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Iran, November 2018 - a Window of Opportunity for Europeans?

Iran, November 2018 - a Window of Opportunity for Europeans?
 Michel Duclos
Special Advisor and Resident Senior Fellow - Geopolitics and Diplomacy

The full implementation of new US sanctions on Iran took place on 5 November, after a transitional period following Mr. Trump's decision in May 2018 to withdraw the United States from the nuclear agreement with Iran (JCPOA).
The announcements made by Washington on this occasion included two unexpected elements. 

  • In terms of communication, Mr. Bolton, National Security Advisor, gave the impression that he was not totally in accordance with Mr. Pompeo, Secretary of State and Mr. Mnuchin, Secretary of the Treasury. Moreover, no thundering words were heard from President Trump. 
  • On the substance, the US authorities disclosed  a series of exemptions to the sanctions. Although those exemptions were presented as minor and temporary, they were in reality quite significant. Regarding the main parameter, oil purchases from Iran, 8 countries (China, Taiwan, India, South Korea, Japan, Turkey, Italy and Greece) are concerned and some of them (Japan and South Korea) have already reduced their imports of Iranian crude oil in the medium term. These measures should allow the price per barrel to grow only gradually, thus protecting the US economy from an exogenous supply shock that could harm current growth. 

 Underlying these exemptions, is the fact that the Trump administration has abandoned the objective of "zero Iranian oil exports". According to available information, Iranian exports were already reduced to 1.1 million barrels per day, from 2.6 million barrels in May 2017. Washington's target is now 1 million barrels per day by 2019.

Iranian exports were already reduced to 1.1 million barrels per day, from 2.6 million barrels in May 2017.

The EU as such does not benefit from such exemptions. However, Europe can be proud of having reached the continuation of non-proliferation actions at the Arak and Fordow sites, following intense discussions within the US administration. The fact that the Trump administration gave in on this point following its allies’ pressure shows that the latter recognize the usefulness of the non-proliferation acquis represented by the implementation of the JCPOA.

We have come a long way, if we think that initially, one of the goals sought when the US left the agreement was to push the Iranians to withdraw as well. Humanitarian exemptions (medicines, food products) are ambiguous in their scope. They mainly intend to show that the US administration wants to exert "maximum pressure" on the Iranian government while ‘protecting’ the Iranian population as much as possible. 
The American strategy now faces a twofold question. First, will the decisions announced in Washington at the beginning of November be followed by increased pressure? This seems obvious, particularly in the light of Washington's expected desire to reduce the scope of exemptions, and thus to increase the scope of sanctions over time. American officials make no secret of the fact that they are engaged in a policy of "strangulation". Already, the Trump administration has undoubtedly succeeded in hitting the Iranian economy hard by forcing large companies and banks to comply with sanctions. However, at this stage, the US administration has not succeeded in bringing together a coalition around it that shares its positions. The United Nations Security Council meeting chaired by Mr Trump in September clearly showed that the United States were the ones that were politically isolated, not Iran. This isolation could be a barrier to the "maximum pressure" policy wished by Washington.
Secondly, does the administration want to achieve a regime change, or does it actually hope that the Iranians will accept a resumption of negotiations in line with American requirements? On this subject, there is no unified position in Washington. Officials report that the very hard conditions set by Mr. Pompeo in his speech to the Heritage Foundation on May 21, 2018, are only a starting point for negotiations. Messages were sent to the Iranian authorities indicating the United States' readiness to resume discussions. The US officials can anticipate the possibility of an initiative by President Trump to seek a one-on-one meeting with Mr. Rohani, on the same model of the bilateral meeting between the US and North Korea.

On the Iranian side, Tehran has confirmed its intention of staying in the nuclear agreement despite some signs of hesitation during the summer. From a European perspective, it is understood that the main protagonists come together in a "pragmatic moment": the Americans renouncing to the full imposition of sanctions for now, and the Iranians refraining from pulling out of the nuclear agreement. This situation can be attributed to a certain extent to the diplomatic action of Europeans and other countries (Russians, Chinese in particular).

