Heartland - 2005/04 Unveiling Iran

UNVEILING IRAN

4 •2005

contents n. 4/2005

UNVEILING IRAN

EDITORIAL

After the Ayatollahs…The Dark?

T

he unexpected victory of Mahmud Ahmadi-Nejad in the presidential

elections that took place on June 17-24 of this year marks the success of a sociopolitical bloc led by the pasdaran and the basiji, the parallel armed forces of the revolution, and reveals crisis of power of the Ayatollahs. The eight years of presidency of Mohammad Khatami (1997-2005), exponent of the reformist clerisy, a the preceding presidency of the moderate conservative, Rafsanjani, have frustrated the hopes of a soft transition, piloted by religious potentates. Nor has the distance between Iran and the West been reduced. In a country that one hundred years ago gave itself a relatively advanced constitution, plowed by modernist ferments during the Pahlavi dynasty (1925-79), with a population today made up of two thirds young men under thirty, the lack of horizons left by the reformist delusion has reduced the progressive movement to apathy. Now the theocratic king is naked. In the baroque institutional architecture of the Islamic Republic, founded on the dominion of the clerisy and the duplication of autocratic religious structures with elective organs, the victory of the pasdarans overshadows the Supreme Leader of the Revolution, Ayatollah Ali Khamenei, who has neither the charisma nor the authority of Khomeini. Theoretically he exercises supreme power in life; in reality he is anything but omnipotent. He ratifies more than he decides. And the more Ahmadi-Nejad hurls attacks against he “Great Satan” and its “Zionist” affiliates, the more he reduces Rafsanjani’s and Khameini’s space to maneuver. In a regime in which legitimacy is bestowed by anti-American and anti-Israeli sentiment, Ahmadi-Nejad knows well that no one, much less the supreme authorities, can be allowed to appear soft towards the enemy. The internal political dynamics are joined with regional strategic reality. A reality in which Iran feels encircled. In the last four years it has seen American soldiers encamped on its frontiers in Afghanistan and Iraq. Relations with the other regional powers—Saudi Arabia, Pakistan and Turkey—suffer from age-old frictions (Shiite minorities settled in oil-rich Saudi areas, Turkish-Israeli agreements and Turkish-American alliance, turbulence from drug traffic among the Baluchs along the Iran-Pakistan border) and more recent hostilities (Musharraf’s opening to Israel). The Syrian friend has cleared out of Lebanon, while the UN is engaged in disarming the Lebanese Shiite militias of Hizbullah, the long arm of Tehran on the Israeli border. Of course, Iran can count on important energy convergences: with Russia, which views the Persian ports as ideal outlets for commercializing a significant quota of its energy riches; with China and India, on the hunt for oil and gas wherever they may be found. Nonetheless, Ahmadi-Nejad is prepared for the worst, convinced that in the

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coming months Israel can and will take recourse to force to prevent Iran from acquiring the Bomb. Until that point, is Ahmadi-Nejad to be taken seriously, and until that point is he controllable? The sanctions threatened by Americans and Europeans in response to

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Tehran’s proclamations would end up damaging Westerns interests above all others, seeing as in the great geo-energy game underway it is difficult to imagine that the Russians, Indians and Chinese would pull out of Iran, the world’s third largest exporter of oil and second of natural gas. On the other hand, Bush does not seem today able to open another front in the Middle East, even if he wanted to. In sum: if Ahmadi-Nejad wants the Bomb, he will have it. Unless at the last instant he obtains desirable economic and geopolitical promises. Or unless Sharon, more or less under American cover, manages to take the weapons from his grasp.

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IRAN'S ANATOMY: THE DOMESTIC CONTEXT

UNVEILING IRAN

WHO IS IN CHARGE IN IRAN

WHO IS IN CHARGE IN IRAN

by Ramin JAHANBEGLOO

The structural ambiguity between representative institutions and clergy’s substantial power. The Supreme Guide is still in the driving seat, but his regime’s lack of legitimacy is evident. Ahmadi-Nejad’s populism and the role of the military.

1.

T

he Iranian Revolution of 1978-1979 was a

historical turning point in the crisis of modern politics in Iran. In the absence of any other viable political alternative, a new theocratic state power ascended to lead the Revolution. Michel Foucault welcomed the Iranian Revolution and its “religious spirit” as a intellectually exciting rebellion against the modern secular imagination. “People always quote Marx and the opium of the people”, affirmed Foucault. “The sentence that immediately preceded that statement which is never quoted says that religion is the spirit of a world without spirit. Let us say, then, that Islam, in the year 1978, was not the opium of the people precisely because it was the “spirit of a world without a spirit”. The re-emergence of religion in Iranian politics had a rather different nature this time, and unlike at the beginning of the 20th century, it was not initiated by high-ranking religious leaders. It started gradually and primarily as a religious modernist movement, with strong political inclinations, its leading figures being intellectuals and not the Shiite clergy. The rise of political Islam in the course of the Iranian Revolution was not a historically pre-determined phenomenon, nor an accident. The crisis and decline of liberal institutions resulted in a political vacuum in Iran and provided an ideal opportunity for the Islamic forces to organize themselves and mobilize the population, The Iranians, who could hardly identify themselves with the ideals of the Pahlavi regime turned to the existing religious institutions to promote their political agenda. Therefore the populist Shi'i ideology became not only a base for national identity but also a source of individual self-empowerment in the Iranian society. The Iranian masses found a safe haven in the religious populist ideology of the Shi’i clergy. Waiting for more than half a century the Shi’i clergy was organizationally the anti-Shah movement, almost naturally to establish the Islamic state. The suppression of all forms of the secular liberal opposition by the Shah’s regime contributed to the heroic and romantic aspects of the Islamic movement and obscured the true nature of political Islam in Iran. This is to say that the isolation and decline of secular liberal parties went hand in hand with the ascendancy of religious values in Iranian society. Ironically, the secular intellectuals contributed much to the rationalizing and even legitimizing of Shiism. The popularity of anti-westernization and Iranian-Islamic romanticism became the focus of cultural discourse among almost all of the oppositional intellectuals. A native counterculture with a very strong nostalgic tone

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reflected itself in the language and works of many intellectuals and artists of the 1960s and 1970s who harshly criticized modern culture. Mixing anti-Shah sentiments with anti-western attitudes, the Shi’i clerics took advantage of their institutional position in the society and became the only viable oppositional force active in Iran. It is wrong to believe that Khomeini’s role was only confined to his personal leadership. He also provided an innovative political doctrine for the political Islamic movement. He thought of himself as the heir of the Usuli movement within Shiism and formulated a political theory for the foundation of an Islamic state. 2. Of the existing Islamic states, Iran is the most interesting case but also the most problematic to consider. Saudi Arabia emerged out of tribal rivalries and is sustained in its present form by its vast oil revenues. As for Sudan and Pakistan, Islamic state was imposed in recent decades by military regimes in order to reinforce control. Iran is the only example of an Islamic state installed through a popular revolution. This is why there is a dualism in the structures of the Islamic Republic of Iran. The duality is not only indicated in the very title of the Islamic Republic which refers to an elected republican body with a president and a parliament functioning in the same political structure with the rule of a Faqih, but it also relates to the fact that the Islamic Republic declares the unity and brotherhood of all Muslims in one Umma and yet reinforces Iranian nationalism. In this sense, the concept of the government of the jurist, whereby the state is largely an administrative arrangement to implement the Shari’a, was only one element in Khomeini’s understanding of the nature of the state. He also saw it as vested in the model of a philosopher ruler, with a wisdom and knowledge that is higher than the law. But Khomeini’s understanding of authority had to come in terms with modern understandings derived from the West. The result has been a constitution which gives predominance to the Shari’a and authority based on the divine will, but also incorporates the will of the people and their sovereignty. This mixture has produced many contradictions, particularly in terms of parliamentary legislation conflicting with the Shari’a and the authority of the jurist overriding legitimate constitutional structures. Therefore, one can say that Khomeini succeeded in creating a new Islamic order with a new value system, new identity, new social system and to some extent new institutional arrangements, all of which had the purpose of fortifying Islam. In this process of mobilizing the people, the Iranian Revolution gave them the sense that their participation was important to the new state. Thus the Revolution created a popular support for the state, but on the basis of two conflicting principles of sovereignty. Iran’s constitution is, therefore, in reality two constitutions: one, which emphasizes on people’s authority and rights and the other which is a divine clerical right constitution. Any debate about the power structure of the Islamic regime in Iran and the struggle among different institutions hinges upon how this dichotomy is perceived and practiced. This is to say that politics in the Islamic Republic of Iran are characterized by fierce competitiveness among power groups.

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Iran’s formal power structure is grounded in the constitution and governmental regulations and consists of state institutions. Among these the most important are the Supreme Leader, Assembly of Experts, the President, the Majlis (parliament), the Council of the Guardians and the Expediency Council. At the top of Iran’s power structure is the Supreme Leader, Ayatollah Ali Khamenei, who succeeded Ayatollah Khomeini, the father of the Iranian Revolution in 1989. He is responsible for delineation and supervision of “the general policies of the Islamic Republic of Iran”, which means that he sets the tone and direction of Iran’s domestic and foreign policies. He is the commander-in-chief of the armed forces and controls the intelligence and the security. He also has the power to appoint and dismiss the leaders of the judiciary, the state broadcasting networks and the supreme commander of the Revolutionary Guards. He also appoints 6 of the 12 members of the Council of Guardians.

As for the Council of Guardians, it is vested with the authority to interpret the constitution and determines if the laws passed by the Parliament are in line with the Shari’a. Hence, it has a veto power over the Parliament. The council also examines presidential and parliamentary candidates to determine their legitimacy to run for a seat. In the latest presidential elections in Iran only 8 of over 2000 candidates were allowed to go on the ballot paper. The Assembly of Experts which meets for one week every year in turn elects the Supreme Leader. The assembly consists of 86 “virtuous and learned” clerics elected by the public to 8 year terms. Many analysts compare the Assembly of Experts to the

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Vatican’s College of Cardinals. In 1988, Ayatollah Khomeini created the Expediency Council, which has the authority to mediate disputes between the two bodies of the Council of Guardians and the Parliament. The supreme Leader appoints each member of the Expediency Council, which in turn serves as an advisory body to the Supreme Leader. The Council is presently headed by former President Ali Akbar Hashemi Rafsanjani, and the majority of its 34 members hail from the conservative groups. The Iranian Parliament is a unicameral legislative body with 290 members elected by the public every 4 years. Each member of the Parliament represents a geographic constituency. The Parliament introduces and passes laws that are ultimately checked and approved by the Council of Guardians. The Parliament is also responsible for impeaching Cabinet ministers and for approving the country’s budget. Last but not least, the President is the second highest-ranking figure in Iran. Elected by popular vote to a four-year term, the President appoints and supervises the Cabinet and coordinates government decisions. The President is also responsible for setting the country’s economic policies, but does not control the armed forces. As a matter of fact, though the President has a nominal authority over the Supreme National Security Council and the Ministry of Intelligence, in practice the Supreme Leader controls all matters of security. The constitutional amendments of 1988, which appeared to consolidate presidential authority, in fact granted the Supreme Leader and institutions related to him unhindered power. By contrast to the formal institutions of power, the informal power structure consists of revolutionary organizations, the foundations (Bonyads), the IRGC (Revolutionary Guards), the Bassij militia, security forces and the media. Therefore, if all of Iran's power structure is controlled by the Islamic revolutionary elite, composed of Shi'i clerics and laypersons, yet they do not have a monopoly of power over the practice of politics in Iran. In fact, there are numerous political groups and personalities that are located in the gray zone between the regime and the civil society. Many of these such as Abdolkarim Sorush , Mehdi Sahabi or Ibrahim Yazdi held influential positions in the regime during the first years of the Revolution, but they were subsequently forced to the margins of the system. Among these, Ayatollah Hossein Ali Montazeri plays an important role because, unlike the quietist clerics of Qom or Mashad (who advocate the withdrawal of clerics from politics), he accepts the concept of Velayat-e Faqih in principle but rejects Ayatolah Khamenei's credentials for this position. 3. The election of Mohammad Khatami initiated a new phase in the evolution of the power struggle in the Islamic Republic of Iran. When Khatami won the presidency in 1997 the clerical establishment tried to portray it as a great victory for the clergy, one that reaffirmed the people’s faith in their leadership. Khamenei called Khatami’s election a “referendum of the Iranian nation and an act of reiteration of the people’s loyalty to Islam, the clergy and the religious system of government”. That system, according to Ayatollah Khamenei , was the “most progressive political system in the world”, because it meant “rule by someone

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who knows about Islam and is familiar with the methods of government”. In his message for Khatami’s inauguration ceremony on August 3, 1997, Khamenei thanked the Almighty that the Iranian nation had once again displayed its “political maturity” without having had to follow political parties and their “materialistic leaders”. Eight years after the landslide victory of Khatami in 1997 the ruling clergy continue to resist the establishment of a political platform for debate and rational discourse and the question remains: Khatami’s presidency has been an utter failure and therefore a mere footnote in the evolution of Iran’s Islamic Revolution? What is certain is that Khatami’s landslide election in 1997 was a positive step in transition to popular sovereignty. The enthusiastic participation of a new generation of voters in 1997 increased the pressures for political pluralism. Iran’s youth, many previously too young to vote or alienated from the political system, made up a large part of the 20 million who gave Khatami his surprise victory. They were joined by unprecedented numbers of women. Both groups perceived Khatami to be an agent for change. That they believed they could achieve change by means of the exiting political system speaks well for the exiting contradictions inside the Iranian political system. As for Khatami, he used Islamic vernacular and nationalistic symbols to articulate a new discourse of governance in Iran, based on popular sovereignty. It can hardly be contested that Khatami’s election and his 8 years of presidency has popularized the discourse of democracy in Iran and opened once again the debate about Iran’s democratization. However, the main issue in this debate, is less the transition to some kind of multiparty democracy than the consolidation of Iranian civil society and the improvement of civil liberties. The genie of democratization is certainly out of the bottle and cannot be forced back into it. Yet his struggle for the last 8 years have shown that the institutional configuration and the fractionalized nature of Iranian politics do not allow quick reforms. Yet the fact remains that, since Khatami’s election, a new political discourse gained currency whose main themes are: the rule of law, tolerance versus violence, inclusivism versus exclusivism and the need to move towards a civil society. Also the political opening via electoral politics increased the integrative capacity of the Islamic political system and enhanced the regime’s survivability. Of course, since Khatami presented himself as a supporter of people’s sovereignty (Mardomsalari) and not necessarily an advocate of the Iranian civil society, he never spelled out clearly the development of civil society against the arbitrary political powers such as the myriad of courts that in many cases over the past 8 years stifled public debate, freedom of the press and cracked down on dissident intellectuals. While the reform movement which started with the 1997 elections that brought Mohammad Khatami to power did not fully any of its engagements, it however produced one big change in the way politics was practiced in the Islamic Republic of Iran: elections became the most important place where the struggle for power had to occur. It was for stopping the expansion of the electorate process as the centre of Iran’s political system and thus preventing it from becoming the primary tool for the creation of political authority that the conservative forces opposed fiercely the reform movement during 8 years and finally reached their aim of annihilating it. The question

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today is no longer whether the political situation of the country could be improved through a reform, or whether Iran will need a constitutional change. The answer is clear: nobody wants the reform anymore. With the blow struck at the electoral process, the question is now whether the agents of change will continue looking at it as a means to create change or whether they will seek other means to this end. Aside from the paradigm shift in the Iranian political mentality from the talk of “revolutionary charisma and divine mandate” to the “spread of the language of democracy”, there is also the fact that civil society, more than any other topic, is subject of intense debate and contention in the Islamic Republic of Iran. The idea of civil society has moved to the centre stage of the public sphere in Iran today as sign of rejection of the Islamic discourse. The post-Khatami Iranian society is a secularized public sphere. In other words, unlike 1979, Islam today has lost all its appeal to younger Iranians as a basis for political organization and mobilization of the society. Islamism, as a political doctrine that subordinates popular sovereignty to the Shari’a as interpreted and enforced by an Islamic government, is rejected by the majority of the population. With the erosion of such religious legitimacy, cleric’s monopoly on power is certain to be challenged not only by the reformists, but by the different sociological actors of the Iranian civil society. 4. That said, the failure of the reform movement and the growing dissatisfaction prompted the emersion of three principal positions in Iran. First, there are the hard-line conservatives, those who reject the whole concept of civil society and who have rallied around the doctrine of Absolute Velayat-e-Faqih by asking the continuation of the supremacy of the Islamic jurisprudence. Some of these occupy the most powerful positions within Iran’s political and economic establishment such as the Bonyads and the Revolutionary Guards. Second, there are those who want to islamicize the idea of civil society and make it compatible with the demands of their religious intellectual priorities. Among these we can find individuals like Soroosh, Kadivar and Alavitabar. The third group is symbolized by the students, secular intellectuals and women organizations who view civil society as a basis for structuring state-society relations promoting a more tolerant, pluralistic and democratic order. So the battle lines are drawn. On one side we have those who defend an Islamic-made democracy and on the other hand we have those who support a secularized sphere inside the Islamic regime. Therefore, one can say that the Iranian civil society survives the Iranian political gridlock and factionalism as a public sphere for the development of future changes in Iran. This is to say that Iran today is very much like the Soviet Union in its last days. The ideology has burnt out, Iranian youngsters are disenchanted, the reform movement has failed to fulfill the popular demand and there has been practically every year spontaneous rioting and civil unrests in the major cities of Iran. But 26 years after the revolts that did away with the Shah and his regime, there is an absence of an organizational factor to unite the diverse inspirations of Iranians. Whether the Islamic Republic evolves into more of a democracy or will crumble in

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WHO IS IN CHARGE IN IRAN

revolution is anyone’s guess. For the vast majority of Iranians living inside the country, a people who are already disenchanted with one revolution and have suffered from a brutal eight years war with Iraq, peaceful evolution is a more favorable option. For the younger generation, the 70 percent of the population under the age of 30, the change has to come sooner or later, because the youngsters are looking for jobs, social freedom and opportunity. 5. So the practical problem Islamic Republic faces is that it has two poles: on the one hand, subjecting practical problems to so much religious dispute that solving the practical problem becomes secondary, and on the other hand, the danger of secularization of the Iranian society. Secularization is less apparent in domestic politics, however, where a strict Islamic system is still enforced, and no political parties, factions or candidates other than those supporting the system, are allowed into the political arena. So, as long as the constitution remains in force, the Islamic Republicanism will have practical difficulties and the tension between the "republican" and the "Islamic" will continue. Could the Islamic Republic survive from its ideological identity by leaving place for popular sovereignty or the divine mandate of Velayat-e-Faqih will put an end to all hope of democratic transition in Iran? This is the key question that should be asked by every acute analyst of the Iranian situation after the recent presidential elections and the victory of Mahmood Ahmadi-Nejad. His victory was surprising, as many had predicted Hashemi Rafsanjani would become Iran's next president. But what is totally unprecedented is that as a result of this election, for the first time in the life of the Islamic Republic, virtually every organ and institution of power, elective or otherwise, has been handed over to the complete control of the conservatives. There is no doubt that Ahmadi-Nejad and his Cabinet belong to the conservative wing. However, they belong to a group which has been named as radical neoconservatives. Over the last few years, encouraged by the Supreme Leader, this group has been taking root, predominantly in the security forces and military organs. They managed to quietly infiltrate many organs, outwitting their rivals to end up controlling many town councils, the parliament and now the presidency. They follow populist-Islamist values and distinguish themselves from the clerics and the other conservatives. There is no doubt that the populist slogans of Ahmadi-Nejad have found an echo in some of the poorest sections of society. What is forgotten, however, is that while most of the middle class turned out to vote for Rafsanjani, the majority of the 20 million who did not vote belonged to these destitute strata. This signifies that Ahmadi-Nejad’s influence remains weak. Therefore, even though the Iranian neoconservatives are trying to create a new power structure in the Islamic Republic by embarking on a political, organizational and financial purge of the body of the state and by infiltrating many of the judicial, executive and legislative organs (which has been referred to as a “third revolution” by many of Ahmadi-Nejad’s followers), yet one can say that the Islamic Republic has come out of the latest presidential elections weaker than ever and in the current domestic and international conditions the Islamic Republic cannot find a

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solution to survive without totally negating its very existence. This is to say that the crucial issue facing Iran is not the fate Ahmadi-Nejad and the Iranian neoconservatives. It is the fate of Islamic Republic itself. In other words, either the Islamic Republic will surrender to the idea of reconciliation with the reality of international relations, or what Ahmadi-Nejad and his Islamic populism are trying to save is already doomed.

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THE DRUG WAYS

THE DRUG WAYS

by Ramita NAVAI

Iran is crossed by massive drug traffics, heading West from Afghanistan. The three main routes and the vain attempts to control them. The case of Baluchistan. The international cooperation and the role of Unodoc.

