by Djavad Salehi-Isfahani

The diplomatic push by Iranian President Hassan Rouhani to resolve the decade-long dispute over Iran’s nuclear program reached its zenith during his visit to New York in late September, exactly one year after Iran’s currency collapsed under the weight of US-led sanctions. Although the timing is largely accidental, the [...]]]> via LobeLog

by Djavad Salehi-Isfahani

The diplomatic push by Iranian President Hassan Rouhani to resolve the decade-long dispute over Iran’s nuclear program reached its zenith during his visit to New York in late September, exactly one year after Iran’s currency collapsed under the weight of US-led sanctions. Although the timing is largely accidental, the correlation between sanctions and Iran’s willingness to negotiate is not. These measures have clearly hurt Iran’s economy, and its leaders are searching for an agreement with the West that includes sanctions relief.

Much analysis of the reasons for Iran’s new conciliatory approach credits sanctions for the improved diplomatic prospects for reaching a deal. Where opinions differ is how to respond to Iran. Should the West begin with positive gestures and take steps to ease sanctions or tighten them to squeeze a better deal from an adversary in retreat. The question then becomes: whose side is time on?

As Vali Nasr argued forcefully in the New York Times last week, Tehran does not feel pressed for time on political grounds because it sees itself approaching new negotiations from a position of strength.

Only a few months ago, Iran concluded a landmark presidential election that brought to power a popular government much closer to the reformist camp than to the Supreme Leader, challenging the notion of the Islamic Republic as a political system in demise. The charm offensive in this case is an olive branch, not a white flag.

Those who believe that time is on the West’s side argue that Rouhani’s election is actually a sign of Iran’s desperation. They argue that Iran’s economy is in such dire circumstances that it has forced Ayatollah Ali Khamenei into a domestic compromise that makes an external one possible.

So how bad is the state of Iran’s economy, and will it collapse with more sanctions?

The “collapse” scenario, which at times excites US sanctions advocates into a frenzy like what we saw following the crash of the rial last October, is being revived as a way to dissuade the Obama administration from reaching a compromise with Iran too soon.

Iran’s economy is “already on the verge of collapse”, wrote the Times last week, failing to mention that it has been regarded as on that verge for quite some time. A Brookings report in 2009 called Iran’s economy “teetering”, when in fact it was one of the few countries in the world that was still growing after the Big Recession.

However, unlike political systems, economies do not collapse, they shrink. Economic activity in Iran declined by 2.9% last year (5.4% if you count oil activity) according to government figures, and unemployment is at historic levels, though not as bad as what we’re seeing in Greece or Spain.

If sanctions tighten, Iran’s economy will continue to slide for a year or two but will eventually reverse course. Per capita income will probably fall from about 20% below Turkey today to 30% below, but still more than 50% above that of Egypt. This doesn’t foreshadow a collapse as much as it does a slow adjustment to more difficult circumstances.

Positive steps to push Iran’s economy onto a recovery path were in fact taken in the last months of the Ahmadinejad administration and continue today. The rate of growth of Iran’s money supply and inflation started to fall before Rouhani took office. For the past three months, the average rate of inflation has been below 20% annually, about half of what it was in the months before.

The new economic team is also much more competent and looking in the right direction — to the private sector — for solutions to Iran’s economic problems.

Rouhani’s administration is the most business-friendly team to rule the Islamic Republic. The head of Iran’s Chamber of Commerce, Mohammad Nahavandian, is Rouhani’s chief of staff and the closest person to the president. The head of a private bank is also the governor of the Central Bank. Former president Hashemi Rafsanjani, whose men fill key posts in the new administration, encouraged the private sector to view Rouhani’s government as “family”.

Unemployment is approaching 20%, a record level, but will not surpass it. One reason is demography. For every person who entered retirement age in the last few years, 5 new people reached the working age. In the next few years this ratio will fall to 3, substantially reducing the pressure on the labor markets.

Future growth will also likely bring more jobs. After 2005, a large inflow of oil revenues opened a floodgate to cheap imports that hurt local production, causing jobless growth. Thanks to a more realistic value for the rial, the local production of most consumer goods has become more economical for local producers. The easing of sanctions, especially on the banking sector, would be of enormous help to these producers, but this will not be the game-changer.

In deciding how far they can push Iran, the P5+1 negotiating team should bear in mind another important fact about the political context in which the peace initiative of Iran’s new president is taking place. For Rouhani, reaching a compromise with the West is important, but not if it risks losing the support of his conservative rivals who are deeply suspicious of this process.

Rouhani sees his election as a historic opportunity to move Iran closer to a more pluralistic and tolerant society and not merely to settle the nuclear dispute. Forcing him to choose between making peace abroad and keeping it at home, which more sanctions would do, will not yield a better outcome for Iran or the West.

by Shawn Amoei

Foreign Affairs

by Robin M. Mills

Hassan Rouhani is known as a man who sprays air-freshener in the room before a meeting. When it comes to Iran’s oil industry, Iran’s fastidious president-elect may have a great deal of spring-cleaning to do.

Much outside attention has been paid to the impact of sanctions on Iran [...]]]> via LobeLog

by Robin M. Mills

Hassan Rouhani is known as a man who sprays air-freshener in the room before a meeting. When it comes to Iran’s oil industry, Iran’s fastidious president-elect may have a great deal of spring-cleaning to do.

Much outside attention has been paid to the impact of sanctions on Iran and global oil markets. There has been less discussion of what Iranian policymakers should be doing with their oil, and what effect different policies would have within the country. Turning around the petroleum sector is crucial to Iran’s economy, and in turn, to the success of the centrist-reformist current that the pragmatic Mr. Rouhani is now representing.

During the phase of post-war reconstruction under Akbar Hashemi Rafsanjani, oil production rose by more than 3 percent annually and grew by more than 1 percent per year under Mohammad Khatami as major foreign investment flowed in from European, Russian and Asian companies. In 1995, Bill Clinton vetoed a contract for US oil company Conoco to develop the offshore Sirri fields, which allowed France’s Total to step in. The National Iranian Oil Company (NIOC) as well as domestic engineering and service companies also significantly improved their technical capabilities.

In contrast, the economic consequences of Mahmoud Ahmadinejad were oddly similar to those of Hugo Chávez in Venezuela — the replacement of skilled oil technocrats by less qualified allies, leading to stagnant output. Two giant oil field discoveries of the early 2000s, Azadegan and Yadavaran on the Iraqi border, have barely been developed.

Driven by South Pars, the world’s largest field — shared with Qatar — natural gas production continued to rise impressively under Ahmadinejad, albeit at a slower rate than with his predecessor. But with lines being drawn all over the map like spaghetti, minimal progress was made on gas export plans — to Turkey and Europe; Pakistan and India; the UAE, Bahrain, and Oman — and as liquefied natural gas. The country that, according to British Petroleum, now has the world’s largest reserves, is barely a net exporter of gas.