The United Nations Security Council meeting chaired by Mr Trump in September clearly showed that the United States were the ones that were politically isolated, not Iran.

However, Iran's official discourse remains forceful. Institut Montaigne, on the fringes of the Paris Peace Forum, received the former Iranian Foreign Minister Kamal Kharazi, Director of a centre for strategic studies attached to the services of the Supreme Leader. From the discussion Institut Montaigne had with Kamal Kharazi, it appears that the Iranians have no intention of renegotiating the terms of the nuclear agreement with the Americans, nor of engaging with them in discussions regarding regional issues or the Iranian ballistic programme. Iranians also refuse to reopen the nuclear discussion with the Europeans and show little openness towards them regarding other issues, should they have any link with the nuclear agreement. Showing her frustration in the light of the weak solutions that Europeans suggest in order to circumvent US sanctions, Tehran maintains the threat of withdrawal from the agreement, and also suggests the risk of a chain of reactions and, ultimately, that of destabilisation of the region with detrimental migration and security consequences for Europe.

This views presented by K. Kharazi correspond to Iran's positions over the past few months. The question of Iran's substantive strategy however remains open. The Supreme Leader has indeed instructed that no further negotiations should be held - as it had been the case for long periodes of time between 2003 and 2015 on the nuclear issue. At that time, European diplomats joined by Americans and Russians, were meeting with their Iranian counterparts for endless discussions that led nowhere. Nevertheless, the Iranians are well aware that their country is sinking into an economic impasse. Some of our Iranian interlocutors do not hesitate to express their disturbing concerns: pragmatism may prevail on both sides for the time being, but no more than the United States does Iran have a strategy to go beyond the current stalemate.

The Iranians are well aware that their country is sinking into an economic impasse. Some of our Iranian interlocutors do not hesitate to express their disturbing concerns.

In the meantime, the exchange rate of the rial against the euro has more than tripled between the summer of 2017 (1€/40,000 rials) and the summer of 2018 (1€ / 150,000 rials), causing a proportional inflation of imported goods. The country's foreign exchange reserves are not unlimited. The Iranian official discourse emphasizes the important efforts made to improve the self-sufficiency of the national economy, in particular by emphasizing the declining (albeit still structurally important) share of oil revenues in the country's overall revenues. However, oil revenues are an essential source of funding for Iran's social security system, which faces the major challenge of the country's demographic dynamics. Iran can certainly reactivate alternative networks to try selling some of its oil. Some Asian tankers have resumed their old practice of disconnecting routers in order to obtain their supplies discreetly from Iranian ports. All this, combined with the possibility of a relatively high barrel price, can constitute a balloon of oxygen; it is hardly a platform to move forward a country whose population is constantly expressing its dissatisfaction.

Our Iranian interlocutors argue that the positions they have acquired at the regional level, from Afghanistan to the Mediterranean, constitute an asset for them, either in offensive terms (creating situations contrary to Western interests) or in terms of negotiations (case of Yemen). This is probably true, but only to a certain extent. After a period of considerable expansion, Iran is facing difficulties in the region. In Iraq, for example, Saudi recommitment is a challenge to Tehran's traditional influence on Baghdad. The Kurdish threat to Iraq's political unity has diminished, making Baghdad less dependent on Tehran on this issue. Iran's local supporters (militias and pro-Shiite parties) were less loyal than might have been expected during the Basra events. In general, Iranians are never completely sure of the reliability of their various local customers and the formation of a new government in Baghdad is not entirely favourable to their interests. In Syria, a consolidation phase is beginning, in which Tehran must above all preserve the positions acquired, and this in a context where the Russians are trying to find a political settlement that will necessarily include the concerns of Turkey, Israel and even the West. It should be noted that the Iranian interlocutors received by Institut Montaigne insist on differences in approach, which they believe are becoming increasingly important, between Moscow and Tehran on the Syrian question (e.g. Idlib or Syria's institutional future). The question of Yemen remains, where, indeed, rightly or wrongly, other international and regional actors consider Iran to be in a good position to negotiate.  For the time being, on this issue it is the change in attitude of the United States and its allies towards Saudi Arabia that seems to constitute the game changer.
In the background of the "pragmatic moment" - accompanied by a lack of strategy - is the major question of the country's margins of resilience in the face of American pressures. The Washington architects of the "maximum pressure" strategy are betting that tightening sanctions will lead to the collapse of the regime, or to a considerable evolution of it. These calculations are at the very least random; in the short term, Mr. Rohani may have lost support (and ministers), but he managed to survive politically. Ongoing social movements (truck driver strikes, school teachers' strikes) have not federate on a large scale. A careful examination of Iranian political life suggests that Mr. Rohani has so far been rather successful in directing the virulent criticism of Iranians, who are dissatisfied with their country's poor economic health, against the United States. His popularity in public opinion has certainly plummeted, but the President of the Republic remains a possible option for the succession of Supreme Leader Ali Khamenei. More generally, it would be wrong to underestimate the implantation in society of the pillars of the Iranian regime - from the Supreme Leader to the Guardians of the Revolution, from bazaar circles to religious foundations at the head of huge industrial conglomerates.

