On a Path to War: US-Iran Tensions are Reaching Boiling Point

Trump vs. Rouhani (Image: AP)

On May 8, 2018, US President Donald J. Trump carried out one of his old projects, i.e., to explicitly walk out of the Joint Comprehensive Plan of Action (JCPOA) reached between Iran, the United States, China, France, Russia, the United Kingdom, Germany, and the European Union on July 14, 2015.

IAEA inspectors spend 3,000 calendar days a year in Iran, checking its nuclear facilities, and so far they have not ascertained any particular Iranian infringement of the 2015 agreement.

Immediately after the US action, the EU adopted a blocking statute, based on the fact that the USA had unilaterally stated that Iran had not publicly declared a previous nuclear program, prior to the JCPOA.

According to the 2015 treaty, Iran had agreed to destroy its arsenal of medium-enriched uranium, as well as to eliminate 98% of its low-enriched uranium production, and to finally reduce the number of its gas centrifuges for the selection of isotopes by two-thirds, for a period of 13 years starting from the signing of the JCPOA.

For the subsequent 15 years, in fact, Iran had committed to enrich its uranium by only 3.67% compared to the levels before the signing of the agreement, without building other centrifuges for the following 10 years as from the signing of the JCPOA, while the enriched uranium production had to be reduced to the activity of a single first-generation centrifuge.

As previously mentioned, the EU put in place a blocking statute mainly to protect EU-based companies from the effects of US sanctions against Iran. In May 2019, however, IAEA established that Iran had basically complied with the JCPOA, except for some doubts about the number of centrifuges actually in operation.

Immediately after the US withdrawal from the treaty, Iran reaffirmed its acceptance of the treaty of July 14, 2015, along with France, Germany and Great Britain, while the Russian Federation and China explicitly supported Iran, which stated that only the USA had unilaterally and illegally withdrawn from the agreement.

According to President Trump, one of the political reasons for the US withdrawal from the JCPOA was the resulting strengthening of his positions during the negotiations with the North Korean leader, Kim Jong-un, while the former US President, Barack Obama, said that the US withdrawal from the treaty of July 14, 2015 left the USA torn between two equally suicidal choices: a completely nuclearized Iran or the quick breaking out of another war in the Middle East.

The only countries supporting President Trump, against the nuclear agreement with Iran, were Saudi Arabia, the traditional enemy of the Iranian Shi’ites, and obviously Israel.

The US President also added that the USA would cooperate with the EU to “put pressure” on Iran, but the European Union implemented a project, called Instrument in Support of Trade Exchanges (INSTEX), to avoid the negative effects of US sanctions on European companies. INSTEX, officially announced on January 31, 2019, is led by Per Fischer – former Head of Financial Institutions at Commerzbank – as President, and includes Simon McDonald, permanent undersecretary for foreign affairs of Great Britain, Miguel Berger, Head of the economic office at the German Foreign Ministry, and Maurice Gourdault de Montaigne, Secretary General of the French Foreign Ministry (“and of Europe,” as the official formula states). The whole body does not include senior managers of the banking system and of commercial institutions.

A political organization that has political purposes vis-à-vis Iran and the USA, not a real starting point for continuing to do business in Iran.

For many countries, including Iran, INSTEX is more a political move to differentiate themselves – with difficulty – from the USA than an effective and operational system against the US sanctions on Iran.

On April 29, Iran announced it had set up the Special Trade and Finance Institute (STFI) to monitor the INSTEX activities and thus favor Iran-EU trade even during the US sanction regime.

The Iranian President of STFI is Ali Askar Nouri, former consultant of Iran Zamin Bank and the Institute also includes Hamid Ghanbari, former director of the Central Bank of Iran, Farshid Farrokh, manager of the Refah Bank, and finally some other managers coming from the Iranian banking system.

Given the low political level of the Iranian STFI, it is likely that the Iranian government does not trust the INSTEX system at all as a way to really solve the trade relations between the EU and Iran.

