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Why the JCPOA Won’t Turn Iran Into the Next Saudi Arabia

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Of all the anxieties surrounding this summer’s groundbreaking accord between the United States and the Islamic Republic of Iran, concern over oil has been among the most prevalent. Once the terms of the Joint Comprehensive Plan of Action (JCPOA) are firmly in place, sanctions on Iran’s economy, including a set of rigorous restrictions on its oil industry, will begin to recede.

This could unleash a potentially-gargantuan supply of Iranian oil onto an already-saturated world oil market and augment the abilities of the Islamic Republic to influence regional politics. The Washington Institute has warned that a “post-sanctions windfall” will allow Iran to “rescue the Syrian regime, reshape Iraq’s political environment, expand its terrorist proxy activities in various theaters, and otherwise amplify the effects of its destabilizing regional posture.”

There is fuel for such speculation. Iran has the fourth-highest proven oil reserves in the world, and the second-largest gas reserves. If it gains the ability to tap these enormous resources, Iran could potentially become a major world oil and gas producer, rivaling Saudi Arabia, its major regional competitor.

Yet it is far from certain that the JCPOA will have anything like the cataclysmic effect some have predicted. Moreover, it is questionable how far Iran will push its newly-freed oil economy once sanctions are lifted, with a host of infrastructural challenges, as well as some compelling historical experience, potentially foiling the country’s rise into major petro-state status.

Before the U.S. began pressuring it to give up its nuclear ambitions, Iran was a major oil exporter, second only to Saudi Arabia among the OPEC member-states. Production reached 4 million barrels per-day (bpd) in 2007 before dropping to 3.6 million bpd in 2011; sanctions took that down to 2.85 million bpd by July of 2015, with exports dropping from 2.6 million bpd to 1.4 million bpd.

Expectations for Iran to immediately increase its production one sanctions begin to taper off are high. Iran’s oil minister Bijan Zhanganeh boasted in July that Iran would increase its national production by 1 million bpd within one month of sanctions being lifted. While more moderate analysts debate this figure, most agree that Iranian production will increase by the end of 2015, dropping the anticipated price of crude by $10-12 per barrel.

While the impact of greater Iranian production could further depress oil prices which have struggled for over a year, Iran will likely experience a sudden economic stimulus. The World Bank estimates that Iran’s economic growth forecast for 2016 could increase from 3% to a robust 5% if the JCPOA is approved, signaling a real end to the economic stagnation that set in with the sanctions regime.

Commentators and skeptics of the Iran deal have suggested that Iran’s aspirations to regional hegemony will finally become attainable once oil revenues are freed from sanctions limitations. There is the immediate impact of $150 billion in frozen assets to consider, money Iran will potentially be able to access once sanctions are lifted. This enormous windfall along with greater oil revenues will lead to a more strident Iranian policy, challenging Saudi and Gulf interests and ratcheting up support for Bashar al-Assad’s regime in Syria.

But considerable debate surrounds the precise amount of capital Iran has locked away in overseas accounts: $150 billion is the oft-quoted sum, but the Obama Administration has dropped its estimate from $100 billion to $50 billion, and one analysis in Fortune based on information from Iran’s Central Bank suggests that only $29 billion will be immediately available.

Depressed world oil prices will likely increase Iran’s oil revenues by a relatively small amount, from $50 billion to about $65 billion, roughly what it was earning in 2013 before prices fell. Rather than a sudden, tremendous surge in new assets, Iran will see a modest and gradual financial windfall over the course of 2016 and 2017.

How that new income will affect Iran’s foreign policy is difficult to say with any precision. The regime spends an estimated $10 billion per year on foreign “adventures” like the wars in Syria and Yemen, yet this amount dropped in 2014 in light of lower oil prices and seems trifling when compared to the amounts spent by Riyadh on similar endeavors. Saudi Arabia military spending surpasses that of Iran by five times and the UAE’s small force spends 50% more than Tehran on new weapon systems and arms. It is unlikely that any increase in oil revenues will upset this balance.

Support for Iran’s regional allies, proxies and clients will likely be overshadowed by investment that Iran will direct towards is domestic oil industry. Some of Iran’s most important oil fields are 70 years old and after a decade of sanctions the country’s infrastructure, from the wellhead to the refinery, has suffered considerable degradation for want of investment. Even the CIA, in a recent intelligence analysis, predicts that Iran’s economy will take precedence over support for regional allies.

