Special Report from Money Morning
by Kent Moors, Money Morning
Years ago, when I was doing monthly analysis on Iran’s oil and gas industry, one of the biggest quandaries was trying to make market sense out of what came from the leadership in Tehran.
Well, the past 72 hours and the July 14 Iran nuclear deal have brought me back to those days.
Back then, it was not unusual for Iran’s religious and political heads to shoot themselves in the foot economically every time they opened their mouths on policy matters. And Iran remains one of the most convoluted webs of power relationships and brokerages anywhere.
Recent statements from the Iranian Supreme Religious Leader, Ayatollah Ali Khamenei, and Iranian Revolutionary Guard Corps (IRGC) military commander, Major General Mohammad Ali Jafari, have certainly appeared to have thrown a monkey wrench into the recently negotiated nuclear deal between Iran and world powers.
In fact… it is almost as if they want to bait the U.S. Congress into rejecting the deal.
The Situation in Iran Grows Worse
In return for the International Atomic Energy Agency (IAEA) monitoring its nuclear program, Iran for the first time in a decade has a genuine opportunity to increase oil and gas production, investment, and exports. All of which would inject very badly needed revenue into a domestic economy that collapsed some time ago.
As I have noted before, those who have warned about a flood of Iranian oil exports drowning the market simply do not understand how bad matters in Iran actually are.
Field operations are, frankly, a mess. The exchange of domestically trained technical personnel for experienced but now cut-off Western services has been a failure despite Chinese assistance, Iran’s broader banking networks are illiquid, and there are few knowledgeable oil people left in Iran’s oil ministry or state oil company.
Iranians have known deprivation, crippling inflation, high unemployment, a rapidly devaluing local currency, and the lack of essential products before. Virtually the entire period following the 1979 Revolution has witnessed such fallout.
But there is no question about what the Western sanctions accomplish…
They’ve made matters even more acute. They significantly restrict Iran’s access to foreign oil export markets, cut it off from necessary access to hard currency banking abroad (mandatory since international oil/gas trade is denominated in U.S. dollars), prevent badly needed Western technology and expertise from entering the country, and severely cut into the profitability and revenue flow from the resulting decline of exports.
The leadership has no intention of opening main military compounds to outside inspection bases, nor will it curtail supporting Assad in Syria, Hezbollah in Lebanon, the Houthis in Yemen, or Hamas in Palestine.
The 5+1 (the five permanent members of the U.N. Security Council – the United States, UK, France, China, and Russia – plus Germany) early in the discussions had to decide whether a tangible ability to obstruct any move to an Iranian nuclear device took precedence over curbing Tehran’s support of revolutionary movements abroad. The nuclear issue prevailed.
The Security Council’s unanimous vote in favor of the pact should have bolstered the chances of the agreement’s approval by Iran. Instead, it has unleashed highly provocative statements from the leadership.
Khamenei urges a continued opposition to “U.S. arrogance,” claiming the two countries remain 180 degrees apart on just about everything.
Iran’s Playing “Charades” with Domestic Consumption
But why is Tehran apparently trying to undermine the deal?
I see three main reasons…
First, much of this can be for domestic consumption. We have experienced strong denunciations in public while serious negotiations were taking place behind the scenes.
For example, consider back at the outset of American involvement in Afghanistan, a nation to the east of Iran in which Tehran has some direct interest. Iran strongly stated that any U.S. attempt to supply the Northern Alliance in the Afghan War by crossing Iranian air space would be considered an act of war.
At the same time, the country had agreed to allow Russian aircraft to cross that air space carrying American supplies to the Northern Alliance.
The problem these days is that some of these folks have been reading their own press releases and have begun to believe what is written in them.
The Power of the “Mullahcracy” Is Absolute
Second, the sanctions have provided some IRGC leadership the opportunity to profit from an extensive smuggling network. The lifting of sanctions would interrupt the money realized. Some of that subsidizes domestic charities, providing the unusual result that the truly needy have come to rely on handouts from smugglers.
But the main reason for these critical statements comes from a third and more fundamentally important source. There is a rising disagreement among the religious hierarchy itself.
Shi’a-majority Iran is unlike other Sunni-majority Muslim states. The ayatollahs wield considerable power; all public decisions must be approved by clerical councils to ensure they are consistent with religious law and the “spirit of the Islamic Revolution.”
Normally, most of the clergy would prefer not to become involved in politics. They admit to not being good at it and have little interest in ruling in any traditional sense. But they will intervene if government decisions impact on the fabric of social life (a continuing area of strong religious influence) or orthodoxy.
This has set the conditions for an internecine power struggle within the clerical hierarchy. It is here that Khamenei is decisive. His control of the process and the religious leadership is absolute. There will be no acceptance of the agreement without his consent.
Ayatollah Khamenei: Having His Cake and Eating It, Too
In large measure, economic sanctions have limited impact on matters of primary national importance. The prevailing conclusion among policy analysts was that Iran would be acquiring nuclear weapons threshold capability shortly.
After all, cutting off Japan from oil did not prevent World War II, nor did sanctions result in offsetting conflict in a number of other situations subsequently – Saddam’s Iraq, Ghaddafi’s Libya, and Putin’s adventure in Eastern Ukraine, to name the more obvious recent examples.
Khamenei may be structuring a “having one’s cake and eating it, too” scenario. He has already declared that having nuclear weapons is against the teachings of the Koran. If he can entice the U.S. Congress to reject the deal on its end (thereby dividing the branches of government in Washington and guaranteeing a presidential veto), he sticks his finger in the “Great Satan” while occupying the defiant position at home and obtaining economic relief.
The nuclear accord does not end the matter. But it will signal that we have entered new and unchartered waters.
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