The Pros and Cons of Iran's Oil Threat

As the Iranian economy begins to feel the growing pain of American-led sanctions, the question of a proper counterstrategy to minimize the damage and to ensure the sustainability of Iran's economic well-being looms large. There is no denying the existential threat to the Iranian economy posed by these sanctions that have already resulted in significant damages, reflected in the growing number of foreign energy and non-energy companies pulling out of Iran and most of Iran's energy trade partners buckling under pressure and reducing their Iranian oil imports, irrespective of political statements to the contrary by various governments including India. The latter have sought to receive exemptions from Washington to no avail (so far) and, chances are, by late Fall we will witness a substantial decline in Iran's oil exports, which can be only nominally remedied by resorting to the pre-JCPOA pattern of oil smuggling.

Henceforth, in light of the simple fact that oil receipts account for more than 40 percent of the government's budget, there is a near future possibility of a budgetary crisis of the state that will be rather endemic and can be reduced in its intensity by tapping into the country's national savings, the so-called future generation account. A more inward-looking "resistant economy" is also called for that re-orients away from the influx of foreign commodity imports, particularly in the realm of luxury consumer goods, and therefore much depends on the government's ability to keep the economy afloat through the sound pillars of a resistant economy, perhaps mandating the re-introduction of coupons, rationing, enhancing the cooperative and agricultural sectors, and financial discipline. Keeping pace with the public demand curve will be a tough challenge and reflects one of the major vulnerabilities of the government in the coming battle for survival against the oppressive American sanctions.

Of course, the government continues to pin hopes on a JCPOA minus US, so that Europe in particular could maintain healthy trade and financial relations with Iran, which is in the interests of both sides and, yet, the important limits on what the European governments can do, e.g., in the areas of oil purchases and or private engagements with Iran, regardless of the legal protections erected through the "blocking statute." Fact of the matter is that Europe is highly interdependent with the US economy and even the European Investment Bank has opted not to get involved with Iran because of its connections to the US financial system. As a result, pro-JCPOA political statements by the EU countries have gone hand in hand in with the actual mass exits from Iran by the European firms, with minor exceptions, reflecting an inevitable chasm between words and actions and thus accounting for the EU governments' delay games with their proposed package. This delay is partially attributable to a 'wait and see' attitude at Iran's cost and, simultaneously, a nod to the White House's strategy of weakening Iran's will in order to extract major concessions down the road. The longer Europe drags its feet on implementing its proposed package, the bigger the damage to Iran's economy, adding to Iran's vulnerabilities.

Of course, Iran has a long history of resisting sanctions, which have been in place since 1979 and the partial relief of the past two years constitute an exception to the rule. Iran has survived the oppressive Western sanctions before and will continue to do so, albeit at exorbitant costs to the economy and masses of Iranians. The US will continue to apply pressure and counts on the gradual yet speedy erosion of popular support for the Iranian government, as a prelude for a wave of popular uprising culminating in a 'regime change'. The US's script for Iran assumes hardly any direct costs to US and its allies, foreseeing a linear process whereby the law of intensifying pressures on Iran apply and yield the desired results.

But, the American assumptions and plans of action against Iran can only be countered by raising the costs to them and to their regional allies, which in turn raises the issue of protean value of Iran's oil threat and the specter of closing the Strait of Hormuz. This card, already played by President Rouhani and backed by the military leaders, can be effective only if played (a) in tandem with the other cards, such as sustained diplomacy, and (b) with the necessary credibility. On the other hand, if the other side does not take this threat seriously and considers it as an empty tactical maneuver, then its use would be sub-optimal and even counterproductive. Only when invoked as part and parcel of a broader and coherent, i.e., multi-dimensional, counterstrategy, then we can expect to see definitive results. At the moment, Iran's mix of 'carrots and sticks' remains in a rudimentary state, far from a polished long-term strategy. If Iran's oil threat is not repeated, then it reinforces the outside suspicion that Iran is not serious, and yet there are sunk costs associated with such a repetition that might alienate China, which relies heavily on Persian Gulf oil imports. Policy coordination with both China and Russia is therefore required, with due sensitivity to the varying interests of Moscow and Beijing with respect to an Iran nuclear crisis II. 

This aside, nuclear threat, that is, Iran's threat of resuming full-scale nuclear work, is yet another card in Tehran's hands that must be deftly played along with the oil threat, together constituting the core elements of an Iranian politics of brinksmanship that requires a great deal of political will in Iran, as well as courage under fire and foresight, so that the initial shock of foreign pressures on Iran to give up on this politics can be deflected. Brinksmanship is not easy to do and has a low chance to succeed if the government is not fundamentally committed to it and views it simply as a secondary tactic. Yet, the crucial circumstances today warrant a closer attention to the nuances and modalities of an Iranian brinksmanship that raises the specter of conflict and tension in the oil hub of Persian Gulf. This is, indeed, one of the top priorities of the Iranian government today that it can ill-afford to play it poorly.