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Gulbanu Mukhamejanova. Iran-US relations: present status and prospects for the future

The Islamic Republic of Iran (IRI) is a key geo-political figure in the Middle East, which plays an important role in stabilizing the world order, and in the military and political settlement in the region. Iran’s geographical location allows it to be in the epicenter of overlapping strategic geopolitical objectives and ambitions of global and regional forces. The situation in the Middle East can be best described as the widening gap between Shiite Iran and Sunni Persian Gulf, and the relations with the West are undergoing a long-term persistent antagonism and confrontation.

For more than 30 years, Iran has no diplomatic relations with the United States. Anti-American and anti-Israeli position can be traced in domestic and foreign policy of Iran, reflecting the conservative beliefs of government. Political pressure applied on the internal and foreign policies of the country by external actors, along with numerous sanctions adversely affect the well-being of the country. Despite the label of “nuclear rogue state” Iran has a significant voice in global and regional politics, to which the USA is forced to pay attention.

The thaw in Iran-US relations has coincided with a period of tightened economic sanctions, and, consequently, led to political changes in Iran. In particular, this has led to the victory of the most moderate candidate in the presidential elections, Hassan Rouhani, whose top priority was the reintegration of Iran into the international community[1]. A silver lining was the desire of both countries to establish a dialogue and reduce tensions in the Middle East. With the support of the permanent Supreme Leader of Iran, Ayatollah Ali Khamenei, H.Rouhani compromised on the issue of Iran’s nuclear program in exchange for the lifting of economic and financial sanctions. With respect to the new balance of power in the United States, the prospects for better relations between the USA and IRI are quite unpredictable, and depend on domestic political situation, as well as on intentions and interests of the main players in the region.

 

History of sanctions

Sanctions are one of the USA strategies used to limit IRI power in the region. Their main goal is to make IRI stop supporting terrorist groups and lead to a regime change. Since 1979, the USA imposed various economic and financial sanctions which target key sectors of Iran, as well as sanctions against weapons of mass destruction, missile systems and conventional weapons.

The first category of sanctions include the US President Executive Orders that ban the purchase of Iranian oil, deny Iran access to the US financial system, sanction Iranian banks and foreign banks that conduct financial operations with them, and include sanctions in support of democratic change and civil society in Iran. Military-strategic sanctions include a range of sanctions against governments engaged in the sale of arms to Iran, as well as sanctions against foreign companies that supply Iran with WMD technology or with the conventional arms of the modern type in “destabilizing quantities[2].

Iran’s nuclear capabilities are a threat to US security and to its key allies in the Persian Gulf. The unilateral sanctions were considered to be not effective enough to influence Iran, whose growing power upset the balance of power in the region. All of these required more concrete measures.
George W. Bush has paved the way for the imposition of multilateral sanctions: in 2006 Iran’s nuclear dossier was transmitted to the UN Security Council (UNSC), and it was supported by UNSC resolution 1737 of the Non-Proliferation of Nuclear Weapons dated 27 December 2007. After that, the EU, US and UN consolidated a joint sanctions regime against Iran.

In turn, Tehran declared that its nuclear program is exclusively peaceful in nature. The introduction of the EU sanctions was perceived as a pressure from the USA and the Jewish lobby, present in the governments of Germany, France and the United Kingdom[3]. The Government of Iran spoken out negatively on the application of double standards in the Western policy, given the presence of a de facto nuclear Israel in the region.

Series of new sanctions by the European Union (EU) followed after 2006, and targeted main sectors of the Iranian economy. Leading financial institutions and funds, including companies engaged in petrochemical production, the Central Bank of Iran, and many second-tier banks fell under the sanctions regime.

A new wave of sanctions in 2011-2012 was multilateral, and reflected growing political pressure on Iran due to its active military presence in Syria. Intransigence of Iranian government only exacerbated the situation, and strengthened doubts of the great powers and superpowers regarding the peaceful motives of its nuclear program.

