India’s Growing Iran Dilemma – Iran Faces Bleak Options as the U.S. Turns the Screws

  • Despite the United States’ move to end exemption waivers for Iran’s oil exports — the country’s economic lifeline — Tehran will continue to make some shipments.
  • Nevertheless, the robust measures will exacerbate Iran’s economic, currency and financial crises as the country struggles to import much-needed food.
  • Iran’s lower and lower middle class will begin to feel economic pain as a result of the sanctions, raising the risk of a humanitarian crisis that would compound the one Iran is already facing because of record flooding.
  • Hard-liners are calling for a strong retaliation, including Iran’s departure from the nuclear deal, but such action would come at a high cost for Tehran.
  • As part of its campaign of maximum pressure, the United States is likely to allow other waivers to expire without extension and impose even more sanctions on Iran.

The United States’ campaign of “maximum pressure” against Iran has been no bluff. In announcing its intention to deprive Tehran of all oil revenue, Washington is moving into uncharted territory, as it previously offered sanctions waivers to importers of Iranian oil. So what does Iran do now? Until now, Tehran has adopted a pragmatic response to U.S. President Donald Trump’s harsh stance, remaining within the Joint Comprehensive Plan of Action (JCPOA), as the 2015 nuclear deal is formally known, and avoiding other retaliation even if it hasn’t benefited economically from maintaining its moderation. But given Iran’s bleak economic prospects as a result of the United States’ punishing line, Tehran’s patience could soon wear thin. An Iranian retaliation in the form of renewed uranium enrichment or attacks on shipping would certainly invite a furious U.S. response, yet it’s not clear if Washington’s aggressive campaign would ever achieve the United States’ ultimate goal: altering Iranian foreign policies that undermine U.S. allies in the Middle East.

The Big Picture

Since October 2017, the United States has pursued a campaign of “maximum pressure” against Iran. After Washington withdrew from the Iran nuclear deal in May 2018, it imposed sanctions on Iran’s exports — albeit with some exemptions — in November 2018. Iran, nevertheless, chose the path of pragmatism by refusing to abandon the nuclear deal. But now that the United States has eliminated all exemptions from sanctions, Iran has little to gain materially from continuing to uphold its end of the bargain.

Oil: Iran’s Economic Lifeline

Oil makes Iran’s economy go round, accounting for 90 percent of the country’s foreign currency income and paying for imports of everything from basic goods to mechanical parts to luxury items. Already, luxury and specialty goods are becoming increasingly difficult to obtain, resulting in increased economic uncertainty among Iran’s middle and upper classes. Oil export revenues also cover roughly 40 percent of Iran’s government budget. Unsurprisingly, a major decline in oil income will have an injurious effect on Iran’s economy, while also forcing leaders to make some tough decisions about what to prioritize to stave off economically motivated unrest and retain citizens’ faith in the government.

Iran, too, can find little succor in non-oil exports. The country does maintain a healthy non-oil sector and boasts an economy that is more diverse than a number of other major Middle Eastern energy exporters, but the United States’ moves to broaden sanctions against the Islamic republic in the last two years makes it increasingly difficult for Iran to cultivate new markets for non-oil exports. For instance, foreign companies could run afoul of Washington’s measures against the Islamic Revolutionary Guard Corps (IRGC) in which the United States can sanction such firms for any transactions with IRGC-related entities — even if there are many degrees of separation between the Iranian firms and the IRGC.

Iran, a country of more than 80 million people, has strived to achieve self-sufficiency in food since 1979, but it has not attained its goals apart from certain crops, like wheat. According to the World Food Program, Iran had only achieved 50 percent self-sufficiency in food by 2016, meaning it must import a great deal of food — as well as medicine. Iran still has permission to import such goods, but the foreign currency crunch caused by the precipitous fall in oil export revenue is complicating its efforts to do so. The dilemma will damage already declining confidence in Iran’s economy and could drive down the Iranian rial while also raising inflation — perhaps even to triple digits. (According to the latest data, inflation from March 21 to April 20 — the first month of the Persian year — increased 50 percent year on year, while food prices also rose 85 percent compared with same period last year.) All of this uncertainty heightens the risk of economically motivated protests that the government will struggle to answer.

With Iran destined to suffer economically, its leaders are trying to determine how to respond politically.

The Benefits of Pragmatism

With Iran destined to suffer economically, its leaders are trying to determine how to respond politically. For the past two years, Iran has remained faithful to the JCPOA, allowing the country to continue drawing diplomatic support from powerful allies in the European Union who can defend Tehran’s demands for humanitarian relief. What’s more, remaining in the JCPOA provides a signal of goodwill to the international community that could come in handy if Tehran one day sits down for negotiations with a different (and friendlier) White House.

And although adhering to the nuclear deal prevents Iran from making full use of its capabilities to fight the United States as related regulations limit the country’s ballistic missile program, Tehran can still use clandestine means to counter foes who want the Islamic republic to cease its support for pro-Iran states and armed groups elsewhere in the Middle East, as well as its oppositional stance against the United States and Israel. Iran, for one, has excelled at conducting cyberattacks and other offensive actions for which it can invoke plausible deniability. Beyond that, Iran continues to support a large network of militia forces across the Middle East (and in Hezbollah’s case, around the world) that project Tehran’s political and security power well outside Iran’s own borders — all with some degree of plausible deniability as well.