“I

t's a war out there". This is how Roberto

Arbitrio, the United Nations representative in Tehran for the Office on Drugs and Crime (UNODC), sums up Iran's fight against drugs. Over 3,600 Iranian police officers have been killed and some 11,000 wounded over the last twenty-five years during military style operations involving both traffickers and Iranian troops in combat. There are over a thousand armed confrontations every year and every week an Iranian is killed in such skirmishes. But, for the Iranians, it's a war that is impossible to win with 1,925 kilometers between Iran and neighboring Afghanistan and Pakistan, Iran's aim to seal its eastern border is hopeless. Iran is now the major transit country for drugs, but this has not always been the case. Before the Islamic Revolution in 1979, Iran was itself a producer, with up to 33,000 hectares of opium poppy cultivation. Poppy cultivation was totally eradicated by the end of 1980 but this did not solve the problem. Domestic drug abuse has been soaring ever since the new regime and increased opium production in Afghanistan and, until the early 1990s in Pakistan, transformed Iran into a major transit corridor for opium and heroin. According to official figures, about 50-60 per cent of all the opiates produced in Afghanistan transits Iran. Of this, 40 per cent makes its way through the Afghan boarder while 60 per cent comes via Pakistan. This is the world's new golden triangle, dubbed the golden crescent. Afghanistan currently produces about 85 per cent of the world's opium and figures for 2004 show an increase in poppy cultivation, with up to 4,200 tons of opium being produced. Iran seizes more opium than any other country in the world and for the last few years has been seizing around 70 per cent of the world total, some 97 tons. It is estimated that this may be only 15 per cent of the total amount. Most heroin sold in Europe comes from poppies in Afghanistan. The border between Iran and its two eastern neighbors, Afghanistan and Pakistan, is long and porous. Rugged mountain passes and barren, parched desert stretch as far as the eye can see, scorched by the unrelenting glare of the sun. Armed guards patrol the border, but the small ant-like figures are lost amid the backdrop of the expansive landscape, barely perceptible reminders of the magnitude of the task of manning the border. Also strewn across the arid land are the efforts to thwart the traffickers - huge walls, deep ditches, canals and barbed wires extend for kilometers. But the traffickers are constantly adapting and evolving their methods. Convoys of four-by-fours are

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THE DRUG WAYS

equipped with rocket propelled grenade launchers and smugglers use sophisticated equipment to fight border patrols, such as night vision goggles, satellite phones, Kalashnikov rifles, heavy machine guns and bullet-proof vests. Where vehicles cannot traverse the passes, the smugglers revert to ancient tried-and-tested methods. Trained camels are stuffed full of drugs and cross the border unaccompanied. And there are the human mules. Most individual smugglers cross the mountains at night carrying backpacks laden with 20 - 25 kilos of opium. They risk the death penalty if caught carrying over 30 grams of heroin or five kilos of opium, and even though public hangings of drug smugglers are not rare, it has not served as an efficient deterrent.

Drug smuggling routes Iran's geographical position, bridging east with west, the Middle East with Central Asia means that drugs can enter Iran several times, over several borders to ensure its best passage. There are three main trafficking routes through Iran - the Northern, Southern and Hormuzgan routes. The Northern route is through Iran's Khorasan province, which borders Afghanistan and Turkmenistan. Drugs either pour from Afghanistan into Khorasan, where they are then transported through Iran, or they enter Khorasan via Afghanistan, exiting Khorasan via Turkmenistan where they re-enter Iran via the Caspain provinces of Golestan or Mazandaran. According to the authorities, trafficking in Khorasan is mainly carried out by Afghans who cross the border by foot, in armed groups of various sizes. Smaller groups, between 2-4 people, carry up to 10 kilograms of heroin / opium per person and larger groups can carry up to several hundred kilos using donkeys and camels. The authorities report that larger groups have been known to kidnap and murder locals to ensure support. Khorasan is also one of the major transit routes for illegal Afghan migrants and the Iranian authorities have identified some 90 illicit entry points along this border. The Southern route is also known as the traditional route. Here, the drugs enter via Afghanistan, either straight into Iran or first via Pakistan. As with many of the routes, transiting drugs are mainly headed for Turkey from where they travel the so-called Balkan route, toward Europe. Drugs enter Iran via its poorest province, Sistan-Baluchestan. Plagued by drought and unemployment and dotted by slums, it is a tribal land that spans through all three countries. Out of a population of 1.7 million, some 300,000 are refugees or illegal migrants, while some 20,000 are local Baluchi nomads. Iranian authorities say the drugs barons and smugglers are from powerful Baluchi families and that many Baluch involved in drug trafficking are holders of all three passports, enabling legal and unhindered passage between the countries. In this part of the country, borders are virtual and have little meaning.

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THE DRUG WAYS

The Baluch have a reputation for being independent and rebellious with strong clan loyalties that translate into a tight network of information, safe-houses and shared interests. Unlike the Northern route, where local support is gained by intimidation, here family ties and local interests mean that the traffickers operate with the support of the local communities. The authorities have identified about 50 smuggling routes along this border. Smuggling is an ancient occupation here - for centuries Baluch have been traversing the mountain passes with age-old knowledge of the land passed down from generation to generation, with only the commodity smuggled changing. For many there is simply no alternative. In the eastern city of Zahedan it is hard to escape the drugs war as it spills from the border into its dusty streets. Kidnappings and assassinations are waged, gruesome photographs of police officers 'martyred' in battles

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THE DRUG WAYS

with the traffickers adorn police stations and 50 per cent of arrests here are on drugs charges. Traffickers are also increasingly using coastal routes. Consignments of hashish and opium bound for the Arabic peninsula have been seized near the Persian Gulf. This is the Hormozgan route, taking its name from the Hormozgan province that sits on the Persian Gulf and the Sea of Oman. The provincial capital, Bandar Abbas, is Iran's most important international port. The drugs enter via Pakistan and speedboats and small vessels are used to smuggle them through Hormozgan. There is also a route via the Caspian Sea, through the Caucasus either towards Europe but also increasingly en route to feed Russia's booming drug consumption. After the fall of the Taliban in 2001, the re-opening of the Termez bridge, also known as the Friendship Bridge, allowed the resumption of the old trade route between Uzbekistan and Afghanistan. However, this has also paved the way for a drug trafficking route and a knock-on effect has been that areas of poppy cultivation are now increasing in northern Afghanistan, ready for passage through Tajikistan and Turkmenistan. Turkmenistan's lack of co-operation with Iran, coupled with the area's lack of resources and the fact that most Caucasus countries do not have the infrastructure to protect their borders, means that the Central Asian countries are easy pickings for the traffickers. "The traffickers are diversifying. They find places where they can penetrate the borders. And for this, northern routes are important," says Arbitrio. But one of the most worrying new trends is that drugs are being trafficked from Afghanistan, through Iran and into Iraq. "This is very concerning because it may be that these trafficking routes are connected to insurgent activities in Iraq," says Arbitrio. "More and more terrorist or insurgents lines have been overlapped by the trafficking routes and this may apply to the Caucasus as it would apply to Iraq, so there may be a close connection between drugs trafficking and the activities of insurgents and terrorist groups which are using drugs trafficking to gain fund." Arbitrio says the trend is currently under investigation and monitoring, but consignments of morphine and opium seized by the Iranian anti-narcotics police were destined for Iraq and more specifically, Basra. The fact that morphine was seized, says Arbitrio, could mean that there are processing laboratories in Iraq that refine opium and morphine into heroin, which boosts the value of the drug. Another development in the region is that skills to process morphine into heroin are being acquired across the region. "Afghanistan has now got laboratories for processing and they now have the skills to manufacture good quality heroin, which is a finished product," said an official who wished to remain anonymous. "This means there are now more heroin than morphine seizures in the region."

Rising domestic consumption Not all drugs that stream into Iran are bound for foreign consumption. It is estimated that about 700-800 tons of drugs transiting Iran are absorbed by the domestic market. According to the UNODC 2005 World Drug Report, more than half

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THE DRUG WAYS

the world's total opiates abusing population is in Asia and the figure is rising. The countries with the highest levels of opiate abuse are countries along which the drugs are trafficked out of Afghanistan - most notably, Iran. The report links this rise to the re-emergence of large-scale opium production in Afghanistan. Conservative official figures put the number of opiate abusers in Iran at between 1.2 to 2 million 'problematic' drug abusers. However, studies by the Ministry of Health and the Drug Control Headquarters say the figure is much higher, with almost 4 million drug users - 6 per cent of the population. In most European countries, the figure is less than one per cent. Of these drug users, ten percent are heroin addicts between 200-400,000 people. The rest are opium addicts. "In the past there was a difference between producing countries and consumers, where producers would be poor countries and European countries would be consumers, this is not valid any more," says Arbitrio. "Now producers are becoming the most affected by drug abuse. Iran does not produce, but it is a major transit country, like Pakistan which now is also a main consuming country." Cultural use of opium poses a major problem for demand-reduction programs. Opium is socially acceptable in many areas of Iranian society, from older generations, who use it for both medicinal and social purposes, to middle class occasional users. The 2003 earthquake in the city of Bam, a city directly on the trafficking route, revealed the underbelly of Iran's drug problem. The makeshift hospitals were not only dealing with injured survivors but with thousands of locals suffering from withdrawal symptoms. As the number of drug users in Iran soars, so too does the number of people infected with HIV/AIDS. The official figures for registered HIV infected people in Iran is 11,221 but unofficial estimates say the figure is much higher, with at least 50,000 infected people. The UN estimates that 60-75 per cent of these cases are due to sharing contaminated needles; injecting drug use is the most prevalent form of HIV transmission in Iran. About half of the country's 170,000 prison inmates are inside for drug offences and intravenous drug abuse is particularly rife inside Iran's prisons. The UN reports that HIV prevalence among injecting drug users in 10 Iranian prisons has reached 63%. The Iranian government has now accepted the situation is grave and it has adopted surprisingly progressive measures including AIDS awareness campaigns, free treatment for the infected and needle and syringe exchange programs. There are over 100 outpatient treatment centers in Iran and a growing number of NGOs offering drug treatment, including a pioneering methadone maintenance program.

Regional and international implications The Iranian government has adopted innovative strategies to fend off the trafficking bands, including the creation of villagers paramilitary armed unites and launching alternative crop substitution projects in Afghanistan. Fighting the drug war is not cheap and Iran spends $100 million a year on its anti-narcotics programs.

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THE DRUG WAYS

According to the Five Year National Drug Control Plan, a large portion of this budget is allocated to drug demand reduction activities, highlighting the new trend in Iran's priorities in its drug control policy. But Iran says that it should not bear the financial burden on its own and the responsibility should be shared with the West. European countries do contribute to Iran's drug war. Britain recently donated two mobile search units, France has donated sniffer dogs and there is an exchange of best practice between British and Iranian customs officials. Iran says this is not enough. "What the Europeans give us is a drop in the ocean. We are also fighting their war - you shouldn't forget that a lot of these drugs are going to their countries. We need more support from them, we can't fight this war on our own," said an Iranian official. The reconstruction effort in Afghanistan has highlighted Iran's lonely battle against the traffickers and European involvement in Afghanistan means that Iran is now host to two drugs liaison officers, from Britain and Italy. Britain, which holds the European Union presidency, and Italy say they are drawing the EU's attention to Iran's plight and so far they seem to be doing the trick -more drug liaison officers are planned from other European countries. "This is important on a regional level and an international level. The drugs which are seized in Iran are partly bound for Europe. What Iran is doing is benefiting Iran, the region and the International community. That's why it's a key player," says Arbitrio. Cooperation over drug control has also proved to be an important step in international dialogue with Iran. Being a politically neutral area of mutual benefit, it has resulted in a level of information and intelligence sharing that has been unprecedented in the Islamic regime's 26-year history. It is hoped this cooperation could go one step further. With the close connections between trafficking and organized crime and terrorism, UNODC hopes to develop joint action programs on drug control for curbing terrorism and the financing of terrorism. But many believe that the only way Iran will be able to really tackle the drugs problem is by introducing money laundering legislation. "It's a way of depriving the traffickers and criminal gangs of proceeds so that they lose the incentive to get involved in such activities," says Mehrdad Rezaeian, UNODC national project coordinator. "It's a vital measure. Without it, the overall campaign against drugs cannot be fully complete." Rezaeian says that money laundering legislation would not only beef up the fight against traffickers but it is also an economic measure since the process of money laundering adversely affects the health of an economy. After much lobbying from UNODC there is now a bill on money laundering, although it has been awaiting ratification for almost two years. When that happens, it will be a small victory in the never-ending war against drugs.

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UNVEILING IRAN

THE OIL WEAPON

THE OIL WEAPON

by Ali GHEZELBASH

Teheran is more and more dependent on oil and gas revenues. But, at the same time, its huge energy resources can become an effective geopolitical tool for pressuring the West and the rest of the world.

1.

H

olding some 11% of the world’s proven

oil reserves and around 15% of its gas1 and as a the second biggest producer within the Organization of Petroleum Exporting Countries (OPEC), Iran both affects the international petroleum market, and is widely affected by it. This article highlights some of the key issues Iran faces borne out of its dependence on crude oil income, how it intends to reach its development goals through the use of these valuable resources and last but not least, how it attempts to use oil and gas as diplomatic instruments. Issues pertaining to how Iran’s international relations are conditioned by its oil and gas resources and policies as well as some of the domestic implications of the recently high oil prices are also examined. Iran faces both immense geopolitical opportunities due to its vast resources and its own strategic geographic position, as well as being faced with challenges in dealing with global changes and domestic political and economic shifts. 2. Since its discovery in Iran in 1908, oil has been centre-stage in the Iranian economy. The dependence on fossil fuels as a source of hard currency income and a relatively cheap domestic energy source has increased significantly over the past decades. The discovery of significant gas deposits has further increased the Iranian state’s concentration on these resources as a formidable source of income and driver behind economic and industrial development. Nonetheless, in parallel to the positive use of the hard currency accrued from oil and gas sales to develop the country, the injection of these funds into the economy has also entailed some negative side-effects. Currently, some 75% of the state’s hard currency income comes from crude exports, while the sale of oil (and to a lesser extent gas) amounts to around 20% of Iran’s GDP. The state has sought to promote the development of non-oil industries to diversify its sources of income and also reduce the shocks to the economy from oil price fluctuations. However, high oil prices in recent years and increased government income have caused a relative neglect of stricter economic discipline. Thus, while one of the priorities of the state has been to use high oil revenues to promote the broader growth of the economy, larger oil income has largely entailed increased current spending by the government and a lesser sense of urgency about the need to diversify Iran currently has the world’s second biggest oil and gas reserves. Gas reserves at the end of 2004 were 27.5 trillion cubic meters (tcm) and recoverable oil reserves were 132.5 billion barrels. Source: The Iranian Ministry of Petroleum and BP Statistical Review of World Energy, 2005. 1

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its sources of income by promoting other industries. Although oil price trends continue pointing upward, this absence of a strong push to promote other sectors of the Iranian economy and the slow pace of privatization and the internationalization of Iranian business and industry are likely to pose obstacles to Iran’s long-term development. The continued lack of the necessary economic and technological infrastructure in many sectors remains an obstacle to overall growth, even if high oil prices mean that Iran’s GDP grows impressively during this year (growth by year-end predicted at just below 6% – chiefly due to high oil prices).

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Management and planning weaknesses also continue to mar the development of various industries in Iran and weaken its ability to fully utilize the huge windfall currently being experienced. These are not issues with which Iranian decision-makers are unfamiliar. Understanding the need to curb the negative impact of oil price fluctuations, these decision-makers made an attempt in the 1990s to create a financial buffer to counter this phenomenon. The creation of the Oil Surplus Fund (OSF) – alternatively known as the Oil Stabilization Fund – in the late 1990s has been the most serious step to this end thus far. The chief function of the OSF is to ensure that the government has a “rainy-day” fund to dip into in case oil prices plummet, while it can also use some of its funds to finance infrastructural projects and promote non-oil industry developments. In each annual budget (running from 21 March-20 March), the predicted price of oil is set at a certain amount. For example, in the current Iranian year (1384; ends 20 March 2006), the predicted price of each barrel of crude is $28/barrel, with the total predicted income amounting to some $14.1 billion. Any income above this amount will be deposited in the OSF and can be used for the above-mentioned purposes. The funds in the OSF are legally prohibited from going below $5 billion, so as to ensure that a buffer remains in case of a drop in oil prices. Although the OSF has on several occasions served as a highly useful tool with which the state has carried out major development projects, it has also become a source of political and economic controversy over the years. Debates have often raged about the “politicised use” of OSF resources, e.g. the promotion of withdrawals by certain actors in the Iranian Parliament – Majles – to address constituency concerns or in other ways curry favours with key stakeholders. There has also been direct criticism of the government’s own spending of these resources, which many economists believe not only has lead to lax discipline but has also spurred inflation. Although partly modelled along the lines of the Norwegian Petroleum Fund (created in 1990 and currently holding $170 billion), the OSF (which at the end of the last Iranian year held around $7 billion and is predicted to hold around $40 billion by the end of this year following very high oil prices) is still too poorly regulated to act as a stabilizing force in the economy. While legal and financial arguments explain why the OSF has not been fully utilized to its best effect, psychological factors borne out of high oil prices are also significant: if key decision-makers believe that oil prices will remain high for the foreseeable future, they are less likely to promote a policy of saving for a rainy day. In addition to these factors, the Iranian state has over the past few years been subject to a relatively high amount of international pressures (chiefly debates on its nuclear program) and domestic shifts (e.g. two turbulent elections – the Majles in 2004 and the presidency in 2005). While the impact of oil and gas in diplomacy will be examined in the following section, the domestic impact of high oil prices is worth discussing here. When under pressure, the state is likely to use its increased income to promote matters that affect people’s standard of living, such as through infrastructural projects, targeted job

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creation (Iran currently suffers from an official unemployment rate of around 12%) or by simply enabling greater “hand-outs” in the form of subsidies. This tends to increase support for the broader policies of the government and also decreases the potential of popular discontent causing legitimacy crises. At the moment, the Iranian state spends around $12 billion/year in blanket subsidies. Among others, certain basic goods such as bread, milk, rice and cooking oil can be purchased at subsidised prices. Perhaps more significantly, petrol is also heavily subsidized in Iran, with one litre of regular petrol costing around $0.09. These blanket subsidies entail that for example, a high income individual with two cars is the one benefiting most from the subsidy, while the villager that has never sat behind the wheel of a car is also sharing the overall national burden of the subsidy. They share the burden of the subsidy equally, but enjoy its benefits in a highly disproportionate and unfair manner. Subsidizing foodstuffs and industrial goods is facilitated by high oil prices and will of course put a heavier burden on the state in times of oil price slumps. However, the reverse is also true, in the case of the petrol subsidies. The average daily consumption of petrol in Iran is around 70 million litres, of which it has to import around 30 million litres due to inadequate domestic refinery capacity. Given that the imported petrol is bought at international prices and sold at subsidized prices, this creates a severe drain on the economy. Issues of petrol smuggling to neighbouring countries (e.g. Turkey and Pakistan) where petrol is sold at higher prices are also exacerbated, since the profit of selling subsidized Iranian petrol at international prices increases manifold. Despite these issues, the state has maintained subsidizes at the current levels and although faced with a necessity to reduce them or in other ways reform their distribution, no major attempt at creating targeted subsidies has so far been made. The state is likely to face a major public backlash in the case of any radical change to the current system and is thus reluctant to take the bull by the horns, even though feeling the acute necessity to do so. 3. The Iranian state plans to use its vast energy resources to fuel industrial growth, with the ultimate vision of becoming the main economic and technological powerhouse of the Persian Gulf region. This Iranian vision is not new per se. However, the Islamic Republic did not formalize it as a goal until around the end of 2004, when the so-called 20-Year Outlooks (or 20-Year Perspectives) were presented as a blueprint for Iran’s development course until 2025, with the specific aim mentioned above. This document was prepared by the Expediency Council (EC)2 following a decree by Supreme Leader Khamenei, and took several years to finalize after debates within the state apparatus as well as with private/state sector industrialists, experts, etc. Although The Expediency Council (EC), currently headed by former President Rafsanjani, was formed as an arbitration body between the Majles and the Guardian Council (the body vetting all Majles bills for civil legality and conformity to Islamic law) in the late 1980s. It also serves as an institution for macro-policy debates. In recent years, it has become increasingly active in the formulation of policies and was even responsible for a re-interpretation of the Constitution in 2004 in order to facilitate privatizations. 2

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still largely a macro-policy document, its framework has nonetheless been given to all ministries and state institutions, which have to base their policy-making decisions on the outlines and goals provided in it. In addition, the five-year development plans that have been in place since 1990 (Iran is currently in the fourth development plan, 2005-2010) also serve as macro outlines for Iran’s development. All future five-year plans as well as all legislation in the Majles and other state policy-making bodies have to be carried out in accordance with the frameworks of the 20-Year Outlooks. In these policy documents, oil and gas are viewed as key to Iran’s development. However, the state is not going to attempt to mainly sell these products in crude form. As much as is possible, Iran will promote the creation of value-added industries and the increase of exports of products from energy-intensive industries. In addition, the revenues accrued from the sale of crude products as well as value-added products (e.g. petrochemicals, which have experienced severe growth in recent years) are to be used to further develop Iranian infrastructure and to promote the growth of domestic industries based on domestically created knowledge, i.e. a software movement. Gas has a special place in this equation and has thus gradually become a serious focus point for Iran. Not only does Iran want to increase its concentration on gas due to regional rivalries (Qatar is currently producing and exporting more than Iran), but it also has ambitious industrial and strategic goals for its gas. Among other things, Iran wants to gradually substitute the domestic use of oil products with gas. This would free up some of the almost 1.7 million bpd crude oil consumed internally for exports (to reach some of the goals stated in the next section), while also promoting energy intensive industries that not only entail the transfer of knowledge and technology to Iran but also create a supply chain within the country, with job creation and increased revenues. Furthermore, Iran wants to use gas as a way of engaging in positive diplomacy with regional states and assist them in promoting downstream industries. Thus, the deepening of energy ties with Iran’s neighbours and regional allies is of crucial importance, to ensure that this vision can be achieved in a calm regional setting. There is also a hope that the interdependencies created will be tilted in Iran’s favour so that it is Tehran that is calling the shots in regional diplomacy and security, rather than others. This will be elaborated upon in the following section. In many ways, Iran is well situated to reach its desired goals. In addition to oil and gas resources, it also has extensive mineral and land resources as well as a vast potential labour force drawn from a large and young population. Most of the states in Iran’s immediate neighbourhood do not benefit from equally favourable conditions. Although there are states with far greater oil resources – such as Saudi Arabia – or more advanced industries – such as Turkey – there are none that have the combination of resources and geostrategic position that Iran enjoys. However, Iran is also faced with some serious obstacles in reaching these goals. Not only will it continue facing international pressure in the short-term due to its nuclear program, but also has domestic structural problems that will hamper its overall development. The economy continues to be heavily dominated by the state, while weaknesses in banking, industrial manufacturing, human resource development and