An estimate from Iran’s oil ministry puts the total cost of industry upgrades at $200 billion, roughly half of Iran’s gross domestic product. Iran will have to pump a considerable amount of its new revenues into re-building its industry, and while external agents (including the massive Western oil firms like Royal Dutch-Shell, ENI and Total) have shown considerable interest in investing, the Obama Administration continues to warn off American companies, arguing that Iran’s aging infrastructure makes it a poor candidate for increased investment.

Even if its production reaches former levels, Iran must fight to win back market share from Saudi Arabia, which has increased its own production to record levels in order to force out new producers and bring the price back up. Saudi Arabia dominates the oil market and will likely continue to do so, as its production level (nearly 10 mbd) dwarfs that of Iran. Iran must effectively triple its current production level in order to compete, a feat that could take decades to accomplish.

Finally, a strong historical argument exists that might very well deter Iran from aggressively embracing increased oil production. Oil revenues largely funded the 1960s and 1970s regime of Mohammed Reza Shah Pahlavi, who pumped most of the country’s earnings into its military and expansive modernization programs. The Shah’s policies made Iran a regional power but over-heated the economy, created powerful inflationary effects and so destabilized his regime that it collapsed in the 1978-79 Islamic Revolution.

Ayatalloh Ruhollah Khomeini, Iran’s Supreme Leader, cut Iran’s oil production in half after 1980, causing it to fall from 6.6 million bpd to 3 million bpd. He believed Iran needed a “revolutionary economy” separate from the wider capitalist world.

Khomeini may have been driven by ideological concerns more than hard economics, but his reasoning was largely validated by post-1970s scholarship. Influential texts by Terry Lynn Karl, Hossein Mahdavy and Richard Auty point to a “resource curse” that affects country’s overly dependent on export earnings and rents from oil production. Today, oil-rich economies like Venezuela and Russia are struggling with such dependence.

If history is any guide, Iran will likely steer clear of such a policy, using its new oil revenues to bolster domestic economic growth and infrastructural development, shoring up the political support for its hardline regime (which has staked a considerable amount on reducing sanctions) while continuing its support for regional proxies and allies. The effect of a sanctions-free Iranian oil industry may take some years to reveal itself, but it is unlikely to be as dramatic as some have speculated. After all, the world oil market remains glutted; the Middle East remains a region riven by conflict; and neither the U.S. nor Iran have indicated that they plan to alter the nature of their postures towards one another. Iran’s oil may alter this situation, but it probably won’t upend it completely.

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Chinese purchases of Iranian oil raise tantalizing questions

Dr. James M. Dorsey

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A fully loaded Chinese oil tanker ploughing its way eastwards from two Iranian oil terminals raises questions of how far Beijing is willing to go in defying US sanctions amid a mounting US military build-up in the Gulf and a US-China trade war.

The sailing from Iran of the Pacific Bravo takes on added significance with US strategy likely to remain focused on economic rather than military strangulation of the Iranian leadership, despite the deployment to the Gulf of an aircraft carrier strike group as well as B-52 bombers and a Patriot surface-to-air missile system.

As President Donald J. Trump, backed by Secretary of State Mike Pompeo, appears to be signalling that he is not seeking military confrontation, his administration is reportedly considering a third round of sanctions that would focus on Iran’s petrochemical industry. The administration earlier this month sanctioned the country’s metals and minerals trade.

The sailing raises the question whether China is reversing its policy that led in the last quarter of 2018 to it dramatically reducing its trade with Iran, possibly in response to a recent breakdown in US-Chinese trade talks.

“The question is whether non-oil trade remains depressed even if some oil sales resume, which I think it will. That’s the better indicator of where Chinese risk appetite has changed. Unfortunately Iran‘s reprieve will be limited—but better than zero perhaps,” tweeted Esfandyar Batmanghelidj, head of Bourse & Bazaar, a self-described media and business diplomacy company and the founder of the Europe-Iran Forum.

A Chinese analyst interviewed by Al Jazeera argued that “China is not in a position to have Iran’s back… For China, its best to stay out” of the fray.