Development of the oil sector was, of course, hampered by increasingly tight sanctions. Western companies essentially suspended new activities by 2008, while Chinese and Russian firms did no more than keep a foot in the door. But bigger barriers — already apparent during Khatami’s second term — were unattractive contract terms, interminable negotiation periods and decision-making paralysis.

Three of Ahmadinejad’s nominees for oil minister were rejected by the Majlis in 2005; in 2011 he attempted to act as his own oil minister, again ruled out by parliament. As Kevan Harris has documented, from 2006, Ahmadinejad accelerated a process already underway since the 1990s — the pseudo-privatisation of a wide range of state-controlled entities, including oil development and engineering companies and petrochemical plants. In a process reminiscent of the “nomenklatura capitalism” of post-Soviet Russia, many of these companies have fallen under the control of regime insiders and government bureaucrats.

High and rising oil prices permitted complacency as Iran received more oil revenues than in the entire previous century of production during Ahmadinejad’s two terms as president. An increasingly overvalued exchange rate made domestic industry uncompetitive and attracted a flood of cheap imports in a vain attempt to keep down inflation sent soaring by excess liquidity. In a curious reversal of monetary orthodoxy, Ahmadinejad insisted that interest rates not exceed the inflation rate.

The main positive achievement of Ahmadinejad’s administration was reforming Iran’s ruinous energy subsidy scheme, which was replaced by direct cash payments to families. The plan was conceptually sound and surprisingly well-executed; consumption fell and the basic income provided made a substantial difference for poorer Iranians. But the scheme stalled as a result of further infighting between the Majlis and president, the sanctions-induced collapse in the rial, severe inflation and the failure to compensate affected businesses.

The administration did not anticipate how successful the US would be, from early 2012 onwards, in cajoling both allies and rivals to eliminate or cut oil purchases from Iran, as well as targeting insurance, shipping, financial transactions and exports of other Iranian products. Iran’s oil sales fell by a million barrels per day, while increased output from Saudi Arabia and from the US itself prevented global prices from rising too far.

The path of Iran’s oil industry under Dr. Rouhani will depend on progress made in nuclear negotiations and the easing of sanctions, as well as his administration’s domestic policy choices. A military conflict with the US and/or Israel would have highly unpredictable but damaging effects on Iran’s oil industry and possibly those of its neighbours.

If the current sanctions regime remains in place, Iran’s new administration will have to do its best to survive on a severely diminished income. As the Mossadegh government did in the early 1950s under somewhat similar circumstances, it can reorient the economy further towards domestic production and consumption, eliminating the luxury imports that boomed over the past decade. Better management and tackling corruption would reduce the social impacts and inequality — at the potential cost of harming some leading regime figures.

Bringing back Iran’s capable technocrats — and some of its talented diaspora, with more relaxed social conditions, as under Khatami — would keep oil production steady. Two candidates helped manage Rouhani’s campaign – former deputy oil minister Akbar Torkan and former refining and petrochemical chief Mohammad Reza Nematzadeh. Discounts, loopholes and disguised shipments can maintain exports, even at a reduced level. Over time, the enforcement of the sanctions can be eroded.

But, with the demand for OPEC oil set to be stagnant or falling over this decade, the prospect of lower oil prices, and Iraq’s taking an increasing share of the pie, the path ahead could be hazardous. Iran’s purported ally Russia has no interest in encouraging a competing oil and gas exporter. Given the Islamic Republic’s paranoid (if not unjustified) suspicion of the West, it would be ironic if it ended up yet more dependent on the Kremlin and China.

In the event of a breakthrough on the nuclear issue, and a lifting of most oil-related sanctions, the stage would be set for a pragmatic, Rafsanjani-style reconstruction. If the shutdown could be managed correctly, oil production could bounce back to near pre-2012 levels quite quickly.

But fully realising Iran’s petroleum potential requires foreign investment and expertise, ideally including Western companies. This will have to be under better contractual terms than the “buybacks” offered in the early 2000s that provoked so much nationalist debate within Iran.

Giving international companies a long-term stake in fields can be done with modern contracts that still provide Iran with full sovereignty and control over its industry. This would achieve two objectives. First, it would ensure efficient operations and maximum recovery from the country’s mature fields while encouraging technology transfer. Second, it would give momentum to the removal of remaining sanctions and create a barrier against their reinstatement.

In the same way, gas exports — to the GCC, Turkey and Pakistan — would anchor Iran more tightly within the regional economy and make it indispensable to its neighbours. The window for major exports to Europe has probably closed, with Azeri and Iraqi Kurdish gas set to flow. But Iran could still resurrect its liquefied natural gas plans, where it has fallen infinitely behind Qatar.

Domestically, Iran’s subsidy reform needs to be revived — more propitious when the economy is growing and government finances are increasing. The web of pseudo-privatisation also needs to be untangled and replaced by a balance of true private investment and commercially focused state enterprise.

The sine qua non is a resolution to the nuclear issue and an end to the major sanctions. A whole-hearted pursuit of these policies would amount to a revolution in Iran’s energy affairs — likely to provoke major domestic opposition and run into significant international hurdles. But even a pragmatic, technocratic house-cleaning of Iran’s oil sector would help set the economy on a path to recovery and give hope for the success of Dr. Rouhani’s tenure.

– Robin M. Mills is Head of Consulting at Manaar Energy and author of The Myth of the Oil Crisis and Capturing Carbon. Email him or follow him on Twitter.

Talking to ordinary people in Neishabour and Tehran about Iran’s June 14 presidential election, economic issues seem foremost on their minds. But whom they will vote for is based on vague promises to pull the economy out of its deep crisis rather than well-defined economic programs.

Significant differences on economic philosophy divide [...]]]> by Djavad Salehi-Isfahani

Talking to ordinary people in Neishabour and Tehran about Iran’s June 14 presidential election, economic issues seem foremost on their minds. But whom they will vote for is based on vague promises to pull the economy out of its deep crisis rather than well-defined economic programs.

Significant differences on economic philosophy divide a confused public about how to end economic stagnation and high inflation.

In the last three decades of the Islamic Republic’s history, Iranians have experienced both market-based economic growth and populist redistribution.

This election cycle would have been a good time to debate which of these two economic development strategies should be used in moving forward.

However, the decision by the Guardian Council to eliminate two important candidates, Ali Akbar Hashemi Rafsanjani and Esfandiar Rahim Mashaei, from the list of those eligible to run has sharply limited the value of this election as a space for vibrant public debate about the issues that are of greatest daily concern to most Iranians.

These two politicians could have represented the contrasting economic strategies and turned the election into a referendum on the past eight years of populist economics practiced by the Ahmadinejad administration.

Mr. Rafsanjani, the former two-time president, is well known for his preference for market-based economic growth as a solution to poverty and equity issues.

Early on in Mahmoud Ahmadinejad’s tenure, Mr. Rafsanjani rejected Mr. Ahmadinejad’s populist policy of cash distribution as “fostering beggars.”

His elimination from this election has deprived voters of a critical assessment of Mr. Ahmadinejad’s populist program that has inflicted serious damage on Iran’s economy.