In July 1, 2012 the EU introduced an oil embargo, which decreased the export volume of Iranian oil to the EU by 30%[4]. Before the introduction of sanctions around 600 thousands of barrels per day (bpd) of crude oil were exported to the EU. These sanctions affected not only Iran, but also the main importers of Iranian crude oil: Italy, Spain and Greece[5]. Iranian OPEC quota on oil supplies passed to Saudi Arabia, who willingly decided to compensate the missing volume of Iranian oil to meet the demands of the European importers.

Notwithstanding the loss of the European market, Iran could rearrange its priorities and took a strategic step in redirecting its export of crude oil. Asia-Pacific countries such as China, India, South Korea and Japan served as an alternative to the EU. After the imposition of sanctions, Iran has redirected all of its European oil supplies to the Asia-Pacific region.

In general, oil production decreased by 50% and stood at the level of 1.3 million bpd. Before introduction of oil embargo, domestic oil production reached 4.2 million bpd, 2.6 million bpd of which were sent to the foreign markets[6]. The country’s economy was not ready for a new large-scale onslaught of the newly introduced sanctions. Limited access to the financial assets from the sale of oil affected main macroeconomic indicators of the country.

Inefficient and inadequate mechanisms of governance further aggravated domestic economic situation of the country. Policy of excessive monetary and fiscal expansion of the previous government led to the economic downturn, which resulted in a high level of inflation, an overall unemployment, and a two-year negative GDP growth. Inflation increased by 40%, while the national currency devalued by 60%[7]. The consumer price index increased by 45.1% in 2012[8]. The unemployment rate reached 11.7%[9], and in particular, youth unemployment has increased significantly to 27%[10].

Oil export revenues significantly fell during 2012/2013 fiscal year[11]. The energy sector could bring only $63 billion to the state budget, which is 47% lower than the figures for 2011/2012 fiscal year[12].

The USA and the EU countries also suffered from its own sanctions. According to the National Iranian American Council, the economic and commercial losses of the US from 1995 to 2012 totaled $134.7-175.3 billion. These numbers include what the countries could potentially gain from trade with Iran. The EU countries have lost 2 times more than the USA. Economic losses in Europe varied from $23.1-73 billion in Germany to $145-458 million in Greece[13].

 

Donald Trump Administration and the future of JCPOA

Donald Trump’s victory cast doubt on the existence of a key international document achieved after lengthy negotiations during B. Obama administration. This key document, referred to as the Joint Comprehensive Plan of Action (JCPOA), was signed on 14 July 2015 by 5+1 countries (Britain, China, France, USA, Russia and Germany), and was backed up by the resolution of the UN SC.

JCPOA served as a historical detente in relations between Iran and the United States. It allowed to partially lift the economic and financial sanctions against Iran imposed by the USA and the European Union. By this agreement, Iran was forced to reduce its uranium stocks by 98% and to renounce its enrichment above 3.67% over the next 15 years[14]. It was also agreed that the IAEA will have a permanent access to the nuclear facilities in Iran, which would allow for proper monitoring and control in order to fulfill the obligations within the framework of the agreement.

D.Trump’s victory, who had repeatedly promised to abolish the nuclear deal in his presidential election campaign, called the existence of JCPOA into question. On the contrary, the priority for the IRI is the preservation of the international agreements on the nuclear program. Iran’s supreme leader A.Khamenei has criticized the possible renewal of the sanctions. Iran is convinced that the US will not be able to withdraw from the nuclear agreement unilaterally. Moreover, Iran does not intend to conduct any political negotiations on the revision of the nuclear agreement in the future. Any attempt by the US to cancel the nuclear deal would undermine the confidence of the international community in the US government and force Iran to resort to a “zero tolerance policy[15]. In the event of termination of JCPOA Iran will be able to resume its nuclear program, and surpass significantly its previous level.

The main appointees of D.Trump reinforce doubts about the “soft” policy towards Iran. Thus, the defense minister James Mattis believes Iran is a major threat that could undermine stability in the Middle East. He calls JCPOA a “poor agreement”, which does not imply the termination of Iranian nuclear program, but only gives “a nuclear pause”[16]. Secretary of State Rex Tillerson insists on carrying out a full review of the nuclear agreement[17]. National security adviser Michael Flynn sees political Islam as an existential threat and focuses on regime change in Tehran[18]. CIA Director Mike Pompeo is also a fierce critic of the nuclear deal “with a regime that is going to destroy America”[19]. Obviously, the nuclear agreement is not acceptable in its current state for D.Trump administration, but its unilateral abolishment is not convenient and can play in favor of Iran.

