Has the Developing World Abandoned Iran?

iran-brics-isolatedIn a recent interview, the eminent geo-strategist Ian Bremmer suggested that a “nuclear-armed Iran” is inevitable because, in an emerging “G-Zero World” where no single bloc of countries can dominate international affairs, the emerging powers can frustrate the West’s efforts to thwart Tehran’s nuclear ambitions. There are basically two underlying assumptions to his argument: first, that the rising powers have the will and the capacity to ameliorate Iran’s growing isolation; and second, that Iran is willing to push its nuclear frontiers at any cost.

However, recent years given lie to these assumptions. Not only are many emerging powers beginning to distance themselves from Iran, but also Tehran itself — facing the prospect of an economic meltdown — is beginning to reexamine its nuclear calculus.

Clearly, emerging powers are explicitly prioritizing their ties with the West at the expense of Tehran, while the moderates and pragmatists within the Iranian leadership are pushing for a diplomatic compromise to diffuse rising tensions.

Iran’s Post-American Foreign Policy

Prior to the 1979 Iranian Revolution, the United States occupied a central position in Iran’s foreign policy. America was Iran’s most important external ally, as well as a key source of technology, investment, and trade. However, after the 1979 hostage crisis, everything changed.

Since its inception, the Islamic Republic has had to contend with tremendous economic pressure (beginning with America’s trade and investment embargoes) and constant external threats, culminating in Saddam Hussein’s invasion of Iran in 1980. So naturally, an isolated and vulnerable Iran had to rely on the Eastern powers such as China and Russia to enhance its national security and retain a semblance of a functioning international life.

After the Iran-Iraq war ended in 1988, a more pragmatic Tehran prioritized reconstruction and recovery under the leadership of President Hashemi Rafsanjani. As Iran pushed forward with a more moderate foreign policy, the 1990s underscored a period of Iranian rapprochement with the West, ushering in more than a decade of burgeoning economic and political relations.

Simultaneously, Iran stepped up its trade and investment relations with leading Asian economies, from China to South Korea and Japan, while enhancing its security partnership with Russia and normalizing relations with proximate Arab countries in the Persian Gulf. Soon after, East Asian states turned into Iran’s leading trading partners, alongside the European Union (EU) and the United Arab Emirates (UAE). Iran even flirted with the possibility of normalizing ties with Washington, although ultimately to no avail.

Tilt to the East

In early 2000s, Iranian-Western relations faced a new period of crisis. Despite Iran’s constructive role in the immediate aftermath of the 9/11 attacks – from assisting anti-Taliban operations in 2001 to acquiescing to the Iraq invasion in 2003 – the discovery of purportedly “clandestine” enrichment facilities in Natanz and Arak alarmed Western powers.

Initially, the Iranians agreed to concrete confidence-building measures (e.g., implementing an Additional Protocol (AP) and imposing a temporary enrichment freeze) to contain the brewing crisis, but the situation dramatically escalated when hardliners took over the Iranian state in 2005.

The new leadership, under President Mahmoud Ahmadinejad, upped the nuclear ante by pushing the boundaries of Iran’s enrichment capabilities, reversing prior agreements with the West and ignoring repeated UN Security Council resolutions calling for greater transparency and cooperation from Iran. Gradually, Iran faced not only political isolation but also economic isolation as European companies withdrew from key economic sectors such as manufacturing and energy.

In response, the Iranians sought greater support from traditional allies such as Russia and China, while offering increased access to Asian companies to tap into Iran’s huge hydrocarbon reserves and burgeoning consumer market. Although Korea and Japan, close U.S. allies, intermittently tempered their immersion in the Iranian economy, other emerging powers — especially China, Brazil, Russia, India, Turkey, and South Africa — deepened their presence in the country’s telecommunications, energy, consumer, and infrastructure sectors.

Iran’s explicit alignment with rising powers accomplished two objectives. First, it allowed Tehran to dampen the impact of sanctions and its growing isolation within the Western order. And second, it increased the stake of emerging economies in the stability and growth of Iran, thus providing Tehran with more international support amidst intensifying external pressure over its nuclear program.

This trend reached its peak in 2010, when the Brazilians and the Turks brokered a “nuclear swap” deal to kick-start what the West failed to do from 2005-2009: convincing Iran to ascertain the peaceful nature of its nuclear program by subjecting its high-grade uranium stockpile to compromise. When the West turned down the deal, Turkey and Brazil expressed their dismay by opposing a new UNSC resolution against Iran’s nuclear program. Arguably, this was the last time that emerging powers firmly stood by Iran.

The East in Retreat

The failure of the Turkish-Brazilian mediation was followed by vigorous, coordinated transatlantic efforts to bring Iran back to the negotiating table. When the January 2011 Istanbul I talks between Iran and the world powers ended inconclusively, with the Chinese and Russians subsequently opposing further sanctions, the West resorted to unprecedented measures targeting Iran’s economic lifeline: oil exports and the Iranian Central Bank.

Precipitously, the emerging powers began to distance themselves from Iran. While the change in the Brazilian leadership reversed former President Lula’s embrace of Tehran, differences over the Syrian crisis — coupled with growing American pressure on Ankara — drove a wedge in Turkish-Iranian relations. Meanwhile, the Chinese began (followed by the Indians) to exploit Iran’s growing economic isolation by pushing for barter trade, discounts, and favorable credit terms in oil purchases, as well as lopsided investment deals in Iran’s infrastructure and energy sectors. Meanwhile, the Russians – the world’s leading non-OPEC oil producers – have been benefiting from Iran’s declining output and rising global oil prices. For Moscow’s leadership, which is facing chronic budget deficits and rising economic expectations, oil prices above $100 per barrel are a matter of political expediency and fiscal survival.