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competitiveness dent its prospects of achieving a dominant position on a regional level. These issues are exacerbated by continued excessive red-tape and complicated procedures for conducting international business. Furthermore, years of relative isolation (both self-imposed through antagonistic policies and externally imposed through sanctions), have entailed that Iran’s economy has remained behind international business trends while its lack of integration with the international economy has strengthened the hold of self-interested and powerful economic actors. Another major issue, which also popped up repeatedly in the presidential campaign was the issue of mismanagement and “corruption” within the oil sector itself. President Ahmadi-Nejad, for one, has vowed to “stake his life on countering the activities of the ‘oil mafia’ and ensuring that people feel their share of the state’s oil incomes in their daily lives.” Although the term “oil mafia” remains vague, it is broadly taken to mean that there are either powerful individuals within the oil apparatus that have acted based on personal interests or that there are powerful families outside of the petroleum decision-making bodies who are gaining unfair advantages through the use of the national wealth. These issues, and many other structural obstacles, make reaching the 20-Year Outlooks a formidable challenge for the state. A telling example of one of these challenges is that facing Iran’s ambitious oil and gas policies over the course of the next decade. The Ministry of Petroleum has announced that in order to reach the objectives of the 20-Year Outlook, and to maintain Iran’s OPEC production share, Iran’s crude production will reach 5.5 million bpd in 2010 and 7 million bpd in 2015. A medium-term calculation will highlight the difficulty of achieving this vision. Iran’s 2005 average production has stood at around 4.2 million bpd, which means that it will need to increase production by some 1.3 million bpd in five years to reach this goal. That, in a sense, is the easy part. The country is also experiencing some 200,000 bpd each year in depletion due to the old age of its most significant producing fields (some estimates state 250,000 bpd each year), which means that Iran will need to make up for another one million bpd over the course of five years to reach the desired production levels. Iran has been relatively successful in attracting foreign investment and dealing with the sanctions in place against its petroleum industry. However, it took it some five years to increase production from 3.6 million bpd to 4.2 million bpd, while the volumes of investments it is attracting in its petroleum industry are still far below those of its Persian Gulf neighbours, particularly due to complex and often ambiguous legal frameworks and contracts. Reaching these objectives will be a formidable technical, legal and financial challenge for the Islamic Republic and most analysts predict that Iran is most likely to reach a production target of around 5 million bpd by 2010. 4. As one of the founding members of OPEC, Iran has always attempted to maintain a strong regional and international position by using its oil and gas resources. With continued strong global demand, partly fuelled by major consumption in East Asia,

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and in particular China, Iran and the other OPEC members are continuing to strengthen the position of the organization in the international market. Iran’s own policy at the moment is to maintain its share of 14% of OPEC production, which will need some of the production increases outlined in the previous section. Currently, Iran has the second largest oil and gas reserves in the world. Although hoping to utilize these for its own development needs as noted above, there is also an acute understanding of the broader geopolitical implications of Iran’s resources. Although located in a region rich in oil and gas, Iran’s specific geographic position provides it with different potential export routes and trade possibilities than most of its southern Persian Gulf neighbours. In addition to straddling the Persian Gulf – the most significant international energy export route – it also has land borders with seven countries while being one of five Caspian Sea littoral states. This location not only provides Iran with a significant strategic position for becoming an energy transit route (e.g. from the former Soviet Republics to the Persian Gulf) but also with major trading opportunities. Examples of the Iranian desire to utilize this strategic position are the various pipeline projects executed or under construction. Iran has a gas export pipeline to Turkey and an import pipeline from Turkmenistan, while other pipelines are being constructed to Armenia, the Autonomous Republic of Nakhichevan and the UAE. Oil pipelines to Iraq are also in the process of construction, aimed at taking crude oil from Iraq to Iran’s Abadan Refinery and then returning the refined products to Iraq, while one to Kuwait is also being negotiated. The most significant pipeline however, is that being planned between Iran, Pakistan and India. Although marred by diplomatic delays and security concerns, there are nonetheless continued efforts at pushing the project forward. Iran also signed a $22 billion agreement with India in early 2005, under which it will export some 5 million tons of LNG annually for 25 years. This deal not only secures a portion of India’s vast energy needs, but will also provide Iran with a long-term energy export partnership. Although export income is important, the chief motivating factor for Iran when carrying out energy deals in the neighbourhood is regional interdependence. Although energy exports to India may experience a hiccup due to developments on Iran’s nuclear program (where India voted against Iran in the IAEA Governing Board despite apparent earlier pledges of support), they are unlikely to be fully cancelled due to the mutual benefits involved. The Caspian Region Oil Swap (CROS) scheme is another example of the interlinking of regional interests. Under the CROS, which has been in operation since 2002, Iran imports crude from its northern neighbours and exports the equivalent amount of its own crude from its Persian Gulf export terminals. Not only does Iran accrue a transit fee, but it also ensures lower domestic energy transport costs since most of its population is in the central and northern parts of the country, while almost all of its energy resources are in the south. Its northern neighbours, meanwhile, are able to export their crude using Iran’s facilities without having to bear the infrastructural costs associated with setting up export facilities of their own. Iran’s borders also provide it with ample trading opportunities. For example in

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neighbouring Iraq and Afghanistan, where the reconstruction efforts will gradually pick up speed, Iran can provide energy but also material created in energy-intensive industries such as steel and cement. In sum, Iran’s geographic position provides it with significant geopolitical opportunities through the use of its oil and gas resources. In addition to these utilizations of oil and gas as a tool for deeper ties, Iran naturally also views its resources and production capabilities as an instrument for diplomatic pressure. At times of high oil prices, such as those currently witnessed, the creation or escalation of crises in the Persian Gulf tend to further exacerbate the effects on the international economy. For example, it is sometimes debated whether the “oil weapon” should be used to diffuse some of the pressures Iran has been under since 2003 over its civilian nuclear program. The argument thus goes that if Iran is faced with a referral to the UN Security Council or in other ways pressured beyond the ongoing negotiation framework, not only could it explicitly attempt to increase oil prices by for example cutting off production but that it could actively work to highlight that any excessive pressure on Iran would by itself result in price increases and further burden the global economy. Some decision-makers still view the use of the “oil weapon” somewhat in the same way as it was viewed in the 1970s, even though its utility may be overstated (given Western strategic reserves and increased energy source diversification since the 1970s and 1980s). A more subtle form of the diplomatic use of oil and gas, however, could be to give favourable treatment to states that support Iran directly on the international stage in the form of more lucrative export agreements or through other forms of deepened energy cooperation. For example, contracts with companies from specific countries can be promoted or hindered, depending on the diplomatic stance that Tehran wants to adopt against them. There have also been murmurings of Iran itself sanctioning the activities of certain countries in its oil and gas sector. However, the likelihood of any major European country becoming subject to this remains relatively low, given Iran’s financial and technological needs. Overall then, Iran is in a condition not only to impact global energy policies due to its position within OPEC and its increased activities in gas exports, but it also views these resources as an instrument for furthering its diplomatic and national security interests. However, the extent to which Iran will be able to “buy” the support of others using oil and gas as well as to successfully make its regional neighbours stakeholders in its stability and survival remains to be seen. 5. Iran has ambitious plans for using its oil and gas resources to progress economically, technologically and diplomatically. On this path, Tehran faces some considerable obstacles, both from within and outside. Iran continues to be faced with unilateral US sanctions, which hamper its ability to develop its petroleum industry at the rates it wishes. Not only is Iran deprived of the presence of large US corporations, with massive financial and technological capabilities, but many European firms also face obstacles to their business in Iran due to these sanctions. While Iran itself constantly notes that it does not have an issue with the presence of American oil companies, it is unlikely that these sanctions will be

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lifted any time soon. In addition to the sanctions, Iran continues to experience pressures from the US and the EU with regards to its nuclear program, and to a much lesser extent in the past two years, on human rights/political freedom issues. The overall perception of international investors of the Middle East as a high-risk environment has also been detrimental to Iran’s visions. All of these matters entail that Iran is operating in a less favourable international setting than desirable. One of Iran’s reactions to these pressures has been to gradually shift its attention eastwards, in particular to China and India. These two countries are viewed as a target for energy exports as well as way of diversifying its sources of technology and financing. In recent years, several oil and gas projects have been awarded to companies from these two countries, as Iran has sought to put its eggs in several baskets. Domestically, the massive structural issues facing the economy continue to hinder development at the desired rates. Determining how oil and gas income is used in the economy without posing major inflationary threats and without further increasing the size of the bloated state sector remains an issue to be solved. Endemic problems in effective management and planning will also pose obstacles. In addition, legal ambiguities and complex contractual frameworks are hurdles to the expansion of the presence of international companies, even though improvements have been witnessed in recent years. Although Iran intends to increasingly utilize gas to raise its export income and to broaden its diplomacy, the lack of sufficient progress on major gas projects (such as LNG plants) as well as technical limitations (e.g. the inability to use US-licensed technology) remains a hurdle. However, despite threats and limitations, opportunities can also arise. If Iran can manage the currently rough international waters and weather the internal storms it is facing, it is likely to emerge as the most influential and economically powerful state of the Persian Gulf region and perhaps even the broader Middle East. Despite the various limitations it faces, it still retains significant amounts of the most powerful economical and diplomatic instruments at its disposal – oil and gas.

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THE RICH & THE POOR

THE RICH & THE POOR

by Heydar POURIAN

Long and meandering is the Iranian way to affluence. The economy of the oil giant doesn’t manage to take off. The mistakes of the past and the strategies of the new President. The challenge is to catch up with the well-off Gulf countries.

“R

egime change,” is what a portion of the

Iranians felt immediately after the surprising election of Dr. Mahmoud Ahmadi-Nejad. In fact, during the campaign, Mr. Ahmadi-Nejad chose the word change or “transformation” as his main catchword. During the campaign many criticism were leveled against him, accusing him of attempting to make a “u-turn” in Iran’s path to development. However, after the new president’s plans and policies were announced, a portion of the worries was cooled down. Nevertheless, all eyes are on the new president’s actions and the execution of his plans. Whether, in fact, there is a regime change or a “u-turn” or an “inflection point” in Iran’s economic, political and social trends, the actions during the next four years would testify. This article is concerned with the current economic profile of Iran and will limit itself to the economics of the new president and his predecessor, Mr. Mohammad Khatami.

Khatami’s Presidency During the eight years (1997-2005) of Mr. Khatami’s term in power, annual economic growth averaged 4.3 percent, while the unemployment rate – which has been the basic headache for every Iranian president – remained above 10 percent. During this time, the growth rate was as high as 7.5 percent (in 2002), while the unemployment rate peaked at 14.2 percent (in 2001). In U.S. dollar terms, GDP increased from $100 billion to $150 billion during Mr. Khatami’s presidency. The other headache – the inflation rate – averaged 15.8 percent, partly reflecting the high growth of bank liquidity, itself due to large government budget deficits. During this period, budget deficit was continually increased, partly reflecting the need to increase entitlements, such as teachers and police/army salaries, and partly revealing the growing need for funds by state-owned enterprises (SOEs) and state-sponsored entities (SSEs). However, per capita nominal income of Iranians, reflecting the satisfactory economic growth and a fall in the population growth, was consistently increased during these eight years. Along the same lines, domestic and foreign investment both also increased. Domestic investment’s annual growth rate averaged 8.8 percent. On the other hand, foreign direct investment was nil in 1997 when Mr. Khatami was elected. It increased to $1.5 billion in 2004 when he was getting ready to leave the office. During Mr. Khatami’s period, oil and gas exports exhibited the sharpest increase

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among all economic measures and indexes. This category of exports jumped from $9 billion to $36 billion, reflecting the Iranian oil price of as low as $8 to as high as $50 per barrel. In fact, the share of oil sector from the gross domestic product (GDP) increased from 9.26 to 13.2 percent. Indeed, the government of Mr. Khatami was “lucky” to see oil prices increase to unprecedented levels in international markets. Had oil prices remained at 1997-98 levels, Iran’s economic development would have been suddenly halted and uncertainty would have reigned. Nevertheless, when Mr. Khatami took the office, rial/U.S. dollar conversion rate was one dollar to 5,626 rials. Today it stands at 9,000, reflecting about 60 percent devaluation. In terms of the GBP, it was devalued from 7,676 to 17,100. In 2001, euro was 7,900. Today is at 11,900. During Mr. Khatami’s period in office, average annual exports (including oil, gas and petrochemicals) equaled 12.5 percent, while non-oil exports averaged 12.3 percent. Import growth also stood at 12.5 percent annually. There are pockets of critics who argue that excessive imports during this period damaged Iranian industries, increased unemployment rate and – since a great portion of them was consumption, rather than materials or investment goods – the country wasted its potential savings. In the meantime, smuggling of commodities into Iran has exacerbated the situation. Currently, Iran faces billions of dollars of smuggled goods every year. Other accomplishment during this time has included increase in human index components (including education and literacy rate), expansion of roads, and agricultural improvements (including large production of wheat that has turned Iran from the largest importer of wheat in the world to self-sufficiency). Illiteracy rate has declined from 26.7 percent to approximately 22 percent. Life expectancy, according to U.N. statistics, has increased from 69.2 to 70.5 years. Nevertheless, Iran’s ranking in the world regarding the Human Development Index (HDI) has gotten slightly worse during this time. In terms of economic legal foundation, Khatami made interesting headway. New tax law (lowering corporate tax rate from 64 percent to 25 percent), revision in foreign direct investment law, preparing a modern securities law, lowering tariffs, establishing an Oil Stabilization Fund (OSF), exchange rate unification, discipline in foreign debt were the important accomplishments in this area. But the ratio of government budget including state-owned enterprises (SOEs) and state-sponsored entities (SSEs) to GDP increased from 67 percent to 88 percent, reflecting the growing government share of the economy, despite Mr. Khatami’s plans to do otherwise and to promote privatization. One of the largest projects in Iran’s history has been the ongoing “South Pars Field Project” in the Persian Gulf region. Petrochemical industry has been also greatly strengthened. The number of students accepted to universities expanded and the number of doctorates received increased from 7,765 to 8,212 during Mr. Khatami’s presidency. What do Iranian people think of Mr. Khatami’s eight years of economic performance? In a poll taken by Iran Economics monthly, respondents were asked to evaluate Mr. Khatami’s economic management and performance. The results are

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shown in the following table. How would you evaluate the economic performance of Mr. Khatami’s government? (%) Significantly positive Somewhat positive His presence has not been effective His performance has not made a difference Significantly negative

6.25 32.81 35.94 10.92 12.50

During Mr. Khatami’s term in office and for the first time after Revolution, banking licenses were issued to private groups. Currently, 5 private banks operate in Iran and have been relatively successful. Also as part of liberalization, licenses were issued for private insurance companies and credit institutes. Some observers believe that lack of coordination between Mr. Khatami’s cabinet ministers was a problem. Specifically, the Economic & Finance Minister, the Central Bank Governor, and the Management & Budget head did not “get along.” In fact, they all represented different groups within the ad hoc-organized political factions within the fragile Iranian political environment. On the other hand, diversity of economic philosophies and doctrines troubled Mr. Khatami continually and it was spilled over to his second term, when he suddenly replaced the Economics & Finance Minister and his Management & Budget Head. Some other experts argue that Mr. Khatami’s emphasis on “political development” instead of “economic development” and his own boredom with economic issues were reasons for not achieving many of his plans and programs. In fact, Mr. Khatami often switched his main catchword during his presidency; for instance, from “civil society” to “religious democracy.” Indeed, during the last two years of his presidency, he gave up on using slogans, altogether. In spite of some progress and development, Iran’s status in the region has fallen behind. Currently, Iran ranks last in terms of per capita income of about $2,000 as compared to countries in the Persian Gulf like Oman (with $9,000 per capita income), Saudi Arabia ($12,000), United Arab Emirates ($23,000), and Qatar ($25,000). Also Iran’s inflation rate of about 15 percent does not compare well with the average inflation rate of Persian Gulf countries of about 2 percent.

Facing Challenges Indeed, today the Iranian economy and its social setting face a full array of challenges. A sample is informative: • Rent-seeking activities and corruption continue, partly reflecting the fragile political and legal environment in Iran. • Large state subsidies, especially in oil products, are being paid by the government. Mr. Khatami’s government, despite planning otherwise, did not succeed in re-channeling state subsidies to target, low-income groups.

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• Meritocracy, which was so much emphasized and promised by Mr. Khatami in the early years of his presidency, has not materialized. Later it was dropped as an important slogan of the “reform government.” Critics argue that given the level of education and the experience of the appointed officials, the system is tangled in a web of political relations that perpetuates the bad management and keeps outsiders, outside. • Partly for the reason cited, Iran is the source of largest brain drain in the world. Furthermore and contrary to norms, Iran’s unemployment rate correlates directly with the level of schooling! That is, the highest the number of schooling years, the highest the unemployment rate. • Bureaucracy, red tape and lack of motivation by the government work force continues. • During the last 16 years, privatization has not proceeded well. In fact, today Iranian governance – including executive, judicial, and legislative branches, together with state-owned enterprises (SOEs) and state-sponsored entities (SSEs)— use much larger budgets. The governing bodies have not gotten leaner; or, more disciplined. • Transparency and accountability of the government has not advanced significantly. • The economy remains much dependent on oil (85 percent of exports and 60 percent of government budget). • Creation of “productive employment” is in doubt, reflecting over-employment in many firms (especially SOEs). • Government still lacks “monetary and financial discipline” due to large budget deficits (in the government as well as SOEs and SSEs budgets). • No substantive support for small and medium size enterprises is launched. In fact, private sector firms operate on shaky grounds. The business environment lacks many of the fundamentals that are available in other developed or emerging countries. • Due to the debt monetization by the government (of its budget deficits) – using overwhelmingly government-owned banking system – liquidity has been growing excessively around 30 percent, leading to inflation rates which are around 15-20 percent. • High inflation rates have damaged the business environment, putting pressure on costs of doing business and damaging the management-labor relations, including government workers such as teachers and police and armed personnel. To remedy the situation, government directives practically index government employees’ salaries and keep the budget deficit perpetuating. • Cost pressures lead to unemployment and, in turn, damage the culture of private sector and push the fate of privatization into ambiguity. • To avoid damages to saving process during inflationary times (and the high cost of providing banking services by inefficient government banking sector), banks keep interest rates high, questioning the feasibility of many investment projects and, therefore, damaging the investment process. • The high interest rates, in turn, damage the performance and – indeed – the reputation of “Islamic banking.” • The management of Oil Stabilization Fund (OSF) has been unsatisfactory. Instead of using the proceeds solely for investment and as a buffer for oil price

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fluctuations, the proceeds were used for current expenditures, and mostly used by the government. • Inflation, on the other hand, has damaged the distribution of real income and made the poor, poorer. Worst, since the low-income classes have little access to bank debt, any benefit from repayment of debt during inflationary times (with lower purchasing power) does not apply to them. Therefore, they have serious difficulty in meeting everyday needs. • No serious attention is made regarding productivity improvement, as the root of growth and welfare. • The usual hierarchy in terms of different levels of work responsibility is rather weak in Iran, and therefore makes achieving excellence in management and in organizations rather difficult. During the presidency of Mr. Khatami, a total of $170 billion was earned as oil revenues. Critics argue that this amount (more than one-year Iran’s GDP) could have renewed the engine of industry in Iran but it was not used properly for investment and renovation of industry. In addition, observers argue that foreign policy and overt and covert embargoes and boycotts are continually hurting Iran and increasing the cost of doing business and development. In social environment, while number of marriages has increased from 512,000 to 680,000 (a 32 percent increase) during this period, the number of divorces has expanded by more than 70 percent, from 42,000 to 72,000.

Prospects However, plans and policies announced by the new President are interestingly promising. Dr. Ahmadi-Nejad seems to be genuinely interested in advancing the fundamentals that would create a fair, gentle and humane society; including eliminating corruption – which is one the biggest headaches the Iranian society faces today. Furthermore, Mr. Ahmadi-Nejad has promised to lower inflation and to improve the distribution of income (while the exact method of redistribution of income is to be determined). In addition, the new Economics & Finance Minister has spoken of market-oriented plans, and he is expected to push for reforms in the Iranian industry and markets. Nevertheless, the manner of execution of these plans and policies – and their outcome – remains to be seen. Of course, in the past, rosy plans and policies – including during the two previous presidents, Mr. Hashemi Rafsanjani and Mr. Khatami – have generally remained short of their goals.

