The latest report of the International Atomic Energy Agency (IAEA) once again accused Iran for trying to acquire a nuclear weapon. Although a military intervention is unlikely, the report will probably pave the way for enhancing the sanctions. Whether they really work, however,seems irrelevant for the international community at this point.
Last week domestic politics prevailed international politics all over again. US and Israel’s internal woes (occupywallstreet movement in US and political unstability in Israel) cornered the governments. In times like these, citizens are reminded why they need a government: security. While U.S. does that through international terrorism and the “axis of evil”, Israel often emphasizes Palestine issue. However, the most frequent excuse used by both countries is, by far, Iran’s nuclear program. The nuclear program that Iran is claimed to be for energy purposes, is most certainly not peaceful. Nonetheless, the way that the country is dealt with, should be deemed nothing more than the good old hypocrisy. Other countries acquiring a nuclear weapon were neither exposed to sanctions nor inspected by the IAEA.
This is, unfortunately, how things work in the Middle East. Iraq, a country subjected to similar accusations, was invaded due to the allegations of possessing weapons of mass destruction which were later refuted. Yet, Iran is a more powerful “enemy” than Iraq in terms of not only military but also economics and politics. It has attachments as Hamas and Hezbollah amongst others and a strong influence on the Shia sect of Islam. So any military intervention which would possibly engulf at least Syria, Lebanon and Palestine, can not be taken for granted.
Taking these into account, U.S. and Israel would probably avoid actual martial confrontation with Iran. The real motive behind these countries’ threats, on the other hand, is to introduce new and rougher sanctions. Among the limited options they have, sanctions are the most vivid, practical and accessible choice at the moment. Although, Russia and China would almost certainly veto it, the Obama Administration probably has a pre-packed list of sanctions, ready to be conveyed to the UN Security Council. However, simple tools are not necessarily accompanied by successful outcomes in international politics.
A Complicated Economy
Iran does not have an ordinary economy that could be dealt as the modern economic systems of the world. Country’s economy consisting of state owned enterprises (SOEs), Islamic Foundations, cooperatives and “complementary” small-sized private sector, is mainly dominated by the state. (Constitution of the Islamic Republic of Iran Chapter IV) The anti-western notion that the Islamic Revolution built upon promotes a closed national economy. The state owns and/or controls the whole means of production by SOEs and foundations, making market accession for private sector (be they national or foreign) almost impossible. So, market is run by politicized bureaucracy which usually favors politically correct management rather than the economic rationale. Thanks to high oil revenue, Iran’s economy can still afford to crowd out economic rationale. (Last week’s exposure of banking fraud worth 2.6 bn USD is a good example in this regard. See here) Therefore, even if there were no sanctions, Iran would still try to maintain at least “closed to west” national economy.
Furthermore, Iran’s economy is accustomed to sanctions. Since the Islamic Revolution in 1979, Iran has been subjected to sanctions to a diverse extent. They have ranged from oil industry to financial sectors. Under such circumstances, the state has resorted to alternative means of production -albeit ineffective- and cooperation options with other countries. Vast hydrocarbon resources enables to finance R&D on substitute industries and imported goods and services particularly from Russia, China, India and N. Korea.
But above all, sanctions often serve the very political regime that they try to overthrow. Iran’s political system is intertwined with economy more than some think. The regime survives simply by buying loyalty through handing out political and/or economic rent. In that sense, mullahs, ruling clerics, need to control country’s wealth as much as they can. The Revolutionary Guard (RG), country’s main military muscle, is suitable for this job. In addition to its political and military clout, RG has a say also in economics. For instance, the Defense Industries Organization (DIO), one of the SOEs run entirely by the RG, was established soon after the Iraq-Iran war in order to produce high-tech defense equipment with related to RG’s own military needs. Since then, DIO has increased the radius of its action and began to operate on several other sectors such as chemicals, marine and transportation among others. Not surprisingly, mullahs, officials of RG and their relatives are usually in the Boards of Directors of all SOEs. Moreover, oddly enough, these people are trained to be businessmen. Most of RG’s own staff are sent abroad to learn and improve business administration skills. And this provides a basis for regime’s perpetuity; buying loyalty through economic rent that is allocated only by the henchmen.
