Tehran’s brinkmanship

Iran is unlikely to bow to international pressure as hardliners cement their grip on power. Published in MEED, 16 March 2012

In the coming weeks, Iranian negotiators will once again sit down with their counterparts from the EU, the US, China and Russia to discuss the country’s controversial nuclear programme. It will be an important test of what impact the ever more onerous sanctions and threats of military action are having on Tehran.

However, there have been many rounds of talks before and all have ended in failure, so it would take a particularly strident optimist to believe there will be significant progress now.

While the sanctions are certainly making life difficult for the regime and ordinary Iranians, the economy is not about to buckle under the pressure just yet. At the same time, the more conservative elements of Tehran’s elite are making gains in domestic politics. The 2 March elections for the Majlis (parliament) boosted the position of Supreme Leader Ayatollah Ali Khamenei and his supporters, who now have a clear majority in parliament.

Hardliners benefit

“If anything, the elections will have strengthened the hand of hardliners, which means I won’t expect much change in attitudes to the West, negotiations and sanctions,” says Hassan Hakimian, director of the London Middle East Institute at the School of Oriental & African Studies in the UK.

Parliament is a secondary actor in the Iranian political scene, but the election and its results are a good indication of the direction in which the country is travelling.

For one, it is clear the authorities are cementing their grip on power. Reformist and liberal candidates were either excluded or chose not to run in the election and their supporters largely boycotted the poll. The turnout of 64 per cent has been called into question by many observers, but officials lined up to praise the Iranian people for voting in large numbers, taking it as an implicit endorsement of their rule.

“On 2 March, people have indeed voted for the Islamic system,” said Khamenei in comments reported by the official Irna news agency. He described the turnout as “an awakening slap in the face of those who have been hallucinating about the nature of the Islamic establishment and its future”.

At the same time, President Mahmoud Ahmadinejad, who has had a turbulent relationship with Khamenei, lost ground. Ahmadinejad’s presidency is due to end next year and, under the constitution, he cannot stand for a third term. With a hostile Majlis, he will struggle to achieve much of note in the interim.

“There’s a conflict among conservatives and the Supreme Leader’s supporters have come out ahead,” says Mark Katz, professor of government and politics at George Mason University in the US. “I think it’s another sign that Ahmadinejad has entered his lame duck phase. I just don’t see what he can do.”

Whoever holds the reins of power, there are some tough economic issues to deal with in Iran. Inflation was 22.1 per cent in November and is likely to have risen since then. The official unemployment rate is 12 per cent, but in reality is probably much higher, particularly among women and the young.

The government replaced an expensive system of subsidies for fuel and other goods in late 2010, instead offering cash handouts to a wide swathe of the population. More austerity measures are likely to be needed in the future. However, Tehran is able to deflect some public anger over the state of the economy by blaming the measures on the sanctions.

Sanctions impact

“The increasing tension with the US and the West over the nuclear issue is useful because it allows them to say this is why we have austerity right now because of this imminent threat,” says Katz. “So that’s playing into their hands.”

Certainly, the sanctions are partly to blame for the country’s economic situation, although domestic policies have also contributed. It was the latest US sanctions that lead to a steep decline in the value of the Iranian rial in December and January. According to the reference exchange rate from the Central Bank of Iran, a dollar was worth 10,870 rials at the start of December, but 12,260 rials by February. The black market rate in Tehran is thought to be closer to 20,000 rials. The rial’s depreciation has led to import costs rising substantially, hurting ordinary Iranians and businesses. The central bank responded by raising base rates, which helped to stabilise the situation, although higher interest rates will also hurt anyone with bank loans to service.

If there is one silver lining to this cloud, it is that the higher cost of imports could prompt greater domestic economic activity.

“Imports are more expensive and people are really feeling the pressure on the price of goods they consume on a daily basis,” says Nader Habibi, senior lecturer in the department of economics at the US’ Brandeis University. “The devaluation can trigger domestic production because imports have become more expensive.”

The government is finding ways to work around other sanctions measures and there are still many countries that are content to trade with Tehran, despite the criticism and diplomatic pressure this might draw from the US.That was made clear in early March when an 80-member Indian trade delegation arrived in Iran. Arvind Mehta, joint secretary of India’s Ministry of Commerce & Industry, was quoted by Irna as saying trade between the two countries would rise from the current $15bn a year to $25bn within four years. The prospects for bilateral trade have been boosted by Iran saying it is happy to accept payments in Indian rupees rather than US dollars for its exports.

Other countries are also unwilling to go along with the US sanctions and are only imposing the far narrower UN measures. As a result, more Iranian trade is now passing through Turkey, including financial transactions that once went via Dubai, and the importance of China as a trading partner is also increasing.

What all this means is that, while the sanctions are creating problems for Iran, they are not insurmountable ones. The combination of resilient trade links and high oil prices means that the Iranian economy is still growing, albeit weakly. Habibi predicts gross domestic product should rise by 1-2 per cent this year.

The larger, darker cloud hanging over the country is the threat of military strikes by Israel or the US against its nuclear facilities. While it is impossible to say whether they will happen, many observers believe they are becoming more rather than less likely.

“If you’d asked me six months ago, I would have said it was just rhetoric; now I’m not so sure,” says Nathan Brown, professor of political science & international affairs at the US’ George Washington University. “The Israelis, for whatever reason, seem to be serious when they talk about this as an existential threat. I have absolutely no idea about how this will end or what the Israelis will do, but I think an Israeli strike of some kind is a definite possibility.”

The responses that Iran could offer to any attack include direct missile strikes against Israel, attacks against US interests in the Gulf, a closure of the Strait of Hormuz, or asymmetrical attacks on Israeli targets using proxies, such as militant groups Hezbollah or Hamas.

Domestically, any military action against Iran is likely to draw different factions within the country closer together, according to Hakimian. It would also provide a basis for a further stifling of dissent. And as with sanctions, it is far from clear that a military attack would persuade Tehran to change direction.

“Any external threat - be it military or turning the economic screws - would, if anything, unite different factions,” he says. “The sanctions bite hard, there’s no doubt about it. They bit very hard in Iraq, in Zimbabwe, in North Korea; they impoverished people, raised infant mortality and sped up the brain drain, but they didn’t make the slightest difference regarding the political elites’ attitudes.”

Tehran’s response

The sanctions might not be having the impact that Western powers would want, but the regime does seem to have responded to the heightened economic, political and military pressure by suggesting the latest talks. It was a letter on 14 February from Saeed Jalili, secretary of Iran’s Supreme National Security Council, to Catherine Ashton, the EU’s high representative for foreign affairs that suggested fresh dialogue.

Whether Tehran is serious about negotiations remains to be seen, however, and for every seeming advance there are just as many signs of intransigence. A report from the UN’s nuclear watchdog, the International Atomic Energy Agency, on 24 February said that Tehran had again denied its inspectors access to a military complex at Parchin in January and February.

“Economic pressure on Iran and the threat of confrontation is strong enough that I think Iran has an incentive to come forward and at least reactivate negotiations because they are mindful of the cost on the economy,” says Habibi.

“I’m not predicting that they’ll give in to Western demands completely, but they will at least come to the negotiating table and might bring some offers. In other words they might come one step closer than they’ve been willing to do in the past, but not much more.”