Complicated Calculations: Iran and its Options for Dealing with the US ‘Zero Pledge’ on its Oil Exports

ByRasanah

The US administration decided on April 22, 2019 not to extend the waivers granted to the countries importing Iranian oil, which are expected to expire in May 2019.  Iranian policymakers  looked at these exemptions as a necessity for the United States to maintain global oil price stability, and that this would continue to restrain Washington’s policy aimed at bringing Iranian oil exports to zero. The US approach in adopting harsher policies by revoking the waivers has become a discussion point among Iranian policymakers. This has pushed Iranian policymakers towards considering several options and alternatives to avert the impact of this policy, which could deprive Iran of 80 percent of its main source of national income.
The Iranian regime has benefited over the past six months from the US decision to grant waivers to eight countries importing its oil. It managed to stabilize the fragile economic situation which  has prevailed across Iran since November 2018. However, with this latest US decision its internal crisis is heading towards further complications, while the Iranian public’s pressure on the regime through stirring up the home front will gain greater momentum.
It is certain that the Iranian regime has a strategy to face up to the possibility of its oil exports being reduced to the minimum, especially if we take into account that US pressures are not just confined to reducing its oil exports but also include placing harsh restrictions on Iran retrieving any revenues from the sale of its oil. This is in addition to other US policies aimed at exerting more pressures on the regime such as classifying the IRGC, which plays a major role in running the Iranian economy and in circumventing US sanctions, as a terror group.
The solution is that the Iranian regime reconsiders its priorities, instead of defying attempts to bring down its oil exports to zero through other options which it deems more realistic and less costly, even though comments made by Iranian officials give the impression they prioritize escalation and confrontation. Such options would have devastating consequences for the entire regime.

Ineffective Steps
Iran had preemptively taken steps ahead of the expected US decision through seemingly less costly options, such as circumventing  US sanctions by smuggling its oil.  However, the United States has rich experience in this area as a result of long years of pressures and sanctions on Iran.
Last year, Iran rehabilitated complex networks and adopted different ways to circumvent US sanctions. The United States managed to track some of these networks, with their activities  evident in some countries such as Syria, Russia, Iraq, Lebanon and the UAE. Iran has set up dozens of these networks which are being secretly used to help Tehran circumvent US sanctions as well as to implement its policy.
During that year, Iran managed to smuggle some of its oil and was able to obtain some of its oil export revenues. Officials did not hide the fact that this provided the regime with the necessary resources to maintain a state of temporary stability at home, along with the policies adopted by the regime to control the low currency exchange rate and to provide basic needs as well as to reduce its reliance on exports. This may explain the internal situation’s return to a cautious calm although the official figures on  Iranian oil exports suggest that there is a noticeable decline, perhaps down to below one million barrels per day, a 60 percent decline compared to last year. Oil exports before the US withdrawal from the nuclear deal in May 2018 hit 2.5 million barrels per day.
In reality, Iran did not implement the option of circumventing  US sanctions through smuggling and others means in the past when the US administration under the former President Barack Obama adopted the method of comprehensive sanctions on Tehran. It was obliged to enter into negotiations on its nuclear program, which ended with it signing the 5+1 deal in mid-2015. It is likely that with the tightening US sanctions this time that the same option will not salvage Iran in the long run, given that the country is suffering from a severe economic crisis, rampant corruption, stagnant or even declining economic growth (official Iranian figures suggest growth will be -6 percent). This is in addition to the massive financial expenditure by the regime on its foreign policy last year.
Yet Iran is incurring heavy losses while insisting on adopting this option as it is selling its oil at prices lower than global prices. It also bears additional costs in smuggling and delivering shipments of its oil to importers as well as being exposed to blackmail and other pressures in one way or another. Finally, Iran needs powerful importers who are able to take the risk of having dealings with the country. China is likely capable of performing this role for political reasons. However, it has been keen on maintaining balanced relations with the United States in recent times. The United States could wield a great deal of pressure on Turkey and Iraq which could prevent them from taking the risk of defying the US position on Iran.