So in a complicated economic system as such, who does benefit from the sanctions? The RG does, mostly. After the UN sanctions, western companies were forced to give up on their investments worth of approximately 13 billion USD at total. (see numbers) For instance, Statoil (Norway), Total (France), ENI (Italy), Royal Dutch Shell (Netherlands) and Inpex (Japan) all stopped their activities on the oil fields in the Persian Gulf. Nokia (Finland), Siemens (Germany), Fiat (Italy), Renault (France), Samsung (S.Korea) and Volvo (Sweden) also suspended their businesses on several Iranian sectors. However in the following days, Iran finds new partners. National Iranian Oil Company (NIOC), the main SOE in the energy sector, has signed an agreement with China and Turkey for developing the South Pars Oil Field. Government officials also announced that Iran, Russia and Turkey agreed to cooperate on mining and other energy (nuclear and so on) sectors. Furthermore, in order to fill the gap on telecommunications and automotive sectors, Iran signed deals with Telekom Malaysia International, Petronas and started talks with India’s Land Rover and Tata Group. Petrobras (Brazil), Sinopec (China), ONGC (India), SKS (Malaysia) could be counted as other major partners of Iran from transportation to chemicals sectors. (full list)
Although the possible outcome and future of these partnership agreements are uncertain, RG’s rising influence on economy is crystal clear. All of these agreements were signed with an Iranian SOE, regime’s eyes and ears in economy. While agreements with western companies were based broadly on economic interests, the new ones often build upon political gains. Thus, it would be possible for Iran to forge volatile cooperation ties with countries willing to do so, that would revitalize state’s influence on economy if and when it tends to diminish. For instance, Iranian Minister of Petroleum has announced the abolition of South Pars Oil Field Development Agreement with China National Petroleum Corporation (a deal worth of 4.7 billion USD). GUBRETAS, a Turkish Agriculture Giant, is also forced to end its activities in Iran due to losses arising from market restrictions. The 1 billionn USD worth of investment will be left to the hands of the RG if the company decides to leave Iranian market. Unfortunately, this is a common tactic of Iranian statesmen on foreign investment. Invite, allow, tire and seize.
Sanctions Don’t Help
Growing economic influence of the RG enables state to maintain and cover up regime’s malignities. Even though majority of the real sector is well below its potential (ineffective production of commodities and services), it is possible for state to buoy Iranian economy due to large oil revenues. However, if foreign investors were able to do business with Iran’s primitive private sector, there would be a chance for a new Iranian bourgeois, that would probably trigger demands of freedom in economics and politics eventually, to emerge. That would, in turn, undermine the repression regime in the country since the loyalty of the new economically-sound class would be harder to buy. And this is exactly what the sanctions block. The state which has already dominated economic activities, maintains its economic clout because them. They hinder the minor opportunity for the redistribution of wealth, making it possible for state to strengthen its monopoly on every sector. What’s worse, the regime has not been weaken since it has developed substitute sectors and replaced previous partners with new ones. This blog believes that without sanctions, free capital could forge a new economic class from Iran’s small-sized businesses (bazargan) and extend it so as to include some of the moderate political figures such as Rahim Masha'i.
And then, there is politics. Sanctions also cripple the efforts of reformists. In a country where all western nations impose sanctions for ultimate isolation, it is hard to advocate liberalism. Therefore, dissidents of the regime could only offer minor reforms which has no real effect on political or economic system as a whole. Moreover, even if they do ask for an ambitious restructuring in the system, they don’t have substantial economic means neither to realize it nor to stand against the hardliners.
Today, more sanctions are not the answer for setting Iran straight. They would only further radicalize the regime, helping justify its references to religion and ideology. The question is not whether the Islamic Republic could endure isolation. A country with enough money always finds new ways for economic survival and Iran has the money. The question is how long West allows mullahs to control it.
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> Briefing: The Political Economy of Iran
> Towards a New Middle East Economy
> Elections in Iran
> Briefing: The Political Economy of Iran
> Towards a New Middle East Economy
> Elections in Iran