Iran and the US confrontation: What can Pakistan do?

Pakistan’s former foreign secretary, explains how Pakistan needs to rework its policy towards Iran in view of the incoming US sanctions.

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The EU, France, Germany, China, and Russia; signatories of the JCPOA (the Joint Comprehensive Plan of Action) and the IAEA, which is responsible for carrying out the monitoring and inspections to ensure that Iran is abiding by the terms of the JCPOA- are all agreed, with the notable exception of the U.S, that Iran is abiding by the terms of the agreement and there is, therefore, no justification for any signatory to renege on the agreement or to call for its renegotiation.

All have been brave in their words but the reality on ground belies these assertions. In May this year, Reuters reported that Lukoil had put on hold its agreement on developing oil fields in Iran.

It was also reported that India’s Reliance Industries, which owns the world’s biggest refining complex in the state of Gujarat and has significant exposure to the U.S. financial system had told the Iranian National Oil Company that it would stop importing Iranian crude in October. In the first two weeks of September, oil sales by Iran were down to 1.6 million barrels compared to the 2.5 million barrels they sold in April.

Bloomberg report has listed a number of events that have already started a sharp decline in Iranian oil exports and what Iran can anticipate having to contend with as the Novem ber 4 deadline for the full implementation of American sanctions come into effect.

These are (i) Though European countries opposed Trump’s actions, and have reassured Iran’s government that they want the nuclear deal to continue, European refiners have had little choice but to comply with sanctions. Washington can cut off access to the U.S. financial system for any company judged to be doing business with Iran.

In the first two weeks of September, oil sales by Iran were down to 1.6 million barrels compared to the 2.5 million barrels they sold in April.

The latest company to have submitted to the U.S. is Volkswagen, which in negotiations with the American Ambassador in Berlin, has apparently agreed to terminate its proposed investment in Iran and to limit its involvement in some humanitarian interventions. 

(ii) The earlier-than-expected decline in both crude and condensate exports appears to be a reaction to U.S. banking and shipping insurance sanctions that went into effect over the summer. (iii) South Korea, a major importer of Iranian crude in the past, hasn’t shipped any oil from Iran for 75 days.

(iv) In the first two weeks of September, India has loaded just 240,000 barrels a day of Iranian oil, less than half the usual amount. (v) After the November 4 deadline, even the countries that continue buying Iranian oil will struggle to transfer the money back to Tehran, potentially stranding billions of dollars in revenues overseas and forcing Iran into barter deals that swap crude for other goods.

Read more: Iran and USA; the real enemies!

Other sources show that Maersk, a major European shipping company, has refused to provide any tankers for Iranian crude largely because of its dependence on the American financial market and because insurance is no longer available. Iran, which was disallowed use of SWIFT, the international system for online monetary transactions in 2012, was readmitted in 2016 after the JCPOA.

While it is based in Europe and operates theoretically under Belgian law, President Trump seems intent to ensure that Iran is again disallowed after November 4. The Europeans want to create an alternative that would be independent of New York, but that would take time and may in fact not be attempted given the continued dependence of Europe on the U.S. financial center.

Iran’s removal would further restrict its ability to sell and receive payment for crude oil that generates 80% of its revenue. Currently, Iran can expect that its trade with China will remain untroubled despite its inability to use the international system, since the $37 billion trade between the two countries is almost balanced, with only a $200 million gap between imports and exports.

Its trade with India, however, will leave Iran with a large Rupee balance under the barter arrangement they have, that it cannot use or convert. Though, it appears that Indian buyers of Iranian crude, as noted earlier, are now shying away from making the usual purchases from Iran.

Iran, which was disallowed use of SWIFT, the international system for online monetary transactions in 2012, was readmitted in 2016 after the JCPOA.

Further afield it is almost certain that both Japan and South Korea will abide by U.S. sanctions and stop purchasing Iranian oil after November 4. Currently, it appears that the gap between production and offtake has led Iran to employ “floating storage” At least 8 tankers carrying 14 million tons of oil are now in ports in the Gulf.

These have been Iran’s principal buyers and therefore the future of legal trade appears bleak. Iran has been through this sort of ordeal before. For instance, during the imposed war with Iraq from 1979 to 1987, Iran was subject to many such sanctions. Its oil and finance experts found ways and means to overcome the difficulties that were created for them.

Read more: Legal Battle: US vs Iran in UN top court

They proved able in this period and the subsequent period of sanctions in 2012, to survive using ingenious ways to circumvent sanctions. This time around admittedly the difficulties will be much greater and the elements that will compound problems for Iran are its internal situation and the American effort to effect a “regime change” despite denying that this is their objective.

