Clouds of uncertainty

Can the July 2015 Joint Comprehensive Plan of Action (JCPOA), commonly known as the Iran nuclear deal, be salvaged amid escalating tensions in the Gulf? Will the renewal of sanctions tame Tehran’s geostrategic ambitions?

Iran is looked upon as a ‘rogue’ state by the West and some other countries in the Middle East. When one nation sees another in such a manner, the key question it faces is how to deal with the latter. For respectable but weak neighbours, the best course is to avoid said state. Powerful neighbours, by contrast, are in a position to take the bull by the horns.

By the same token, a rogue state can be left to its own, constructively engaged, or sorted out. In 2010, the US, and later the European Union (EU), imposed stringent economic sanctions on Iran. The sanctions were wide-ranging and included Iran’s energy, petro-chemical, banking, insurance and shipping sectors. The sanctions declared it illegal, and thus subject to punitive action, to carry out transactions with the public and private-sector entities of Iran. Washington and Brussels were also instrumental in having the UN place curbs on Tehran.

From the standpoint of liberalism, to which both the US and the EU adhere, sanctions don’t make much of a sense because by restricting the movement of goods, services, capital or labour, they end up shrinking the size of the economic pie. Be that as it may, inter-state relations, like inter-personal ties, are seldom driven by pure economic considerations. Countries may forgo a considerably large market in pursuit of wider geostrategic objectives.

The JCPOA represented a trade-off: Iran would put curbs on its nuclear programme in exchange for the lifting or softening of the international sanctions that had crippled its economy. The agreement embodies a comprehensive set of measures designed to ensure transparency and verification in its execution. The agreement also signalled a shift in the US-EU Iran strategy from bullying to constructive engagement and the willingness of the two sides to turn swords into ploughshares. The nuclear deal, however, raised the hackles of Iran’s Gulf neighbours and Israel, which feared that a rejuvenated Iran would constitute an even greater threat.

The compact also didn’t go well with a section of American society including the then White House contender Donald Trump, who put it down as ‘the worst deal in history’ and vowed to tear it apart in case he won the presidential race. After his election, Trump proved as good as his word and walked out on the JCPOA in May 2018. The Trump administration advanced a simple logic for unilaterally quitting the multilateral agreement: not only was the JCPOA insufficient to check Iran’s missile programme, it also failed to rein in the country’s geostrategic ambitions, as, for instance, the Islamic republic continued supporting the Assad regime in Syria, which the West was dead set on toppling, and posing threats to Washington’s strategic allies in the region. The deal, therefore – going by their logic – had to be renegotiated to turn the screw on Tehran.

The immediate implication of the US pullout from the JCPOA was that American sanctions on Iran were restored. In fact, Washington had never lifted the sanctions in toto. The Americans have the knack of complicating matters. Not surprisingly, the US sanctions on Iran were categorized into primary and secondary. The primary sanctions apply to American citizens as well as entities, while the secondary sanctions cover persons and enterprises outside the US.

After the nuclear deal, Washington had withdrawn the secondary sanctions, while the primary sanctions remained in force. Following the withdrawal from the JCPOA, the secondary sanctions were re-introduced. However, starting November 5, 2018, eight major buyers of Iranian oil were allowed to continue procuring from Tehran for six months. The waivers expired in the first week of May 2019.

Most, if not all, waiver-receiving countries have stopped buying oil from Iran, which responded by putting on hold parts of the nuclear agreement. That was followed by escalation of tensions in the Gulf, as Iran and the US shot down each other’s drones, and Iran and the UK seized each other’s vessels in the strategically vital Strait of Hormuz.

The petroleum sector is the mainstay of Iran’s economy, and oil export revenue bankrolls the country’s foreign policy. So pulling the plug on Iranian oil exports, the argument goes, will affect the establishment in Tehran. An Iran squeezed by the sanctions would cease to constitute a significant threat to its rivals. It may even sue for a revised agreement on bended knees. Such conclusions are not just wishful thinking.

About 60 percent of Iran’s oil is exported. After the conclusion of the JCPOA, the country’s average crude oil output scaled up from 3.49 million barrels per day (bpd) in 2015 to 4.37 million bpd in 2016 and further to 4.70 million bpd in 2017. In 2018, however, the oil production slightly came down to 4.47 million bpd, as Washington re-imposed the secondary sanctions. Iran’s crude oil exports rose from $19.2 billion in 2015 to $48.3 billion in 2017 before falling to $45.6 billion in 2018.

Between 2010 and 2015 – the sanctions period – the Iranian economy registered nominal average annual growth of 0.68 percent including negative growth of 1.3 percent in 2015. In the wake of the lifting of international sanctions, the economy registered staggering growth of 12.5 percent in 2016 – mainly due to the stellar performance of the energy sector. However, growth shrank to 3.7 percent in 2017 as the excess capacity ran out. Following the renewal of US sanctions, the Iranian economy contracted by1.5 percent in 2018, and is projected by the IMF to shrink further by 3.6 percent in 2019 before registering a marginal growth of 1.1 percent in 2020. When an economy contracts, jobs are shed by the bucketful, the standard of living comes down precipitously and social discontent balloons up.

Be that as it may, international sanctions are a double-edged sword that can work either way. By all accounts, a slump in oil revenue will throw an already fragile economy into a tailspin. But how Tehran responds is anybody’s guess. The situation may deflate the Iranian establishment and force it to make peace with Washington on the latter’s terms. Alternatively, it may further harden the hardliners and make them take some drastic measures including practically setting aside the JCPOA.

Likewise, the people may go against the system. Or the famous Iranian nationalism may trump economics and the people and the government make common cause.

The writer is an Islamabad-based columnist.

Email: hussainhzaidi@gmail.com

Twitter: @hussainhzaidi