First of all, the nuclear agreement can only be abolished if and only if the USA would be able to prove that Iran is violating its obligations prescribed in JCPOA. According to the paragraphs 36 and 37 of JCPOA, the USA, as the state that has veto power in the UN Security Council, has the right to block the resolution 2231.  In this case, “… the provisions of the old UN Security Council resolutions would be re-imposed, unless the UN Security Council decides otherwise”[20]. Thus, the sanctions will be introduced for the next 10 years[21], with the possibility of extension for 5 years.

Secondly, the review of the nuclear deal will involve the United States and partner countries in the long process of renegotiations. Such a maneuver would undermine the credibility of allied nations in the USA and adversely affect D.Trump’s intention to play on reducing tensions with Russia. Groundless provocations against Iran could provide it with supporters that would like to keep the nuclear deal.

ISA or “Iran Sanctions Act”, which is the basic US legal act of sanctions against Iran, may exacerbate tensions between Iran and the USA. The law came into force in 1996[22] and limited investment flows in the oil sector of Iran. If not renewed, the term of the ISA could have expired on 31 December 2016. Nevertheless, in December 2016 the Senate unanimously passed the bill to extend these sanctions, which caused controversy among the US government elite[23]. According to the White House estimates, the renewal of sanctions violates the terms of the nuclear agreement and may trigger an immediate response from Tehran.

In response to the sanctions, Iran announced the development of nuclear-fuelled ships[24]. Their development will go along with the medium-range ballistic missiles program. Moreover, this is not the whole arsenal of strategic trump cards, to which Iran may resort in case anti-Iranian actions increase. The only question is, how effective they will be and whether they can be sufficiently convincing.

First of all, Iran is going to strengthen relations with allies, in this case with Russia. Given the significant Iranian factor in Syria and the victorious joint military actions of Russia, the Syrian and Iranian coalition in the northwest of Syria, it is fair to expect the revival of the Russian-Iranian talks. The evidence of this is the decision of Iran to invite the Military Space Forces of the Russian Federation to use the airbase in Hamadan. Previously, the presence of foreign forces in the country caused anxiety, but now, due to the uncertainty about US foreign policy, as well as the capacity of the Iranian military presence in Syria, it is considered to be essential. Iran has defined clear objectives to stabilize the situation in the region within the framework of military cooperation with Russia and intends to use them as a guide in making future foreign policy decisions.

Secondly, Iran has full control over the strategic waterway in the Persian Gulf – the Strait of Hormuz, through which passes around 40% of the world’s daily oil exports. The distinguishing feature of the Strait is the fact that it is the only sea route through which the export of OPEC oil takes place. Over 85% of oil exports go to Asian markets such as Japan, India, South Korea and China[25].  Maritime ships pass through the territorial waters of Iran and, accordingly, the Iranian Navy becomes directly involved in it. Iran has repeatedly expressed intention to deny the access and to limit the use of territorial waters to foreign maritime vessels[26]. Closing the Strait of Hormuz will not pose a threat to international navigation in the strait, however but the policy revision on the use of Iranian territorial waters can directly touch the USA and its allies.

 

Economy after JCPOA

The economic performance of oil-exporting countries, such as Iran, heavily depends on a number of domestic market conditions as well as on the overall situation in the international oil market. Therefore, lifting of sanctions did not produce the desired effect on the revival of the Iranian economy.

Firstly, in the medium term there are obstacles in the form of technical constraints in oil production. Iran needs additional investment to explore oil fields and to modernize infrastructure. To resume the projects and increase the capacity of oil and gas exports, Iran needs western technology and specialists. According to a sixth 5-year development plan for 2016-2020, in order to expand its oil sector, the volume of foreign investments should reach at least $200 billion, $130 billion of which is to be spent on “upstream” projects[27].