In March 2017, the CIA appointed Michael D’Andrea as the point man for Iran. He is known as the Dark Prince and the New York Times story that reported his appointment said that no other individual had done more to weaken Al-Qaeda than D’Andrea. In tracking Al-Qaeda during his long counter-terrorism stint, he headed the counter-terrorism center from 2006 onwards, during which it is certain that he developed a lot of contacts in Iran, where many Al-Qaeda operatives lived and worked both before and after 9/11.

It is also certain that he is in contact with the large Iranian diaspora in the U.S., many of whom have relatives in Iran and visit from time to time. It is my view, his focus is going to be on both the internal unrest caused by the rising prices (on which more later) and on exploiting the unrest in the provinces or regions that have chafed under Tehran rule and the areas where smugglers have used to smuggle drugs and other items into Iran.

It appears that the gap between production and offtake has led Iran to employ “floating storage” At least 8 tankers carrying 14 million tons of oil are now in ports in the Gulf.

Iran is making every effort to maximize sales as much as possible, to build its foreign exchange reserves, however, it has had limited success. Prices have risen in the country as the black market rate for Dollars has risen to 150,000 Rials, by comparison, when I left Tehran in 1994, the exchange rate was 12,000 Rials. Much of Iran’s industry is dependent on imported components.

The BBC reported that Ayatollah Khamenei himself referred to the deleterious effect of the devaluation, pointing out that diapers were in short supply and that this was being done by the enemy to make the people angry with the government. The BBC report concludes that “hardliners blamed government mismanagement, while the government blamed U.S. sanctions and businesses profiteering and those in favour of regime change blamed the Islamic Republic.”

Read more: Iran has ‘unclean hands’: US tries to deflect in world court

It should be noted that the official exchange rate is 41,000 Rials to the Dollar, but in Dubai which has the most extensive unofficial trading of the Rial, it hovers around 141,000 Rials at the time of writing this article. Since the Iranian Central Bank can only offer a limited amount of foreign currency for imports, many industries dependent on imported raw material, are unable to get quotas from the Central Bank, have had to cut or shut down production, adding further job losses to the high unemployment rate.

The automobile industry seems to be particularly affected following the decision by Renault and Volkswagen to back away from promised investments in joint ventures with local partners.

During the September meeting at the United Nations, the EU, France, Germany, Russia and China have announced the setting up of a Special Purpose Vehicle (SPV), which will allow legitimate trade between Iran and entities in these countries or other countries choosing to use this facility. Pompeo has castigated this move as “most counter-productive”, further highlighting differences between the U.S. and the EU on this issue.

Iran is making every effort to maximize sales as much as possible, to build its foreign exchange reserves, however it has had limited success.

The question, however, is how effective will this vehicle, the details of which are yet to be worked out, prove to be in practice. Brian Hook, Director of Policy Planning and Senior Policy Advisor to Secretary of State Mike Pompeo, in his briefing on Iran, maintained that “The private sector has heard this message around the world and that’s why you see major companies from Europe to Asia getting out of Iran and terminating business. 

And so companies have a choice: to either do business in Iran or in the United States. And they are making those decisions based on what makes business sense. Potential deals with Iran just pale in comparison with deals in the United States”. He went on to add “regardless of what kind of special purpose vehicle or other mechanism is created, the United States will vigorously enforce our sanctions, and the private sector understands this.

We have had road shows that have gone to almost 30 countries around the world explaining the reimposition of our sanctions that were lifted under the JCPOA. The private sector understands this.” While one would like the SPV to succeed, it seems unlikely, given the importance of the United States market and its control of dollar-denominated transactions.

While this will be little consolation for Iran at this time, this initiative does mean that in the not-so-distant future there will be other means of international trade free from America’s dominance. The U.S. may be isolated on this issue but it will continue to pursue the policy of destabilising the Iranian regime. What are the areas on which the ‘Dark Prince’ will focus on as he seeks to foment unrest?

Perhaps the most significant now is the area where Iran’s Kurdish region borders on the Kurdish Regional Government in Iraq. On 7th September, the Iranians after surveying the area fired a missile at a gathering of Iranian Kurdish dissidents on Iraqi territory. Iran has also called upon the Iraqi Kurds to deny sanctuary and operating areas to the Iranian dissidents.

Read more: The deep state’s long enmity toward Iranians

Iran enjoys a great deal of influence in Iraq, but there is clear sympathy for the Iranian Kurds in that region of Iraq and it is likely, that subtly or otherwise, the Americans will use all their influence in Baghdad and Erbil to ensure sanctuary and assistance for the Iranian Kurds.

The attack on the military parade in Ahwaz causing gruesome loss of life and damage to property was attributed by the Iranian regime to disaffected Arabs in the Ahwaz province, which has an Arab origin population and produces much of Iran’s oil wealth. They believe that they were instigated by the Arab countries of the region.

