Destabilizing the Iranian Regime in the Aftermath of the JCPOA: The Economic-security Nexus

, July 11, 2018

What I did in this book, The Commercial Risks Entering the Iranian Market, was I decided not to focus on why the deal was a bad deal from a political perspective, but rather focus on why it was an incoherent deal and how that potentially posed risk for foreign companies. But for the sake of this talk I’m going to extend it further than the scope of this book to the nexus between security and economics. Dore Gold said something incredibly important, but I think underpins everything, in that Iran has been very committed to the exporting of the Iranian Revolution at the expense of their own domestic constituencies. We have to understand that this is how autocrats that are not accountable and have no notion of transparency behave.

I remember watching this amazing documentary years ago on Robert McNamara, former U.S. Secretary of Defense, when he spoke about the Bay of Pigs crisis and how he met Castro years later, and Castro revealed to him that he was willing to undergo national annihilation, but it was Khrushchev that held him back. One of the reasons why Robert McNamara was stunned is the same reason that Ben Rhodes had this fallacious approach of providing economic incentives and in turn moderating the Iranian regime. As human beings, we tend to project and transfer our psychologies on to the other, and it’s quite challenging and most sophisticated for policymakers to adopt a versatile and multi-dimensional mindset that’s broad in order to shift psyche and enter the other person’s shoes. So, we speak in terms of carrots and sticks, incentives and disincentives, but actually for them they don’t have it because they are revolutionary, because they are ideological. They never had Adam Smith. They care about resistance. For them, disincentives harden identity, and that for them is more important than economic inducements.

Now, if I was the head of the Iranians, if I was, let’s say Khamenei, or even Rouhani, or a leading figure in the Iranian regime, I would feel quite threatened, and my calculus would be that Iran is encircled as its sphere of influence is eroding.  First of all, Israel is expanding its strike capacity against Iranian infrastructure and personnel in Syria. Schisms are occurring between Iran and Russia, as Russia is giving Israel carte blanche to strike upon Iranian forces in Syria and have stated that Iranian forces will eventually be withdrawn from Syria. There’s been speculation in the media that Israel contributed to President Trump’s willingness to offer concessions on sanctions to Russia vis-à-vis Crimea in order to be on the same page as the United States and Israel vis-a-vis Syria. I don’t know whether that’s fake news or not, but I think that it’s very conceivable. Another area of encirclement is how the United States has assisted both Saudi Arabia and the UAE to bring an end to the control of the Houthis to the strategic port city of Al-Hudaydah in Yemen. Finally, the Trump administration’s foreign policy is muscular and it’s decisive as opposed to many people that thought that the Trump administration was going to be isolationist because it’s “America First.” Actually, “America First” means increased interventionism, decisiveness, a streamlined approach, and a cost-benefit analysis approach to foreign policy, which ends up being increasingly muscular. He also sees that Iran is looking at North Korea, just as what Yuval Steinitz said beforehand. President Trump badly needs foreign policy victory, for all his muscular talk. The question is, is he going to be able to have a victory with North Korea? If he does, that really sends a strong hard message to Iran, which is, “Hey look, you need to abide by the international order that we’re putting in place.” If he fails with North Korea, you can bet that the Trump administration is going to adopt an even more hardline approach toward Iran.

Now, that’s the external stresses and pressures that Iran is facing. However, Iran’s also experiencing acute domestic stresses as the value of the rial has plummeted. Riots and protests are breaking out all over Iran, for example, on issues like water shortages, and Iran realizes that due to the size of the U.S. economy, it cannot realistically isolate the Trump administration and create a schism between the European Union and the United States regarding the continuation of the JCPOA. I would interpret the initial statements of Macron, Merkel, and Theresa May as being pure bluster. At the end of the day, the United States market is too large, and they can’t ignore it, and while they initially said that they were going to continue cooperating with Iran and that they were taking economic measures at a state level to ensure that businesses could continue operating in Iran, the business sector actually took the lead here.  This is because due to simple cost-benefit analysis and economic considerations, they think to themselves, “Right, we need to be connected to the U.S. financial system. Our banks need to be connected to the U.S. economy,” and they froze operations as a result in Iran. They’re only willing to resume them once they receive an exemption from the U.S. administration, and it’s unlikely that the United States is going to offer anybody an exemption. This lead that the business community actually set led Angela Merkel to say that her government will not be able to fully compensate for the impact of U.S. sanctions.

 So, you’re seeing now that the EU governments are sort of increasingly back-footed and backtracking. German Foreign Minister Heiko Maas says we are facing difficult circumstances. How can we assume any countries would risk economic connections with the United States for the sake of Iran during such circumstances? So just as the business community had a cost-benefit analysis approach, now governments are increasingly following suit too. Don’t for a moment think – this is what the book actually covers – don’t for a moment think that it was better for businesses during the JCPOA. It wasn’t. In a sense, you can interpret what President Trump’s withdrawal from the Iran deal as creating greater security, greatest certainty, and eliminating risk for businesses because the ambiguity was killing companies in the past. At best they were willing to sign MOUs. However, they were unwilling to really operate there in a practical tangible manner just due to the incoherence and the ambiguity that existed. Just one example among many: When you had elements of the IRGC that was sanctioned then you had at the same time the energy sector that was delisted. Now, the IRGC dominates the energy sector, so if you’re a foreign investor or foreign company, you’re going to be caught in the crosshairs of the two. It doesn’t make any sense, and you can bet that your legal department would be advising you strongly, “Don’t enter the Iranian market because you may be penalized, because even the implementation of the JCPOA or the implementation of sanctions, it will say, politicize that sanctions could be applied in an arbitrary and ad hoc manner. So as a foreign business or investor, you’re at enormous risk, and at least now you know where you stand.”

