With the United States and the European Union imposing one of the toughest sanction regimes ever on Iran, the world is inching closer to a potential catastrophic war at the heart of the Middle East. Meanwhile, Israel is suggesting a pre-emptive strike if sanctions fail to deter Iran’s nuclear program, with Tehran vowing to retaliate.
The economic sanctions are targeting Iran’s main exports, namely oil and gas, and increasingly freezing Iran’s central bank out of the global financial system. This has made it extremely difficult for Tehran to engage in large-scale, dollar-denominated international transactions, forcing the country to rely on cumbersome and often unreliable third-party financial institutions to undertake substantial trade deals.
The sanctions have been coupled with an intense diplomatic effort to convince Iran’s major Asian trade partners – including South Korea, Japan, China, Turkey and India – to sever their oil imports.
The Western strategy is twofold: first, the West has rallied the support of major Arab oil-producing countries, such as Saudi Arabia and the United Arab Emirates, to supplant any actual and prospective shortfall in oil supply if and when Iran’s exports are squeezed out of international markets; and second, by pressuring Iran’s Asian oil partners, the West is trying to limit Iran’s pool of customers, therefore giving immense leverage to Tehran’s narrowing circle of buyers. South Korea and Japan – key American allies – have tentatively agreed to cut their Iranian oil imports, while India and China are said to be exploiting the situation by forcing Iran to make discounts and practically forcing Iran to buy Indian and Chinese products in return for oil.
Under growing American pressure, Iran’s most important regional trade partner, the United Arab Emirates, has also partially severed financial ties with Tehran, complicating Iran’s importation of essential primary products, especially food. Making things worse, the EU has imposed sanctions on Iran’s most important port operator, Tidewater Middle East Co., which is responsible for much of Iran’s external trade. These moves are clearly designed to strangle the Iranian economy, meaning they go well beyond the scope of the nuclear issue.
In addition, Iran is in the midst of an unprecedented rollback in state subsidies, which has placed significant inflationary pressure on the prices of basic commodities. Inflation has already reached double digits, while the multi-billion-dollar manufacturing and real estate sector is struggling to access steel as well as intermediate and high-tech imports from abroad, especially the West. As a result, the industrial and service sectors, as well as “Main Street Iran,” are bearing the brunt of a tightening economic siege.
However, Iran does still possess some room for maneuvering. Iran has around $104 billion in foreign currency and gold reserves, giving the country some cushion against currency shocks. Moreover, Iran’s strength is its trade surplus, low gross public debt, and relatively large economy (the 17th largest in the world), which has benefited from structurally high oil prices in recent years.
Indeed, despite the sanctions, Iran is still expected to export a considerable proportion of its oil, so the regime will still be flush with cash in the coming months. The sanctions could at best target around 10 percent of Iran’s economy, but the regime may well still have all the funds it needs to pursue its nuclear ambitions. In fact, the government has proposed a $443-billion budget for 2012, and it plans to more than double its military expenditures in coming months.
Still, Iran seems to be interested in going back to the negotiating table, with top Iranian officials constantly visiting Moscow and Ankara to lay the groundwork for talks. The Iranian economy is feeling the pinch, and Tehran’s military options are limited. If Iran closes the Strait of Hormuz, it will not only invite a military retaliation by an armada of Western militaries, but it will also jeopardize Tehran’s ties with friendly neighboring Arab countries such as Qatar and Oman as well as key allies such as China, which sees the stable flow of oil in the Persian Gulf as crucial to its energy security.
Pragmatists are proactively pushing for a diplomatic resolution. Both Iranian President Mahmoud Ahmadinejad and Foreign Minister Ali Akbar Salehi have recently reiterated their country’s interest in reviving talks with the so-called (P5+1), composed of Germany and the five permanent members of the U.N. Security Council. To prove its sincerity, the Iranian leadership last month welcomed a technical visit by IAEA representatives. Both sides have characterized the visit as very constructive, with a mutual agreement reached for another IAEA visit as soon as possible.
Iran has already finalized the contents of its response to the EU’s request for nuclear talks, and there’s a possibility that Iranian nuclear chief Fereydoon Abbasi-Davani will join Iran’s chief negotiator Saeed Jalili during the upcoming talks. So far, Istanbul is the prospective site for the negotiations. Crucially, Iran may also allow the IAEA to access the crucial nuclear facility in Qom, the Fordow Fuel Enrichment Plant.
Up until now, Iran has rejected any demand for suspending nuclear enrichment, instead offering new announcements of its nuclear achievements, especially the installation of indigenous nuclear rods, to signify the country’s mastery of the nuclear cycle. But Tehran could still agree to concrete confidence-building measures within the framework of Russia’s “step-by-step” approach, whereby in exchange for Iran’s transparency at every stage of negotiations, there would be a corresponding rollback in sanctions. For Iran’s pragmatists, defusing the crisis and “broadening cooperation” on the nuclear issue could still be a top priority.
It remains to be seen, though, whether the pragmatists will be able to determine the course of the upcoming negotiations.
Javad Heydarian is a Manila-based foreign affairs analyst focusing on international security and development issues. His articles have been featured or cited in The Diplomat, Foreign Policy in Focus, Asia Times, UPI, the Transnational Institute and the Tehran Times, among other publications. This post has previously been published by The Diplomat.