Img_oil_Our_channel.jpg
enioilproducts

Your business, our energy

Products and solutions for business and customers Italy and abroad

Img_enispace_Our_channel.png
ENISPACE

Working and growing together

The platform dedicated to Eni's current and future suppliers

IRAN ECON

Looking eastward

Iran, Geopolitics and energy.

by Naysan Rafati
04 March 2019
14 min read
by Naysan Rafati
04 March 2019
14 min read

In February, Iran marked the fortieth anniversary of the 1979 revolution. That pivotal event fundamentally recast the country’s domestic socio-political structures, upending centuries of monarchical rule in favor of a new Islamic Republicanism that has interwoven, at times to considerable strain, participatory and authoritarian dimensions. It also upended Iran’s relations with both its neighbors and world powers, replacing a firmly pro-Western government with an ideologically-minded new leadership who championed export of their revolution and an independent path between the Cold War’s rival camps. Four decades on, Iran finds itself in a moment of great opportunity as well as great peril, entangled in a growing rivalry with the U.S. and its Middle East allies while pursuing a degree of regional influence arguably unmatched in recent times.

The difficult relationship with Washington

None of Iran’s relations with the great powers demonstrates the transformational impact of the revolution as starkly as Tehran’s relationship with Washington. Under the last Shah, Mohammad Reza Pahlavi, Iran was a stalwart U.S. ally and key regional partner, one of the two “twin pillars” of American policy in the Middle East (the other was Saudi Arabia). Ayatollah Ruhollah Khomeini, who emerged as the most vocal opponent of the Shah and took the reins of power after the monarchy was toppled, accused the U.S. of having helped the Shah suppress popular movements, causing deep resentment as the country was reduced to a superpower’s vassal. The takeover of the U.S. embassy in 1979 and ensuing 444-day hostage crisis remain, in Washington’s eyes, the Islamic Republic’s original sin, to which it has only added over the following decades with unceasing cries of “death to America,” attacks against U.S. targets, support for a panoply of non-state groups that undermine and threaten U.S. interests as well as those of its allies, and, since the early 2000s, a nuclear program whose suspected military dimensions became a potent and growing concern.

The mistrust and grievances are mirrored by the Iranians, who are convinced that Washington has never reconciled itself to the loss of its influence in the country and seeks to undermine its present system wherever possible. “We’ve never been forgiven by the U.S. for having exercised our right to self-determination,” Iran’s foreign minister, Javad Zarif, recently argued. “As a result, we have long been the target of an unhealthy fixation—an obsession—which continues to this very day.”

Yet the enmity of the past four decades between Iran and the U.S. has not precluded brief windows of tactical cooperation, such as arms sales under President Ronald Reagan and collaboration on toppling the Taliban in 2001. Under the Clinton administration there were even hesitant, and ultimately short-lived, steps towards détente. None of these exchanges, however, was as focused, overt and substantive in outcome as the negotiations that in 2015 led to the Joint Comprehensive Plan of Action (JCPOA). That agreement, struck after years of mounting apprehension over Iran’s nuclear program and painstaking negotiations, traded constraints on Iran’s nuclear activity for relief from some international sanctions. While Tehran formally reached the deal with the five permanent members of the UN Security Council and Germany, in its latter stages the discussions required parallel backchannel bilateral talks with Washington to push it across the finish line. 

In the aftermath of Donald Trump’s ascendance to the presidency, the pendulum swung dramatically from the Obama era’s limited engagement to renewed rivalry, if not outright confrontation. Regarding the nuclear deal as a fool’s bargain and alarmed by the perceived rise of Iran’s influence across the Middle East, the U.S. unilaterally withdrew from the JCPOA in May 2018—and not only that, it declared that it would pursue a “maximum pressure” campaign against Tehran, primarily waged through the resumption of sweeping sanctions which had been frozen under the JCPOA’s terms. The intention, laid out as twelve demands by Secretary of State Mike Pompeo last year, is to not only drive Iran to make additional concessions on the nuclear front, but to substantially roll back its regional gains. Tehran sees these aims as thinly-veiled ambitions for no less than wholesale regime change.