The European system also implies that the profit generated from the purchase of Iranian oil by companies having their headquarters in the EU must be transferred to the INSTEX “special-purpose vehicle.”

Nevertheless, considering the general US restrictions on the sale of Iranian oil, in all likelihood the EU “special-purpose vehicle” will be increasingly linked to ever smaller Iranian funds and hence will not be in a position to collect enough liquidity to justify reasonable trade with Europe.

Moreover, considering that the major buyers of Iranian oil belong to non-European States, it is equally unlikely that these countries – namely China, India, Korea, and Japan – will accept to transfer their payments to INSTEX.

Furthermore, considering the US regulations, even if the EU vehicle really worked, Iran could spend all the funds included in the EU mechanism only for medicines and – to a little extent – for food.

Hence, no mechanism to protect Iran-EU trade can be created unless agreements are also made with the USA.

But who is really hit by the US sanctions? Rather than the political and military actions of the Iranian government, what is really destroyed is Iran’s private economic sector.

Currently. the Iranian population is equal to 82 million inhabitants, with an economic ranking that places the Shi’ite Republic of Iran in the eighteenth position in the world.

In the case of Iran, another reason for the economic crisis led by foreign countries is the devaluation of its national currency, namely the rial.

The local government’s inflationary actions, the restriction of foreign currency assets and the related slowdown in growth, with an inflation rate at 13% and an unemployment rate at 12.3%, are drastic measures. This is official data from the Iranian government, which is apparently much more acceptable than real data.

Furthermore, the Shi’ite regime has imposed restrictions for as many as 1,300 types of product, in addition to the escape from the dollar in transactions and the preferential use of the Euro in international trade.

In the real exchange market, currently the rial is worth 90,000 as against the US dollar, while at the end of last year one dollar only was worth 42,840 rial. An induced Weimar-style inflation, which is destabilizing for every social system.

The Euro, however, is not a currency that has the characteristic of being a Lender of Last Resort, as Paolo Savona often says – hence its global use is inevitably very limited.

Therefore, the rial should still decrease by at least 10% in the exchange with the US dollar.

At official rates, bank interest is already at 24%. In these crisis contexts, the Euro is therefore not allocable, while the role of the Chinese renmimbi is growing, considering China’s vast purchases of Iranian oil – which will not last forever.

If not to maintain a game of tensions with the USA, on the part of China, pending the trade war that inflames the two major players in global economy, namely the USA and China.

Transfers abroad – to the EU in this specific case – cost the Iranian companies at least 20% of the total capital transferred.

It should also be recalled that oil sales are worth only 40% of Iran’s total GDP, considering that the largest sector of the Iranian economy is services, which account for 51% of GDP, followed by tourism (12%), the real estate sector, and finally the mining sector (13%) and agriculture (still at 10%).

What could be a possible solution? The greater economic correlation between Iran and China, considering that the commercial crisis between the United States and China is almost simultaneous to the crisis between Iran and the USA – and it has quite similar strategic potentials.

Hence, for the United States, the effects will be the maximum pressure available against Iran, in addition to greater US military presence in the Middle East and the damage caused by the USA to the European allies still tied to the signing of the 2015 JCPOA.

It is also impossible not to think about the inevitable negative reactions on the Nuclear Non-Proliferation Treaty, already under pressure from various parts.

Moreover, the bilateral relations between China and Iran are still growing significantly, at economic, political and strategical levels.

Furthermore, China currently imports 11% of its oil from Iran, in addition to an investment of over USD 5 billion for the technological upgrading of the refining and transport of oil and gas.

China has also invested in the urban transport system, particularly in the Tehran subway, as well as in regional motorways and in the Mehran Petrochemical Complex, in addition to a credit line of the Chinese State financial holding (CITIC) to the Iranian government, amounting to over USD 10 billion.

The China Development Bank has also guaranteed additional USD 15 billion– up to a transfer of capital – between Iran and China, which, as stated by Hassan Rouhani, the current leader of the Iranian government, are expected to reach USD 600 billion.