A further blow to a meaningful debate on populism came from the elimination of Mr. Mashaei, who was Mr. Ahmadinejad’s close associate and in-law.

It would have been highly interesting, if not very informative, to watch him debate Mr. Rafsanajani on such important issues as the record of the government’s three ambitious populist programs — low-interest loans to small and medium producers, low-cost housing and cash transfers.

What this election should be about is how to achieve a key promise of the Islamic Revolution.

More than three decades ago, a vast majority of Iranians supported the revolution, expecting that it would divide Iran’s oil wealth more equitably.

Early on, Ayatollah Khomeini, the revolution’s leader, tried to limit these expectations by famously saying that “economics is for donkeys.”

But the failure by two previous administrations (Mr. Rafsanjani and Mohammad Khatami, each serving for eight years as president) to reduce inequality has kept the issue of income and wealth distribution at the forefront in recent elections.

Mr. Ahmadinejad came to power in 2005 promising to take the “oil money to peoples’ dinner table,” which he tried to do.

The last two years for which we have survey data, 2010 and 2011, show falling poverty and inequality, but the economy is in shambles.

Prices rose by 40% last year according to official figures, and the same surveys show unemployment at about 15% overall and twice as high for youth.

It would have been valuable for the public to learn if Mr. Ahmadinejad’s redistribution policies are responsible for the current economic mess, or something else, like incompetence in execution or international sanctions.

What the candidates have said in the short time they have had to campaign is that they will do something different. What and how is not clear.

The four front-runners, Saeed Jalili, Mohammad-Baqer Qalibaf, Hassan Rowhani, and Ali Akbar Velayati, have expressed their differences on how to deal with sanctions.

Sanctions loom large in voter minds, but few believe that whoever is elected will be able to influence Iran’s nuclear policy, which is being tightly directed by the Supreme Leader, Ayatollah Ali Khamenei.

What seems to distinguish these candidates most clearly at this point is social rather than economic issues.

They all promise to reduce inflation, increase employment and run a less corrupt and more efficient administration. The differences exist in emphasis rather than specifics.

Mr. Jalili is the most conservative candidate in the race and closest to Mr. Ahmadinejad in economic philosophy but has also been careful to neither defend nor criticize the latter’s policies.

He has defended Iran’s stance in the nuclear negotiations with the P5+1 group (the U.S., Britain, France, China, and Russia plus Germany), which he led in recent years, with the usual anti-Western rhetoric.

By saying the least of any candidate about the economy, he has clearly indicated that economic issues are not his top priority.

In the televised debates, Mr. Jalili made it clear that a more effective enforcement of cultural values was the right way to solve the country’s economic problems.

More specifically, he seemed to reject compromising with the West over Iran’s nuclear program in order to lessen the pain of Western sanctions on ordinary Iranians.

If Mr. Jalili is Mr. Ahmadinejad’s favorite candidate, Mr. Ahmadinejad has not said anything.

He has not made any public statement regarding the candidates so far, except to request time on national television to respond to their criticisms, which was denied.

Word on the street in Tehran is that Mr. Ahmadinejad secretly roots for Mr. Jalili because he believes a President Jalili would be the most likely to make him look good, not by defending his policies, but by taking the economy further into the deep end.

Mr. Rowhani, the only cleric in the race, is the most moderate candidate among the four front-runners.

In the eyes of liberal voters, following this week’s departure of reformist candidate Mohammad-Reza Aref (after an explicit request from the popular former president, Mohammad Khatami), Mr. Rowhani has inherited the reformist mantle of Mr. Khatami as well as Mr. Rafsanjani’s pro-business legacy.

Mr. Rowhani energized Iran’s young voters after the second televised debate in which he criticized the heavy hand of security forces in social affairs.

He appears to have gained the same lift that former presidential candidate Mir Hossein Mousavi achieved four years ago upon declaring he would end police enforcement of public chastity.

However, like Mr. Mousavi, Mr. Rowhani has not offered clear economic policies to address the youth’s more serious problems of unemployment and family formation.

A formidable challenge to Mr. Rowhani comes from Mr. Qalibaf, the current mayor of Tehran and a moderate conservative.

During a recent televised debate, they clashed over how the police should treat student protests, but they have not tried to distinguish themselves on how they would help university graduates get jobs.

If the election goes to a second round run-off between these two candidates, which now seems likely, there is a chance that voters will hear more about their approach to revive the economy.

But then the candidates may find it easier to appeal to voters’ emotions than to their pocketbooks.

Photo: The campaign headquarters of presidential hopeful Mohammad Baqer Qalibaf in the Iranian city of Neishabour. Credit: Djavad Salehi-Isfahani

by Jasmin Ramsey

Press reports about medical supply shortages in Iran, some of which have described devastating consequences, have been surfacing in the last two years, while debate rages on about who’s responsible — the Iranian government or the sanctions regime. Siamak Namazi, a Dubai-based business consultant and former Public Policy [...]]]> via Lobe Log

by Jasmin Ramsey

Press reports about medical supply shortages in Iran, some of which have described devastating consequences, have been surfacing in the last two years, while debate rages on about who’s responsible — the Iranian government or the sanctions regime. Siamak Namazi, a Dubai-based business consultant and former Public Policy Fellow at the Woodrow Wilson Center for International Scholars, admits the Iranian government shares responsibility but says sanctions are the main culprit. Humanitarian trade may be exempted from the sanctions, says Namazi, but that isn’t enough when the banking valve required to carry out the transactions is being strangled. “[I]f [sanctions advocates] maintain the sanctions regime is fine as it is, then how come they try to promote substitution from China and India?” asks Namazi. The following Q&A with Namazi was conducted in Washington, DC.

Q: You recently authored a policy paper published by the Woodrow Wilson Center where you essentially blame medical shortages in Iran on Western sanctions. How did you reach this conclusion?

Siamak Namazi: We concluded that the Iranian government deserves firm criticism for mismanagement of the crisis, poor allocation of scarce foreign currency resources and failing to crack down on corrupt practices, but the main culprit are the sanctions that regulate financial transactions with Iran. So, while Tehran can and should take further steps to improve the situation, it cannot solve this problem on its own. As sanctions are tightened more and more, things are likely to get worse unless barriers to humanitarian trade are removed through narrow adjustments to the sanctions regime.

My team and I reached these conclusions after interviewing senior officers among pharmaceutical suppliers, namely European and American companies in Dubai, as well as private importers and distributors of medicine in Tehran. We also spoke to a number of international banks. None of us had any financial stake in the pharmaceutical business, whatsoever, and we all worked pro bono.

Q: What is your basis for this claim given the humanitarian exemptions to the sanctions regime that allow for the trade of food and medicine?

Siamak Namazi: The US Congress deserves kudos for passing a law making it abundantly clear that humanitarian trade in food, agricultural products, medicine and medical devices are exempted from the long list of sanctions against Iran. This law is the reason why the Western pharmaceuticals can do business in Iran. I sincerely applaud that gesture.