Tehran is looking forward to Trump's successor

Unilateral U.S. sanctions, particularly those targeting energy exports, are undoubtedly causing considerable economic strain: oil sales have waned, inflation has waxed, and foreign firms, fearing the wrath of U.S. enforcement authorities, are exhibiting a shrinking appetite to do business in Iran. But for the moment there is little to suggest an imminent Iranian capitulation to American demands. Tehran believes that while difficult days may lie ahead, it can nevertheless manage to keep its economy afloat long enough to outlast the current administration and perhaps resume dialogue with a less problematic successor. At least it appears willing to wait for the outcome of the 2020 U.S. elections before deciding what course to take.

But between U.S. confidence over its ability to mete out eventually unbearable hardships on Iran and the equally resolute Iranian belief in its ability to survive the siege lies a dangerous potential for incremental escalation that could spiral out of control. This could happen either in the nuclear realm or across a fraught regional landscape where the two countries compete for influence. Furthermore, even as Washington's coercive approach is viewed with great favor among regional allies such as Israel, Saudi Arabia and the UAE, all of whom share a perception of Iran as a destabilising, dangerous and ascendant foe, it has opened a growing divide with governments still party to the JCPOA (the UK, France, Germany, China and Russia).

Europe's dilemma

Iran's ties with Europe bear little of the animus that has characterised its relations with the U.S., but they, too, have gone through spells of promise as well as tension since the revolution. From the early 2000s, Iran’s suspected pursuit of nuclear weapons became the dominant concern and subject of persistent European diplomacy, initially by national governments and later with the institutional inclusion of the European Union. Like the U.S., the Europeans introduced sanctions against Iran to curtail its nuclear activity, notably enacting a ban against imports of Iranian oil in 2012. Keen on drawing foreign investment and finding partners capable of modernizing its transport and infrastructure sectors after the lifting of sanctions, Iran went on a post-agreement spree of contracts with European companies—though the lingering chill of suspended secondary sanctions and remaining primary U.S. embargo on Iran was still potent enough to keep many banks wary of underwriting such ventures.  

The U.S. decision to pull out of the JCPOA, despite the fact that Iran continues to implement its end of the agreement, has put its European allies in a serious quandary. On the one hand, the transatlantic relationship is a core and longstanding interest for the European Union as well as its individual member states. On the other hand, the multilateral process which culminated with the JCPOA, and the continued non-proliferation gains secured and still maintained under its terms is something they do not wish to see collapse. The nuclear deal, they reason, has certainly not curtailed many aspects of Iranian policy which they, like the U.S., view with significant concern. The testing of ballistic missiles and supply of weapons to regional proxies, Tehran’s role in buttressing the Assad government in Syria and revelations concerning suspected Iranian government involvement in a series of attempted bombing and assassination plots on European soil against Iranian dissidents are among the key areas where Europe, like the U.S., believes Iran to be firmly in the wrong.

Between a rock and a hard place

Unlike the current U.S. approach, however, the Europeans are in favor of ring-fencing the nuclear agreement from these non-JCPOA issues so long as Iran remains compliant with its commitments under the deal, believing that continued cooperation on the critical non-proliferation front might lead to more productive discussions with Iran on other issues. Iran has, for example, held a series of discussions with the UK, France, Germany and Italy on the conflict in Yemen. Thus, while the Europeans in January approved targeted sanctions against Iranian intelligence operatives, London, Paris and Berlin also agreed later that month to set up a new mechanism, the Instrument in Support of Trade Exchanges, or INSTEX, to facilitate trading with Iran. This arrangement will begin with humanitarian goods, whose sale to Iran is permitted in theory but is often hamstrung in practice by unilateral U.S. sanctions.

