THE BLOG

Iran Hits the Sanctions Threshold

In a rare display of growing disquiet within Iran's top leadership, the country's Supreme Leader Ayatollah Ali Khamenei has lashed out at western sanctions, characterizing them as "illogical" and "barbaric." He admitted their debilitating impact by stating, "They may create problems. Mismanagement may even increase these problems..." Equally defiant, though, he called for a "resistant economy" and chided his Western adversaries by declaring, "You [West] are worse off and you are moving towards collapse and recession. These problems [sanctions] cannot bring the Islamic Republic to its knees." Addressing thousands of his supporters in the northeastern city of Bojnourd, he also counseled top officials to stop internal bickering, "fulfill their obligations" and be "united and sympathize with each other."

The speech comes against the backdrop of growing pressure -- from varying branches of the state as well as the powerful merchant class, the "bazaaris" -- on President Ahmadinejad's government to rein in spiraling inflation (above 25 percent) and stabilize the country's chaotic currency market. Last week alone, the Iranian rial lost 40 percent of its value, a whopping total of 80 percent decline since the imposition of Western sanctions in late-2011. Crucially, after three years of hiatus, the currency "free fall" precipitated pockets of protests in Tehran's commercial heart, the "Bazaar."

Although touted as "target-specific" measures against Iran's nuclear program, Western sanctions have been actually unprecedented in scope and breadth. They range from a collective EU embargo on oil purchase and shipping-insurance coverage, to American sanctions against Iran's oil customers, and the expulsion of major Iranian banks, including the Central Bank, from global financial channels. As a result, Iranian traders -- both private and public -- are having difficulties conducting trade, channeling payments, procuring credit, and receiving oil payments. Even the import of essential commodities, from food to medicine and advanced medical facilities, is increasingly difficult.

Bearing the economic situation in mind, the significance of Ayatollah Khamenei's speech should not be overlooked. He is the ultimate authority in Iran, having the final say on the country's nuclear policy. Since its very inception, the Islamic regime has been placed under varying forms of sanctions, beginning with the Carter administration's oil embargo in response to the 1979 hostage crisis. However, the Iranian leaders have always -- almost as an article of faith -- dismissed sanctions as nothing but a political nuisance, touting the country's resilience in face of external pressure and international isolation. So, at least on the surface, the supreme leader's statements could be interpreted as a more explicit recognition of the disruptive impact of sanctions.

Presently, Iran and the West are locked in a dangerous "chicken game": the West is aggressively tightening the noose around Iran's beleaguered economy, while Tehran is expanding its enrichment capacity, fortifying its facilities, and inching closer to a "nuclear fait accompli." It's a classic case of brinkmanship. Iran refuses to admit more intrusive inspections unless the West is willing to (1) recognize its peaceful enrichment rights in accordance to the NPT provisions and (2) reverse the sanctions. Meanwhile, the West is unwilling to reverse sanctions unless Iran shuts down its heavily-bunkered facility in Fordo, ships out its 20 percent enriched uranium stockpile, and open all its nuclear facilities, including the Parchin military facility, to a comprehensive, real-time, and unbridled inspection regime, under a so-called Additional Protocol (AP).

Yet, if one digs deeper, the speech -- admitting to the impact of sanctions -- could also be interpreted as something more consequential: perhaps, an indirect signal of growing willingness on the part of the Iranian leadership to break the nuclear deadlock. There are two new developments that could provide some clues.

First, President Ahmadinejad's surprisingly conciliatory speech at this year's UN General Assembly meeting, whereby he signaled his country's willingness to cap enrichment levels below the 20 percent threshold, set-up communication channels with U.S. Navy in the Persian Gulf, and even assist the international community in dealing with ongoing conflicts in places such as Syria and Afghanistan.

Second, reports that Iran has presented a "nine-point plan," whereby in exchange for a "phased" withdrawal of sanctions, Tehran will not only cap its enrichment levels at around 3 to 5 percent purity, but also consider the suspension of enrichment at the controversial Fordo nuclear facility. Also, the Iranians are willing to accept a more intrusive inspection regime under an AP. (This was later denied by members of Iran's Supreme National Security Council.)

Meanwhile, the meter is running: Sanctions are ravaging Iran's civilian economy, while the Persian Gulf is increasingly crowded with both Western and Iranian warships -- raising the possibility of conflict due to "accidental clashes" in high seas.

America is understandably worried about the economic impact of a geopolitical meltdown in the Persian Gulf, but the Iranians are facing a real and present danger: most powerful sanctions regime in modern history.

Oil exports represent around 75 percent of the country's revenues and 90 percent of its exports. As Iran's oil exports stagnate at 50 percent of historical levels, Tehran's ability to defend both the rial and its influence within the OPEC is diminishing. With a merchandise-to-GDP ratio (total value of merchandize trade in dollar terms) hovering around 40 percent, Iran is vulnerable to the massive currency fluctuations. The IMF is already predicting an almost 1 percent contraction for 2012, while the budget-deficit (at 2.9 percent of the GDP) is widening to its highest levels in almost five years.

Recent history provides valuable lessons for Iran. The Soviets Union's collapse underlined the extent to which national survival is contingent on possessing a viable economy, while Saddam's Iraq demonstrated the futility of direct confrontation with the West. In fact, sanctions against Iran are increasingly reminiscent of those that crippled Iraq in the 1990s, undermining Baghdad's ability to sell its oil, replenish state functions, and maintain an effective army. Most of all, the Arab spring also demonstrates the lethal mixture of massive economic dislocation and an increasingly restive population.

Nonetheless, Tehran will have to wait until the conclusion of U.S. presidential elections to make its next diplomatic move.

Richard Javad Heydarian is a Philippine-based foreign affairs analyst, specializing on Iran and international security. He has been a regular contributor to Asia Times, the Diplomat, Russia Today, and Tehran Times. He can be reached at jrheydarian@gmail.com