Unfortunately, what we see is a case of what lawyers refer to as “frustration of purpose.” Iran can in theory purchase Western medicine, but in practice it is extremely difficult to pay for the lifesaving drugs it needs. Despite the Congressional directive, a number of Executive Orders that restrict financial transactions with Iran remain in place, making it all but impossible to implement that exception.

Sanctions also limit Iran’s access to hard currency. The country’s oil sales are seriously curtailed and have effectively been turned into a virtual barter with the purchasing country, mainly China and India.

Q: Not all Iranian banks are blacklisted by the US and there is a long list of small and large international banks that could carry out humanitarian transactions. Why can’t Iran use these channels for importing the medicine it needs?

Siamak Namazi: The non-designated Iranian banks are small and lack the international infrastructure required to wire money from Tehran to most foreign bank accounts. They rely on intermediary banks to process such transactions. Unfortunately, it’s extremely difficult, if not outright impossible, for these Iranian banks to find such counterparts, even when they are trying to facilitate fully legal humanitarian trade.

In the end, Iran needs to go through many loops and plays a constant cat and mouse game, creatively trying to find a channel to pay its Western suppliers of medicine. Not only does this increase the costs of medicine for the Iranians, it also causes major delays. In the meanwhile, pharmacy shelves run empty of vital drugs and the patient suffers.

Q: Isn’t that just a reflection of the international banks being too cautious rather than shortcomings in US sanctions laws? In a recent testimony to the Senate, US Treasury Undersecretary David Cohen was clear that no special permission is required to sell humanitarian goods to Iran and foreign financial institutions can facilitate these permissible humanitarian transactions.

Siamak Namazi: What Mr. Cohen actually said is that all is fine “as long as the transaction does not involve a U.S.-designated entity,” meaning a sanctioned Iranian bank.

How, exactly, does an international financial institution guarantee that none of Iran’s main banks, all of which are blacklisted, were involved in any part of the long chain involving a foreign currency transfer from Iran? Recall that foreign currency allocation for pharmaceutical imports start with the Central Bank of Iran, which is blacklisted. Maybe the CBI wired these funds to the non-designated Iranian bank from monies it holds in say, Bank Tejarat or Bank Melli, potentially adding further layers of banned banks to the chain.

Given the severity of the risk involved — fines that have reached nearly $2 billion in recent months — international banks seek clear indemnity. They want legal clarification that basically says, “You will not be fined for clearing humanitarian trade with Iran, period.”

So far Treasury has refused to grant such a measure, though recent comments by senior officials suggest that the US government has sent out delegations reassuring the banks, without actually making any changes to the letter of the law. While this is a welcome move, and indeed one of the recommendations in the report published by the Wilson Center, it is far from sufficient.

Q: You say that Iran has a hard time finding a banking channel to pay for Western medicine. At the same time, for the first time in many years, Iran purchased $89 million in wheat from the US in 2012. Why were they able to find a banking channel to pay for wheat, but have difficulty purchasing medicine?

Siamak Namazi: My claim is supported by recent US trade statistics showing that exports of pharmaceuticals to Iran dropped by almost 50 percent, but these numbers are ultimately misleading. My understanding is that US trade data only reflects exports from an American port, directly entering an Iranian port, which is a thin slice of the overall trade. This is while most companies send their goods to Dubai, Europe or Singapore and cover the entire Middle East, including Iran, from these hubs. So, when the statistics refer to a drop of sales of medicine from around $28 million in 2011 to half that figure in 2012, the figure grossly misrepresents the scale of the problem.

Let me stress this point again: the loss of $14 million in American-made drugs does not make for a crisis. The real problem is exponentially bigger than this. We are talking about the loss of hundreds of millions of dollars worth of American and European medicine.

You must also keep in mind supplier power in trade. Wheat is a perfectly substitutable good, so Iran is bound to find one supplier that is willing to sell its wheat with extended credit terms, until it secures the hard currency and banking channel to pay for it. A vital drug is often perfectly un-substitutable; meaning that a single company — most often American or European in the case of the most advanced medicines — enjoys a 20-year patent to manufacture it. So if Iran cannot find a banking channel to reimburse the manufacturer for it, it will have to do without that medicine until it can pay.

Q: Why can’t Iran procure its medicine from China, India or Japan — the countries it’s selling oil to?

Siamak Namazi: Iran has already increased its purchase of medicine and medical equipment from all the countries you listed. However, as I stated earlier, due to the highly regulated and patented nature of the pharmaceutical business, vital drugs are often un-substitutable.

Even when there is an alternative drug made by the Chinese, Indians or Japanese, there is an additional barrier. Medicine has to be registered before its importation is permitted. Just like the US has the Food and Drug Administration, Iran, like most countries, has an equivalent body that must approve the medicine. The specific molecule must be registered after thorough testing. In Iran, this process takes an exceedingly long time and should no doubt be improved, though recently they have taken steps to expedite it by making exceptions. The Ministry of Health sometimes allows a drug that was approved for sale in another country to also be imported and sold in Iran. But this rushed process has had major consequences in terms of side-effects. There are even press reports of deaths when substandard drugs were imported.

To be honest, I don’t understand the logic of the advocates of this solution. They argue that the existing humanitarian waivers are sufficient and claim any shortage of medicine in Iran is the consequence of Tehran’s own mismanagement. I have even heard accusations that Iran is intentionally creating such shortages to create public outrage against the US. But if they maintain the sanctions regime is fine as it is, then how come they try to promote substitution from China and India? Besides denying Iranian patients their right to receive the best treatment there is, aren’t they also rejecting the American pharmaceutical companies’ right to conduct perfectly legitimate business?

Q: To be fair, Iran’s own former health minister, Marzieh Vahid Dasjerdi, also accused the government of failing to allocate the necessary resources and lost her job after doing so.

Siamak Namazi: I actually commend the former health minister for her courageous intervention and have also voiced my concern about the misallocation of hard currency in various forums.

That said, I am not in a position to know or comment on the exact nature or circumstances of her dismissal. I can only reference our direct research and findings. We found and verified ample cases where Iran had allocated hard currency for vital medicine, yet the purchase fell through because they could not find a banking channel. This includes the sale of an anti-rejection drug needed for liver transplants by an American pharmaceutical that ultimately failed. Can you imagine waiting years for a donor and when your operation time arrives, being told that you cannot have it because the drug you need is missing?

You need not take our word for it. It is very easy for the US government to verify our claims by talking to the American pharmaceuticals that do business with Iran, or even by reviewing some of OFACs own files. In fact, the US industry lobby USA*Engage recently wrote a letter refuting Undersecretary Cohen’s claims that American companies have no problems dealing with Iran. In their own words: “Despite … clear Congressional directive and long-standing policy, the U.S. Treasury implements Executive Branch unilateral banking sanctions in a manner that blocks the financial transactions necessary for humanitarian trade.”

Q: So is there a solution to all this?