New Presidential Policies After the election of the new president, the government has announced new plans and strategies (over 100 points). Dr. Ahmadi-Nejad’s doctrine is based on four pillars: Justice, Love, Service and Promoting material and spiritual well-being of the society. His detailed plans include:

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• Promoting government accountability and welcoming criticism (as stated in the Iranian Constitution). • Spreading the rule of law. • Fighting against injustice, discrimination, corruption, bribery, nepotism. • Increasing investment security, creating employment. • Poverty eradication. • Promoting research and development. • Increasing economic stability through implementation of modern policies. • Reducing government waste and red tape and promoting lean government. • Allocating oil revenues to investments. • Engaging in active diplomacy – by use of economic instruments. • Utilizing “transformation management.” • Re-channeling subsidies to target, needy groups. • Reducing both unemployment and inflation. • Promoting true, probably voucher-type, privatization. • Securing and stabilizing the economic and legal environment for domestic and foreign investors. In the international area, some observers argue that Iran will be probably more isolated during the presidency of Mr. Ahmadi-Nejad. While this remains to be seen, the new government’s plans include not only active diplomacy, but also various international trade and investment moves, such as: • Increasing non-oil exports. • Paying sufficient attention to “comparative advantages” in international economic scene, including promoting energy-oriented industries. • Promoting the competitiveness of Iranian industries. • Welcoming foreign investment – direct and portfolio. In terms of Foreign Portfolio Investment (FPI), the new government is expected to follow in the footsteps of his predecessor. Indeed, one of the last ratifications of the government of Mr. Khatami was the new FPI Rules. According to the Cabinet’s ruling: • FPI permit is required from Investment Organization of Iran. • One-year time limit is allowed between issuance of permit and investment. • The investor can invest in Common Stocks, “Participation Securities” (secured, lower rate of return), and other securities (once introduced). • Investment funds must be channeled through the banking system. • Investment is restricted to 10% of shares of any listed company in the Tehran Stock Exchange (TSE). • Ceiling of 10% of portfolio in Participation Securities is mandatory. • A 3-year moratorium on capital repatriation (including any capital gain) must be observed, but dividends can be repatriated every year. • Financial statements must be reported.

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Future Developments Apart from the announced plans and policies, economic performance of the government of Mr. Ahmadi-Nejad will be influenced by several important documents and their execution in the years to come. They include: a) The Medium-term 4th Development Plan; b) The 20-year (Strategic) “Outlook”; c) New legislation, especially the new Securities Market Law. a) The 4th 5-Year Development Plan (2005 - 2010) Iran’s basic development strategies get reflected in its 5-year plans. The 4th Plan: • Gives attention to the benefits of Globalization, Competition & Knowledge-Based Economy. • Attempts to use oil money wisely (saving/investment). • Disallows government debt monetization. • Recognizes the importance of productivity to growth. • Expands stock exchange conduits and launches an over-the-counter (OTC) market. • Attempts to develop relations with regional and international markets. • Develops a capital market for housing, establishes a secondary mortgage market and welcomes foreign investment in housing. • Eliminates price distortions. The Plan’s quantitative goals – in terms of annual averages – are set as the following: • Economic growth rate of 8%. • Per capita income growth of 6.6%. • Fixed investment growth of 12.2%, equivalent to 200 billion USD, plus USD 15 billion in FDI is projected (FDI is expected to increase to USD 3.8 billion annually; it now stands at USD 700 million). b) The 20-Year Strategic “Outlook” (2005 - 2025) According to this document (ratified by the Leader of Revolution), Iran would: • Move toward dynamic and flexible markets. • Use regional and international opportunities. • Reduce red tape, modernize production. • Foster knowledge-based economy, research and innovation. • Abolish lifetime employment in lieu of merit-based employment. • Shift toward a more privatized, less government-controlled economy. • Attempt to secure a leading place in the Region. This document’s quantitative goals (in terms of average annual ranges) include: • Economic growth rate of 7-8.6%. • Per capita income growth of 5.6-7.2%. • Industrial sector growth (dominating) at 10-11%.

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• • • •

THE RICH & THE POOR

Investment growth of 9.3-10.9%. Non-Oil export growth rate between 10.1-15.8%. FDI rate of 13.5-23.4% (reaching USD 2.7-6.3 billion by year 2025). Reduction of unemployment rate between 7–12 percent.

c) The New Securities Market Bill For the first time since 1966, Iran is renovating its stock market and securities law, which is necessary for the targeted growth, productivity and privatization. The new law’s targets include: • More organized, fair, efficient, transparent market. • Recognition of the importance of the primary market. • Setting up a “SEC” (Securities & Exchange Commission). • Permitting new institutions such as investment banks, rating agencies, market makers, and mutual funds. • Disallowing inside information misuse. • Imposing penalties on fraudulent activities. • Recognizing SROs (Self-Regulatory Organizations). • Establishing Brokers Association (also modeled as an SRO).

Conclusions Given the plans and policies announced by the new government, as well as other medium-term and strategic documents legislated, the outlook for the Iranian economy seems promising if the plans are well managed and well executed. Of course, the way the ongoing nuclear issue would develop, will also affect the economy. Wrestling with and tackling unemployment and inflation, making the government lean and eliminating corruption remain the biggest challenges for the new government and, especially given the inertia within the Iranian economy and society. The new government of Dr. Mahmoud Ahmadi-Nejad is set to face and, hopefully, resolve some Herculean challenges.

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HANDBOOK FOR BUSINESS HUNTERS

HANDBOOK FOR BUSINESS HUNTERS

by Elisabetta CAVANNA

Despite high geopolitical risks, the Iranian market proves quite appealing to foreigners, especially Europeans and, among them, Italians. The uncertainty surrounding the privatization process. The bonyads case. Not only energy.

I

ran is an important country in the Middle

East Region. With a population of about 70 million and a GDP of $147 billion1, it is the second most populous country and largest economy in the region. In addition, it is the second largest OPEC oil producer and holds one of the world’s largest gas reserve. Since the Islamic Revolution in 1979, which resulted in the breakdown of Mohammad Reza Shah Pahlavi’s monarchy, Iran went trough a destructive war with Iraq during the 1980s and a long period of uncertainty, characterized by international isolation, internal post-revolutionary strife, and experienced deep economic instability. However, recently Iran seems to be progressively emerging from such instability and is showing its will to re-build relations with the international community and to restore its economy by opening up its market to foreign operators. As a matter of fact, in the last decade the country has started a major process of economic re-orientation, and significant evolution in its social and institutional system. Centrality of the State and dependence on oil industry are the main characteristics of Iranian economy. The dramatic growth that recently characterized this economy is the result of both significant increases in oil revenues (which triggered substantial increases in industrial production and export volumes, and supported the increased demand in domestic and private consumption) and structural changes in economic policies under the presidency of Mr Khatami, who implemented reforms aimed to reintegrate Iran in the world economy and at building up alternative sources of capital. However, attempts for reform met with only partial success: implementation was patchy and prone to severe reverses, as conservatives - many of whom advocated a return to the central planning ethos of the war years - sniped at the reform package. In the economic program, contained in the Third Five Year Development Plan for 2000-05 (TFYDP), Khatami's government committed itself to a range of fiscal, monetary and structural reforms designed to boost economic growth, liberalize trade, support the private sector, generate employment and reduce Iran's reliance on oil export. With the TFYDP, the government also committed itself to privatization and implemented a new foreign investment act - Iran's first attempt in a comprehensive foreign investment law. Economic and structural reforms and plans for privatization 1

Source: EIU Country Report , June 2005.

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have been maintained also in the Fourth FYDP (2005-2009), developed and approved under the reformist Presidency and also supported by the Conservatives. Despite Iran’s attempts to improve its international standing, the election of the ultraconservative Ahmadi-Nejad undermined the perception of Iran at international level. Indeed the International community, and in particular Europe and the US, fear a process of radicalization of the religious system with an impact on social freedoms, human rights, trade relations and security. However, given the limited power of the Presidency as stated in the Iranian Constitution, Ahmadi-Nejad’s election –mostly due to a wide support by an impoverished population to populist promises of social justice and wealth redistribution— should not cause such a worry. In the economic field, despite alarming declarations from public figures of a return to isolationism, it is reasonable to expect continuity with the guidelines of the Foruth FYDP towards privatization and liberalization of the market. Moreover, Ahmadi-Nejad shall carry the delicate task to solve the structural weakness of Iranian economy (high inflation, corruption, inefficiency of administration and justice, high unemployment rate, low foreign investments, lack of efficiency in the bank system, excessive subsidies in critical sectors), since the populist promises at the base of his election created an illusion in the Iranian electors of a fast redistribution of wealth. Ahmadi-Nejad might therefore be conditioned in his political choices by the evaluation of the social impact of the much needed reforms, including the one from the current FYDP which he claims he will respect. But, with unemployment at the limit of sustainability, it is difficult to foresee a wide support to the promised process of privatization that inevitably would cause loss of workplaces on a short term, while fiscal reform could be suspended in fear of a reaction of Iranians to reduction of subsidies and salary cuts in public sector. Also, the future business climate shall depend on the evolution of the nuclear issue: unsuccessful negotiations might undermine EU economic relations with Iran. Considering the above, Iran cannot be considered yet a safe and stable business environment, but the high potentialities Iran offers with its enormous natural resources, its strategic geographic position, the great internal demand together with the progresses achievable with the recent reform programs and laws, make the country worth to be considered by international business operators.

Potentialities Iran is potentially the dominant Middle Eastern economy, 85% of which is controlled directly or indirectly by the state. It can certainly be classified as an oil-dependent economy, as the energy sector is the main source of its development: in 2004, the oil industry represented 23% of the nation’s GDP2, and oil exports accounted for over 81% of the country’s total export revenue3.

2

Source: Economic Trends – 1st quarter 2004/2005.

This reliance on oil revenue has left Iran vulnerable to international demand, the most recent example being the economic depression of 1997-98, which saw government revenue fall by 10% in 3

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Potentialities of Iran are not limited to its economic structure. In fact, its overwhelmingly young demographic profile led to a marked growth in the work force: it is estimated that some 600.000 new job-seekers enter the market each year. Such a young and skilled population should be one of the major potentialities of the country. Clearly, most of the business potentialities in Iran are merely based on the exploitation of its natural resources. The primary sources of national economy are certainly oil and gas: hydrocarbon remains the country’s dominant industry, its main foreign exchange producer, the leading source of government revenue, the largest employer and probably Iran’s main geostrategic tool. Iran is believed to house the world’s second largest reserves of natural gas (amounting to 15% of proven world reserves), the great majority of which have not been developed yet. The key to this expansion program is the development of South Pars (mostly carried on with the support of foreign investors, including Italian ENI) – a giant offshore gas field in the gulf, estimated to hold as much as 8-10% of the world’s proven gas reserves. Iran’s intention is to use the output to become the world’s largest producer of liquefied natural gas (LNG). Iran is also rich in mineral resources: currently excavated minerals include copper, lead-zinc, iron ore, bauxite, coal, strontium, gold, chromium, uranium, red oxide, turquoise, sulphur and salt. Foreign investors have concentrated most on Iran's copper-extraction industry. Agriculture remains one of the most developed sectors in the country thanks to the great diversity of climate and terrain, allowing it to produce tobacco, green leaf and dried tea, along with more traditional staple cereals. Concerning industry, an increasingly important sector is manufacturing. Traditionally Iran showed its preference for trade over production, starting to develop an industrialization program only in the 60s. The growth of this sector was affected by the domination of inefficient state-owned firms and by severe import restrictions. Only in the last decade, a more flexible policy stimulated public firm’s capital spending, improved credit availability to the private sector and reduced considerably import control, though accelerating the growth especially in petrochemicals, steel, agro-industry and textile. The agro-industry, in particular, is attracting the interest of Italian investors who, in joint venture with domestic manufacturers, are investing in rice milling, barley, corn and other grains processing, fruit and vegetable canning. Finally, the services sector has seen the greatest long-term growth in terms of its share in GDP, but currency-exchange restrictions, excessive bureaucracy and the uncertainty of long-term planning have made this a volatile sector.

Risks Despite the appeal of its largely untapped market, Iran’s difficult and risky operating climate discouraged many foreign firms to establish significant interests in the country so far, excepted in the energy sector. Key risks are mainly derived from the political regime and the poorly defined 1998-99, leading to a 22% increase in the country’s budget deficit. Source: HSBC Report on Iran, Second edition, first quarter 2004.

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regulatory system, which continues to be governed by an inconsistent framework often hostile to foreign business. A main obstacle to a better business environment for foreign investments is the resistance of the current economic structure to change. Since the revolution, inefficient state-owned enterprises and politically powerful individuals and institutions, such as the bonyads4, have established a tight grip on most of the non-oil economy, using their preferential access to domestic credit, foreign-exchange, licenses, and public contracts to protect their positions, making it difficult for the private sector to compete. The judiciary system is opaque and very slow moving, the courts are not sufficiently independent to protect foreign firms, and although the tax burden placed on foreign firms has eased, risk of arbitrary assessment remains. The new law for the attraction and protection of foreign investments is likely to improve the business framework for foreigners, but the business community is complaining about the timely length of the process and the amount of paper work required. Corruption is also apparent at many levels of the civil service where senior decision-makers are rarely held to account. An intense power struggle within the political and factionary elite has compounded the longstanding shortcomings of the policy- making process. As well as political instability, the country faces significant economic risks related to high unemployment and inflation, low rates of foreign investment and severe structural weaknesses. Thus both political and economic reforms are much needed to ensure the country's long-term stability. Moreover, relations with the US and with EU countries could deteriorate sharply if Iran does not act to ease the US suspicions that it is pursuing over nuclear weapons, while sanctions are unlikely to be removed in the near term. All these problematic aspects, which do not give positive forecast on Iran’s stability, cause the overall risk rating to be still quite high, according to most of the international rating agencies5.

Foreign direct investments in Iran Despite Iran’s extensive, underdeveloped natural resources, and large, young population, the inflows of foreign capital have been rather low, especially those into non-hydrocarbons projects, running at under $50 million a year according to IMF data, Bonyads are Islamic "charities" created after the revolution to control confiscated lands and properties once belonging to the Shah or to other Iranian citizens forced to leave the country. 5 Moody’s and Standard&Poor’s currently do not give any rating on Iran, while for Dun and Bradstreet, in June 2003, Iran’s risk indicator was 5a, first level of high risk, corresponding to a considerable uncertainty associated with expected returns and to an overall risk profile that is deteriorating because of adverse political, commercial, economic and external development. According to Economist Intelligence Unit, Iran’s risk assessment is quite high with regard to almost all risk categories, above all those related to the political and legal/regulatory framework; the overall rating is D. On the other hand, the outcomes deriving from the economic and financial progresses achieved by Iran have been the cause of a positive re-classification by the OECD, based also on the reports and attitudes showed by most Export Credit Agencies in these last years; as a consequence, in the framework of OECD’s risk categories, Iran has shifted from the 6th category first to the 5th and then to the 4th. 4

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the equivalent of less than 0,01% of GDP. Outside the oil sector, individual ministries have attempted to find means to side step constitutional restraints, by the establishment of built-operate-transfer (BOT) agreements or long-term service contracts for sectors in which the constitution explicitly forbids private ownership. The main examples are the power and telecommunications sectors, where, despite constitutional clauses barring foreign ownership, the government has begun to look for foreign firms to provide the capital and technology to support much-needed capacity expansion6. Iran’s failure to generate foreign capital inflows commensurate with its size and potential reflects, indeed, the failing of the operating framework and the strict limits it places on the activities of foreign companies. On the other hand some improvements are expected: WTO accepted to open negotiations with Iran following the US veto withdrawal. Reduction of external debt in the last years caused a soothe in trade barriers and also on May 2002 a Foreign Investment Protection and Promotion Act (FIPPA)was approved, establishing a framework for foreign direct investments and allowing foreign investors to hold up to 100% of the capital of a company incorporated in Iran.

Foreign trade in Iran Isolation and unfriendly attitude towards foreigners characterized Iranian post-revolutionary governments also in trade policies, despite Iran’s tradition of trade. Until the implementation of the Third FYDP, Iran’s tariff and non-tariff barriers to trade were among the highest in the world. Restrictive trade policies were accompanied also by a harsh import suppression which was instituted over the 1990s as a response to the rapid rise in short-term debt obligations built up following the end of the war with Iraq in 1988. The major liberalization of trade led to remove a large number of non-tariff restrictions, but it did not free up trade where local production is deemed comparable. The beneficiary effect of such efforts in liberalizations is an increasing import of machinery, particularly mechanical and electrical, and of industrial goods. This is particularly relevant for European countries and first of all for Italy, which is one of the main producer of this type of goods and one of the first supplier of machinery and chemicals, together with Germany and France. Given Iran’s impetus to trade liberalization in the past two and half years, and considering that economy and population have grown substantially during the same period, there seems to be scope for further increases over the coming years. Iran is not part of any trade agreement even if it is negotiating one with the EU, but a final agreement is not likely to come until the nuclear issue is solved. In March 2003, Iran raised the issue of possible membership in the Gulf Cooperation Council (GCC), in order increase export to the GCC region.

The telecom sector has already seen such a development last May, when a BOT contract to install up to 6 million prepaid GSM lines has been awarded to a consortium headed by a local company with a foreign investor. The local company is Rafsanjan Industrial Complex, while the operator is a European company, Tele2; the foreign investor instead is unknown. 6

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Iran’s relations with the EU Iran and EU are strengthening their relations, and Iranian government hopes to qualify for European Union (EU) aid in the near future. A first EU-Iran dialogue was launched in 1995; it was broadened in scope following the election of the reform oriented government under President Khatami, to become what is now called the ‘Comprehensive Dialogue’. This project allowed for a broad exchange of views on global, regional and co-operation issues, it helped stimulating co-operation between EU and Iran in the energy sector, particularly in the areas of electricity and gas exploration, increasing capacity of power plants and transfer of gas to Europe and, since 2001, it led to negotiations for a Trade and Co-operation Agreement (TCA)7, which sought to strengthen EU trade and investment in Iran and contribute to the country's economic liberalization. The ongoing talks are part of the EU's overall policy of 'critical engagement', which makes closer relations and economic ties reliant on improvements on human rights, compared to Washington's more confrontational approach. The proposed TCA has been intended to demonstrate EU’s support for the reform process and to provide a means through which the EU can continue dialogue and co-operation on issues of mutual interest, such as the Middle East Peace Process, weapons of mass destruction, non proliferation, human rights and the rule of law. However, these negotiations are threatened by Iran's failure to respect human rights and support moves towards peace in Israel and mostly by Iran’s lack of co-operation with the IAEA and EU3, the team of EU negotiators (Britain, France and Germany), both facing the continuation of Iran's nuclear program. European Union is trying to push Iran to give up its nuclear plans, but Iran insists its atomic ambitions are peaceful and has been lobbying Russia, China, India and others to fight against any referral (requested by the US) to the Security Council, which would have the power to impose economic sanctions. Despite this dispute over nuclear activities, Iran’s economic relations with the European Union have substantially improved in the last years. Iranian authorities have shown a continuous and strong interest in a general strengthening of these relations; on the other hand, EU is Iran’s largest trading partner and has always considered trade with Iran as having enormous potential, in view of the country's rich endowments of The TCA has been established to be a non-preferential Agreement, focused on economic and financial co-operation in areas of mutual interest and on trade liberalization, designed to run for an indefinite period. Its objectives are to: Establish a contractual regime to govern trade between the EU and Iran, following WTO provisions, such as "most-favored nation" treatment, national treatment, non-discrimination and defining the level of tariff protection; Support Iran in its adaptation to WTO rules and practice, in areas such as intellectual property, public procurement, standards and sanitary issues; Develop closer co-operation with Iran in economic and other areas such as energy, transport, environment, drugs control, asylum, migration and refugees, and culture; Encourage and support reform, strengthen the rule of law and improve the respect for human rights, in line with the aims of the emerging Human Rights dialogue with Iran. A human rights clause will be part of the Agreement. Under the terms of the agreement, the European Commission will lead the negotiations on economic issues, while the EU Presidency will lead on political questions. 7

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petroleum, natural gas, and minerals, as well as agricultural wealth and industrial potential. According to European Commission’s DG Trade statistics on the EU-Iran trade exchanges, EU holds 28% of Iran’s total market share, followed by Japan (13,4%), UAE (7,1%), China and South Korea (each about 7%). Data also show that the EU is Iran’s first supplier, contributing for a 37,2% to its total import (in 2001) and its main export market as well, with a share of 21,5%. More than 80% of EU imports from Iran are related to the energy sector, making Iran the 7th supplier of energy for the EU and representing the 3,8% of the total EU import of energy products. Other imported products are mainly from agricultural sector (7,5% of the total) and from textile sector (3,5%). EU exports to Iran are mainly based on machinery, transport equipment and chemical products; power generation plants and large machinery make up alone about 47% of the total export. Also, Iran is an important destination market for EU’s steel and iron (imported mainly from Germany), while other major Iranian imports from EU consist in agricultural products, such as cereals and related preparations, and textile. Among EU member states trading with Iran, the largest shares are held by Italy, Germany, France, Spain and Holland.