Second, the low world oil prices did not increase oil export revenues. Despite the rise in oil production and rapid regaining of pre-embargo market share, the low oil prices put significant strain on the state budget and impede the full recovery of the economy. If the fiscal deficit in 2015-2016 reached 1.7% of GDP, in 2016-2017 it amounted to 2.7% of GDP[28]. In order to maintain a sustainable budget, IRI needs to increase productivity of its oil industry, which can result in a further drop of oil prices.

At the moment, Iran is determined to rapidly regain its market share in the international market of crude oil and to reach pre-embargo levels of export and oil production. Within 5 years, Iran plans to increase oil production capacity to 4.8 million bpd.[29]. To this end, Iran actively creates opportunities to attract foreign investors by offering lower oil prices and introducing changes in the terms of contracts. In October 2016 Iran’s oil production already reached 3.72 million bpd, and oil export potential has increased to 2.4 million bpd[30]. These figures are comparable with data on the production and sale of oil prior to 2011-2012 sanctions regime.

Asia-Pacific region remains a traditional market for the export of Iranian oil. China, India, Japan and South Korea are the most promising major importers of OPEC oil. Due to the weak demand for Iranian oil from the EU, Asian countries actively use its close ties with Tehran and are increasing purchases of Iranian oil. In October, four countries have imported up to 1.99 million bpd, which exceed indicators of 2015 by 147.9%. In October 2016 exports to China and Japan grew significantly, accounting for 202 thousand bpd and 773 860 bpd, respectively. South Korea increased its imports of Iranian oil by 73.2%. India increased its oil supplies from Iran to 789.100 bpd, which is 4 times higher than its imports in 2015[31].

In the near future Iran will continue to increase its oil production in order to balance the budget at low world oil prices. Foreign investors will be actively attracted not only to the oil industry, but also to the non-oil sectors of the economy. The latter will be given special attention with respect to the diversification policy. Unstable world oil prices may interfere with Iran’s plans to regain oil market share. Prices may continue to decrease if OPEC countries fail to comply with the agreement to reduce oil production and supplies. Moreover, the uncertain fate of the nuclear agreement creates risks for foreign companies wishing to invest in Iran. Sustainable economic development will primarily depend on the effectiveness of structural reforms undertaken by the government to address the major domestic problems. These pressing issues include systematic corruption, youth unemployment and low female labor participation. The failure to address these problems is a major obstacle to economic development, alongside with Iran’s dependence on external challenges.

 

Key regional players: Israel and Saudi Arabia

Foreign-policy difficulties might arise in the Middle East given the geopolitical ambitions of the key regional players. Economically stable Iran is not in the interests of Saudi Arabia and Israel. Despite ideological, political and cultural differences, these two countries are united in their hostility towards IRI. They see Iran as a threat to their national interests and security. Moreover, the USA takes into account the geopolitical interests of these two countries when they develop their own political course in the Middle East.

In January 2016 the execution of Shiite cleric in Saudi Arabia was followed by a series of attacks on Saudi Arabia’s embassy in Tehran and Consulate in Mashhad. After that, Bahrain and Saudi Arabia broke diplomatic relations with Iran. Kuwait, Qatar and the UAE withdrew their ambassadors. With the revival of the Sunni-Shiite split, the Gulf countries, along with Saudi Arabia are concerned with the sanctions relief and JCPOA. They cast doubts as whether Iran did fully suspend its nuclear program. They supported the sanctions regime, which ensured the balance of power in the region. Given the current political developments in Syria, Iraq, Bahrain and Yemen, the hostility between Saudi Arabia and Iran has become more intense. The new leadership of Saudi Arabia negatively perceives the US inaction in the region, given the growing influence of Iran. Prolonged proxy wars and the conflicts of regional interests require Riyadh to take more aggressive approach and tough policy measures towards Tehran.