Siamak Namazi: Absolutely, and I have spelled it out in my op-ed in the International Herald Tribune and also in the Wilson Center report. It simply makes no sense to say humanitarian trade is legal, but the banking channel needed to facilitate the trade is restricted. In the case of medicine, the solution is arguably simpler than other humanitarian goods. With fewer than 100 American and European companies holding patents to the most advanced drugs needed, we can craft narrow, but unambiguous exemptions to the banking restrictions, essentially allowing these companies to sell medicine to Iran without undermining the sanctions regime overall.

To address the shortage of hard currency, Iran should be allowed to convert some of its current holdings in Chinese, Indian and other banks around the world into hard currencies for the exclusive purpose of buying medical supplies. Alternatively, the US could revisit its earlier decision on the matter and allow European companies that owe billions of dollars to Iran to settle this debt by paying a pharmaceutical company on Iran’s behalf.

US policymakers are reminded that medicine is highly subsidized in Iran. Imported drugs receive hard currency allocations at a greatly subsidized rate and are again supported through government-owned insurance companies. That means that the Iranian government ultimately gains far fewer rials for every dollar it allocates to an importer of medicine than it does selling its hard currency to importers of most other goods.

– Siamak Namazi, a Middle East specialist whose career spans the consulting, think tank and non-profit worlds, is currently a consultant based out of Dubai. His former positions include the managing director of Atieh Bahar Consulting, an advisory and strategic consulting firm in Tehran. He has also carried out stints as a fellow in the Wilson Center for International Scholars, the Center for Strategic and International Studies and the National Endowment for Democracy. A frequent contributor to international publications and conferences, he has authored chapters in six books and appeared regularly as a commentator in the international media. He holds an MBA from the London Business School, an MS in Planning & Policy Development from Rutgers University, and a BA in International Relations from Tufts University.

by Farideh Farhi

It is fair to say that since Akbar Hashemi Rafsanjani’s disqualification, a good section of the Iranian pubic has been in a state of shock and silence. A friend who is also a keen observer of Iranian politics described the mood not only in Tehran but also the [...]]]> via Lobe Log

by Farideh Farhi

It is fair to say that since Akbar Hashemi Rafsanjani’s disqualification, a good section of the Iranian pubic has been in a state of shock and silence. A friend who is also a keen observer of Iranian politics described the mood not only in Tehran but also the capital of a province she visits often as eerie silence.

The excitement that was generated by Hashemi Rafsanjani’s candidacy was unexpected, perhaps even to him. In all likelihood, it was also the reason for his disqualification. Iran’s conservative establishment would have preferred yet another Rafsanjani defeat at the polls as in 2005. But the potential for voter mobilization along the lines of 2009 made that route too risky.

So now the question of what to do must be on the minds of people who identify with the reformists and centrists. Their two key leaders — former presidents Mohammad Khatami and Hahsemi Rafsanjani — have been silent on this since the disqualification.

Voter silence may eventually transform into a turning of the back against the electoral process. It will not be an organized boycott but an effective lowering of the participation rate, particularly in large cities, to which the conservative establishment will probably respond by announcing “a higher than expected” turnout rate along the lines of the “epic” event so desired by Iran’s Leader Ayatollah Ali Khamenei. This is what happened in the rather lackluster 2012 parliamentary election when a participation rate of 66.4 percent was announced to a skeptical and yet indifferent electorate at least in Tehran.

And it is precisely this possibility that compels the reformist and centrist political leaders to mull alternatives. After all, low participation rates have never posed a challenge to the conservative political establishment. Given the solid support from a committed base, lower participation rates can even ensure a conservative victory without ballot box-tampering if the conservatives can agree on a candidate — which as I will discuss hasn’t been the case so far — forcing them to face some decisions of their own in the next two weeks.

But going back to the self-identified reformist and centrist organizations and individuals, in the coming two weeks the two former presidents must decide whether to let the scenario that played out in the 2012 parliamentary election — involving essentially a competition between hardliners and traditional conservatives — to reoccur, or gamble on the energy that was generated for Hashemi Rafsanjani’s candidacy in support of one of the two non-conservative candidates: former nuclear negotiator Hassan Rowhani and former first vice president Mohammadreza Aref. Given their lack of name recognition throughout the country everyone knows that for either of these candidates to have any chance one probably has to withdraw in favor of the other and then receive the public backing of the two former presidents.

In other words, the silence that has followed Hashemi Rafsanjani’s disqualification is underwritten by a turn of the eye towards what these two politicians will call upon their supporters to do.

A call for a boycott is out of the question for Hashemi Rafsanjani who is still the chair of the Expediency Council. It is also highly unlikely for Khatami who knows that such a move would become an occasion for the further purging of reformist parties and organizations from the political system.

The two former presidents can tell their supporters to follow their conscience and vote for anyone they wish or actively try to use their clout in an attempt to shape the election’s outcome. After all, Khatami had already corralled the reformist support behind the centrist Hashemi Rafsanjani. Couldn’t the two former presidents do the same for either Rowhani or Aref — both of whom have performed well in their television appearances so far and staked positions on the economy and foreign policy that are similar to Hashemi Rafsanjani’s while being highly critical of the direction Iran has taken in the past eight years?

Uncertainty in response to this question is the reason for hesitance. Convincing supporters — as well as themselves — that the conservative establishment, which was willing to disqualify one of the fathers of the revolution, will not use other schemes to ensure a conservative presidency will be difficult. The only argument against this deep skepticism is yes, the other side might cheat, but non-participation may ensure its victory without cheating or any challenges.

Electoral mobilization has been the centrists’ and reformists’ only successful instrument against the conservative establishment over the years. True, the last successful mobilization turned into a disaster when post-election protests led to repression and the further securitization of Iran’s political environment. The tired and economically pressured Iranian population certainly has no stomach for a repeat. But throwing away the only instrument that societal forces who have been calling for change have to display their existence — and yes, potential power with — in fear of a repeat of a previous experiment’s consequences is tantamount to prematurely surrendering to authoritarian powers who are perfectly happy if voters mostly stay home.

This argument, while persuasive to me, will nevertheless have a hard time countering legitimate worries that electoral participation in support of either of these two candidates will be pocketed by the conservative establishment as a vote of confidence in the Islamic Republic without giving the centrists and reformists a fair chance.

Still, the decision by both Hashemi Rafsanjani and Khatami — to either not support anyone or clearly back one candidate — is yet to come. There is no reason for them to rush either. In the next two weeks of campaigning getting double air-time for two candidates with similar views that are not generally shown on state television is better than getting air time for only one. But in a week or so the pressure on them will increase to make their move. Already, the reformist Shargh Daily is reporting on a plan by the former presidents’ “advisors” to give support to a slate that has one of the two candidates at the top and the other campaigning as his first vice president in case of a win. The challenge of figuring out who should be at the top, the argument goes, will be resolved by the extent of support each can garner after his performance in the three television debates among the eight candidates that will begin this Friday and end next Friday.

There are two reasons why these former presidents and their supporters have not yet fully abandoned strategizing for a possible reformist/centrist victory. I already mentioned the first reason and it’s related to uncertainty about the length to which the conservative establishment will go to ensure a conservative victory. The argument that the system needs a “clean” election to erase the memory of the botched 2009 election works in favor of trying to mobilize the voters in order to force or impose an election day win.