So, the pressure is mounting and it’s creating a pressure valve for the Iranian regime, and as the pressures mount and as the EU increasingly finds itself on the same page as the United States at one point the pressure cooker is going to explode, and if Iran hasn’t become confrontational at the moment we shouldn’t merely be relieved. We should be asking ourselves, why haven’t they been confrontational? What pressure valves exist for the moment that cause sanctions not to be so comprehensive, that give release to the Iranian regime and actually provide it with survivability?

There are a couple of reasons, and I’m going to say them incredibly briefly. One reason is China’s “one-belt, one road,” strategy. They need to connect. They identify Iran as a gateway between Europe and China, and they’re investing heavily in developing infrastructure across the GCC, but especially in Iranian infrastructure and transportation. This was a trend that already was taking place with the establishment of pipelines. As a result of this, Asian companies have been reluctant to adopt U.S. sanctions. Asian financial instruments in methodology and financial methodologies greatly facilitate Iran’s trading with the Asian market, enabling it to overcome restrictions imposed by the West over its banking system. Asian nations are allying themselves with Iran, especially now during the trade war that President Trump is having with China. If America wants to have China play ball with North Korea or directly increase sanctions on Iran, the trade war that the U.S. has with increasing tariffs certainly isn’t helping, and China is thinking to itself, “Right, we’ve got an increasing population and growing economy. If we have the opportunity of purchasing oil at a cut-down rate, we’re going to do so. We have no incentives to actually draw back from this, and even when you have a nuclear deal, even when you have a sanctions regime that needs to be, it’s not simply you’ve signed an agreement and that’s it. When you’ve got sanctions you need continuous diplomacy and leverage in order to maintain its framework to keep it intact. At the moment now, it’s just not looking great for the United States in terms of leverage and frameworks.

A final thing that China has that we don’t have, and it distorts markets, is that they’ve brought state-owned companies, which means that they’re semi-private sector, semi-public sector, and they’ve gotten a huge injection of capital from the Chinese state, which actually limits their risk.  Now, if you’re a regular Chinese company, regular private sector company, you’re going to think to yourself, “Right, I need to enter the U.S. market. It’s too large a market. We’re going to need to enter, and so we’re going to abide by sanctions.” However, if you’re an energy company, a semi-state energy company, or a fully state energy company, you’re going to think to yourself, “Right, I have no interest in entering the U.S. market, so if, say, the United States cause TOTAL to withdraw from Iran’s South Pars gas field, we’re going to enter the fray because we’re not going to suffer any consequences, and we’re going to get a knockdown rate. We have no interest of entering the U.S. market, so yeah no consequences for us.” This is actually a huge pressure valve that is released.

A final point that is really important to consider is that it was due to political reasons that maybe elements of the IRGC were sanctioned. However, the SETAD, which is also known as ICO, the executive headquarters of the imams’ directive, is the Supreme Leader’s personal network of businesses and financial operations that are hugely lucrative. They’ve not been sanctioned at all, and the reason for that was the Obama administration wanted to demonstrate good faith to the Iranian regime. So, they clamp down on elements of it, and not those elements. This actually provides enormous survivability because if you’re going to simply maintain the previous set of sanctions and leave these guys open, then actually the status quo remains tenable, and the SETAD’s illicit activity included human rights abuses, terrorist activities, which have been extended to facilitating the IRGC’s evasion of sanctions, money-laundering, missile proliferation, and nuclear proliferation, and the IRGC and SETAD conduct numerous joint business ventures together. They buy companies together, so if you want to establish leverage that will destabilize the regime, that will unsettle the status quo, you need to do a couple of things. You need to: a) target the SETAD and b) somehow incentivize China in order to make the existing sanctions regime more comprehensive.

The final thing, as well, that you have to do is sponsor opposition groups. The Obama administration totally overlooked the Green Revolution. By the way, I just remember in the media, the media was focusing on the Opposition’s usage of YouTube and Twitter to communicate to one another. As soon as Michael Jackson died, the media actually shifted attention. Michael Jackson died and so did the Green Revolution.  So much for “heal the world.” But it’s important to you. I remember, as well, critics of the Bush administration’s approach of regime change. They were very anti anything that was militaristic, and they said that you need to cultivate organic growth from within. Yet during the Arab Spring and including the Green Revolution, the Obama administration did nothing to sponsor internal dissent and cultivate as a force of pressure from within. So, they backed the Muslim Brotherhood in Egypt. Pro-western liberal organizations were totally discarded, so it’s really important to cultivate this element. I’m not even going to the military option. I’m saying these are the measures that can be taken prior to considering the worst-case scenario. So, it’s sponsorship of opposition, incentivizing China to create a more comprehensive sanctions regime, and pressurizing the SETAD.

About Barak M. Seener

Barak M. Seener is CEO of Strategic Intelligentia, a consultancy specializing in the Middle East and the Gulf. He was Middle East Research Fellow at the Royal United Services Institute (RUSI) and one of the founders of the Henry Jackson Society, where he served as Greater Middle East Section Director.