As for Israel, the Israeli factor was not primary and lost grounds during B. Obama presidency. Moreover, B. Obama has complicated the course of D.Trump towards Israel by allowing the UN resolution of 23 December 2016 to pass. The resolution required a complete cessation of Israeli settlement activity in the occupied territory of Palestine. Previously, similar resolutions were blocked by Washington, but in this case, the US representative to the UN Security Council abstained from voting. This step might have been B.Obama’s strategic maneuver as opposed to the newly elected president, but it helped to lift the veil on previously unknown political preferences of D.Trump. Immediately after the inauguration of D.Trump in January 20, 2017, Israel received a carte blanche on the issue of new settlement building in the East Jerusalem. Israel has approved the construction of 566 new settlements in Pisgat Zeev, in Ramat Shlomo and Ramot[32][33]. Obviously, D.Trump will challenge the “balanced” resolution of 23 December 2016. Furthermore, he is determined to strengthen his friendly intentions towards Israel by moving the US embassy from Tel Aviv to Jerusalem[34]. Even though this step is widely welcomed by Israel, for the international community it would be an unprecedented step in the history. It will not only exacerbate the existing conflict between Israel and Palestine, but also preclude a “two-state solution” of the conflict.

This political situation implies that Iran can expect Israel and Saudi Arabia’s enlisting the support of the US in the Middle East. This support will be directed at containment of the Iran’s regional ambitions in the region, as well as the actions of the Lebanese “Hezbollah”, which is the most significant non-state ally of Iran.

 

Conclusions

The domestic political situation in Iran directly depends on the position of D.Trump administration towards Iran and the Gulf countries. Abolishment of the JCPOA will aggravate the political situation in the country divided into two camps: supporters of the incumbent president H.Rouhani and followers of Iran’s Supreme Leader Ayatollah Ali Khamenei. Ratification of JCPOA contributed to the strengthening of the position of H.Rouhani and helped his supporters to win parliamentary elections in February 26, 2016. However, D.Trump’s victory revived conservatives, whose critic against H.Rouhani may adversely affect his chances for re-election in June 2017. If the government goes into the hands of the conservatives, the Iranian nuclear program might be resumed, and the country will return to the traditional political course.

At the present time it is not clear what kind of foreign policy course America will choose and what exactly government of Iran should expect. It is extremely difficult to hope for the maintenance of progress achieved by B. Obama, although there is a little probability that the US strategy towards Middle East will be reviewed. Either D.Trump will lead US-Iran relations to a new level, using his extensive experience in big business, or he will involve the United States into another unnecessary intervention in the Middle East.

Iran’s policy will not be proactive, Tehran will vigorously respond to the actions of D. Trump administration. Iran will pay more attention to the close cooperation with Russia and use all the available opportunities in order to intensify its military presence in Syria. Taking into account the aspirations of the main regional players in the Middle East, the government of Iran will face the challenge of maintaining the balance of power in the region with de facto nuclear Israel and with the growing militarization of Saudi Arabia. In all likelihood, the year 2017 will bring a lot of unexpected changes to the Persian Gulf and to the world stage.

 

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[1] Iran’s Foreign Policy: A Shifting Strategic Landscape. Mahmood Monshipouri, Manochehr Dorraj. 2013.

[2] Kenneth Katzman. Iran Sanctions. 2016. https://fas.org/sgp/crs/mideast/RS20871.pdf

[3] Oliver Borszik. International sanctions against Iran and Tehran’s responses: political effects on the targeted regime. 2015

[4] Lifting Economic Sanctions on Iran Global Effects and Strategic Responses. http://documents.worldbank.org/curated/en/298681467999709496/pdf/WPS7549.pdf

[5] President Rouhani and the New Iranian Economy. http://www.strategic-culture.org/news/2016/07/16/president-rouhani-and-the-new-iranian-economy.html

[6] Under sanctions, Iran’s crude oil exports have nearly halved in three years. http://www.eia.gov/todayinenergy/detail.php?id=21792

[7] President Rouhani and the New Iranian Economy. http://www.strategic-culture.org/news/2016/07/16/president-rouhani-and-the-new-iranian-economy.html

[8] Iran’s Economic Outlook- Spring 2016. http://www.worldbank.org/en/country/iran/publication/economic-outlook-spring-2016

[9] Ibid.

[10] President Rouhani and the New Iranian Economy. http://www.strategic-culture.org/news/2016/07/16/president-rouhani-and-the-new-iranian-economy.html

[11] Fiscal year in Iran March 2011- March 2012

[12] Report on Iran. https://www.eia.gov/beta/international/analysis_includes/countries_long/Iran/iran.pdf

[13] The Iran Nuclear Deal: Winning a little, losing a lot. Adam Tarock. 2016

[14] Resolution 2231 (2015). United Nations Security Council //http://www.securitycouncilreport.org/atf/cf/%7B65BFCF9B-6D27-4E9C-8CD3-CF6E4FF96FF9%7D/s_res_2231.pdf.

