Iran Will Raise the Price on the US Before it Shows Signs of Cracking

And Could Use Russia to Broker with the Trump Administration

The Trump Administration has now snapped back the first round of sanctions on Iran. Cars, planes, precious metals and currency are effected. The harsher sanctions designed to preclude the buying of Iranian oil won’t be re-imposed until November 4th. The impact of both the first and second round of sanctions snap-back will depend on broad international implementation of the sanctions. That is not a given. In fact, with the Europeans, Chinese and Russians determined to preserve the JCPOA and Iran’s observance of it, the Trump Administration is likely to find few countries currently doing business with Iran ready to back its approach.

Still, the Iranians are likely to feel the economic sting of the sanctions snap-back. Banks and large multinational or even European based firms will do what their economic bottom-line, not governments, tells them to do. With companies and banks like Total, Peugeot, Maersk, Bundesbank and others signaling that they will stop doing business in Iran, it is clear that the foreign investments the Iranians might have been counting on are not going to materialize.

The irony is that well before sanctions were re-imposed, the Iranian economy was not doing well. Since April, the Rial, the Iranian currency, has been devalued by 50%--meaning that Iranian bank accounts are worth half of what they were worth then. Even before this, bank and credit failures had roiled the economy and fomented increasing public frustration, particularly with widespread corruption and mismanagement.

Demonstrations and strikes began the end of last year, months before Trump walked away from the JCPOA, and have continued with increased regularity over the last month. Traders in the Tehran Bazaar called a work-stoppage on June 25; truckers struck in July throughout the country; last week riot police had to be called out as strikes spread in the cities of Mashhad, Isfahan, Rasht, Ahvaz, and Karaj. With the exception of Ahvaz, these are conservative areas traditionally supportive of the regime. And, yet the demonstrators are clearly angry and carry placards that say No to Syria, No to Lebanon, No to Palestine—and not just “death to prices,” but “death to the dictator.”

All this before the sanctions take effect. Does this mean that the Trump Administration policy of “maximum pressure” is likely to work and bring the Iranians back to the table and ready to negotiate a better deal than the JCPOA? Supporters of the JCPOA universally say no, the Iranians won’t submit.
I, too, believe that the Iranian regime will go to great lengths to show they are not surrendering any time soon to the US. Ali Khamenei, the Supreme Leader, has consistently railed against the United States, saying it seeks not concessions but the demise of the Islamic Republic. He has just as consistently called for Iran to reduce its dependence on the outside world and make its economy self-sufficient. And, yet these themes, which have been his calling card since the late 1990’s, did not prevent him from authorizing the JCPOA. Similarly, in the first term of the Obama Administration, the Iranian leadership was insistent that it would never negotiate on its nuclear program so long as it was under sanctions. But it did after Obama and the Congress tripled down on the sanctions.

Iranians walk past exchange office as daily life continues despite of the U.S. sanctions against Iran on August 08, 2018 in Tehran, Iran. (Getty)

Of course, now we are talking about the US walking away from a deal that was negotiated, and at a time when the Europeans are anxious to keep the Iranians in the deal. Moreover, the Islamic Republic is not isolated. And, even if the big companies and banks are reluctant to do business with Iran, widespread international disagreement with the Trump policy is likely to lead to lax enforcement of sanctions and ample space for the Iranians to evade them.

If nothing else, the Iranians are likely to wait to see whether the US can succeed in squeezing them much more than they are currently. China, as Iranian President Hassan Rouhani observed, stepped in when Total, a French company, pulled out of developing a gas project. China has also indicated it will continue buying Iranian oil. With oil prices increasing to over $70 a barrel, Iran can afford to lose some of its market, especially when its budget was based on a price of roughly $50 a barrel oil.
But the regime knows it has a problem with the Iranian public. A regime that depends on preserving fear becomes endangered when the public shows signs of losing its fear--or the regime loses its nerve in confronting those who challenge it. At this point, the regime has not lost its readiness to crack down but it is being careful how it responds to the demonstrations. Khamenei permitted Rouhani to win in 2013 when he seemed to believe the level of public alienation was a potential danger and he wanted to restore a semblance of legitimacy for the regime.

The Islamic Republic’s pattern historically when it truly feels squeezed is to look for a way out to relieve the pressure. At this point, I expect it to try to show that it can raise the price on us before it shows signs of cracking. One way to do so: give more anti-ship missiles to the Houthis and press them to continue to fire at Saudi oil tankers in the Bab el Mandeb strait—a low cost way for the Iranians to hurt the Saudis, and potentially raise oil prices.

And, should the Iranians look for a way out, as I suspect they will early next year, they are likely not do it directly but through the Russians. They see how the president relates to Putin, and with Putin’s interest in demonstrating Russian clout on the world stage, he will gladly be the arbiter between us and the Iranians. Putin, however, does nothing for free—so he will press concessions from the US. Will it be on Syria and getting the Trump administration to withdraw its small forces from northeast of country? On Ukraine? On lifting sanctions? Time will tell, but at some point next year, Iran will probably seek a way to reduce pressures and will try to use the Russians to broker with the Trump Administration at least some limited changes in the JCPOA. Expect Putin to answer the phone and President Trump—who sees himself as a deal-maker—to take Putin’s subsequent call.

*American Middle East envoy Dennis Ross has served in the Administrations of Presidents Jimmy Carter, Ronald Reagan, George H.W. Bush, Bill Clinton, and Barack Obama, and is counselor and Distinguished Fellow at the Washington Institute for Near East Policy in Washington


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