Trade relations with Italy Italy has an old tradition of trade exchanges with the country, being historically one of the main Iranian commercial partners, ranking first among European importers and second among exporters after Germany. Italian imports from Iran mainly consist of oil and gas products. The most important role played by Italy in Iran’s trade concerns the export industrial goods (in some sectors Italian machines contribute for more than 50% to Iran’s total production), which Iran imports at increasing volumes, coherently with the adoption of an economic policy aimed to promote industrial development. Italian operators have been among the first to take advantage of the opening of Iranian market to foreign trade and largely benefited of moves towards trade liberalization. Indeed in the last four years Italian companies entered in several fields: iron and steel (Danieli, Sms Demag Italia), petrochemical (Tecnimont, Snamprogetti), oil and gas (ENI, Edison) and energy (Ansaldo). In addition, Italian exports to Iran have been supported by the Italian Export Credit Agency, SACE, which has been the first ECA to re-open export credit operations in the country, after a suspension in 1993 due to Iran’s high level of debt; indeed, SACE’s increasing role in providing Italian firms with insurance cover has been significant for the rise of Italian exports to Iran. Last year, the volume of trade exchanges between Italy and Iran has reached the highest level over the last decades, amounting to €4,322 billions, which makes Italy the first European country in the total import-export trade with Iran. On the other hand, last year Iranian exports to Italy decreased by 20,36%, contributing to a significant improvement in Italian trade balance with Iran. The largest group of goods exported to Iran still includes mechanical machinery and equipment, electric machinery (including

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electronic and optical equipment), chemical, metals and metallic products and, in a less extent, transport materials and non-metal mineral manufactures. Some other products are starting to be exported, although the value of their total export is not too elevated: wood manufactures, coke refined oil products/nuclear fuel and plastic material and transmission apparatus for broadcasting, radio-telephony and television, the export of which has almost quadrupled since 2001. These data confirm the increasing interest of Italian firms in the opportunities offered by Iranian market, also as a consequence of recently improved bilateral relations between the Authorities of two countries, which reciprocally committed to support such an industrial cooperation and development8. Interesting opportunities for Italian Small and Medium Enterprises are found mostly in the car sector, the electric and electronic sectors, the packaging industry, artificial fibers, paints, plastic materials, detergents and soaps. The mining industry offers important chances too, given the large reserves of iron, copper, lead and zinc; considerable are also the resources of marble and natural stones. Furthermore, there is a developing metal industry that offers interesting opportunities due to the need of equipments for metal processing. Another interesting sector for Italian enterprisers is agriculture, given the rich and fertile soil and the climate diversification, which provides notable development potentialities; however this sector requires heavy investments and industrial programs of modern management, in cultivation as well as in livestock and fishing. In addition, the lack of proper systems for the conservation, processing, and distribution, is a source of great opportunities with regard to food processing, conservation, cattle-breeding and slaughter techniques. The best opportunities for Italians are offered largely by textile machineries, machines for marble and stones processing, and those for the manufacturing of ceramics, glass, plastic materials, and machines tools for the tan and shoe industries. In conclusion, the need to renew and replace obsolete industrial plants, in order to overcome the technological gap (even in the oil sector), the exigency of export diversification aiming to reduce dependency on oil exchange incomes, the necessity to create adequate infrastructures, together with its several potentialities –strategic commercial position in Central Asia and rich natural resources– make the Iranian market an extremely attractive place for the Italian firms to take on, despite the risks involved.

Such a commitment is part of the bilateral programs signed by Italy and Iran in occasion of the ‘Mixed Commission’, held in Teheran on 25th February 2002 and in Rome on 17th July 2003. 8

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PERSIAN VIEWS: THE REGIONAL GEOSTRATEGIC SCENARIO

UNVEILING IRAN

TEHERAN AND JERUSALEM ARE NOT NATURAL ENEMIES

TEHERAN AND JERUSALEM ARE NOT NATURAL ENEMIES

by Trita PARSI

As Iranian-Israeli tensions peak, it is useful to go over the history of Jewish-Persian relations. From Cyrus to Khomeini, examples of cooperation and pragmatism abound. When Rabin and Peres were pro-Iranian.

1.

T

he enmity between Iran and Israel is

currently at its peak and risks bringing turmoil to the entire region. Either a preemptive Israeli strike on Iranian nuclear installations or a possible nuclear rivalry between the two non-Arab Middle Eastern powers would significantly destabilize the region and beyond. Few international conflicts are as misunderstood as that between Iran and Israel. While some accredit it to historic ethnic hatred between Persians and Jews, others explain it by the ideological musings of the theocracy in Tehran. Few, however, recognize the geopolitical forces that lie at its roots. It is tempting to fall for the fallacy that Iran's harsh opposition to Israel is rooted in the historic enmity between Muslims and Jews that runs deep in Middle Eastern societies. In the case of Iran, however, this logic fails on two key points. First of all, public opinion rarely translates into policy in Iran, keeping in mind Tehran’s less than democratic political system. This was the case during the time of the Shah. The Iranian autocrat maintained close cooperation with the Jewish state even though public opinion in Iran was staunchly pro-Palestinian at the time; ordinary Iranians saw Israel as an aggressive, imperialist power. The most serious outburst of anti-Israel feelings came during a soccer match in Tehran between the national teams of Iran and Israel in 1968. The event quickly turned into an anti-Israeli demonstration in which balloons with swastikas were distributed and an effigy of Moshe Dayan was raised and spat on.1 Anti-Israeli sentiments were not limited to the public; they existed within the government as well. According to a former Iranian official, “even those technocrats that were helping Israel, in their hearts, were really unhappy that Israel was doing these things to the Palestinians.”2 Within the government, the Foreign Ministry was known to be particularly critical of Iran’s relations with Israel, whereas the army and the Shah’s dreaded secret police, the SAVAK, favored stronger ties. For instance, mid-ranking Iranian officials in the Foreign Ministry convinced the Shah to cast Iran's vote in favor of the now notorious Zionism-Racism General Assembly Resolution in 1 2

S. SEGEV, The Iranian Triangle, New York: Free Press, 1988, p. 73.

Interview with a former Deputy Commander in Chief of the Iranian Navy, March 16, 2004.

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1975.3 Today, public opinion in Iran has shifted somewhat. Though average Iranians continue to sympathize with the Palestinian people, discontent with Tehran’s high-profile and direct involvement in the Israeli-Palestinian dispute during the 1990’s is widespread. During the 2003 student protests, one of the more popular slogans was, ''Forget about Palestine! Think of us!'', reflecting the view that Iran's involvement in the Palestinian dispute had come at great cost to its own national interest.4 These sentiments could also be found within the clergy. Abdollah Nouri, a former Interior minister and close confidant of Khomeini, bluntly criticized Tehran’s policy of acting ''more Palestinian than the Palestinians.''5 Secondly, the current Israeli-Iranian enmity has no historical roots, given the long and more often than not amicable relationship between Jews and Persians. The histories of Iranians and Jews are closely intertwined; the Iranian city of Hamadan is reputed to be the burying site of Queen Esther, King Xerxes’ wife who saved the Jewish people from persecution in the fifth century B.C. This occasion is still celebrated by Jews in the Purim Festival. 6 Furthermore, the grave of the Old Testament prophet Daniel lies outside of modern day Susa, in southwestern Iran.7 Most significantly, it was the Persian King Cyrus the Great, who freed the Jews from the Babylonian imprisonment in 539 BC. The second rebuilding of the temple in Jerusalem was financed by Persian tax-revenues. The degree of the ancient Jews’ appreciation of the actions of the Persian king is reflected by his elevation to the status of a God-sent savior, the only non-Jew to achieve that standing in the Bible.8 Thus, there is little evidence to support the claim that the current Israeli-Iranian enmity is rooted in an historic enmity or in Iranian public opinion. The second fallacy is to attribute the Israeli-Iranian enmity to the ideological worldview of the clergy in Tehran. Certainly, Tehran’s venomous rhetoric on Israel and its pan-Islamic orientation lends much support to this hypothesis. But a closer study of Iran's international behavior reveals a remarkable difference between its rhetoric and its actual operational policy. 2. After the revolution, Iran distanced itself from Israel because of the revolutionaries’ conviction that the Shah had failed to befriend the Arabs due to his ties to the Jewish state. The new regime sought to bridge the Arab-Persian gap by replacing the Arabs’ pan-Arab ideology with a pan-Islamist worldview that would enable Iran to overcome its historic differences with its immediate Arab and Sunni 3 4

Interview with former Iranian Deputy UN Ambassador M. EHSASSI, Tehran, August 3, 2004. A. MOLAVI, K. SADJADPOUR, “Is Iran rethinking its position on Israel?”, The New Republic,

November 3, 2003. In Persian, the slogan rhymes: Felestin ra raha kon, be fekre hal-e ma kon. 5 Clearly, tracing the foreign policy of a non-democracy to the public opinion of its populace is a futile process. Yet, one should at the same time not overestimate the impact of public opinion on the foreign policies of democracies either; the recent examples of Spain and Italy are telling in this regard. Both were staunch members of President Bush’s “Coalition of the Willing” though their populaces were adamantly opposed to the war. 6 Esther 3:1; 9:32. 7 B. DEMICK, Iran remains home to Jewish enclave, Knight-Ridder, September 30, 1997. 8 Esra 1:1-7.

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neighbors. But though Iran adopted a harsh rhetoric against Israel, it also recognized that Iraq's rising power presented it and Israel with common geopolitical imperatives. Only months after the victory of the revolution, military contacts between Iran and Israel resumed. Iran was in dire need of spare parts for its American-built military, and Menachem Begin was all to eager to circumvent President Carter’s arms embargo on Iran in order to restore Israel’s strategic ties to Iran. Naturally, Iraq's invasion of Iran in September 1980 only increased Iran's need of Israel. By the time President Reagan took office and the American hostages were released, Washington was fully aware of Israel's dealings with Iran but chose to turn a blind eye to it. In 1982, in an interview with NBC, Defense Minister Ariel Sharon even boasted about Israel's sale of arms to Iran. Israel provided arms to Iran, Sharon explained, because it felt it was important to "leave a small window open" to the possibility of good relations with Iran in the future.9 Indeed, from Israel's perspective, the greatest threat to its security was Saddam Hussein’s army and not the ideological musings of Khomeini. Khomeini, on the other hand, carefully avoided turning Iran's anti-Israeli rhetoric into operational policy. For instance, when Iran's ambassador to Syria, Ali Akbar Mohtashamipour and the head of the Iranian Revolutionary Guards Corps, Mohsen Rafiqdoost, lobbied to dispatch 10,000 Iranian soldiers to southern Lebanon in order to open a two front war – one with Iraq and with Israel – Khomeini strongly opposed the plan and prevented the opening of a second front by declaring that the road to Qods (Jerusalem) went through Karbala.10 In the words of Deputy Foreign Minister Abbas Maleki, this was “a deep strategic decision” void of any ideological considerations.11 At one point, one of Khomeini’s associates informed him that the weaponry in a prospective arms deal originated in Israel. The associate sought the Ayatollah’s blessing and approval for continuing with the transaction. Khomeini asked whether it was necessary to discuss and inquire about the source of the weaponry when making the purchase, to which the associate replied no. “Then,” Khomeini concluded, “we don’t care.” 12 According to a former Iranian official who worked closely with Khomeini, the Ayatollah had in a three hour private conversation spelled out the Islamic Republic’s approach to the Palestinian conflict. In Khomeini’s view, the Palestinian issue was primarily a Palestinian issue. At the second level, it should involve the neighboring Arab states, and only at the third level should it involve Iran and other Islamic states. As a result, Iran should never be more involved in the conflict than the Palestinians themselves and their Arab neighbors. This Iranian official was told by Khomeini that in the event of an agreement between the Palestinians and the Israelis, Iran should lend its support to the agreement by standing behind the Palestinians,

9 10 11 12

Israel Sends Military Equipment to Iran, Associated Press, May 28, 1982. S. BAKHASH, presentation at the Middle East Institute, Washington DC, March 4, 2005. Interview with A. MALEKI, Tehran, August 1, 2004. Telephone interview with Prof. N. ENTESSAR, January 25, 2005.

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which in essence would lead to Iran’s recognition of Israel.13 The shallow depths of Khomeini’s ideological views on Israel did not escape Israeli decision makers. By the mid-1980s, Israel had through the aid of neo-conservatives such as Michael Ledeen managed to convince the US to reconsider its strained relations with Iran. In a letter to President Reagan in February 1986, Shimon Peres wrote that the US should resolve the dispute in Lebanon through dialogue with Tehran in order to establish a “broader strategic relationship with Iran.”14 Israel facilitated meetings between Iranian and American officials with the explicit aim of bringing the Islamic Regime back to the Western fold. Charles Allen of the CIA, who was closely involved in the US-Israeli operations with Iran, identified its principal motivation to be “to open up a long-term geostrategic relationship with Iran.”15 The Iranians had no ideological second-thoughts about using the services of “Little Satan” (Israel) to open up to “the Great Satan;” America. Noticeably, during several days of talks between former National Security Advisor Robert McFarlane and Iranian representatives in Tehran in 1986, the Iranians never brought up the plight of the Palestinian people or the Palestinian issue itself. Clearly, the Israel and Palestinian conflict was not high on the Islamic Republic’s agenda, though its rhetoric would never reveal this realpolitik dimension of Tehran’s foreign policy.16 3. Though Shimon Peres’ efforts to mastermind a US-Iran-Israel rapprochement failed due to Iranian infighting and the political scandal it caused in Washington, Israel never gave up its dream of finding a balance in the Middle East by aligning with the Islamic Republic. At a press conference in October 1987, Yitzhak Rabin even told reporters that “Iran is Israel's best friend and we do not intend to change our position in relation to Tehran, because Khomeini’s regime will not last forever.”17 According to Joseph Alpher, a close advisor to the late Israeli Prime Minister, Rabin often times spoke of Iran in private with great nostalgia.18 Immediately after Khomeini’s death in June 1989, Israel again emphasized that due to the common threat from the Arabs, particularly Iraq, an Israeli-Iranian alliance was “natural.” This belief guided Israel’s policy vis-à-vis Iran throughout the 1980’s, in spite of Khomeini’s rhetoric, and was shelved in the early 1990’s only due to the defeat of Iraq and the collapse of the Soviet Union, which effectively terminated the common threats that had brought Israel and Iran together in the first place. As the geopolitical map of the Middle East was redrawn after the end of the Cold 13 14

Interview with former Iranian official, Tehran, August, 2004.

V. OSTROVSKY, By Way of Deception, New York, 1990, p. 330; S. SEGEV, The Iranian Triangle,

New York, 1988, p. 249. 15 D. KIMCHE, The Last Option, New York: Maxwell Macmillan International, 1991, p. 219. 16 Interview with former National Security Advisor R. McFARLANE, Washington DC, Oct. 13, 2004. 17 B. SOURESRAFIL, Khomeini and Israel, England: Researchers Inc., 1988, 114. 18 J. ALPHER, The Iran-Iraq war: Impact and Implications, New York: St Martin's Press, 1989, p. 163. Edited by E. Kash.

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War, the region slowly moved towards a bipolar structure in which Iran and Israel, rather than finding themselves embattled non-Arab states with common geopolitical imperatives in a sea of Arabs, effectively had become the region’s two superpowers with the rivalry that such a distribution of capabilities brings with it. With the conventional Arab military threat gone, the Labor government under Peres and Rabin’s leadership opted for closer relations with the Palestinians and the Arab states in Israel's vicinity while portraying its former “natural” ally Iran as “an existential threat.” Israel's timing was quite peculiar in light of its efforts in the 1980’s and the fact that Iran's revolutionary fervor had cooled considerably. Iran was struggling with its war-torn economy and it sought a thaw in its relations with Washington. The clerical regime had no uranium centrifuges, no Shahab-3s and no Fajr rockets in Lebanon. Yet, it was the “greatest threat” to the region, Israel insisted.19 Soon after the 1992 American presidential elections, the Rabin government sought to convince the incoming Clinton Administration not to focus on Iraq as a menace, but on Iran. The same officials who only two years earlier had sought ties to Tehran now painted Iran as a world menace. "Iran has to be identified as Enemy No. 1," Joseph Alpher told the New York Times four days after Clinton’s election victory.20 Sensing a shift in Israel, Tehran concluded that it was behind the campaign to isolate Iran. Ever so eager to rebuild its economy and regain its position as the gendarme of the Persian Gulf, Iran feared that a successful Oslo process, and Peres’ portrayal of Iran as a threat to the Arab world, would result in Iran's permanent isolation and pariah status. Ever since the time of the Shah, the Iranians have feared that a resolution to the Israeli-Palestinian conflict could enable the Arabs to turn their energy and focus towards their unresolved disagreements with Iran. Having failed to win US support for Iran's reintegration into the region through various Iranian olive branches, Tehran concluded that it could only compel Washington to recognize Iran's weight and role in the region by attaching a cost to Washington’s unwillingness to accommodate Iran. By sabotaging US policies in the region, primarily the peace process, Iran hoped to put an end to American efforts to build an Israel-centric Middle East order based on Iran's prolonged isolation. Indeed, the weakest link in the American endeavor was the peace process—without a resolution to the Palestinian conflict, there could be no American order in the Middle East and no isolation of Iran, Tehran reasoned. Yet, Iran's influence on the peace process was residual at best. Ultimately, its faith lay in the hands of the Israelis and Palestinians themselves. In 1996, the Likud retook power in Israel and put a hold on the peace process. Prime Minister Netanyahu did not believe in a peace with the Palestinians under Arafat and found the Labor party’s depiction of Iran harmful to Israel’s interest. Even without a powerful Iraq, the Arabs still remained Israel’s number one enemy and the Jewish state should continue to cultivate the friendship of the region’s non-Arab states, as it had done for decades 19 20

S. PERES, Iran greatest threat to peace in the Middle East, Reuters, October 25, 1992.

“Israel Focuses on the Threat Beyond the Periphery”, New York Times, November 8, 1992.

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prior to the peace process, Netanyahu argued.21 As Israel more or less gave up on the peace process, Tehran’s interest in undermining the process diminished significantly. Though Iran maintained its harsh rhetoric, it slowly reverted to its posture from the 1980’s—tough rhetoric on Israel but little if any practical involvement against it. A few years later, during President Khatami’s tenure, Iran further moderated its position on Israel and lent its acceptance to—but not endorsement of—a two-state solution. From Iran's strategic standpoint, by that time, the two-state solution would either be unachievable or materialize without coming at the expense of Iran's influence and standing in the region. While the situation in the occupied territories has deteriorated significantly since the Second Intifada, Iranian verbal attacks against Israel have become fewer and farther in between. Iran's hard-line President Mahmoud Ahmadi-Nejad expressed support for Ariel Sharon’s disengagement plan in an interview with Newsweek in September 2005 and refused to criticize Pakistan for President Musharraf’s outreach to the Jewish state.22 The distinguishable pattern in Iran's approach to Israel is that though ideology certainly matters to the clergy in Tehran, it is at best a secondary driving force of Iran’s Israel policy. Iran's ideological enmity with Israel has only been translated into operational policy when it has coincided with a strategic interest to confront Israel, as it did in the early 1990’s. When Iran's ideological inclinations and geopolitical imperatives have clashed, as in the 1970s and today, strategic interests have consistently prevailed. The Israeli-Iranian geopolitical rivalry is rooted in a competition for regional role and strategic significance. Since they do not have any border disputes or historic grievances, their tensions can be significantly reduced through a collective security arrangement that tempers their hegemonic inclinations and provides both of them with a regional role commensurate with their geopolitical weight.

21 22

Interview with D. GOLD, foreign policy advisor to B. Netanyahu, Jerusalem, October 28, 2004. L. WEYMOUTH, A Demand for Change, Newsweek, September 18, 2005.

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IRAN’S CASTLING

IRAN’S CASTLING

by Rahaman GHAHREMANPOUR

Iran aims at becoming a regional power, but it feels itself under American siege. To break it, Iran will have to cooperate with its neighbors. Teheran and Washington’s common interests in the region and the use of oil as an economic weapon.

I

ran is increasingly becoming a more

assertive actor in its environment. The country's official Twenty-Year Vision Document confirmed by the Supreme Leader and published last year is targeted to change Iran into a regional power by the year 2020. This hypothetical transformation has its own prerequisites and implications. An ambitious, Islamic and militarily powerful Iran would be different from the present one in terms of its influence, national interest, and to a lesser extent, its foreign policy. For the time being, the immediate concern of Iran is to guarantee its survival and security vis-à-vis its main enemy—the U.S.—and in a volatile and war-prone region. Although it is rational to talk about conservative logic of power, or as one guru of international relations, Kenneth Waltz conceptualizes, the socialization of newcomers in international politics1, it is too difficult to ignore the specific theological and to some extent anti-Western characteristics of the Islamic Republic of Iran. In this sense, Iran’s orientation in the coming years and the reactions of the West to Tehran's vital interests will have an vital impact on the Middle East and Central Asia as two critical regions for Iran. It is argued that at the present and even for the foreseeable future, the main concern of the Iranian state is to guarantee its survival by deterring the US on the one hand and using oil as an economic but not political weapon on the other.

Defining the Iranian National Interest It is commonly accepted that national interest is not a clear concept, particularly in the developing world. Instead, state interests may be more useful in terms of analyzing orientations in foreign policy. In the Middle East, power elites are the main actors in defining the national interest. Taking into consideration the historical sociology of the region, it is arguable that elites are not very free in defining their country's national interests. Traditional restrictions, like the religious sensitivity of the masses, and other local factors, make it too difficult to define national interests in a vacuum. The national interest of Iran has been the topic of endless intellectual and policy-making debates during the last decade and particularly in the aftermath of Khatami's rise to power since 1997. The multidimensionality of the Iranian national identity has made this debate complicated and even confusing for many analysts. 1

See K.N. WALTZ, Theory of International Politics, California, 1979, Addison-Wesley.