Affecting the Oil market as an Alternative to Balancing the Pressures
In parallel with the option of circumventing US sanctions, Iranian policymakers may still consider the possibility of influencing global oil markets. As soon as the United States had announced revoking the exemptions it granted for the countries importing Iranian oil, global oil prices rose 2 percent compared to the last  increase in the last quarter of the past year. This may encourage Iran to adopt indirect policies and alternatives aimed at pushing up global oil prices.
In this context, for example, Iran may resort to stirring up disturbances inside Iraq which will affect its oil exports, without Tehran being held directly responsible for this. Iran maintains considerable clout inside Iraq. Iran was previously accused of stirring up unrest and blocking the export of oil from Iraqi ports. Tehran was also accused of undermining the popularity of the former Iraqi premier Haider al-Abadi, who ultimately left office.
Iran may also resort to special operations led by its special force affiliated with the IRGC to affect oil supplies in the Caspian Sea and the Central Asian nations bordering it through striking oil pipelines or targeting oil tankers; particularly in some areas and routes such as in the Gulf of Aden and the Bab al-Mandab Strait through its forces or affiliated militias such as the Houthis in Yemen. It previously carried out similar operations in 2018.
Furthermore, Iran may resort to targeting Gulf oil tankers on the high seas through terror operations that it will not claim responsibility for as well as planting mines in the Arabian Gulf. Iran used similar tactics during the Iran-Iraq war in the 1980s. It is also likely that Iran may prod the Houthi militia and other combat groups affiliated with it to intensify attacks on Saudi Arabia and the UAE as well as targeting some oil producing areas in the Gulf states or striking their vital interests in the region. Iran could also stir chaos in some Arabian Gulf countries that have Shiite minorities in order to disrupt the situation there, including the oil market, which is sensitive to disturbances. In fact, all these options have results and consequences. Failing to achieve any of them could push Iran to other escalation options as long as it is unable to ease the blockade imposed on its oil exports.
In light of these options, Iran may take advantage of the state of the global oil market. The US demand for oil may go up due to its expanding national economic activities following the decision of the Federal Reserve to keep the interest rate unchanged, and because of President Donald Trump’s need for stability in the oil market to appease his popular voter base ahead of the elections as well as due to the effect of crises in Venezuela and Libya on  global oil supplies, subsequently impacting oil prices. This is in addition to what could come after OPEC’s meeting with Russia, which was postponed from April to June 2019 in anticipation of the US announcement on its position regarding the exemptions granted to countries importing Iranian oil. The outcome of this meeting may be in Iran’s favor if the countries attending the meeting continue to agree on 1.2 million barrels per day. Finally, the impact of the significant decrease in the US crude oil inventory, which hit 9.6 million barrels per week in March 2019 may increase US demand for oil.

Escalation as a Costly Option
The ineffectiveness of the previous options and the inefficiency of others may push Iranian policymakers to opt for stronger options. Iranian withdrawal from the nuclear deal or even a return to uranium enrichment do not constitute important options for  Iranian policymakers currently. They can use them on a very limited scale. However, they are likely options. These options may place restrictions on the Iranian regime instead of giving it the opportunity to influence the US position. All the international pressure has not prompted Trump to back down from his decisions against Iran thus far. Furthermore, such options may create a global consensus that Trump’s policy does not have, which could increase the pressure on the Iranian regime.
It is ruled out that Iranian policy makers could adopt a more escalatory approach. It is also ruled out that Iran could go ahead with its threat to close the Strait of Hormuz, depriving the Gulf countries of their oil exports so that they are on an equal footing with Iran which is facing a complete halt in its oil exports. This option could trigger a direct military confrontation with the United States, which is preparing for such a scenario. Additionally, Iran will not escalate regional wars on any of the fronts in Syria or Lebanon or attack Israel through any of its allied fronts or militias. This escalation would not affect the US strategy. On the contrary, it would give legitimacy to the US strategy and would make the prime US aim of changing the behavior of the Iranian regime a subject of international consensus. This may also make a sufficient case for an international campaign against the Iranian role, which Iran seeks to sustain and consolidate. These solutions are not within the realm of possibility as long as the US does not work to change the regime but instead seeks to alter its behavior. The Iranian options will remain confined to attempting to curb the impact of the US strategy and contain its consequences through non-confrontational policies, if we suppose all these options are feasible, since the conservative camp, led by the Iranian Supreme Leader, still insists on setting aside the approach of understanding and negotiating with the US and favors the approach of armed confrontation making such an approach inevitable.

Negotiation: The Delayed Option
If the internal crisis continues to worsen and the United States consolidates elements of its strategy so deeply that the regime becomes unable to overcome the challenge of change or it faces a full-fledged popular uprising, negotiations may become the likelier option for the regime as the case was before it signed the nuclear deal in 2015.
A group within the ruling regime is supportive of this approach. They demand openness to the West and respond to US pressures. The popular pressures are strengthening this approach in fear of deterioration at all levels.
In the end, we could say President Trump has raised the ceiling of confrontation with Iran to an unprecedented extent. His popularity and perhaps his chance to win a second term in the coming elections may hinge on implementing his electoral promises, including the need to make tangible, not nominal, accomplishments on the Iranian file, given Trump’s efforts have not led to the same level of success with North Korea nor Venezuela so far. This may affect his image, impact his popularity and even undermine his credibility in the international arena. Generally, the Iranian regime seems to have limited options. Apart from circumventing the sanctions imposed on its oil exports and the success of smuggling operations in providing reasonable revenue sources for the regime to survive and to continue performing its role, all these options will be costly to varying degrees. Betting on time will not be effective, especially if Trump wins the coming elections or even if a new administration comes to power that implements the same approach as Trump and in case Europe remains passive regarding fulfilling its promises to Iran.
Given the policies being implemented by the two sides, negotiations may be the only viable option for the Iranian regime in the coming phase since it is expected that Trump will not soften his position on Iran. The option of negotiations that will be adopted by the regime may be an opportunity to take pause and restructure its policy. Negotiations may take place under intense pressure which could lead to changing the behavior of the Iranian regime as Trump’s administration has planned.

Rasanah
Rasanah
The Institute Management