In early 2012, as unilateral sanctions intensified, Tehran’s Eastern partners progressively downgraded their exposure to the Iranian impasse. South Africa, Iran’s traditional trading partner, completely halted all oil imports from Iran. Later, South Korea, Japan, and Turkey followed suit by significantly reducing their Iranian oil imports to gain American waivers of exemptions. Then came India’s gradual cut in Iranian imports. Meanwhile, China has refused to increase its overall intake of Iranian oil and is set to further exploit its position as Iran’s sole major importer. In total, top Asian customers have reduced their Iranian imports by almost 18 percent. In exchange, the United States has granted waivers of exemption to all of Iran’s major oil customers.

One thing is becoming clear: the West is still pretty much at the center of the international liberal order. Although emerging powers are showing greater confidence and dynamism amidst the West’s endemic economic troubles, they are also aware that the West still represents a major source of capital, technology, and consumption. Moreover, the West also has tremendous leverage over global insurance and financial markets. The EU hosts around three-quarters of the world’s shipping insurance firms, as well as the world’s main network responsible for facilitating international financial transactions, namely the Society for Worldwide Interbank Financial Telecommunication (SWIFT). So when the bloc imposed sanctions on insurance coverage for Iran’s oil shipments and expelled the Iranian banks from the SWIFT, many Eastern powers faced tremendous restrictions on their ability to import Iranian oil. In fact, the Koreans are contemplating on total halt in imports, while the Chinese, Indians, and Japanese are pushing for sovereign insurance coverage.

The current sanctions are already having long-term consequences. Global customers are already shifting to Arab oil exporters by signing multi-billion-dollar investment and purchase deals. Meanwhile, Iran’s declining oil exports are affecting output, forcing the country to contemplate permanently shutting down some of its oilfields. Tehran’s influence on energy markets as well as in OPEC is also in danger, as historic rivals like Iraq are catching up, while Libya, Saudi Arabia, and other producers in the Persian Gulf are either raising their total output or increasing overall production capacity.

Iran’s Nuclear Soul Searching

Oil exports constitute around three-quarters of Iran’s state revenues. Compared to last year, Iran’s total oil exports are down by almost 40 percent. The upcoming EU embargo could push the figure beyond 60 percent. Sanctions against Iran’s ports and shipping lanes are raising transaction costs, while those imposed on Iran’s banks and oil exports are undermining Iran’s currency, which has lost half of its value in recent months.

The World Bank and the IMF have markedly downgraded their forecast of Iran’s GDP growth for this year. From a relative high of 2.5-3 percent growth projection in mid-2011, the IMF is expecting only 0.36-percent growth, while the World Bank is projecting a 1-percent contraction for the year 2012. With declining currency reserves and stark depreciation of the Iranian rial, the inflation rate has risen to its highest levels in recent years, and declining growth is undermining employment-generation schemes.

But will the sanctions affect Iran’s nuclear calculus? Some argue that Iran is an ideological state, thus the sanctions are expected to have negligible impact on its nuclear ambitions. During the revolution, Iran’s spiritual leader Ayatollah Khomeini once stated, “economics is for donkeys.” Iran’s current President Mahmoud Ahmadinejad is also known for his antipathy toward conventional macroeconomic insights, always stating his preference for “social justice and redistribution.”

However, the reality is much more complex. The fact is that Iran is a trillion-dollar economy in deep need of investments, stability, and growth to battle high levels of inflation and unemployment in a country of 75 million people, lest it risk internal instability. Also, Iran’s leadership isn’t monolithic: pragmatists, moderates, and the influential merchant class (Bazaaris) have always emphasized the importance of macroeconomic buoyancy. Beyond ideology, regime survival and political stability constitute a central role in Iran’s political calculations.

In the past, Iran could afford to defy the West because it benefited from improved ties with rising powers, trade with European economies, and record-high oil prices. Now, Iran is not only facing declining oil exports and estrangement from Europe, but it is also coming under growing pressure by the Russians, Chinese, and Indians to strike a compromise with the West. Ahead of the recent nuclear talks in Moscow, leaders from Beijing, New Delhi, and Moscow have all called on Iran to cooperate with the IAEA and resolve outstanding questions over its nuclear program.

Sensing growing pressure from Eastern powers, the Iranians have displayed greater urgency for compromise. Surprisingly, even the head of Iran’s parliament, Ali Larijani, who is known for his tough stance on the nuclear issue, struck a softer tone when he said, “Concerning the level of uranium enrichment, Iran can define it according to its needs and desires.”

What we are witnessing is a major shift in Iran’s international position. Gradually, Tehran is beginning to realize that the BRICS are neither reliable partners nor are they capable of meeting Iran’s growing economic and security needs as the West tightens the noose around the Islamic regime.

The last thing Iran wants is to antagonize the West just to find itself at the mercy of (less-developed) Eastern powers. After all, one of the main slogans during the Iranian revolution was “neither West nor East, only the Islamic Republic.” This kind of thinking is precisely why Iran could eventually strike a deal with the West.

We maybe moving towards a “G-Zero” world, but the emerging powers are still too busy with their domestic political needs and mercantilist objectives to rescue Iran, especially while the West is showing tremendous internal cohesion and determination on the Iranian issue.

Foreign Policy In Focus contributor Richard Javad Heydarian is a foreign affairs analyst based in Manila. He can be reached at Jrheydarian@gmail.com.