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Pro-Islamic forces that control the main power centers believe that the Iranian national interest is inseparable from its Islamic interests. In other words, the Islamic identity of Iran should be the guiding principle in defining and pursuing national interest. Thus, the range of Iran's national interest is the Islamic world that spreads from North Africa to Southeastern Asia. The Constitution of the Islamic Republic of Iran gives priority to Islamic countries in expanding political and economic relations. Although the number of proponents of this vision has decreased considerably both within and outside the political system, they control the main power centers and try to become an effective and organized political minority rather than an unorganized majority. The victory of Mahmud Ahmadinejad in the recent presidential election has

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reinforced this group and their influence on defining the country's national interest.2 The second camp, which includes secular, nationalist and to a lesser extent Islamic reformists, insists on the geopolitical importance of Iran and believes that Iran should give priority to its geopolitical and geo-economic realities in defining its national interest. Accordingly, the locus of Iranian national interest should be limited to its neighbor countries on the one hand and the centers of power in international politics (the US and EU) on the other. Realistically, Iran is a small power in international politics and a main actor in regional politics and cannot extend its influence beyond its surrounding environment3. Although this group is suspicious of US intentions and its democratic policy towards Iran, it accepts power politik in international politics, which requires a green light from the US for Iran to become a regional power. Bush's neoconservative policy towards Iran in the aftermath of the 9/11 events and his calling Iran a member of the “Axis of Evil” indirectly undermined the second group. Overlooking the complexities of Iranian domestic politics, President Bush and his neo-con team condemned the so-called unelected leaders of Iran and supported any riot and opposition against them. This awkward policy paved the way for hardliners to suppress the proponents of the second group by calling them the puppets and fifth column of the USA that tries to overthrow the Islamic regime and marginalize Islam. This was a political tactic to remobilize the revolutionary masses and paramilitary groups. The title of an article in The Economist magazine was a reflection of the mood of many members of the second group: "Thanks, please do not support us" [Mr. Bush]4. In any case, a complex combination of domestic and foreign variables reinforced the religious and neoconservative perceptions of the Iranian national interest during recent years. However, this does not mean that religious perceptions overwhelmingly dominate national interest. Even hardliner forces have accepted the inevitability of considering the realities of power politics. Although there are some differences between the two aforementioned definitions of national interest, it seems that the commonalties between them are increasing. For the time being, the main distinction relates to the hierarchy of interests, not their relevance. The first group has accepted that it must consider the geopolitical dimension of national interest, and the second group has admitted it should regard the identity of regime as an element of national interest. This means that a type of consensus is emerging between two groups regarding the content of Iran's national interest. Nevertheless, the continuation of this consensus is not taken for granted. It depends on the domestic balance of power between the two groups on the one hand and the regional and international developments on the other. In his early statements in the aftermath of his victory, Ahmadi-Nejad reiterated that Iran is an Islamic country and we should follow Islam in policy-making and even foreign policy. Some of his hardliner supporters argued that Islam has not been the guiding principle during the last two decades. Some higher echelons of the regime protested this argumentation. 3 See M. SARIOLGHALAM, Iranian Foreign Policy: Theoretical Review and Coalition Paradigm, (in Persian), Tehran, 2000, Center for Strategic Research,. 4 The Economist, June 21, 2003, p. 40. 2

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Here, I argue that for the foreseeable future, the Iranian national interest will have three pillars: 1) the survival of the Islamic regime, 2) using oil as an economic, not a political weapon and finally 3) upholding the Islamic identity of regime. The following sections explain these pillars.

The Survival of the Islamic Regime The survival of the regime as the main pillar of Iran's national interest has its roots in the mindset of the country's power elites on the one hand and in the experience of the Islamic regime on the other. The majority of clerics in Iran consider the current state as the only true Shiite state during the history of Islam in Iran. In this sense, they believe that maintaining and preserving this Shiite state is a religious duty. A famous statement of the late Ayatollah Ruhollah Khomeini is the best example. Once, he had said that preserving the Islamic state might be more important than praying at some critical moments.. Furthermore, the experience of Iran's power elites during the life of the Islamic Republic of Iran has taught them they cannot be revisionist in a secular and anarchic international system forever. Saddam's invasion of Iran in 1980 and the ensuing, catastrophic eight-year war coincided with the great powers’ implicit support of the Iraqi secular regime. The relative isolation of Iran's Islamic regime in 1980’s increased the likelihood of the collapse of its political system and persuaded the country's power elites that they cannot ignore the rules of the game in international politics. Accepting the UN Security Council's Resolution 598 in order to make a ceasefire between Iran and Iraq was a turning point in their understanding of the importance of security in an anarchic international system. This decision acted as a driving force of pragmatism in Iranian foreign policy and left behind the revisionist policy of exporting Islam. This experience led Iran's power elites to rethink the defense and security policies of the regime in the late 1980’s and particularly in the aftermath of the first Persian Gulf War in 1991. The collapse of the Soviet Union and the emergence of some new, unstable republics to the north of Iran coincided with the uncertainties of the post-Cold War era. All of this intensified the sense of threat among Tehran's power elites. Khatami's victory in 1997 and his reinforcement of the détente policy with the Arab world and Europe increased the self-confidence of main power circles. Although the post-September 11th era and the US war on terrorism has increased the sense of insecurity among the power elites of Iran, the US invasion of Afghanistan and then Iraq led to the emergence of an unprecedented type of security interdependence between Iran and America. Now America is one of Iran's immediate neighbors in Iraq and Afghanistan. While Iran fears US hidden military and political plans, America is wary of Iran's detrimental impact in Afghanistan and particularly in Iraq. US officials are aware that Iran's influence in Iraq and to a lesser extent in Afghanistan is traditional and cultural rather than political and that Iran can use its influence as an asset when it is necessary. A successful US withdrawal from Iraq is largely dependent not only on Iraq's situation but also on Iran's behavior. Although Iran may not be able to improve the political and security rebuilding of Iraq, it is able to exacerbate it. The specific security structure of

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the Middle East region is the main determinant factor here. The toppling of Saddam has strengthened his main rival, Iran.5 Iran has many stakes in Iraq: the future of the Shiites, the possible presence of Israel in the Kurdish-inhabited northern region of Iraq, the type of Iraqi future state (democratic or non-democratic, federalist, centrist, etc.). Any of these developments would have an undeniable impact on the legitimacy of Iran's political system and, particularly, its security. As Iranians say, America's presence in Iraq is the last phase of a plot to encircle Iran. US foreign policy in the post-September 11th era has persuaded Iranian leaders that America has a hidden plan to implement regime-change policy in Iran. The US presence in Iran's environment is the best evidence. America's military and intelligence presence in Turkey, Azerbaijan, Afghanistan, Pakistan, Qatar, Saudi Arabia, Kuwait and Iraq is enough to conclude that the US has the upper hand in the mindset of Iranian leaders. At present, the greater Middle East is the main source of threat to Iran's security. In the southern Caucasus and Central Asia, Iran's main security concerns are: a) The US presence in some countries like Azerbaijan and Kyrgyzstan; b) The possible enlargement of NATO into this region; c) The issue of the division of Caspian Sea resources; d) The Nagorno-Karabakh conflict, which may have has some ethnic and even religious repercussions in Iran; e) The irredentist claims of some hardliners in Azerbaijan, which are supported by the Pentagon. Some of these irredentists are Iranian exiles in Azerbaijan; f) The issue of revolutions and its possible export to Iran; g) The traditional ambiguity of Russia in its Near Abroad and Turkey's ambitions and expansion of pan-Turkism in this region. In the East, Iran's main security concerns include the following: a) Its long and penetrable border with the failing states of Afghanistan and Pakistan. Organized criminal organizations and groups have made this border insecure for local residents. Narcotic trafficking is the main problem and has not been solved during the last two decades. b) The popularity of Sunni fundamentalists in Afghanistan and Pakistan. Many of them regard Iranian Shiites as profane. They have assassinated many Shiites in Pakistan, Afghanistan and Iran. In addition, the remnants of the Taliban are dangerous for Shiite Iran. c) Pakistan's penetration in Afghanistan, which is aimed at increasing her strategic depth in the Kashmir conflict. Iran has always been anxious about Pakistan's negative role in Afghanistan.

In their seminal book Regions and Powers (Cambridge University Press, 2004), B. BUZAN and O. WAEVER argue that in the Middle Easter security system toppling down an enemy (like Saddam)

5

could strengthen the other enemy (like Iran).

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d) Pakistan may be ready to cooperate with Washington's regime-change policy in Iran, considering Islamabad's behavior during the US invasion of Afghanistan and in victimizing Pakistan's old ally, the Taliban. e) The US’ long-term presence in Afghanistan and establishing military bases near the Iranian frontier is an immediate threat for Iran's security. In conclusion, the sense of being under siege has made the survival of the regime the top priority of Iran's national interest.

Using Oil as an Economic Weapon The second pillar of Iran's national interest is the continuation of exporting expensive oil. Given the structural economic problems, high unemployment rate and redistribution demands, the effectiveness and even popularity of the Islamic regime is largely dependent on oil exports. The US invasion of Iraq, the nuclear crisis of Iran and the rise of demand for oil have increased the sense of uncertainty as well as the price of oil in the global oil market, benefiting oil-exporting countries like Iran. The high oil prices would increase the maneuverability of Iran in its foreign policy, because the domestic economic problem has been one of the reasons for pragmatism in Iranian foreign policy since 1990.6 In order to maintain high oil prices, Iran has attempted to normalize its diplomatic relations with Saudi Arabia, Tehran's main rival in Persian Gulf security and in the Islamic world. The strengthening of ties between Iran and Venezuela during the last decade is understandable in this context. Iran's main policy towards OPEC is changing it into a major actor in the global oil market. In this sense, Iran has refrained from raising tensions amongst OPEC members over electing a Secretary General. Another element of Iran's oil policy is to depoliticize it. Iran has learned that oil should be used as an economic not political weapon in international relations. It has learned that using oil as a political weapon may provoke the great powers (as happened in the 1970’s through the Arabs’ oil embargo) and this is harmful for Iran's interest. Geo-economically, Iran is located at the center of global energy resources. The Caspian Sea in the north and Persian Gulf in the south are two main resources of cheap oil. As estimates show, the industrialized and new emerging industrial countries like China and India will be dependent on the cheap oil of the Persian Gulf at least until 2020. This would intensify the hidden rivalry among the great powers in order to import the oil of the region in coming years. Knowing this fact, Iran has attempted to sign gas pacts with China and India, hoping that they may help Iran resist US economic pressures through its containment policy. In addition, Iran is aware of the importance of oil security for US national interests in the Middle East. As the US Presidential Study Group has insisted in its recent report, "The current situation of American dependence and vulnerability is a profound challenge to the [American] nation in many respects".7 See D.L. BYMAN, S. CHUBIN, A. EHTESHAMI, J. GREEN, Iran's Security Policy in the Post-revolutionary Era, Costa Mesa, RAND, 2001. 7 Report of the Presidential Study Group, Security, Reform, and Peace: The Three Pillars of U.S. Strategy in the Middle East, Washington: Washington Institute for Near East Policy, 2005, p. 34. 6

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The security of oil exports from the Middle East is highly dependent on Iran's stability. Iran and the US have overlapping interests in this region, and the de facto acceptance of the US presence in the Persian Gulf comes from this fact. In this context, the continuation of the present situation in oil prices is beneficial for Iran and even for countries like Saudi Arabia that suffer from different socioeconomic problems. A democratic but US-dependent Iraq is a serious threat for Iran and Saudi Arabia as two great powers of oil production, because Iraq can increase the daily production of oil by using new and undiscovered oil resources, which may in turn decrease oil prices. Iraq's entrance into the oil market will have unpredictable consequences for Iran and other oil exporting countries. Therefore, a certain degree of instability in the region is beneficial for oil exporting countries, because they can mobilize emotional masses and buy their loyalties with high oil revenues.

Upholding the Islamic Identity of Regime From a materialistic viewpoint, it is not easy to understand the importance of state identity in international politics. In his seminal book, Social Theory of International Politics, Alexander Wendt argues that the identity of states may change through interaction with other states and through the structure of international politics. Moreover, a state's threat perception has close relations with state identity.8 The French nuclear bomb is not a threat for the US because both of the countries have a similar identity (secular, democratic and Western), while Iran's nuclear policy is regarded as a serious threat for international security. The self-perception and identity of the Islamic Republic of Iran has changed with the passing of time, but it has not transformed into a secular identity. An important dimension of Iran-America tension is the issue of identity. Referring to the jargon of postmodernism, the Islamic regime has defined the US as her "other," and this is a source of symbolic power. The Islamic regime has represented the US as the symbol of oppression and neo-colonialism in its state-sponsored media and annual ceremonies commemorating the victory of the Islamic Republic of Iran. As the Supreme Leader has repeatedly stated, the Islamic republic of Iran is the symbol of resistance against US imperial ambitions in the Islamic World, and if the US could suppress Iran in any way, the Islamic World would be devastated. Using moralistic language in its diplomacy, Iran's Islamic regime attempts to negotiate with the US in a standoff position. Therefore, non-materialistic and psychological factors like language and respect are important for the Islamic regime. For its fervent proponents, the Islamic regime is powerful and its power is the life of its volunteer forces. In this framework, any hypothetical unilateral or bilateral compromise over issues like nuclear capability or relations with the US would mark the Islamic Republic as a loser in the eyes of the revolutionary masses and veterans because it would weaken the A. WENDT, Social Theory of International Politics, Cambridge: Cambridge University Press, 1999, Ch.1 and Ch.8.

8

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symbolic power of the regime and its religious legitimacy. Western media have a critical role here. The image of Iran in Western and particularly in the US media is so negative. As long as this imagination persists, the non-materialistic factors and above all the identity of the Islamic regime will play an important role in defining Iran's national interest. Iran's Islamic regime has defined itself as the supporter of Muslims and oppressed people all over the world. This is its most persistent role in Iran's foreign policy, although Khatami proposed the Dialogue among Civilization in his tenure. Even Khatami defined his proposal within the Islamic identity of the regime, and many argued that it was a tactic to save Iran from international isolation. It is true that the impact of identity on Iranian foreign policy has decreased during the last decade; it is simplistic to say that the Islamic regime is not sensitive about its identity and can relinquish it. This pillar has close relations with other pillars. One dimension of security is the ontological security of Islamic regime. It should be confident that its identity would be maintained through interactions with other countries. Moreover, many of the world's oil exporting countries are Islamic or revolutionary countries, and by insisting on its Islamic identity, Iran can persuade them to cooperate to increase the price of oil. In this regard, Saudi Arabia as one the leaders of Islamic world has a key role. The Iran-Saudi rapprochement in the last decade was mainly due to the oil issue.

Conclusions Although in many respects the Islamic regime of Iran is a unique actor in international politics, its behavior follows a certain logic. Like many actors, it has plans to guarantee security in an anarchic international structure and uses its assets rationally in this regard. The best evidence is the survival of the theocratic regime in a secular international context, in contrast with the predictions of many analysts that Iran's Islamic regime is fragile and will be overthrown as soon as possible. The geopolitics of Iran has played a key role in sustaining the Islamic regime. Beside this, the geo-economic importance of Iran has given it invaluable opportunities in the post-Cold War era. Iran is trying to use its location at the crossroads of global energy resources to become a regional power in the next decade. Iran's realization of this ambition is dependent on different factors and above all on its ability to manage and control its paradoxical goals and interests. Although the Islamic regime of Iran sees it as the only genuine Islamic state, the changes in its environment has persuaded it that cooperation and detention with its neighbors is an indispensable necessity. In the framework of its national interest, Iran is experiencing a process of redefining friends and enemies. For the time being, the secular regime of Turkey is not considered as a threat for Islamic regime and Iran-Turkey cooperation has improved during the last decade. The new Iraqi and Afghan governments have unique situations. As long as they are not subordinate to the US, they can be reliable friends. Pakistan is in the middle. Its behavior in the aftermath of 9/11 showed that Iran must be cautious about Pakistan's secret decision to cooperate with US regime-change policy. Although Iran-Saudi relations are largely stable, Iraqi developments and reforms in Saudi Arabia

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may affect it in the future. Saudi hegemony in the Arabian Peninsula is critical for Iran's relations with the monarchies of the Persian Gulf and particularly the issue of the three islands. Finally, the US presence in the Greater Middle East will be the main security concern of the Islamic regime in its immediate environment in the coming years and Iran's definition of friend and enemy will be affected by the degree of cooperation of other countries with the US in order to isolate and contain Iran. The general perception in Iran is that the country is not isolated, but it is under US pressure and continuing the détente policy towards neighbor countries, the Arab world and the EU can decrease that pressure. Iran's geopolitical assets play a key role in this regard.

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WHOSE CASPIAN?

WHOSE CASPIAN?

by Seyed Rasoul MOUSAVI

A great game is taking place in the Caspian region. Its object: acquisition of the basin’s vast energy resources, desired by the coastal states and the world’s largest companies. But the estimates of regional oil potential are on the decline. What Iran wants.

1.

F

ollowing the breakup of the Soviet Union

in 1991, the Caspian region, with its rich hydrocarbon reserves, assumed great significance in the energy politics of regional states and global actors. Before this period, the Caspian Sea was known as a common Soviet and Iranian sea and according to pacts signed in 1921 and 1940 it was viewed as a common heritage for both countries. The Soviet Union as a superpower monopolized a large portion of the Caspian Sea and did not allow Iran to utilize a fair share of the resources—especially hydrocarbon reserves of the Caspian basin. At the time, the US had also accepted that the Caspian region belonged to the Soviet Union and did not have any interest in using Caspian oil reserves. The disintegration of the Soviet Union and appearance of new independent states1 in the Caspian basin beside Iran and Russia changed the geopolitics of the region. This new region was not only a new political phenomenon or new geographic entity, but introduced a vast set of geopolitical and strategic equations into regional and global affairs. The Caspian region contains just five littoral states, but from a geopolitical standpoint, it is impossible to isolate it from the broader Central Asian and the Caucasian regions. For example, it is impossible to ignore the important role of Uzbekistan in Central Asia and Georgia in the Caucasus. It is necessary to emphasize that the future geopolitical situation in Central Asia and the Caucasus will depend on how Caspian oil reserves are exploited. Presently, and for the foreseeable future, oil and gas constitute a significant part of world energy consumption; it should be supplied from reliable and diversified sources and should flow unabatedly. Therefore, the Caspian region is a new energy basin with importance for resource diversification. Coupled with the landlocked nature of the Caspian region, the development of transnational export pipelines to transport oil from the Caspian caused competition among companies over the contracts and between states over the final export routes.

1

Azerbaijan, Iran, Kazakhstan, Russia, and Turkmenistan.

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The high stakes led to the struggle known as the “New Great Game.”2 The main actors are the newly independent states of the Caucasus and Central Asia (Azerbaijan, Georgia, Armenia, Kazakhstan and Turkmenistan), Russia, the United States, Iran, Turkey and various international oil firms. Pipelines are not only significant economically but also confer degrees of control, dictating dependence and influence. The pipeline options were evaluated according to criteria determined by the interests of the main actors in the “New Great Game” and the technical requirements of the oil business. Reaching consensus on the Caspian legal status is one of the main activities of the Caspian littoral states in the post-Soviet period. Iran was the first state to propose a mechanism for using the Caspian Sea as a common right for all littoral states. On February 17, 1992, Iran used the opportunity of the ECO Summit in Tehran and proposed the idea of a “Caspian Sea Cooperation Organization”. The presidents of Azerbaijan, Turkmenistan and Kazakhstan and the Special Envoy of the Russian president agreed to follow up on this in the session of foreign ministers held on February 16. They agreed to form five committees on all issues. These committees were: Legal Status Committee, Navigation Committee, Fisheries Committee, Environment Committee and Scientific Research Committee.3 Thereafter, many different ideas were placed on the table over the nature of the Caspian Sea and the question of whether it be defined as a sea or a lake. The answer to this question has various legal and political ramifications. In addition, varying interpretations of the 1921 and 1940 Treaties signed by Iran and the Soviet Union were put forth. First, Iran, Russia and Turkmenistan believed that, based on these two treaties, the Caspian Sea is a common resource for all littoral states and all of them should have equal rights in using Caspian Sea resources; and until the attainment of new consensus on legal status, the 1921 and 1940 Treaties would be a reference for those states. Azerbaijan and Kazakhstan held that neither the 1921 nor the 1940 Treaty addressed the question of seabed resources and those treaties only provided guidelines for fishing and navigation. On November 11-12, 1996 the second session of the Caspian states foreign ministerial was held in Ashgabat. At this session, all five littoral states accepted the legal status of the Caspian Sea, noting that it should be based on the consensus of all five countries. Following this decision, each state designated a special envoy for Caspian Sea-Related Issues, and they formed a working group for defining the Caspian Sea status.4 The idea of the Caspian Sea Cooperation Organization was not received well—especially by Azerbaijan, which engaged in unilateral activities. In signing new pacts for the development of Azerbaijan oil and gas resources Kazakhstan also The term “Great Game” was originally coined by R. Kipling to refer to the 19th century Anglo-Russian rivalry for hegemony in Central Asia. Since the demise of the USSR, this term has been used by analysts and observers of the Caspian region to describe various efforts to fill the strategic void – ranging from military ventures to competition over energy resources and pipelines. 3 A. MALEKI, “Efforts of the Littoral States in Resolving Caspian Sea’s Legal Regime”, Central Asia and the Caucasus Review, No. 41, Spring 2003, pp. 23-24. 4 Ibid., p. 26. 2

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followed Azeri interpretation of the Caspian status. Until 1994, Iran and Russia had a common view about Caspian status. When Azerbaijan signed an agreement (the “Contract of the Century”) on oil and gas industry in the Caspian Sea, Russia officially protested against it. But after this period a significant change took place in Russian policy on the Caspian Sea. Russia shifted towards Azerbaijani and Kazakh interpretations of the 1921 and 1940 Treaties regarding seabed resources. There are many possible reasons for this shift, but security and economic interests were primary. Thanks to the efforts of Niazof, Turkmenistan’s president, the Ashgabat Summit was held on April 22-23, 2003. In this summit, all presidents of the Caspian littoral states participated. The Ashgabat Summit set a new stage for multilateral negotiations and bilateral relations between the Caspian states. It also became clear that working out a comprehensive plan on the status of the Caspian demanded rigorous diplomatic labor.5 All Caspian Sea states pursue their own interests when it comes to the issue of developing the Sea's oil reserves. Some experts believe that while Kazakhstan, Azerbaijan, and Turkmenistan are more interested in the economic aspect of this issue, Russia pays more attention to the security aspect and Iran to the geopolitical dimension. After the Ashgabat Summit we can see that all littoral states follow their interests in the Caspian region more fiercely than ever before, and they are clear in their rhetoric about the interest of each country. Russia, Azerbaijan and Kazakhstan want the Caspian seabed divided along a modified mid-line, with each state free to develop mineral resources in their sector, while cooperating on the use of the actual water basin. These three states have come to a trilateral agreement on sub-surface boundaries and collective administration of the Sea's water. In May 2003, Russia, Azerbaijan and Kazakhstan divided the northern 64% of the Caspian Sea into three unequal parts along a median line principle, giving Kazakhstan 27%, Russia 19% and Azerbaijan 18%. Accordingly, the development of the northern Caspian’s hydrocarbon potential, where most of the region’s oil reserves and largest international projects are found, will in all likelihood move forward despite the lack of comprehensive regional consensus. Turkmenistan’s shifting position seems to have moved towards dividing both the seabed and water basin into sectors, with a 20-mile zone in the middle reserved for free navigation. Iran's stand is complicated. Iran first insisted that according to the 1921 and 1940 Treaties, the Caspian Sea is a common Soviet and Iranian Sea, supporting a condominium status for the Caspian Sea. Since the collapse of the Soviet Union, the condominium status should be sustained and if the littoral states decide to divide the Caspian Sea, this division must be expanded to the seabed as well. In such case, Iran’s share will not be less than 20% of the Caspian Sea.6 After the Ashgabat Summit, the region witnessed an important new development. 5 6

Ibid., p. 28.