Consequently, Europe finds itself between a rock and a hard place as it is under increasing pressure from Washington to abandon an agreement which it still regards as a success, and under growing criticism from Tehran for failing to significantly deliver on the economic normalization it had expected. The latter dynamic could eventually prompt a high-risk gambit by Iran to test the JCPOA’s boundaries in the belief that this might push the Europeans to redouble efforts at mitigating the impact of sanctions—but this could just as easily backfire, pushing Europe closer to the U.S. position.

The strategic interests of Russia and China

Finally, there are the two members of the UN Security Council, Russia and China, that remain supportive of the JCPOA, and each has key interests in Iran that go beyond the nuclear issue. However, Iran will likely be disappointed by the results if it believes that a policy of “looking to the East” can fully counterbalance or compensate for deteriorating ties to the West, not least in the event of a renewed nuclear crisis.   

Iran’s post-revolutionary relations with Russia have oscillated between acrimony, particularly in the early years, and more constructive periods of diplomatic engagement. However, Tehran’s relationship with Moscow has taken a particular strategic significance in light of the civil war in Syria. The two countries have intervened on behalf of the Assad government—a position that most of the international community opposes, not least because of the tragic humanitarian costs and brutal methods used by the regime in maintaining its hold on power. Moscow’s and Tehran’s joint gamble has proven increasingly successful and prompted closer coordination between the two countries, reaching a level a senior Iranian diplomat described as “unprecedented.”

Syria’s war has also provided fertile ground for new, separate battles, including an increasingly tense standoff between Iran and Israel. Already worried about Iran’s support to Hezbollah in Lebanon and Hamas in Gaza, Israeli concerns over Iran’s presence across the north-eastern border have emerged as a volatile flashpoint. Here, though, it has been clear that Russia’s alignment with Iran only goes so far. As tit-for-tat military exchanges between Israeli and Iranian/Iran-linked forces spill into the open, the Russians appear intent on navigating a middle ground between the two sides, complaining about Israeli actions but seemingly disinclined to force the matter.

 

All the same, the Iran-Russia relationship has utility for Tehran that extends beyond the battlefields of the Levant. Russia is a rare sympathetic party to Iran’s interpretation of United Nations Security Council decisions pertaining to Iran’s missile program for while the U.S. interprets a key phrase in Resolution 2231—“calls upon”—as that of an injunction, Moscow views it as a suggestion. Owing to Russia’s veto power, Iran knows that at least on this issue, Washington’s push to penalise Iran’s ballistic launches at the UN will run into a potent procedural hurdle.

For Iran, relations with China center on one key issue: trade. The lion’s share of Iranian energy sales head east—to India, to South Korea, to Japan, but above all to China, which in 2017 was both Iran’s biggest trading partner and primary export destination. All four of these countries received U.S. waivers in November to continue purchasing Iranian oil for at least six months, but on the condition that they demonstrate efforts towards doing so in decreasing amounts. Thus far, China seems to have complied with Washington’s terms, cutting Iranian oil purchases by an estimated 27 percent after energy sanctions came into effect in November 2018, and Chinese exports to Iran have also dropped.  Sino-Iranian interests converge, for the most part, on a mutually-beneficial transactional basis rather than deeper strategic considerations, and for now it appears that Beijing’s ongoing trade negotiations with Washington are affecting its commerce with Iran as China is intent not to unduly anger the U.S. In other words, putting too much hope on China as a lifeline has two downsides for Iran, first by giving Beijing leverage for securing advantageous commercial terms and second by experiencing collateral damage in the U.S.-China trade war.

In a lengthy statement on the anniversary of the revolution, Ayatollah Ali Khamenei, who since Khomeini’s death in 1989 has held the position of supreme leader, reflected that “independence means the freedom of the nation and the state from the imposition and bullying of the domineering powers of the world.” “Independence” he went on to clarify, “should not be defined as the confinement of the politics and the economy of the country within its border.” As it enters its fifth decade, how the Islamic Republic’s politics and economy develop beyond those national confines remains unsettled—and its fate depends not just on the U.S.-Iran rivalry, but also on the great powers’ competition.