The major risk of the American "strangulation" policy is that it could lead, certainly to a collapse, but to a collapse of the country and not of the regime: a terrible situation for the Iranian population, the first victim of the deterioration of the economy and the obsolescence of the infrastructure, but bearable for the conservatives who hold the keys to the system and will be tempted to respond to the country's collapse by tightening the regime. Some observers go so far as to think that, in any event, it will not be the Rouhani-Zarif team that could be authorized by the Supreme Leader to resume negotiations with Washington and that a change of government in Tehran, in the absence of a change of regime, could constitute a prerequisite for any resumption of dialogue.

The Washington architects of the "maximum pressure" strategy are betting that tightening sanctions will lead to the collapse of the regime.

Does the situation briefly described above offer Europeans an opportunity for action? In trying to answer this question, three facts must probably be taken into account. First of all, it is necessary to resist the story of Europe's powerlessness, which would be incapable of protecting her economic interests. However, the Europeans have played a decisive role - which they must make clear to the Iranians - in preventing Iran's political isolation, thus facilitating resistance by the Chinese and others to US sanctions. They have made a powerful contribution to keeping Iran in the nuclear agreement and have therefore in fact achieved their immediate non-proliferation objective. In other words, the effectiveness of European action must be assessed on the basis of political criteria and not exclusively on economic criteria.
Secondly, Europeans must be prepared for a twofold increase in tension, with Washington on the one hand and Tehran on the other. With Washington: the project for a financial instrument - the Special Purpose Vehicle - despite its very limited scope, is causing reluctance in Europe itself and anger among many leaders in the United States. It would be tactically appropriate for capitals supporting the Special Purpose Vehicle to present it as being intended to preserve the JCPOA acquis and not as a step towards Europe's strategic autonomy. With regard to Tehran: on issues other than nuclear, and in particular the question of ballistic missiles, there is reason to fear that a logic of hardening will prevail on both sides. Incidentally, it is necessary to remind Iranians that if they were to carry out a successful attack in Europe, similar to those foiled by the services in France and Denmark, the effect would be devastating - as demonstrated by the effect of the Khashoggi case on relations with Saudi Arabia.
Finally, the only way for Europeans to exploit a possible "window of opportunity" is to intensify dialogue, both with Tehran and Washington. The framework proposed by Mr. Macron for a new "global package" (nuclear, regional, ballistic) has so far come up against a non possumus from Tehran and in reality from Washington. This does not prevent us from offering the Iranians to start a discussion on each of the topics, in different formats and at different paces, by capitalizing on the fact that the leaders of the Islamic Republic could gather as many elements of "normalization" as possible in their relations with their major partners. Ultimately, the objective for Europeans should be, by addressing the most pragmatic currents on both sides, to get the two capitals to finally recognise that it would be in their interest not to delay too long the time to resume substantial contacts between them.

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