But there is also a second reason that’s related to the disarray within the conservative camp itself. As I previously mentioned, the conservatives have been unable to consolidate support behind a single candidate. In fact, as of today two of their candidates — Saeed Jalili and Ali Akbar Velayati — have received organizational support from the two polls of the conservative spectrum. Jalili was formally endorsed by the hardline Steadfastness Front (Jebheye Paydari, which is sometimes translated as the Constancy Front) while Velayati was formally endorsed by the Followers of the Imam and Leadership Line Front, which consists of 14 traditionally conservative organizations and parties.

At this point, despite Jalili’s assiduous efforts to portray himself as such — because believe it or not, trying to convince people that one has the Leader’s support in Iran is an art that is practiced by quite a few people in order to push one’s self ahead — it is not clear which one of these two candidates will by Election Day be the favorite of the “system”, called nezam in Iran, or more accurately, Khamenei’s favorite. If the 2012 parliamentary election is any guide — and parliamentary elections occurring before the presidential race with no running sitting president have been good guides in the past — the candidate of the traditional conservatives should do better or become the favorite. But so far this decision doesn’t appear to have been made.

In any case, the interesting aspect of this election may be that for these two candidates even becoming the favorite may not ensure a win if there is no substantial fraud on Election Day. The so-called mashin-e entekhabat (electoral machine), an army of loyalists the system can mobilize in support of a particular candidate even at the last minute, is at most 6 to 7 million people. This is not sufficient for a win even if only 50 to 55 percent — a historical low only recorded for elections in which either a sitting president was seeking reelection (as in 1985 or 1993) or the victory of a specific candidate was assured like in 1989 — of the announced 50 million eligible voters participate. To be sure, both Velayati and Jalili can try to woo votes beyond the machine. But they do not have much in the way of independent organization and given their lack of personal charisma, and the fact that neither of them has held positions related to domestic policy making, the chances of their success is low. (Again, if the assumption is that the Interior Ministry, which is in charge of conducting the election, will inflate the participation rate, it’s unlikely to substantially tamper with votes in favor of one candidate or another).

The only conservative candidate who can add the machine vote to his own personal following is the more popular Tehran mayor Mohammad Baqer Qalibaf, who has so far garnered no support from conservative organizations and parties. But Qalibaf has been organizing in almost every city and even quite a few villages throughout the country; he has been practically planning and running for the presidency for the past 8 years.

Yet his basic problem remains with the electoral machine vote, which in the 2005 election shifted in the last minute and favored Mahmoud Ahmadinejad, leaving him with only 4 million votes — and fourth position — out of the 28 million votes cast. A decision made to shift the machine towards Qalibaf will probably be dependent on the assessment of how well the reformist/centrist might do. If the election ends up going to the second round with no one mustering 50 percent plus one vote, then Qalibaf is probably the strongest candidate against the reformist/centrist choice — again provided the absence of a systemic will to ensure a conservative win at any cost either in the first round or by pitting two conservative candidates against each other in the second round.

At this point, all I can say is that betting on the win of any given candidate — or point of view — seems premature. It is true that some candidates such as former IRGC commander Mohsen Rezaie, former minister Mohammad Gharazi, or even former speaker of the parliament Haddad Adel have no chance, but some of the other candidates and their supporters will still have to make choices and react to the choices made by others. The reformist and centrist leaders’ choice to become more aggressive players at the immediate political and tactical level and risk the possibility that the electorate will not follow is a gamble that, if successful, will again force the multitude of conservative constituencies and candidates to revisit their calculations, formulate new tactics and tricks, and even re-arrange their alliances.

by Sara Vakhshouri

In the last week of April, the US Energy Department issued a report showing that Iran’s crude oil and condensate exports have dropped to their lowest level in the past 26 years. The Energy Information Administration (EIA) estimates that Iran’s net oil export revenue in 2012 was $69 [...]]]> via Lobe Log

by Sara Vakhshouri

In the last week of April, the US Energy Department issued a report showing that Iran’s crude oil and condensate exports have dropped to their lowest level in the past 26 years. The Energy Information Administration (EIA) estimates that Iran’s net oil export revenue in 2012 was $69 billion, down from $95 billion in 2011.

In 2012, the average export of crude oil and condensate declined to around 40 percent, from 2.5 million barrels a day (mb/d) in 2011 to about 1.5 mb/d in 2012. Due to the substantial drop in exports and a lack of sufficient storage capacity, the EIA estimates that Iran had to reduce 17 percent of its crude oil and condensate production. Iran was, on average, the second largest producer of OPEC in 2012. But for some months, its production fell below Iraqi levels for the first time since 1989, moving it from second to third place.

This dramatic drop in oil production and exports are the result of the US and EU sanctions implemented since late 2011 that targeted Iranian oil income, which makes up 80 percent of Iran’s total export earnings and about 60 percent of the government’s revenue.

The new sanctions ban European insurance companies from offering any coverage to refineries that process Iranian crude oil. Although a tight market combined with higher prices has made up for some of Iran’s income losses, it is believed that these sanctions have hurt Iranian oil exports in an unprecedented and significant way.

The new sanctions also present a major challenge for Iran to sell its oil to major customers, particularly India, Japan and South Korea. According to the US Energy Department, Iran’s crude oil export to India and South Korea is particularly going to be influenced by these sanctions as their refineries rely mainly on European insurance companies. Previously, Iran could skirt the EU ban on insurance by offering its domestic insurance. But the new sanctions make this impossible. This means Tehran is going to have an even harder time marketing and selling its crude oil: its major customers have to start searching for alternative supplies in the market.

The refinery overhaul season is also going to make it harder for Iran to sell its oil. The second quarter of each year is the period for maintenance overhaul for refineries in the Northern Hemisphere that results in a seasonal decline in demand. It is expected that the spike in Iranian crude oil from the last quarter of 2012 will drop once again due to the new EU restrictions on refinery insurance and seasonal demand.

It is not expected that Iranian crude oil production will rise soon. According to the EIA report, Iran’s oil production in 2012 was around 700 thousand b/d, lower than in 2011. The natural production decline of Iran’s matured fields is playing a major role in curbing its crude oil production. Iran needs to invest in its oil fields in order to maintain its production but the large scale of prohibitions on investments in the country’s oil and gas fields imposed by the US and EU prevents any further increase of the country’s production.

by Djavad Salehi-Isfahani

The latest round of talks between the P5+1 (the US, Russia, China, Britain, France, and Germany) and Iran in Kazakhstan concluded on Saturday without any tangible progress. While details of the reciprocal offers remain unclear, what we have learned indicates that neither side is in any particular hurry [...]]]> via Lobe Log

by Djavad Salehi-Isfahani

The latest round of talks between the P5+1 (the US, Russia, China, Britain, France, and Germany) and Iran in Kazakhstan concluded on Saturday without any tangible progress. While details of the reciprocal offers remain unclear, what we have learned indicates that neither side is in any particular hurry to conclude the lengthy negotiations. In the meantime international sanctions, which have plunged Iran’s economy into its deepest crisis since the war with Iraq, will remain in force and may even be tightened. An important question now is whether the delay in resolving the crisis favors Iran or its Western foes, and the answer has to do in part with what one believes is happening to Iran’s economy.

