Khamenei has named his strategy to neutralize US pressures as “resistance.” He advocates “no war, no negotiation.” He does not explain how this resistance is to be pursued. It appears that the government has opted for three strategies to guarantee the survival of the Islamist political system: 1) To ally with Russia and China, 2) To set the region on fire, and 3) To tap into Iran’s national reserves to cover its deficit and to fund its proxies. None of these strategies are proven to be a survival kit.
A Shift to the East
One of the most popular slogans during the 1979 revolution was “Neither East nor West,” meaning Iran should no longer favor either of the world’s superpowers whether the United States or the Soviet Union. Khamenei has openly and clearly signaled a decisive shift in favor of relations with China and Russia. He declared on February 19, 2018, that: “In foreign policy, the top priorities for us today include preferring East to West.” He is aware that western countries and western companies cannot be his government’s partners in the long term.
Based on this strategy, in August 2019, China and Iran updated a 2016 strategic partnership agreement. The central pillar of the new deal is that China will invest $280 billion to develop Iran’s oil, gas and petrochemical sectors in the next 25 years. This amount may be unevenly distributed, with most of it available during the first five-year period. However, the understanding is that the rest of the investment will be available after every subsequent five-year period, subject to both parties’ agreement. There will be another $120 billion investment to upgrade Iran’s transport and manufacturing infrastructure. This seems to be the government’s long-term solution to acquire sufficient revenues and to invest in improving Iran’s poor infrastructure.
It seems that Khamenei is not worried about the domestic repercussions of this deal. It is likely to undermine Iran’s sovereignty. This deal will include up to 5,000 Chinese security personnel on the ground in Iran to protect Chinese projects, and there will be additional personnel available to protect the eventual transit of oil, gas, and petrochemicals from Iran to China. Iranian sources have confirmed this deal.
The terms of the agreement are disadvantageous for Iran. China will be granted the right to delay payment for Iranian products for up to two years. China will also be able to pay in soft currencies that it has accrued from doing business in Africa and the Former Soviet Union (FSU) states, in addition to using renminbi, should the need arise – meaning that no US dollars will be involved in these commodity transaction payments from China to Iran. Therefore, this would be a sanction proof deal for both sides.
Regarding Russia, the Iranian government compromised “Iran’s rights” in the new Caspian Sea deal pushed by Putin. Iran’s share of the Caspian Sea has been reduced from 50 percent to as little as 11 to 13 percent.
Setting the Region on Fire
The declared security policy of the Islamic Republic to counter US sanctions is based on Rouhani’s statement: “If one day they want to prevent the export of Iran’s oil, then no oil will be exported from the Persian Gulf.” Several IRGC commanders have made similar comments.
There has been a direct relationship between the speed of reduction in Iran’s oil exports and the frequency of its military attacks. When Iran’s oil exports decreased to around or less than 500,000 barrels per day, the Iranian government began to carry out its threats through attacking oil tankers: the May 12 Fujairah attacks; the May 14 attack on Saudi Arabia’s East-West Pipeline; the June 14 daylight attack on two tankers in the Strait of Hormuz; and the June 20 shootdown of a US drone.
The next round of attacks came when Iran’s oil exports were reduced to below 200,000 barrels per day. These attacks targeted Saudi Aramco plants in Abqaiq and Khurais which knocked out more than half of Saudi Arabia’s oil-exporting capability, rocked international financial markets and spiked crude oil prices.
Spending Iran’s National Reserves
A country’s national reserves are usually comprised of personal savings and national funds. The Iranian government is tapping into its national reserves to cover its liabilities and to fund its proxies in the region.
The most recent withdrawal of $300 million from the National Development Fund (NDF) was for the Chabahar-Zahedan railroad construction project. Before that, 5,000 billion tomans ($1.2 billion in the official exchange rate) were withdrawn from the NDF to reconstruct areas devastated by flooding in the Golestan province. These are not exceptions. In just a year, tens of billions of dollars have been withdrawn from the NDF to pay for projects related to defense ($1.5 billion in February 2019), development ($2.3 billion in April 2019), employment creation ($1 billion in May 2019), and reconstruction ($2 billion in April 2019). Some withdrawals to fund terrorist groups are kept secret. It is not clear how much is left in the NDF. It seems that Khamenei will pursue his “resistance” policy until every last penny of the NDF is spent.
Other than national reserves, the government has been issuing bonds to take care of its budget deficit. The latest government bonds that were approved on September 17, 2019 were worth 38 trillion tomans ($3.5 billion) to compensate for decreasing oil revenues.
“No War, No Negotiation” but Microaggressions
From Khamenei and his advisers’ point of view, these three strategies are complementary: the first one will allow Iran to deal with the impact of US sanctions particularly on its oil sector and will provide enough cash for the government’s ambitious objectives in the region; the second one will inflict some pain on the United States and its allies in the region; and the third one will reduce domestic tensions for the time being. Considering these factors, Khamenei will continue his “no war, no negotiation” policy while cautiously increasing tensions through microaggressions.