The Costs and Benefits of Leaving the JCPOA

Abandoning the JCPOA and resuming nuclear activities would provide Iran with little economic gain. But amid its dire financial straits, Iran could drum up nationalist support at home that could help it withstand the United States’ economic pressure if it walked away from the international agreement. Washington, at least, has already caused some Iranian politicians to set aside their opposition to the IRGC and rally in support of the group after the United States added the force to its list of foreign terrorist organizations.

Amid its dire financial straits, Iran could drum up nationalist support at home that could help it withstand the United States’ economic pressure if it walked away from the nuclear deal.

In the long term, however, there is another reason for Iran to leave the JCPOA: leverage in any eventual negotiations. Although Iran’s main strategy is to try and wait until after the 2020 U.S. elections in the hopes that Trump loses to someone more accommodating, Tehran will want to have as much leverage as possible in talks, and its nuclear program will remain at the top of Washington’s demands — regardless of who is in the Oval Office. Because Iran and the United States can only seal a deal if both sides make compromises, Tehran might hope to offer a halt to renewed nuclear activities so that it can continue to pursue its regional strategy.

Naturally, however, Iran would face great risk if it restarted its nuclear program. The Trump administration has adopted arguably the most hawkish line on Iran since the 1979 Islamic Revolution; what’s more, it has demonstrated that it will not shy away from breaking diplomatic taboos to pursue aggressive foreign policies that some Iranian political elites view as tantamount to an American push for regime change. If Tehran leaves the nuclear deal or increases its uranium enrichment above JCPOA-permitted levels, the United States or its allies could stage a limited strike against Iran’s nuclear-related targets in response. Such an attack would certainly allow Iran to shore up more domestic support, but it could escalate the conflict with the West. In fact, the United States even may be trying to provoke Iran into leaving the JCPOA so as to pave the way for broader action against Tehran.

Leaving the JCPOA would also likely burn Iran’s bridges with Europe, pushing the Continent closer toward the United States and almost certainly killing the possibility that Brussels will implement INSTEX, a channel to process transactions between Iran and the European Union. Moreover, it would lead the U.N. Security Council to immediately reimpose sanctions against the country, since the United States would veto any resolution to override the current clause, which stipulates an automatic snapback against Iran if it walks away from the nuclear deal.

Alternatively, Iran could view the United States’ waiver decision as a casus belli, leading Tehran to adopt an assertive stance that goes beyond simply restarting its nuclear program. Already, Iran has threatened to shut down the Strait of Hormuz and the Bab el-Mandeb if it cannot use these waterways to export its own crude oil. From a military perspective, Iran has the capability to both disrupt shipping through the Strait of Hormuz and attack oil tankers, although it would not be able to shut the passage for an extended period of time. Iran has even less chance of closing the Bab el-Mandeb strait in the long term, as it would have to rely on Yemen’s Houthis, who may or may not be entirely on board with the strategy, to attack tankers. In the end, the United States would likely take an even dimmer view of Iran’s attempts to disrupt shipping than its departure from the JCPOA, meaning that Washington would likely conduct airstrikes against the IRGC’s naval installations. But just as with airstrikes on its nuclear sites, hits on Iran’s military infrastructure could rapidly escalate the conflict between the two countries.

The United States’ decision to cut off waivers for Iran’s oil customers likely presages even stronger measures against Iran.

What Comes Next?

The United States’ decision to cut off waivers for Iran’s oil customers, combined with its recent decision to place the IRGC on its foreign terrorist organization list, likely presages even stronger measures against Iran. In addition to possible measures to counter Iran’s cyber activities, the United States still has two other waiver-related decisions to make. First, it must decide whether to renew “temporary” waivers for certain civilian activities at the Bushehr nuclear power plant, Arak heavy water reactor and Fordo enrichment plant. By ending the waivers, the United States would make it impossible for foreign companies to participate in nuclear activities that Iran is allowed to conduct under the JCPOA. Second, Washington must decide whether to extend waivers for Iran’s Chabahar port, which New Delhi and Tehran are constructing to facilitate trade with Afghanistan that bypasses Pakistan, as well as China’s Belt and Road projects with Islamabad.

The United States is not only loath to extend waivers for Iran’s civilian nuclear program — especially the Fordo enrichment plant — but it is likely to even slap new sanctions on Iran as well, including new secondary measures that will target a broader swath of Iran’s exports, such as other industrial products and raw materials. Given how harsh the new sanctions will be, the European Union, China and Russia could eventually make a more concerted effort to introduce a mechanism that would circumvent U.S. sanctions if Washington’s campaign consigns Iran to a long-term humanitarian crisis.

Ultimately, the United States is ratcheting up its measures against Iran in the hopes of provoking ordinary Iranians’ anger at their government so as to weaken the ability of political hard-liners to direct Iran’s government. By continuing to exert “maximum pressure” on Iran, the United States will certainly incite the ire of Iran’s citizens — but, in all likelihood, only so far as to convince them to circle the wagons against a foreign aggressor. Beyond that, Iran will hope to retaliate without stirring a greater conflict, all while riding out the storm.

Stratfor Enterprises

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