Just before the talks restarted, a report in the New York Times entitled “Double-Digit Inflation Worsens in Iran” may have strengthened the belief of those in the US who think that time is on their side. If inflation — the most obvious, if not the most painful, effect of sanctions — has gotten worse for the sixth month in a row, then waiting a few more months might weaken Iran’s position. The article was based on new data released by Iran’s Statistical Center, which, when looked at more closely actually shows that inflation has been up and down in the last six months, falling as many times as it went up, though prices go only up (see a detailed graph of monthly inflation rates here). The persistence of high inflation has as much to do with sanctions as with Mr. Mahmoud Ahmadinejad’s insistence on making good before he leaves office and ahead of the June presidential election by pushing ahead with his unfunded (and therefore inflationary) promises of cash transfers and low-cost housing.

Iranian officials who were last year denying the impact of sanctions now praise them for helping Iran wean its economy from oil. Last month, Iran’s Minister of Economy, Shamseddin Hosseini, said that “Thanks to the sanctions [imposed] by enemies, a historical dream of Iran is being realized as the oil revenues’ share in the administration of the country’s affairs has been reduced.” The Minister for Industry, Mining and Commerce also added a humbling note, “What we had been unable to achieve on our own, sanctions have done for us.” He was referring to the huge inflow of cheap imports paid for by the oil revenues over which he has presided since 2009.

As these officials have discovered lately, oil money can stock the kitchens and living rooms of the average family while keeping their educated son or daughter out of a job. While imports increased eightfold over the last ten years, many local producers in agriculture or industry have either shut down or increased the import content of their production. Either way, jobs have been lost. Between 2006 and 2011, census figures show that Iran’s economy created zero new jobs, as the working age population increased by 3.5 million.

As I have argued before, the devaluation of the rial, which many saw as the reason why Iran restarted negotiating, is actually a reason why it may not be in such a hurry to resume its oil exports. A study last week that was surprising for its source — the Washington Institute for Near East Policy, which has always pushed for tougher sanctions on Iran — admitted that Iran is doing a good job of adjusting to reduced oil revenues. It shows how the balance of trade in non-oil items is improving and how the government budget is becoming less dependent on oil.

But adjusting to the financial sanctions is an entirely different story. After being cut off from the international banking system and with limited access to global markets, Iran is finding it extremely hard to turn its import-dependent economy around. If Iran could choose which of the two sets of sanctions to lose first, oil or financial, it would definitely be the latter.

by Jasmin Ramsey

The Director of National Intelligence submitted the annual report on the “Worldwide Threat Assessment of the US Intelligence Community” today. The report can be accessed here and following are key passages that are relevant to Iran’s nuclear program, compliments of the Ploughshares Fund Early Warning [...]]]> via Lobe Log

by Jasmin Ramsey

The Director of National Intelligence submitted the annual report on the “Worldwide Threat Assessment of the US Intelligence Community” today. The report can be accessed here and following are key passages that are relevant to Iran’s nuclear program, compliments of the Ploughshares Fund Early Warning mail-out, which I encourage everyone to sign up for.

–On Iran: “We assess Iran is developing nuclear capabilities to enhance its security, prestige, and regional influence and give it the ability to develop nuclear weapons, should a decision be made to do so. We do not know if Iran will eventually decide to build nuclear weapons.”

–“We judge Iran’s nuclear decisionmaking is guided by a cost-benefit approach, which offers the international community opportunities to influence Tehran…In this context, we judge that Iran is trying to balance conflicting objectives. It wants to advance its nuclear and missile capabilities and avoid severe repercussions—such as a military strike or regime threatening sanctions.”

–While Iran has enhanced its uranium production capabilities, “we assess Iran could not divert safeguarded material and produce a weapon-worth of WGU before this activity is discovered.”

Interesting Iran-related takeaways from this latest US intelligence community assessment include the notion that Tehran’s decision-making process with regard to its nuclear program can be influenced, as Laura Rozen reported today, and that while it has grown increasingly autocratic at home, much of Iran’s foreign strategy is described as defensive, according to this analysis by Mideast expert, Trita Parsi. “This is not to say that Clapper discounts or dismisses the challenge Iran poses to the U.S.,” wrote Parsi today, “but his assessment is devoid of the panic-stricken and sensationalist narrative that hints of the coming Iranian land invasion of the U.S. and its desire to destroy Western civilization.”

Following is the DNI’s assessment of Iran’s WMD-Applicable Capabilities (more on this later):

We assess Iran is developing nuclear capabilities to enhance its security, prestige, and regional influence and give it the ability to develop nuclear weapons, should a decision be made to do so. We do not know if Iran will eventually decide to build nuclear weapons.

Tehran has developed technical expertise in a number of areas—including uranium enrichment, nuclear reactors, and ballistic missiles—from which it could draw if it decided to build missile-deliverable nuclear weapons. These technical advancements strengthen our assessment that Iran has the scientific, technical, and industrial capacity to eventually produce nuclear weapons. This makes the central issue its political will to do so.

Of particular note, Iran has made progress during the past year that better positions it to produce weapons-grade uranium (WGU) using its declared facilities and uranium stockpiles, should it choose to do so. Despite this progress, we assess Iran could not divert safeguarded material and produce a weapon-worth of WGU before this activity is discovered. We judge Iran’s nuclear decisionmaking is guided by a cost-benefit approach, which offers the international community opportunities to influence Tehran. Iranian leaders undoubtedly consider Iran’s security, prestige and influence, as well as the international political and security environment, when making decisions about its nuclear program. In this context, we judge that Iran is trying to balance conflicting objectives. It wants to advance its nuclear and missile capabilities and avoid severe repercussions—such as a military strike or regime threatening sanctions.

We judge Iran would likely choose a ballistic missile as its preferred method of delivering a nuclear weapon, if one is ever fielded. Iran’s ballistic missiles are capable of delivering WMD. In addition, Iran has demonstrated an ability to launch small satellites, and we grow increasingly concerned that these technical steps—along with a regime hostile toward the United States and our allies—provide Tehran with the means and motivation to develop larger space-launch vehicles and longer-range missiles, including an intercontinental ballistic missile (ICBM).

Iran already has the largest inventory of ballistic missiles in the Middle East, and it is expanding the scale, reach, and sophistication of its ballistic missile arsenal. Iran’s growing ballistic missile inventory and its domestic production of anti-ship cruise missiles (ASCM) and development of its first long-range land attack cruise missile provide capabilities to enhance its power projection. Tehran views its conventionally armed missiles as an integral part of its strategy to deter—and if necessary retaliate against—forces in the region, including US forces.