The stakes for China go beyond the troubled trade talks. In Canada, a senior executive of controversial Chinese telecommunications giant Huawei is fighting extradition to the United States on charges of violating US sanctions against Iran.

Reports that Western companies, including Kraft Heinz, Adidas and Gap, wittingly or unwittingly, were employing Turkic Muslims detained in re-education camps in China’s north-western province of Xinjiang, as part of opaque supply chains, could increase attention on a brutal crackdown that China is struggling to keep out of the limelight.

The Trump administration has repeatedly criticized the crackdown but has stopped short of sanctioning officials involved in the repressive measures.

Bourse & Bazaar’s disclosure of the sailing of the Pacific Bravo coincided with analysis showing that Iran was not among China’s top three investment targets in the Middle East even if Chinese investment in the region was on the rise.

The Pacific Bravo was steaming with its cargo officially toward Indonesia as Iranian foreign minister Mohammad Javad Zarif was touring his country’s major oil clients, including China, in a bid to persuade them to ignore US sanctions.

A second tanker, the Marshal Z, was reported to have unloaded 130,000 tonnes of Iranian fuel oil into storage tanks near the Chinese city of Zhoushan.

The Marshall Z was one of four ships that, according to Reuters, allegedly helped Iran circumvent sanctions by using ship-to-ship transfers in January and forged documents that masked the cargoes as originating from Iraq.

The unloading put an end to a four-month odyssey at sea sparked by buyers’ reticence to touch a cargo that would put them in the US crosshairs.

“Somebody in China decided that the steep discount this cargo most likely availed … was a bargain too good to miss,” Matt Stanley, an oil broker at StarFuels in Dubai, told Reuters.

The Pacific Bravo, the first vessel to load Iranian oil since the Trump administration recently refused to extend sanction exemptions to eight countries, including China, was recently acquired by China’s Bank of Kunlun.

The acquisition and sailing suggested that Bank of Kunlun was reversing its decision last December to restrict its business with Iran to humanitarian trade, effectively excluding all other transactions.

The bank was the vehicle China used in the past for business with Iran because it had no exposure to the United States and as a result was not vulnerable to US sanctions that were in place prior to the 2015 international agreement that curbed Iran’s nuclear program.

China’s willingness to ignore, at least to some extent, US sanctions could also constitute an effort to persuade Iran to remain fully committed to the nuclear accord which it has so far upheld despite last year’s US withdrawal.

Iran recently warned Europe that it would reduce its compliance if Europe, which has struggled to create a credible vehicle that would allow non-US companies to circumvent the sanctions, failed to throw the Islamic republic an economic lifeline.

In a letter that was also sent to Russia and China, Iran said it was no longer committed to restrictions on the storage of enriched uranium and heavy water stocks, and could stop observing limits on uranium enrichment at a later stage.

Russian president Vladimir Putin warned in response to the Iranian threat that “as soon as Iran takes its first reciprocal steps and says that it is leaving, everyone will forget by tomorrow that the US was the initiator of this collapse. Iran will be held responsible, and the global public opinion will be intentionally changed in this direction.”

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The Iran Question

Dr. Arshad M. Khan

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Will there be war with Iran?  Will there not be war with Iran?  The questions are being asked repeatedly in the media even though a single carrier task force is steaming up there.  The expression is old for the latest carriers are nuclear powered.  Imagine the mess if it was blown up.

There are two kinds of weapons in the world … offensive and defensive.  The latter are cheaper, a fighter plane compared to a bomber.  If a country does not (or cannot afford to) have offensive intent, it makes sense to focus on defense.  It is what Iran has done.  Moreover, its missile centered defense has a modern deadly twist — the missiles are precision-guided. 

As an Iranian general remarked when questioned about the carrier task force:  some years ago it would’ve been a threat he opined; now it’s a target.  Iran also has a large standing army of 350,000 plus a 120,000 strong Revolutionary Guard and Soviet style air defenses.  In 2016 Russia started installation of the S-300 system.  It has all kinds of variants, the most advanced, the S-300 PMU-3 has a range similar to the S-400 if equipped with 40N6E missiles, which are used also in the S-400.  Their range is 400 km, so the Iranian batteries are virtually S-400s.  The wily Putin has kept trump satisfied with the S-300 moniker without short-changing his and China’s strategic ally.  The latter continuing to buy Iranian oil.

