November 07, 2018

In the Middle East, WorldAware is following events in Iran, where - after prodding from Israel, Saudi Arabia, and other Arab allies the US renewed sanctions in August. The decision came fewer than three months after President Trump withdrew from the Iran Nuclear Deal. Other signatories to the nuclear deal – Russia, China, France, Germany, and the UK –largely oppose the new US sanctions and have announced that special channels will be created to facilitate ongoing trade with Iran. However, this opposition is unlikely to prompt a major shift in Trump’s policy. 


Iran's oil exports, the country's primary revenue stream, were spared from the first round of sanctions in August, but the US began targeting Tehran's energy exports in November. Initially, Trump called on foreign purchasers to cut Iranian oil imports to zero by Nov. 4. While, US officials have since eased their demands slightly, earlier Iranian hopes that the economic benefits of the nuclear deal could be salvaged through a separate deal with Europe, Russia, and China have been largely dashed. Eight countries, India, China, South Korea, Japan, Italy, Turkey, Greece, and Taiwan have been granted temporary waivers and will continue to purchase Iranian oil. However, fearful of secondary US sanctions, most foreign purchasers of Iranian oil will likely sever business ties with Tehran, exacerbating the country’s ongoing financial crisis. 

The second wave of US sanctions on Iran will lead to further economic deterioration and spur tensions nationwide. Spikes in civil unrest, labor strikes, and crime are likely in many major population centers. A surge in internal armed conflict is also likely, as shown by the recent uptick in insurgent activity in Kurdish areas in the northwest, Arab-populated areas in Khuzestan Province, and the Baluch tribal areas in the southeast. The government will resort to increasingly oppressive measures – such as communication blackouts, curfews, mass arrests, and public executions – to curb dissent, but such drastic measures will likely fuel further unrest.

Annual Iranian oil exports are already down 20 percent since August, and inflation is rising. The Rial, which has already lost two-thirds of its value since the beginning of 2018, will continue to plummet, worsening inflation and eroding real incomes, and prompting increasingly common utility and essential goods shortages. Tehran will also likely be forced to cut subsidies, meaning that Iran's poorest communities will bear the economic brunt. 


Political direction

Political infighting in Tehran will accelerate in the coming months, as officials try to avoid blame for the situation. Grand Ayatollah Ali Khamenei, the Guardian Council, and other religious hardliners - including segments of the national security apparatus - will retain power; but cabinet ministers and lower-level bureaucrats will continue to be scapegoated. President Hassan Rouhani is also vulnerable; he faced a parliamentary inquiry in August over his handling of the financial crisis; this inquiry has since been elevated to the judiciary, which could recommend impeachment proceedings.  

Decades of sanctions prior to the nuclear deal failed to curtail the regime's domestic and regional ambitions, so there is little apparent chance that the latest measures will be any different, at least in the short term. 

Iran will likely pursue a strategy aimed at mitigating the impact of sanctions by attracting investment and support from its allies while bolstering its “resistance economy” through self-sufficiency measures. This is unlikely to succeed in the long term but could provide short-term relief. Potential investment from Russia, China, India, and, to a lesser extent, Europe, is unlikely to halt Iran's economic downturn.


International relations

Tensions across the Middle East are likely to increase in the coming months. Saudi Arabia, backed by the US, has been competing with Iran for regional hegemony for decades. Saudi Arabia will seek to capitalize on the restoration of sanctions to roll back Tehran's influence further. Competition between Tehran and Riyadh risks undermining long-term peace prospects in Yemen, as well as ongoing government-formation efforts in Iraq and Lebanon. Israel could also take a more assertive stance against Iran. Tel Aviv has already launched hundreds of military strikes against Iranian proxy groups in Syria and has repeatedly threatened to target Iranian-linked militias in Lebanon and Iraq.   


In response, Tehran will advertise its military capabilities in the coming months with high-profile show-of-force operations, particularly air and naval exercises around the Strait of Hormuz. Such displays are not intended to involve combat operations but, at times of heightened tension, they could increase the chance of a political or strategic miscalculation, and inadvertently lead to clashes. An increase in attacks against Iranian dissidents operating outside Iran's borders, similar to the recent ballistic missile strike against Kurdish separatists in Koyasinjaq, Iraq, is also likely. Many regime hardliners could even opt for a more aggressive approach, in which Tehran increases military support for its proxies across the Middle East. A surge in proxy attacks on Saudi, Israeli, and US interests in the region cannot therefore be ruled out, including in Syria, Lebanon, Yemen, Gaza, and perhaps even Bahrain and eastern Saudi Arabia.  

In summary, as the US sanctions erode Tehran's oil exports and government revenues, civil unrest will likely increase nationwide. Factionalism within the regime will probably increase, but the religious and military establishment in Tehran will remain resilient. The government will resort to increasingly brutal measures to quiet dissent, which will further fuel unrest. Domestic insecurity will threaten Tehran's strategic ambitions across the broader Middle East, which will likely prompt hardliners in Tehran to adopt a more assertive stance. Tehran will likely increase military support for its regional proxies, though a major military confrontation between rival states remains unlikely.


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