Iran is currently China’ second trading partner, after the United Arab Emirates, and is also capable of permanently supplying the Shi’ite republic with advanced weapons.

Therefore, it is a real “substitution of Iran’s imports” both from the EU and, obviously, from the USA, which enables China to create an economic and military outpost in the Persian Gulf, capable of opposing – in a short lapse of time – the US strategic presence in the region. Not to mention the EU countries’ military set-up and arrangement in the Middle East.

Moreover, the USA knows that, considering the asymmetric structure of Iran’s military forces, a clash with Iran could be very costly and even burdensome for the US itself, which probably could barely penetrate the Gulf, while it is still believed that a direct North American action on Iranian soil is currently ever more difficult.

Meanwhile, Iran is struggling to create new markets for its oil, in areas that cannot be integrated into the JCPOA and the US system.

The target countries of Iran’s expansion are Brazil, China – as usual – but also India, which can be decisive today, considering that the Iranian production reached only 400,000 barrels per day last May, less than half of the sales in the previous month and even below the 2.5 million barrels per day of April 2018.

Everything started with an annual income from Iranian oil of approximately USD 50 billion.

Currently, however, according to US experts, oil proceeds have fallen by at least USD 10 billion, after the US re-imposing full sanctions last November.

The situation is still better for Iranian exports – also to Turkey – of petroleum by-products, such as urea, but above all for the sales of natural gas, liquefied petroleum gas, biofuel, methanol, and even other non-oil energy products.

Iran accepts payments either in currencies other than the dollar or with the old trade-in system, which is a traditional and widespread system in the oil world.

Let us revert to the bilateral political crisis between the USA and Iran.

After the sanctions renewed by President Trump, Iran has started again to enrich uranium to 20% and has also announced it would update the Arak reactor, which was part of the Iranian military system and produced plutonium.

Moreover, Iran claims that the Arak reactor is still subject to the JCPOA rules and that its productive activity will end soon.

In Natanz, another important center for the Iranian production of enriched uranium, the extraction of isotopes has increased significantly. As Iranian leaders themselves say, this extraction should be increased by 400% compared to the JCPOA rules.

It should be recalled that the treaty of July 14, 2015 limits the production of uranium to 300 kg of uranium hexafluoride (UF6), which has a real content of active and useful uranium to the tune of 202.8 kg.

On a strictly military level, the USA has already sent to the Persian Gulf region a group of warships, including the aircraft carrier Abraham Lincoln and four destroyers armed with missiles. Furthermore, some B-52 bombers have been deployed in the Al-Obeid US base in Qatar, in addition to over 120,000 soldiers, distributed in the various US facilities in the Middle East. While President Trump initially said that the shipment of these troops was “fake news,” it was recently confirmed by the US Administration.

On May 12 last, Iran’s Revolutionary Guards, the so-called Pasdaran, attacked four to seven large commercial ships in the port of Fujrairah, one of the great world hubs in oil maritime trade. Other data has not been provided to the press.

Allegedly, they were vessels belonging to companies based in the United Arab Emirates.

It is also likely that at least two of those ships were of Saudi nationality.

Another attack of obscure Iranian origin occurred on May 19, when a Katyusha rocket was fired against the US Embassy in Baghdad, but without causing casualties.

On May 14, Supreme Leader Ali Akhbar Khamenei said that “there would be no war against America.” At the same time, however, the Iranian Rahbar does not want to re-open the nuclear talks with the United States.

Both because Khamenei does not want to give the impression of rapidly succumbing to the United States – and here the Shi’ite regime could even self-destruct – and because, in all likelihood, reopening negotiations would imply the end of Iran’s nuclear ambitions.

It should be noted that there is also the oil issue for the USA itself.

Tension in the Gulf leads to a fast and significant increase in all OPEC crude oil prices while, even considering its higher extraction costs, the US oil is also capable of producing profit, in a context of quick and uncontrollable growth in the OPEC oil barrel prices.