My own feeling and I have no evidence of this, is that the attack may have come from Kurdish dissidents encouraged by external forces. The other border which will be of concern is the border between Pakistan’s Baluchistan and Iran’s Sistan va Baluchistan province of Iran.

Sistan va Baluchistan is the only Sunni majority province in Iran, who are proponents of an independent Greater Baluchistan in the area on both sides of the border, in the fight against whom the Shah provided assistance to the 1973-77 period. Now the Iranians have built a 3-foot thick and 10 feet high wall along this border because of what they allege are the incursions of smugglers and others with more sinister purposes in mind. 

The other border which will be of concern is the border between Pakistan’s Baluchistan and Iran’s Sistan va Baluchistan province of Iran.

They see organisations like the Jundullah and Jaish-e-Adl infiltrating through this border and even though Pakistan has banned the Jundullah and handed over the leaders, the Iranians fear that those who wish to create trouble, such as the Americans will use these organisations.

The third frontier that Iran, Pakistan, and Afghanistan all have to be concerned about is Nimroz province in Afghanistan, where the frontiers of the three countries meet and where a large part of the smuggling of opium and heroin takes place; here, it seems that the smugglers have better intelligence and arms than the forces of Iran and Pakistan.

Read more: Trump says walking out of nuclear deal has tamed Iran

Both countries have an interest in curbing the drug trafficking, as they have become conduits for the smuggling of these drugs to markets in the West, which has inevitably created a large number of addicts in these countries. The concern about drugs apart, Iran also has to worry about what else could be brought across the borders.

Pakistan’s self-interest dictates that it should ensure the enforcement of the writ of the government, in all parts of the country; recognising, that those elements that today seek to create turbulence in Sistan va Baluchistan, may tomorrow ally themselves with the extremist elements, that we are seeking to eliminate.

The Iranians have built a 3-foot thick and 10 feet high wall along this border because of what they allege are the incursions of smugglers and others with more sinister purposes in mind.

We must tighten our control of the border and ensure through coordinated or joint patrolling that this border remains impermeable for inimical forces. One consequence of Iran’s difficult economic situation may be that Afghans will be asked to leave in large numbers. We know that Afghans in Iran have been recruited for the Fatimoyoun and Zainabouyoun Brigades to safeguard shrines in Syria and have been promised citizenship or permanent residence in Iran.

Accurate figures are difficult to obtain, but it is estimated that more than 20,000 Afghans have been recruited. An equal number of Pakistanis have been similarly recruited and both have fought alongside Hezbollah fighters under the control of the IRGC. As changes happen in Syria, will these people, largely Shias, be forced to return to Afghanistan and Pakistan and if so what will be their role is of grave concern.

Senior diplomats from Iran, the P5+1 group of world powers and the European Union, Vienna, Austria, on July 14, 2015.

Theoretically, in Afghanistan, they will be staunchly anti-Dae’sh and anti-Taliban but it is difficult to say what will happen in practice when there is unemployment and when the only skill of the returning mercenaries is the wielding of a gun. What impact will this have on an already fragile political situation in Afghanistan?

Will Pakistan see increase in local sectarian tensions? Furthermore, what will be the global impact of the oil situation; a reduction in Iran’s oil sales combined with the disruption of production in Venezuela and Libya, at a time when global demand particularly in East Asia and in the U.S. is on the rise.

Read more: US to impose ‘strongest sanctions in history’ on Iran

While, the U.S. may meet its own needs (it is today the largest producer of fossil fuel energy, having overtaken Russia and Saudi Arabia) and may increase its exports, but it is inevitable that oil prices will climb for the rest of the world. This is one more impact that Pakistan will have to cope with and will become one more reason for us to consolidate the good relationships we enjoy with the Gulf States. Iran will hopefully understand our compulsions and welcome efforts to settle Saudi-Iran differences.

These differences are due to Saudi apprehensions, shared by the USA, that Iran in its bid to be a regional hegemon is trying to create an arc of Shia influence in the region. The truth is that the regimes in Syria and Yemen that Iran is supporting, are far from sharing the “Twelver’s Shia belief (Ithna Ashari) of Iran.

Similarly, the ability of the Iranians to pose a military threat to the region needs to be examined bearing in mind that Iran’s military budget is dwarfed by the budgets of other regional states. These subjects need to be analyzed in depth if a true understanding of the Gulf region is to be developed.

Najmuddin A. Shaikh is Former Foreign Secretary and Former Ambassador in the USA and Iran. Currently head of Global and Regional Security Studies a think tank of the IoBM a Karachi based University. This article was written in late September.

The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Global Village Space. 

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