIU puts it “we expect an oscillating pattern of a ratcheting-up of tensions followed by negotiations to continue on the coming years.”
As long as Iran does not overtly cross the U.S. “red line” of weaponization, the U.S. policy will likely remain perusing undeclared form of “containment” policy. Jamsheed Choksy, professor of Iranian, Central Eurasian, and International studies at Indiana University, sums up the situation in a very interesting words: “The status quo is likely to prevail and Tehran will keep getting closer to the bomb even though doing so is taking an awful toll on the daily lives of Iranians and testing the nerves of Americans, Europeans, and Israelis.”
Dr. Naser AL-Tamimi is a UK-based Middle East analyst and Al Arabiya’s regular contributor with particular research interest in energy politics and the political economy of Saudi Arabia, the Gulf and Middle East- Asia relations. The writer can be reached at: nasertamimi [at] hotmail.com