The United States has now reached a production of at least 2.5 million barrels per day, which makes the USA attentive to any possible useful hedging on OPEC oil, with a view to exploiting any geopolitical crisis that – in the oil market – always has immediate consequences on the oil barrel price.

It should also be noted that the Strait of Hormuz is twenty miles wide. It is technically impossible for Iran to control or block it all.

Iran, however, can use strong cyberattacks against the oil networks of the neighboring states that, in various ways, are also all linked to Saudi Arabia.

Nevertheless, Saudi Arabia and the United Arab Emirates have alternative pipelines that can easily bypass the Strait of Hormuz.

Even in the case of an Iranian unconventional attack, Saudi Arabia can sell at least 6.5 million barrels per day. Also, the USA is currently much less exposed to an oil shock like those of the 1970s, given that the American economy is less oil-dependent and particularly considering that the national production of American (and Canadian) oil and gas is such as to ensure an acceptable level of oil use, even without the North American purchases from OPEC countries.

In 2019, however, China has agreed to keep on buying oil and gas at low prices in Iran, at a level ranging between 700,000 and 800,000 barrels per day.

Iran has no interest in dealing with the United States, now that a new presidential election cycle is starting.

On June 8 last, Tehran officially declared that it would break some other restrictions included in the JCPOA if the 2015 treaty continues not to provide the expected economic benefits to Iran.

The remaining parties that adhered to the JCPOA have recommended Iran to comply – even unilaterally – with the agreement of July 14, 2015 – and these countries are China and the United Kingdom.

The EU, however, will continue to carry out checks on Iran’s compliance with the JCPOA, both in the collection of heavy water and in the production of enriched uranium, which is essential for building nuclear weapons.

On a strictly economic level, Iran has abolished the oil subsidy regime for the population – a cost of USD 38 billion a year, equal to approximately 20% of GDP.

As both the International Monetary Fund and the World Bank have noted, this is the first aspect to be kept in mind.

Nevertheless, in a context like the sanction regime, it is impossible to maintain a policy of internal liberalizations.

However, on a purely strategic level, what could all this mean, insofar as a permanent geoeconomic clash is emerging between Iran and the United States?

For example, a much harder and more continuous war in the Lebanon than we have already experienced.

Or a clash with Israel involving Assad’ Syrian Army, Hezbollah, some units of Iran’s Revolutionary Guards, and even Hamas in the South.

A long-term war capable of slowly consuming both the material and soldiers of the Jewish State and its international support.

Or a new war in Syria, between the Golan Heights and the areas close to Damascus, forcing Russia to play a military role in Assad’s Syria and creating a clash between Israel and Russia, again on Syria alone.

Or another possibility could be a direct confrontation between Israel and Iran, with airstrikes on the territory of the Shi’ite republic and the whole panoply of means available for non-conventional actions.

Or finally a clash throughout the Middle East, with the possible presence of Saudi Arabia and Iran’s coordination of all Shi’ite forces inside and outside the opposing countries.

It is from this viewpoint that we must evaluate the above mentioned strengthening of the US military structure throughout the Middle East.

It should also be noted that the 120,000 US military to be deployed in the various US bases in the region are more or less the same – in number – as those that were used in the attack on Saddam Hussein’s Iraq in 2003.

Meanwhile, the economic crisis is tightening on Iran: last March, oil exports fell drastically up to reaching only 1.1 million barrels on average, while Taiwan, Greece, and Italy stopped their imports and the major importers, namely China and India, reduced their purchases from Iran by 39% and 47% respectively.

The more the crisis deepens in Iran, the more likely the option of a regional war – probably triggered by Iran – becomes.

The probable clash between Iran and the United States, Israel, and Saudi Arabia must be assessed in the framework of this very weak balance between a possible anti-Shi’ite war and a careful evaluation of the effects and results of a probable war against Iran and on how it will leave the Middle East.