Photo: National Intelligence James Clapper. (Official White House Photo by Pete Souza)

Negotiations on the Iranian nuclear program are set to re-start in February, but Iran’s previous foot dragging in agreeing to a time and venue for the negotiations has been vexing for U.S. and allied diplomats. Iranian behavior is particularly puzzling given the urgency of resolving the nuclear crisis peacefully and alleviating pressure [...]]]> by Alireza Nader

Negotiations on the Iranian nuclear program are set to re-start in February, but Iran’s previous foot dragging in agreeing to a time and venue for the negotiations has been vexing for U.S. and allied diplomats. Iranian behavior is particularly puzzling given the urgency of resolving the nuclear crisis peacefully and alleviating pressure on an increasingly vulnerable Iranian economy. What is Tehran thinking?

Some analysts have suggested that Tehran is divided internally and cannot make a decision. This is unlikely. Supreme Leader Ayatollah Ali Khamenei has consolidated power since the 2009 presidential election and makes decisions for the entire country. If Khamenei wants negotiations to proceed, then Iran’s negotiators will respond accordingly. Rather, Khamenei is hesitant to engage the P5+1 (the United States, United Kingdom, France, Russia, China, and Germany) due to his ideological distrust of the United States. Specifically, he may view the P5+1 offer for Iran to stop uranium enrichment to 20 percent, ship out its highly enriched uranium, and close down the underground Fordo facility in return for a consideration of sanctions relief as not only a trap but also a prelude to defeat for himself and his regime. Khamenei may be reluctant to make a deal, but mounting pressures from a broad section of the political elite and Iranian society may ultimately force his hand and even loosen his grip on power.

The gridlock in negotiations between the P5+1 and Iran is a problem of sequencing. The P5+1 wants Iran to make the first move in order to build confidence, while Tehran is anxious for the P5+1 to recognize Iran’s right to enrichment and to lift sanctions before Iran takes any action. Tehran may be more willing to ship out its 20 percent enriched uranium than to give up its Fordo nuclear facility entirely. Fordo is viewed by Tehran as one of its greatest sources of leverage, especially because it is buried deep beneath a mountain and is less vulnerable to Israeli and possibly U.S. air strikes (although the United States has the military means to do much greater damage to Fordo).

Nevertheless, there is a much larger issue at stake: the historical and ideological rivalry between the United States and the Iranian regime. For the Islamic Republic, the nuclear program is a strategic card in its ongoing battle with America. And although the United States may claim it has no agenda other than solving the nuclear crisis, there is a great deal of hostility toward the Islamic Republic among influential American political constituencies. This is not surprising, given the Iranian regime’s history of supporting terrorism, its hostility toward Israel, and its widespread human rights abuses. Among the Iranian elite, there is deep resentment toward the United States for its support of the Shah and of Saddam Hussein during the Iran-Iraq War. Hence, the nuclear crisis is not just about Iran’s pursuit of a potential nuclear weapon capability. Rather, it is a bitter struggle over the future of Iranian, Israeli, and U.S. power in the Middle East.

Can such obstacles be overcome? Yes, but only to the extent that the goals are limited to a diplomatic solution that is just enough to avert a costly military conflict over the nuclear program. The other issues will not go away as long as the Islamic Republic rules Iran. Regardless, although Khamenei may be reluctant to make a deal, mounting pressure may leave him little choice but to be more flexible.

Although he is Iran’s most powerful leader, Khamenei is nevertheless surrounded by rivals and enemies at home. The reformists who so brazenly challenged his regime in 2009 have been effectively pushed out from the corridors of power. But this does not mean they are inactive. The reformists want to contest the June 2013 presidential election, which they claim should be “fair and free.” (Khamenei has stated that the words “free election” are code for “sedition.”) More moderate conservatives, such as Ayatollah Hashemi Rafsanjani, are also keen to protect their interests and contain, or perhaps even reverse, Khamenei’s quest for absolute power. Both reformists and the Rafsanjani camp are anxious about Iran’s growing international isolation and its declining economy.

Followers of President Mahmoud Ahmadinejad also view the presidential election with deep concern. Ahmadinejad, who cannot run for the presidency again, has been politically marginalized and worries that his allies will not be able compete in the election. Recently, the powerful Guardian Council diluted the Interior Ministry’s authority to supervise the election. The Guardian Council is largely against Ahmadinejad, whereas the Interior Ministry is controlled by his allies. The Ahmadinejad camp’s total political isolation may embolden it to challenge Khamenei even more publicly—and even criticize his nuclear policy.

More importantly, Khamenei may come under greater pressure from his own conservative camp, especially the Revolutionary Guards. Khamenei’s conservative supporters are his most important constituency. He may be able to ignore the reformists, the Rafsanjani conservatives, and the pro-Ahmadinejad elite, but he has to keep the Revolutionary Guards and the merchant class happy. To date, neither appears to have publicly criticized him over Iran’s nuclear policy. Khamenei’s key foreign policy advisor, former Foreign Minister Ali Akbar Velayati, has resolutely declared that there is “complete agreement on the nuclear program” within the Islamic Republic.

It is true that some hardline Guards and conservatives may be wedded to Khamenei’s policy of resistance against the United States, but many also value money, luxury, and power. This group may become more critical of Khamenei as sanctions take their toll. For example, Habibollah Asgaroladi, a key conservative figure and one of Iran’s richest men, recently criticized the house arrest of reformist leaders Mir Hossein Mousavi and Mehdi Karroubi. Mousavi, in particular, is considered to have been an effective manager as Iran’s former (and last) prime minister, steering the country through its economic crisis during its war with Iraq. Asgaroladi may recognize that Iran needs such guidance once again.

Finally, the Iranian people are becoming restless, as evidenced by recent demonstration in Tehran’s bazaar and numerous labor demonstrations throughout the country. The Iranian economy is in much worse shape than the Islamic Republic admits. The effect of sanctions has not been limited to the energy sector; other important export industries such as auto manufacturing, petrochemicals, and even Persian rug making have suffered. There have been reports of many factories shutting down and hundreds of thousands of workers losing their jobs. A Revolutionary Guards officer recently predicted that the next popular uprising will start in the provinces and smaller towns due to declining living conditions. The Iranian people may not be involved in the nuclear negotiations, but they are unlikely to stand idly by and see their once proud, productive, and ancient nation come to total ruin.

Khamenei may very well lose face in future negotiations, but a characteristic of a sensible leader is a willingness to accept some defeats along with the victories. After all, it is the Islamic Republic that is in violation of the Treaty on the Non-Proliferation of Nuclear Weapons, and it must prove to the world that its activities are peaceful in nature. Khamenei’s mounting pressures may compel him to be more flexible on the nuclear program. Otherwise, he will face greater sanctions, more internal political opposition, and, possibly, the wrath of his own people.

This commentary is part of the Woodrow Wilson International Center for Scholars’ February 2013 Viewpoints issue no. 21, “The Nuclear Issue: Why is Iran Negotiating?”

Alireza Nader is a senior policy analyst at the nonprofit, nonpartisan RAND Corporation.