Iran has friends in Europe also.  Angela Merkel in particular has pointed out that Iran has complied fully with the nuclear provisions of the UN Security Council backed Joint Comprehensive Plan of Action i.e. the Iran nuclear deal.  She is mustering the major European powers.  Already alienated with Trump treating them as adversaries rather than friends, they find Trump’s bullying tiresome.  President Macron, his poll ratings hitting the lowest, is hardly likely to engage in Trump’s venture.  In Britain, Theresa May is barely able to hold on to her job.  In the latest thrust by senior members of her party, she has been asked to name the day she steps down.

So there we have it.  Nobody wants war with Iran.  Even Israel, so far without a post-election government does not want to be rained upon by missiles leaky as its Iron Dome was against homemade Palestinian rockets.

Topping all of this neither Trump nor Secretary of State Pompeo want war.  Trump is as usual trying to bully — now called maximum pressure — Iran into submission.  It won’t.  The wild card is National Security Adviser John Bolton.  He wants war.  A Gulf of Tonkin type false flag incident, or an Iranian misstep, or some accident can still set it off. 

In Iran itself, moderates like current President Hassan Rouhani are being weakened by Trump’s shenanigans.  The hard liners might well want to bleed America as happened in Iraq and Afghanistan.

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Iran’s game just started

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By announcing that Iran will begin keeping its excess uranium and heavy water, the Islamic Republic now sends a firm and clear message to the west, exactly one year after U.S. president, Donald Trump unilaterally withdrew from its nuclear deal with Iran. 

At this point, it seems that Iran has made a wise decision. Over the last year, the European troika has not only done anything to revive the nuclear deal or bring any kind of benefit to the Iranian nation, but they have actually backed up U.S. by developing new plans to undermine Iran’s “missile work”, and diminish its “power in the region” as well as its “nuclear technology”.  

As stated in clauses 26 and 36 of Joint Comprehensive Plan of Action (JCPOA), if the other side fails to meet its obligations, Iran is entitled to partially or completely end its commitments as well. So, Iran’s recent decision could be analyzed both on legal and strategic terms. 
However, it seems that the strategic aspects of Iran’s decision are even more important than its legal aspects. This decision is strategically important because it stops Washington and European troika to carry out their anti-Iran scheme, a dangerous scheme that they actually started devising when Trump took the office in 2017.  

At the time, Theresa May, the British Prime Minister, and Emmanuel Macron, the French president played a major part in carrying out the west scheme. A scheme based on enforcing Iran to keep its “nuclear promises” and stay committed to a “distorted nuclear deal” while “U.S. had abandoned the deal”, and at the same time, trying to “diminish Iran’s power in the region” and “reduce its missile activities”. 

All other actions of Europeans toward Iran were also simply targeted at carrying out this major plan, including how they constantly changed their strategies toward Tehran, and how Germany, U.K. and France intentionally delayed in launching the alternative trade mechanism (Instex) with Iran.  

Now, Iran’s decision to keep its Uranium and heavy water is definitely in compliance with JCPOA, and more importantly, it will seriously undermine the “American-European” joint plan against Iran. This also explains why French government was so distressed by Iran’s new nuclear strategy and had such a quick reaction, considering that Emmanuel Macron, the French president and Jean-Yves Le Drian, the French Foreign Minister both have had important roles in carrying out the American-European anti-Iran scheme. 

At any rate, what is clear now is that the game has just started! And the Iranian political system and specially the foreign ministry have a great mission to run this game wisely.  

In following days, the European troika might want to force Iran into changing its decision by threats such as reviving the European Union sanctions against Iran or even taking Iran’s case to the United Nations Security Council (so that Trump administration can meddle in Iran’s affairs). But, it is time for Iran political system to be adamant in its decision.  

The Iranian Foreign Ministry should clearly ask the Europeans to choose one of these options, either Iran will “further reduce its commitments to the nuclear deal” or the Europeans should do something practical to “protect the rights of Iranian nation”. 

It is also necessary that the Iranian political system reveals the American-European joint anti-Iran scheme to the people so that the true nature of Europeans is showed to Iranians. In that case, Europe and specially the European troika will completely lose their reputation.    

First published in our partner Tehran Times

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