M. SAFARI, “Central Asia and the Caspian Sea: Priorities and Development”, Central Asia and

the Caucasus Review, No. 43, Fall 2003, p. 80.

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Russia carried out an extensive naval exercise in the Caspian Sea in August 2002. More than 60 Russian ships together with land-based airplanes and thousands of Russian soldiers conducted military maneuvers, which covered the non-Russian parts of the Caspian Sea and involved the deployment of significant number of the newly constructed ships for surveillance purposes.7 This was the first deployment on such a vast scale. Russia never stated an exact purpose for this exercise, but many aims can be ascribed to it. stabilization of the Caspian Sea, Dagestan and North Caucasus; counterterrorism operations in the Caspian; defense of the North-South Corridor; protection of oil and gas reserves; operations against narcotics trade and smuggling. It is well known that in a closed sea there is no access given to foreign states, where Russia maintains forces exceeding those of the remaining countries. What necessitated an increase in an already excessive power, when the other coastal states have no means to accumulate military power? After the Ashgabat summit, we can see two important developments with respect to Caspian issues. The first is the signing of the Environmental Pact by five littoral states in Tehran in November 2003. This was the first such agreement signed by the five Caspian basin states since they began to hold talks on the Sea's status in 1996. Under the environmental agreement, the Caspian States pledged to tackle such problems as industrial pollution, oil refinery and tanker leaks and the energy industry's potential environmental impact on marine life, including the endangered, caviar-producing sturgeon. The pact, some officials noted, shows that Caspian Basin states are prepared to set aside eight years of squabbling in an effort to forge consensus on territorial issues. Iran fully supports this type of consensus and Iranian Foreign Minister Kamal Kharrazi pointed to the November accord as a model for agreements to come. Although many obstacles remain concerning the implementation of the Environmental Pact, i.e., the ratification of the convention by all five states and agreement on the protocols, it can be seen as a sign of cooperation.8 The second important development was the Moscow meeting on Caspian-related issues on April 6, 2004. Representatives of the Sea's five littoral states sounded optimistic at this conference. At its conclusion, the participants presented a joint communiqué, in which they noted that all remaining points should be resolved by consensus and principles of international law. At this meeting the diplomats of the five Caspian states explored the feasibility of hosting the gathering in the second half of the current year in Tehran. Iran proposed hosting the gathering.9 2. "Energy security" is an important term, not only for the US as a global power but also for all developed and developing countries, because energy accelerates the 7

Y.S. UMANKSY, “The Caspian Oil: Geopolitics and Geo-economic Implications”, Marco Polo

Magazine, No.3 2003, pp. 4-5.

For more information on Caspian’s environmental issues see: A. MALEKI, The Caspian Sea and Environmental Necessities: Cooperation for Confronting Problems, Amu Darya, Spring and

8

Summer 2003, Vol. 7, No. 14&15, pp. 71-113. 9 Iran News Agency (IRNA), April 7, 2004.

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development process. Therefore, states seek to secure uninterrupted and cheap energy from diversified sources; oil and gas account for 60 percent of world energy consumption; and in 2020, their share will increase to 66 percent.10 In this context, the Caspian Sea region is significant for world markets because of its vast oil and gas reserves. During the 1990’s, the American and British oil multinationals invested billions in the states that encircle the Caspian: the Republic of Azerbaijan, Kazakhstan and Turkmenistan, and their neighbors such as Georgia. In September 1997, the New York Times observed, "Forget mutual funds, commodity futures and corporate mergers; forget South African diamonds, European currencies and Thai stocks. The most concentrated mass of untapped wealth known to exist anywhere is in the oil and gas fields beneath the Caspian Sea and lands around it.” But after five years, Newsweek magazine, in its April 8, 2002 issue, published a report by O. Matthews, who wrote: “It is apparently beyond the limits of journalistic restraint to tell the story of Caspian oil as anything but a breathless spy thriller.” He claimed that, “the Caspian Basin, at a conservative estimate, contains about 70 billion barrels of oil.” Speaking on the same day in Almaty at the Eurasian Economic Summit, G. M. Gros-Pietro, chairman of Italy's ENI oil company, said that the Caspian contains only 7.8 billion barrels of oil. ENI is the only Western company that has discovered a new oil field in the Caspian, the Kashagan in Kazakhstan, and I have more confidence in the estimate of its president, although it is tenfold less than the sensationalist journalistic account. Nowadays, many analysts say that the original projection of Caspian oil potential rested on a number of questionable assumptions. Instead of the politically bloated appraisal of 200 billion barrels in Caspian oil reserves (compared with Saudi Arabia's 260 billion), valued at 4 trillion dollars, exuberantly cultivated for years by the State Department to lure American investors into the region and justify its own strategy there, today there are only 18 to 34 billion barrels, 70% of which are confirmed under Kazakhstan’s section of the sea, according to another American government agency, the US Energy Information Administration.11 And finally, in a report based on the Wilton Park Conference held on October 13-18, 2003 on "The Caspian and Central Asia: Stability and Development", Roger Williamson wrote: "It can be argued that events of the last three years have led to a decline in the importance of the Caspian Region, compared with Middle East and Central Asia. This is partly as a result of earlier over-estimation of the importance of oil reserves in the Caspian and partly because of security issues linked to Afghanistan and Iraq and now all experts believe that Caspian Sea seems to be more North Sea than Persian Gulf."

10 11

US Energy Information Administration, International Energy Outlook 2000. US Energy Information Adm. - Caspian Sea Region. http://www.eia.doe/gov/emeu/caspfull.

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Oil and Gas Proven Resources in the Caspian Basin Countries

WHOSE CASPIAN? 12

Oil and gas reserves are valuable only so long as they can reach their market. One of the major problems in developing the Caspian resources is the lack of transportation routes for oil and gas exports. The Caspian region is thus disadvantaged because it has no direct outlet to the high seas, except the Volga-Don channel, which is frozen for six months a year. This necessitates pipelines to carry the region's oil to the market. These pipelines must travel through third states after they pass through the territories of the Caspian littorals, which translates into economic benefits for the transit states. Also for the producers and the transit states, pipelines have a decisive effect on degrees of control, dependence and influence. Here, the economic and political interests of Russia, Iran, Turkey, the US, the states of Central Asia and the Caucasus cross. They are so contradictory that it is unlikely that oil exports from Central Asia and the Caucasus will start before 2010. Political instability in the region is one of the major issues that affects all decisions about pipeline routes. There are a number of security concerns in the Caspian region. The stalemate between Armenia and Azerbaijan over Nagorno-Karabakh continues, Chechnya is not yet at rest, the future relations between Georgia’s regime and its autonomous regions are unpredictable, terrorist groups are active in Central Asia. Meanwhile, other internal ethnic problems, consolidation of statehood, economic challenges and the development and improvement of government efficiency are a set of problems in the Caspian region all make it difficult to determine the final routes. In other words, finalizing the pipeline routes to carry Caspian oil and gas depends on various factors, among which the geopolitical concerns of world powers, regional security issues, financial estimates, geographic status of major producers and the existing infrastructure. Unsurprisingly, regional conflicts, political instability and the lack of regional cooperation have all slowed the development of Caspian oil and gas reserves. 3. One of the main obstacles for Iran in developing its oil industry in the Caspian Sea is the sanctions on Iran imposed by the US government. The Iran-Libya Sanction Act (ILSA) has directly affected Caspian pipeline development through Iran's territory. In practice, the ILSA bans foreign direct investment in Iran's energy capability and infrastructure and applies to US businesses as well as third parties, although there is little provision for international coordination or enforcement. The US position on energy-related matters in the region has been clear: it has been I. TOMBERG, “Energy Policy in the Countries of Central Asia and the Caucasus”, Central Asia and the Caucasus 2003, Center for Social and Political Studies, Sweden, p. 72. 12

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discouraging the laying of oil and gas pipelines through Iran while inducing US investment. Washington has been working to promote westbound pipelines from the Caspian basin, particularly the BTC oil pipeline, which will run from Baku, Azerbaijan, through Tbilisi, Georgia to the Mediterranean port of Ceyhan, Turkey. Iran always criticizes US backing of the BTC oil pipeline and claims that there is no need for the multi-billion dollar project, because the Iranian route to transport Caspian oil is the shortest and the least expensive. On April 29, Iran inaugurated the Caspian oil swap project. This project facilitates access of the Caspian states to the high seas. A major part of the project includes the Neka oil terminal and crude oil mixing installations.13 The project costs 330 million dollars and its current capacity is about 170,000 barrels per day, which can be increased up to 500,000 barrels a day. Repayment of capital and costs will take place through swap revenues. Customers of the National Iranian Oil Company will deliver Caspian crude to Neka and receive an equivalent amount of oil in the Persian Gulf. The crude comes from Siberia, Kazakhstan and Turkmenistan. It mixes with light oil inside reservoirs in Neka and the resulting oil, which is called mixed oil, will flow to Tehran and Tabriz refineries through Neka-Sari and Ray-Sari-Namrod pipelines. Iran obtains 2 dollars per barrel and also saves the expenses of pumping oil from south to north.

13

Iran, April 29, 2004.

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WHAT IRAN IS LOOKING FOR IN CENTRAL ASIA AD THE CAUCASUS

WHAT IRAN IS LOOKING FOR IN CENTRAL ASIA AND THE CAUCASUS

by Abbas MALEKI

The collapse of the USSR has freed the Persians from the historical Russian threat. Priorities and limits of Teheran’s economic and political penetration in the region. An extremely pragmatic approach. The pipelines issue.

1.

T

he territory of Central Asia, which consists

of vast expanses of steppe-land, desert and semi-desert with fine seasonal pastures, was destined by nature for the development of nomadic cattle breeding. Between the seventh and third centuries B.C., it was inhabited by a large number of tribes called Scythians by the Greeks, and Sakas by the Persians.1 The history of central Asia prior to its annexation by Russia can be divided into two major eras: pre–Islamic and Islamic. The pre-Islamic era was an Iranian era as most parts of Central Asia were under Iranian control. Islamic history in Central Asia and the Caucasus can be divided into six categories: the advent of Islam, Persian dynasties, the Mongolian and Taymourid era, the Russian era, the Soviet era and the contemporary era2. The Islamic era was the time of gradual loss of Iranian control over this region.3 Although all the dynasties in Central Asia had some roots in Iran or Iranian culture, the Iranian empires in Central Asia diminished until Nadir Shah (1736-1750) restored Iranian control over the Turkmen tribes, Khwarazm and Bukhara (all in Turkmenistan, Uzbekistan and Tajikistan).4 In the other parts of the Caspian Sea, Iran had vast territories from the early years of civilization. But during the Ghajarid Dynasty in two rounds of battles between Iran and Russia, Iran lost all of its territories in Caucasia. The first period of war ended in 1813 and because of the Golestan (signed in Nagorno Karabakh) Treaty, Iran gave away Daghistan, Chechnya, Georgia, Armenia and part of the Azerbaijan Republic. The second round of war ended in 1828; with the Turkmenchai Treaty (signed near Zanjan in Iran), Iran lost the rest of the Azerbaijan territories in Caucasia, including Nakhichivan and full rights for navigation and fishing in Caspian Sea. A. ABETEKOV, H. YUSUPOV, “Ancient Iranian Nomads in Western Central Asia”, in J. HARMATTA, History of civilizations of Central Asia, Paris: UNESCO Publ., 1994, Vol. II, p.23. 2 A. MALEKI: “Islam in the Caucasus and Central Asia: review of the Iranian connections”, Marco 1

Polo Magazine, No. 2/1998, pp.21-26.

3

R. FRYE: “Pre-Islamic and Early Islamic Cultures in Central Asia”, in R. CANFIELD (ed.),

Turko-Persian Historical Perspective, Cambridge University Press, 1991, p.37.

H. PEIMANI: “Regional Security and the Future of Central Asia: The Competition of Iran, Turkey and Russia”, London: Praeger, 1998, pp.24-25. 4

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The two major defeats of Iranian troops had impacts on Central Asia also and the Akhal Treaty was the last part of Iran’s direct presence in the region. It also caused a new trend in a Caucasian literature of envy (Hasrat), which speaks of return to the Iranian motherland.5 Geographically, the southern part of Central Asia is part of Great Khorasan, parts of which are now in Uzbekistan, Tajikistan, Turkmenistan and Afghanistan. Khorasan province, Iran’s largest, remains the most important part of Central Asia as far as providing food and commodities.

I. AFSHAR: “Zendegi Toufani (memories of Seyyed Hasan Taghizadeh)”, Tehran: Elmi Publications, 1989, pp.16 –17. 5

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Russia’s massive expansion into Central Asia began when it emerged as a power. Russia speeded up its expansionist policy in Central Asia following its defeat in the Crimean War of 1855. By the end of the 19th century, all of Central Asia had become a part of Russia.6 World War I and the Bolshevik Revolution did not bring independence to the annexed region, even though they changed its traditional structure. On February 26, 1921, Iran and Soviet Russia signed a treaty by which Iran regained some of its Caspian Sea rights and was permitted to have commercial relations with the Soviet Republics in Central Asia and the Caucasus. Despite the great heritage from Iran’s culture and civilization in Central Asia and the Caucasus, during the former Soviet era, Iran had only one Consulate General in Baku and never had access to the region, a few delegations for cultural ceremonies over the course of 70 years, notwithstanding. After World War II, the allies' forces withdrew from Iran, though Soviet troops remained until the Iran’s Azerbaijani disintegration movement and the US ultimatum to the Soviets in 1946.7 Then Iran maintained friendly relations but preserved its distance from Soviet Union. During the Shah era, the Soviets enjoyed many profitable projects in Iran after the 1973 oil shock. The events in Iranian society before and during the Islamic revolution in 1979 were not well understood in Moscow. But Vinogradov was the only ambassador who was received by Ayatollah Khomeini. Ayatollah Khomeini sent a message to Mikhail Gorbachev in 1989, which broadcasted from Soviet media.8 It was the first time that Soviet Muslims discovered Islam has strong positions outside of Soviet territory. The same year, Tehran and Moscow in a consular agreement allowed that their nationals within 45 kilometers on each side of the 2,250-kilometer frontier could pass the border with local government permission and without visas. Consequently, a huge population of Soviet Azerbaijanis rushed across the Iranian border and went to Iranian cities like Tabriz and even in prayer to Mashad, center of the Khorasan province. Eventually, when Azerbaijanis in Soviet Azerbaijan attempted to tear down border posts and meet their co-ethnics in Iran, in 1990, Gorbachev blasted the Azerbaijanis for supposedly turning to Khomeinism on the eve of a massive introduction of Soviet troops in Baku.9 In mid-January 1990, the Red Army attacked people in Baku over the huge flight to Iran. Ali Akbar Velayati, Iran’s foreign minister, traveled to Moscow in November 1991 and then to the Soviets republics of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan and Azerbaijan and witnessed these republics’ desire for closer relations with Iran.10 The dissolution of the Soviet Union was the 6

N. T. HOMAYOON: “A Glance at Asia: Understanding Central Asia”, in Journal of Central Asia

and Caucasus Review, Tehran: IPIS, No. 3/1993, Vol. 1, p.32.

L. FAWCETT: “Iran and the Cold War: The Azerbaijan Crises of 1946”, (translated to the Persian by Kaveh Bayat), Tehran: IPIS, 1995, p.216. 8 See Amu Darya: The Iranian Journal of Central Asian Studies, Vol. 4 No. 2, Summer 1999. 9 B. SHAFFER: “Partners in Need: The Strategic Relationship of Russia and Iran”, Washington: Institute for Near East Policy, Policy paper No. 57/2001, p.34. 10 A. MALEKI: “Iran and Russia: Neighbors without Common Borders” in G. CHUFRIN (ed.), Russia and Asia: The emerging Security Agenda, SIPRI: Oxford University Press, 1999, pp.230-65 7

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biggest event in the history of Iranian foreign policy.11 2. A combination of strategic location and energy resources has made Iran a focus for great power interests and competition throughout the modern period. This fact has profoundly affected Iranians’ perceptions of the world, of the historical process and international relations.12 Iran is situated at the heart of the world’s most important petroleum hub. Geographic diversity, a skilled and semi-skilled workforce and communication routes all contribute to this country’s standing.13 Iran has long considered itself the first neighbor of Central Asia and the Caucasus. Its strategic interests involving this region are as follows: a) Developing positive political relations with the states of the region, to include expanded trade and investment; particularly with Turkmenistan, Kazakhstan, Tajikistan and Armenia, although its relations with Azerbaijan are likely to remain professional but strained. b) Protecting open access to energy supplies, including the development of energy-based industries that complement rather than compete with domestic industry. c) Building relationships that help it escape from international isolation, which it sees as guarded by US global hegemony. d) Maintaining close and professional, if not always cordial, relations with Russia.14 In Iran, there are two approaches for the former southern Soviet Union states: one economic and one political-security. The Economic Approach dominated during Akbar Hashemi Rafsanjani’s Presidency (1989-1997). Despite western accusations of its exporting religious extremism in central Asia and the Caucasus 15 , Iran followed the expansion of economic and social relations with its neighbors. For this reason, Iran enjoyed good relations and expanded contacts with the newly independent states. The role of Iran for building different institutions and facilitating the entrance of these states into international organizations such as the UN, OIC and NAM is clear. Iran has been actively promoting its interests in Central Asia and the Caucasus. Iran is one of the most efficient routes for bringing Caspian gas and oil to the nations of East and South Asia. It has well-developed shipping terminals, a technically skilled workforce and a well-developed pipeline network that can be easily reached from A.Z. RUBINSTEIN, O.M. SMALANSKY: “Regional Power Rivalries in the New Eurasia: Russia, Turkey, and Iran”, London: M. E. Sharpe, 1995, p.29. 12 G. FULLER: “The Center of the Universe: the Geopolitics of Iran”, Boulder, CO: Westview Press, 1990, pp.17-23. 13 Q.N. MESHKINI: “Challenges and Imperatives of the Iranian Policy in Central Asia”; Amu Darya: The Iranian Journal of Central Asian studies, Vol. 4, No. 5/2000, pp.73-101. 14 C.J. FAIRBANKS, S.F. STARR, R. NELSON, K. WEISBRODE; “Strategic Assessment of Central Eurasia”, Washington: The Atlantic Council of US & SAIS, Johns Hopkins University, Jan. 2001, pp.73-77. 15 G.E. FULLER: “Turkey Faces East: New Orientations Toward the Middle East and the Old Soviet Union”, Santa Monica, CA: Rand, 1992, p.45. 11

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Azerbaijan, Turkmenistan, or Kazakhstan.16 It has, however, been blocked by US sanctions from playing a role in the exporting of Caspian oil and gas through the Iran-Libya Sanctions Act (ILSA), which was ratified again in August 2001 by the US Congress; any change in US policy is unlikely in the near future. In the compulsory absence of Iran in the Caspian energy market, Turkey’s best hope is that the region’s energy resources will be attractive enough to justify the construction of multiple pipelines, making the Baku-Tblisi-Ceyhan project with a $4.7 billion cost a feasible option.17 This pipeline is operational as of October 2005. Iran has several opportunities for transportation of oil and gas from Central Asia and the Caucasus. Iran is itself a consumer of these products. Shipments of crude to Iran’s Caspian port of Neka are running at around 50,000 b/d—less than 50% of the volume achieved in the spring of last year—because of the loss of the Asian premium that had made the route so attractive. Naftiran Intertrade Co, the Swiss-based subsidiary of National Iranian Oil Co, is trying to offer favorable terms to its “swap” customers, but there is little it can do unless the premium comes back. In April 2005, around 46 crude vessels discharged at Neka, the Iranian port on the Caspian, roughly the same volume as in March. Most of the ships came from Aktau in Kazakhstan, which is used by Kazakh state trader Munai-Impex, and the Russian Caspian port of Astrakhan, which handles barrels from Lukoil’s trading arm Litasco, BP and Vitol. BP puts in a handful of cargoes of Saratov Light crude from its TNK-BP joint venture, and also Turkmen Okarem crude that is charged from a jetty in Keimir. Dragon Oil, the first company to sign a swap contract with NIOC, puts in the occasional batch of Cheleken crude. After a break of several months, Litasco resumed shipments of Siberian Light crude to Neka in March. But the Russians, who in the first half of 2004 were making over 30 shipments per month of Siberian Light to Neka, are struggling to make the economics work this time round. LUKoil is in many ways ideally suited to supply barrels to Iran, because it operates the terminal at Astrakhan and has access to its own vessels. As the Iranian Ambassador to Kazakhstan says, Iran expects oil supplies from Kazakhstan to double from 50,000 to 100,000 barrels per day under a swap scheme in 2005.18 3. Prior to the May 1994 cease-fire in the Karabakh war, Iranian diplomats brokered several short-term cease-fires between Armenia and Azeri forces, and sent forces to the border between Iran and Azerbaijan. One thing that halted the further advance of Armenian troops after occupying Nagorno Karabakh and some Azeri district like Zangalan, Fizoli, and Gebrail was the warning of the Islamic Republic with Armenia. R. BHATTY, R. BRONSON: “NATO’s Mixed Signals in the Caucasus and Central Asia”; Survival, Vol. 42, no. 3, Autumn 2000, pp.129-45. 17 Z. ONIS: “Turkey and Post-Soviet States: Potential and Limits of Regional Power Influence”, Middle East Review of International Affairs, Vol. 5 No. 2/2001. pp.1-16. 18 Almaty, Interfax, Mar. 22, 2004. 16