[15] Implementing the Iran Nuclear Deal: A Status Report. Jan 16, 2017. https://www.crisisgroup.org/middle-east-north-africa/gulf-and-arabian-peninsula/iran/173-implementing-iran-nuclear-deal-status-report

[16] Donald Trump finds his swaggering Patton in ‘Mad Dog’ Mattis. 2016. https://www.ft.com/content/d840adf6-b833-11e6-ba85-95d1533d9a62

[17] R.Shabad. Rex Tillerson confirmation hearing for secretary of state. Jan 11, 2017 bloghttp://www.cbsnews.com/news/rex-tillerson-confirmation-hearing-for-secretary-of-state-live-blog/

[18] M. Rosenberg, M.Habermannov. Michael Flynn, Anti-Islamist Ex-General, Offered Security Post, Trump Aide Says Nov. 17, 2016 https://www.nytimes.com/2016/11/18/us/politics/michael-flynn-national-security-adviser-donald-trump.html?_r=0

[19] Trump’s CIA pick Pompeo anticipates ‘rolling back’ the ‘disastrous’ Iran deal Nov.18, 2016. http://www.timesofisrael.com/trumps-cia-pick-pompeo-anticipates-rolling-back-the-disastrous-iran-deal/

[20] Iran Sanctions. Congressional Research Service. // https://fas.org/sgp/crs/mideast/RS20871.pdf.

[21] Resolution 2231 (2015).United Nations Security Council http://www.securitycouncilreport.org/atf/cf/%7B65BFCF9B-6D27-4E9C-8CD3-CF6E4FF96FF9%7D/s_res_2231.pdf.

[22] Iran Sanctions. Congressional Research Service. // https://fas.org/sgp/crs/mideast/RS20871.pdf.

[23] Senate votes to extend Iran sanctions authority //http://www.nytimes.com/2016/12/01/us/politics/iran-nuclear-sanctions-senate.html?_r=0.

[24] H. Agerholm. Iran’s President Hassan Rouhani orders nuclear-fuelled warships as he accuses US of ‘violating’ deal

Dec 13, 2016. http://www.independent.co.uk/news/world/middle-east/iran-nuclear-powered-war-ships-response-us-sanctions-a7471566.html

[25] Iran, Oil and the Strait of Hormuz // http://csis-prod.s3.amazonaws.com/s3fs-public/legacy_files/files/media/csis/pubs/070326_iranoil_hormuz.pdf.

[26] Closing Time: Assessing the Iranian Threat to the Strait of Hormuz. //http://www.mitpressjournals.org/doi/pdf/10.1162/isec.2008.33.1.82

[27] Iran needs $200b to develop oil industry: Zanganeh http://www.tehrantimes.com/news/252897/Iran-needs-200b-to-develop-oil-industry-Zanganeh

[28] Iran’s Economic Outlook- Spring 2016. http://www.worldbank.org/en/country/iran/publication/economic-outlook-spring-2016

[29] Iran’s Oil Production Is Slowing Fast. http://oilprice.com/Energy/Energy-General/Irans-Oil-Production-Is-Slowing-Fast.html

[30] Oil market report. https://www.iea.org/media/omrreports/RussianOMR.PDF

[31] Asia’s October Iranian oil imports more than double year-on-year.  http://www.iran-daily.com/News/172963.html

[32] I.Fisher. Trump Presidency Is Already Altering Israeli-Palestinian Politics Jan 22, 2017. https://www.nytimes.com/2017/01/22/world/middleeast/israel-benjamin-netanyahu-jerusalem-maale-adumim-donald-trump.html?_r=0

[33] Israel approves settlement homes following Trump inauguration Jan 22, 2017. http://www.bbc.com/news/world-middle-east-38711701

[34] US ‘discussing’ moving Israel embassy to Jerusalem. http://www.aljazeera.com/news/2017/01/discussing-moving-israel-embassy-jerusalem-170122193105460.html