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Following the April 3-7, 2001 negotiations convened in Key West, Florida by the Organization of Security and Cooperation in Europe, some hopes of finding a solution for the old dispute in the Caucasus emerged. The United States, France and Russia were the mediators at the negotiations, as co-chairs of the OSCE “Minsk Group” which includes 13 countries, established in 1992 as part of an effort to end the conflict.19 The French head of the Minsk Group went to Tehran and invited Iran to exchange views because “the role of Iran in preserving security and stability in the Caucasus region is clear”.20 The US mediator in the Karabakh negotiation, Carey Cavanaugh, said the co-chairmen were in touch with Iran to arrange to brief the Tehran government “to make clear to the Iranians that nothing in this peace process would infringe on their interests or be aimed against them”.21 Another example of Iran’s attempt as a peace-broker is its mediating role in bringing an end to the costly conflict in Tajikistan between the government and the Islamic and nationalist opposition groups. Iran not only did not tilt towards the United Tajik Opposition, but in fact tried to act as an honest broker between the two factions. In August 1995, Tajikistan’s President Imamali Rahmanov and Abdollah Nouri, the leader of Tajikistan’s Islamic Movement, were invited to Tehran and, in the presence of President Rafsanjani, signed an agreement to settle their differences peacefully. They agreed among other things to extend the ceasefire they had agreed on, again in Tehran, a year before, as well as to form a joint deliberative council to narrow their differences.22 During the trend of peace process in Tajikistan, Iran has been, alongside Russia, the most important country for mediation, guaranteeing promises and supporting both sides. Iran was involved in preparing the Moscow Declaration on June 27, 1997, the General Agreement on the Establishment of Peace and National Accord and the Protocol on Mutual Understanding between the President of Tajikistan and the leader of the United Tajik Opposition, which were signed at the same time. Generally, Iran’s leaders maintained amicable relations with Tajiks from opposing sides of the conflict throughout the 1990s. Tehran never officially supported the Tajik Islamicists’ aspiration to create an Islamic state but directed their efforts towards a peaceful settlement of the civil war. Tehran did, however, support the emergence of Tajik opposition leaders in 1991-92 and it hosted Tajik opposition leaders from 1993 to 1998. Yet its general policy was to maintain good relations with Russia. Both states wished to prevent greater involvement by the Taliban, Pakistan and Saudi Arabia in Tajikistan. They also aimed to minimize US and Turkish influence in the region and keep them at a distance from the inter-Tajik negotiations. Iran was a key sponsor of the negotiations and had the status of an official observer of the process. It hosted the second, sixth, and the eighth rounds of the negotiations, one consultative meeting, and Negotiations on Nagorno-Karabagh: Where do we go from here?, Caspian Studies Program, Harvard University, April 2001, p.18. 20 Tehran Times, April 26, 2001. 21 Reuters, May, 4, 2001. 22 A. TAROCK: “Iran’s Policy in Central Asia”, Central Asian Survey, No. 2/1997, pp.185-200. 19

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two meetings between Rahmanov and Nouri.23 4. Iran has pursued regional ties through the provision of humanitarian aid and sponsoring the construction of pipelines, railroads and electrical transmission grids connecting Armenia and Turkmenistan with Iranian networks. Iran has already made significant investments in a railway link between Mashad and the former Soviet railway system in Turkmenistan, which would connect all five Central Asian countries and Russia to the Iranian network and the Persian Gulf. Iran has encouraged road transport of goods from India, Southeast Asia and the Persian Gulf states to Central Asia along with its own exports and those of Turkey. Iranian and Turkish trucks are a common sight on the main highways of Central Asia, as are Iranian goods in the marketplaces. Iran also facilitated the entrance of Central Asian States and Azerbaijan into the Economic Cooperation Organization (ECO), in spite of Russian pressure to keep those states under its own influence. Iran’s Foreign Minister Ali Akbar Velayati (1980-1997) said, “The Islamic Republic of Iran is convinced that regional cooperation is the only guarantor of regional peace, security and stability. It is in this light that bilateral and multilateral relations are being forged with the countries of Central Asia and the Caucasus. The ECO pursues, inter alia objectives like trade among member states, encouragement of sustained development and active participation in international trade.”24 In addition to promoting bilateral relations, the Islamic Republic also embarked upon a number of regional initiatives designed to promote its image as the leader of the Muslim world and as a major outside player on the former Soviet scene.25 The ECO was established in 1985 by Iran, Pakistan and Turkey to promote economic, technical and cultural cooperation among its members. Under the Protocol on Preferential Tariffs, signed in May 1991, the signatories agreed to offer 10% preferential tariff reduction on selected items. Application of the Protocol was, however, disappointing; the lists of items were extremely limited, and even after national implementation began in May 1993 there were doubts that the preferential treatment was actually being applied.26 Economic links between the Central Asian countries and their southern neighbors have increased, but from a low base and to a lesser extent than links to economies outside the region. Likewise, the attempt to promote a regional grouping of all the non-Arab Islamic countries of western and Central Asia has involved more statements of intent than actual regional integration. Within the ECO, summits and other meetings C. ABDULLAEV, K. BARNES: “Politics of Compromise: The Tajikistan Peace Process”, London: Conciliation Resources, 2001, pp.71-4 and p.92. 24 A. A. VELAYATI: “The Constructive Role of the IR Iran in Maintaining Regional Security”, Amu Darya: The Iranian Journal of Central Asian Studies, Vol.1, No. 2/1996, pp.183-91. 25 O. SMOLANSKY: “Turkish and Iranian Policies in Central Asia”; H. MALIK (ed.), Central Asia: Its Strategic and Future Prospects, New York: St. Martin’s Press, 1994, pp.283-310. 26 R. POMFRET: “Central Asia Turns South? Trade Relations in Transition”, London: The Royal Institute for International Affairs, 1999, p. 24. 23

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may have contributed to confidence building and reduced regional tensions, but on practical economic matters such as simplified transit arrangements progress has been slow. In 1992, Iran took the opportunity to create an Organization for the Caspian Littoral States, which was ratified by Azerbaijan, Iran, Kazakhstan and Turkmenistan. The Russian ambassador to Tehran took part in the summit. In 1997 during the gathering of the foreign ministers of the Caspian littoral states in Ashkabad, Iran played a key role in concluding two points. First, the change and establishment of the new legal regime in the Caspian only with the acceptance of five countries. This case was referred to in an agreement between Kazakhstan and Russia in July 1998. Second, the founding of a joint oil and gas company between Russia, Turkmenistan and Iran for exploration and production. In the standpoint of Iran’s economic interests in Central Asia and the Caucasus, Russia is the most important country in the region and Iran must have the best relation with this country. This approach holds that Russia is a vast market for Iranian goods and a land of opportunities. These opportunities include high tech equipment, military industries, nuclear technology and weapons like submarines. In this approach, each Iranian province has direct relations with each of the Russian Republic Federations. For instance, the province of Gilan has close contacts with the Astrakhan Oblast and large ferries travel twice a week from Bandar Anzali to Astrakhan. This is the very route that decreases the travel distance between Asia and Europe by a considerable amount. 5. The other approach, the political-security one, is presently pursued by the advisors of Iran’s High National Security Council secretariat. Its key elements are: A) The dissolution of the Soviet Union and emergence of eight states as a buffer between Iran and Russia was a very important development for Iran, because these countries either were influenced by Iranian culture, literature and tradition or enjoyed a common language and ethnicity with the Iranian people. Six of them—Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan—are Muslim, while Armenia and Georgia share a deep-rooted common culture with Iran.27 B) For the past two centuries, the greatest threat to the security and the territorial integrity of Iran has been the Russian empire and its successor the Soviet Union. This approach regards the presence of the Russian military in the Caspian Sea as a potential threat and believes the most important result in Iranian foreign policy history is the collapse of the former Soviet Union and the disappearance of Iran-Russia land borders. It also believes that if one can avoid water boundaries, Iran will be immune from a big power threat. The Central Asian and Trans-Caucasian countries act as buffer zones between Russia and Iran and the legal regime in the Caspian Sea based on division will complete this immunity. The interesting point is that in neither the 1921 Treaty of Friendship between Persia and the Russian Soviet Federative Socialist Republic or the 27

A. MALEKI, “Iran and Russia”, p.235.

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1940 Soviet-Iranian Trade and Navigation Agreement, was there differentiation between warships, passenger or cargo ships. Generally, ships from both sides can move freely and enter all ports in both countries. Although Russian warships never entered Iranian ports after this agreement, some experts believe that the reason for Russian emphasis on a dual regime in the seabed and surface of the Caspian indicates that it wants to enjoy the privilege of exclusivity in the Sea. This exclusivity means that other Caspian states do not have any particular naval forces in the Caspian, while Russia has about 100 warships in the port of Astrakhan. Part of this naval force is from the Black Sea, which was transferred via the Volga-Don canal after disagreement between Russia and Ukraine. This approach believes Iran’s best choice in the Caspian legal regime is the complete division and establishment of national waters for each country in seabed and surface in the Caspian Sea. C) Part of this approach is that Iran starts focusing on agreements with Azerbaijan, Armenia and Turkmenistan as its immediate neighbors rather than Russia, Georgia and the rest of Central Asia. This does not mean helping the Central Asian and Caucasian countries because this could create competitors for Iran in the near future, especially in the oil and gas sector. D) The collapse of the Soviet Union removed, to a safer distance if not altogether, the threat of Russian armies and partially redressed the longstanding asymmetry in Iran’s relations with its northern neighbors.28 Iran now appears as a powerful force in comparison with the new Central Asian and Caucasian states. But on the regional level, the gains in security accruing from the removal of the Soviet military threat from Iran’s northern borders are offset by the dangers arising from regional instability and conflict. Iran feels threatened by the expansion of NATO to the east, especially the enthusiasm of Azerbaijan’s officials in granting its forces a base in the Caspian Apsheron peninsula. The concurrent containment of Iran by US and American oil and gas companies’ presence in the Caspian is of great concern to the government of Iran. War and extreme political instability in Azerbaijan and Georgia, recent events in Farghana Valley in Uzbekistan, Tajikistan and Kyrgyzstan29, the bloody confrontation of Russian troops with Chechnya’s Muslims and outbreaks of inter-ethnic violence elsewhere in the region leave the Iranian government anxious about the domestic impact of these conflicts and fearing their spread or escalation, as well as the possibility of outside interference and of new refugee crises—all of which are familiar from its experiences with Afghanistan and Iraq. Now, more than ever, Iran sees itself surrounded by conflict and instability. A further potential threat is posed by the upsurge in nationalist sentiment among the Turkic peoples of Central Asia and Caucasus, which might have an impact among Iran’s minorities, and particularly among Turkish language speakers in Iran. The terrorist events of September 11, 2001 also brought Iran face-to-face with the E. HERZIG: “Iran and the Former Soviet South”, London: The Royal Institute for International Affairs, 1995, p.2 29 S. NUNN, R. RUBIN, N. LUBIN, “Calming the Farghana Valley: Development and Dialogue in the Heart of Central Asia”, New York: The Century Foundation Press, 1999. 28

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emergence of American troops in Central Asia. American bases in Kyrgyzstan, Uzbekistan and Tajikistan are new footprints of western power in the region. Iran does not feel the immediate threats from these troops yet. Uzbek leaders and parliament has forced Americans to withdraw from its base in Khanabad. 6. While Iran’s role in the economic and political developments there should not be exaggerated, it is nevertheless fair to say that it has contributed to the economic development and political stability of the region and is likely to continue to do so in the future. On the economic level, Iran’s activity and success have been modest. This is partly because its own economy has been weak and therefore, unable to invest much in the developmental projects in the republics, or enter into joint ventures with other countries in order to do so. It is also because private companies and businessmen in Iran have had little experience in investing in foreign countries.30 Regional economic integration between Central Asia and Iran has been so limited because of its limited exports. Naturally, economic ties between Central Asia and its eastern neighbors have improved. Cheap goods from the Xinjiang province in China are particularly attractive for Central Asian traders. The fact that Iran’s policy is based not on ideology, but on trade and cultural links has also greatly helped Iran’s position vis-à-vis the republics. Its role in mediating between Armenia and Azerbaijan in their war over the Nagorno-Karabakh, the mediation between the pro-Moscow Tajik government and the nationalist and Islamist opposition groups have kept Iran from being seen as a threat to the stability of Central Asia by the Russians and the leaders of the republics. The prospect for construction of a gas pipeline from Iran to Armenia has been discussed for many years by the respective governments and other interested parties. The amount of gas to be transported to Armenia is one billion cubic meters per year in the first phase. There is also a possibility of expanding the project to export more natural gas to pass through Armenia to other countries. The Armenian border is within 60 km of the Iranian gas pipeline network, which connects Astara to Tabriz. Inside Armenia there would be another 60-100 km of new pipeline to be constructed depending on the final destination of this pipeline. The cost of construction of the pipeline and required compressors are expected to be in the range of $120-150 million and it would take less than a year to be completed by the Iranian and Armenian engineering and construction companies. Both Iranian and international companies have carried out the preliminary study of the project and several financing possibilities have been suggested. The fact that a project with such strategic and economic importance for the region has been delayed for so long shows that there are other variables to be considered.

30

A. TAROCK: “Iran’s Policy in Central Asia”, Central Asian Survey, No. 2/1997, pp. 185-200.

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THE GREAT GAS PIPELINE

THE GREAT GAS PIPELINE

by Narsi GHORBAN

Plans for a gas pipeline stretching from Iran to India via Pakistan have vast economic and geopolitical implications. The dispute over possible land and sea routes. The International Consortium proposal and the role of private companies.

1.

W

orld natural gas consumption is expected to

grow by 2.8 percent between 2000 and 2025 making gas the fastest growing primary energy source in the world. As coal and oil were the dominant sources of energy in the nineteenth and twentieth centuries, gas is expected to be the fuel of the first part of the twenty-first century. The reasons for the dominance of gas in the coming decades are its availability in many countries, environmental concerns, diversification from coal, oil and nuclear energy on economic grounds, market deregulation and security concerns. The substitution of natural gas for coal and petroleum products as an environmentally friendly fuel has been gaining momentum in developed as well as developing countries in the past two decades. According to the British Petroleum Statistical Review of World Energy (June 2000), the Middle East with 40.6 percent of world reserves has the largest gas resources. And if the gas resources of Russia and the Caspian Sea region are added to this sum, nearly two thirds of the world’s gas reserves are situated in Asia between the Persian Gulf and Siberia. In comparison, only 4.1 percent of the world’s gas reserves are situated in North America and 4 percent in Africa. The balance of energy consumption in North America and Europe has changed in favor of gas in the last two decades. In 2004, North America consumed over 29 percent of the world’s gas production. The Middle East region with over 40 percent of the world’s gas reserves has produced around 10 percent of the world’s gas. Iran alone has 15.3 percent of the world gas reserves but its gas production is 3.2 percent of global production overall. This imbalance has been partly due to the geographical distance between Middle Eastern gas producers and major gas consuming regions. The emergence of a huge potential gas market in the Indian sub-continent, Turkey, Europe and within the Middle East itself is likely to change this imbalance in the coming years. It is now widely believed that natural gas from this region will play an important role in supplying part of the increasing energy needs of India, Turkey and Europe in the first half of the twenty-first century. 2. The consumption of gas in India in 2004 was around 32 billion cubic meters (bcm). The present demand for gas in India, in excess of local production, where no fresh gas commitments are being made due to constraints on supply is estimated at over 10bcm/y (30 million cubic meters per day). However, if we consider unconstrained

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demand for gas and availability from external sources, the gas deficit by the year 2010 is conservatively estimated to be around 75bcm. Since 1999, the oil import bill in India has strained the economy as oil prices increased sharply initiating a renewed interest within the Indian government for large-scale natural gas imports from the region. Cross-border pipelines are one of the best long-term solutions to carry natural gas to countries with high-energy demand. While this concept is well established in North America and Europe, it is still a long way from being applied in Asia. Iran with over 27 trillion cubic meters of gas reserves is naturally interested in a large-scale exportation of gas to the Indian sub-continent. The geographical location of Iranian gas resources makes India and Pakistan suitable regional markets in the coming years and Iranian policy makers have focused on gas exports to the India in the form of LNG and via pipeline for over ten years. In November 2000, Iran and India agreed to launch yet another feasibility study on the land and deep-sea option of gas transportation to India. The idea of constructing a pipeline from Iran to India is not new and has been debated for the past fifteen years. Three routes have been considered for a gas pipeline from Iran to India: a) Offshore from the Persian Gulf to the Gulf of Oman and India; b) From Iran and offshore, across Iran’s border with Pakistan and along the Pakistani coast to India; c) From Iran to the Pakistani border and through Pakistan to India. The hostilities between India and Pakistan have been a stumbling block in the construction of a major gas pipeline from Iran to India through Pakistan. India’s first preference is to bypass Pakistan’s territory, laying a deep-sea pipeline far from Pakistani territorial waters. Alternatively, they prefer to bypass Pakistan’s mainland with the pipeline route going offshore from Iran and along the shallow sea route to India. The first option has already faced major technical difficulties, as laying and maintaining a pipeline three thousand meters down on the mountainous seabed is a major engineering undertaking with unresolved technical difficulties (the Oman-India pipeline was cancelled after three years of study with over $20 million costs). In addition, the costs and technical risks involved in the project makes LNG exports more reliable at present. The second option, which envisages the pipeline as passing through the territorial waters of Pakistan, has its own particular problems. If the pipeline were to pass through the shallow territorial waters of Pakistan, the security concerns would not be totally eliminated. Some Indian analyst have argued that a gas pipeline passing through Pakistan’s mainland with all the international and regional security guarantees would be less dangerous than a pipeline going through territorial waters when there would be no clear line of responsibility from Pakistan. The third option, which is the construction of the pipeline onshore from Iran to the Pakistani border and through Pakistan to India, is the most feasible, both logistically and economically. The first serious proposal to export natural gas to India on land was

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presented to the Asian Energy Institute in 1989, as the Asian Gas Pipeline. The Asian Gas Pipeline was a scheme to construct a pipeline with the capacity of 36 bcm/y from Bandar Abbas in Iran to Calcutta. It was envisaged that 10% of this gas would be consumed in the Iranian provinces on route, 20% to be used in Pakistan and the rest in India. In 1993, Broken Hill Petroleum Corporation (BHP) proposed a pipeline to export Iran’s gas to the India’s west coast. Crescent Petroleum, Trans Canadian Pipeline, Ltd. and Brown and Roote, Inc. have also proposed a gas pipeline transmission system from the Persian Gulf to South Asia. In the mid-1990’s, a consortium of Shell, British Gas, Gas de France and Petronas proposed a major gas pipeline from Assaluyeh on the Persian Gulf to Sui in Pakistan and eventually to India. None of these projects ever went beyond desk studies for various technical, financial and political reasons. In the mid-1990’s the Joint Working Committee between the national Iranian Gas Company (NIGC) and Gas Authority of India (GAIL) commissioned a study of the onshore and offshore routes. Pipeline Engineering Gmb of Germany and Sazeh consultant of Iran were awarded the project. The study was not completed due to lack of cooperation from Pakistan who did not allow the work groups in its territorial waters. The preliminary data showed a major technical obstacle in the area where the Indus River pours into the Arabian Sea. 3. The combination of high costs, high degree of inflexibility and high dependence on the economics of scale makes financing the Iran-India gas pipeline project very complex. The cost of transmitting 30bcm/y of gas from Iran to India would be in the region of $4-4.5 billion for the land route and $5-5.5 billion if part of it were to pass offshore. If the gas pipeline were built on land, over seventy-five percent of the total costs would be in local currencies. Engineering and construction firms in Iran, Pakistan and India could easily design and build the onshore gas pipeline within two to three years. Hence, the land gas pipeline would have the highest economic value for the local economies even during the construction period in addition to its importance for economic integration and political stability in the region. There have been a few developments in the past two years that have improved the chances of constructing a land gas pipeline to India. The government of Pakistan has changed its past conservative stance vis-à-vis a gas pipeline through its territory to India and is now actively encouraging the land gas pipeline from Iran to India. The highest authorities in Pakistan have publicly and privately indicated their country’s willingness to give all guarantees needed for the movement of natural gas from Iran to India via Pakistan. In another major development, all parties have accepted the idea of

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the creation of an international consortium for the implementation of this important project. Although a number of experts in the past ten years have suggested this idea, this is the first time that the governments are publicly adhering to this approach. Government- sponsored efforts in the past decade have not been successful and they are becoming more convinced that a private approach may be more constrictive due to variety of economic and political reasons. I have advocated the concept of an international consortium to construct an Iran-India gas pipeline in the past eight years. This international consortium would own the pipeline and enter into a long-term sale and purchase agreement to buy gas from Iran. The consortium would also sign an agreement for the transportation and supplying gas with Pakistan. And finally, it will enter into a long-term sale and purchase agreement with India. It must be noted that the ownership and operation of pipelines and facilities by an international consortium may require new legislation in some of the above countries. It is also envisaged that the government’s shareholding in the consortium would be direct or via their state companies. The principal participants in the Iran-India gas transmission network consortium would be: a) the public sectors in Iran, Pakistan and India; b) international oil and gas companies; c) industrial sponsors (regional & international); d) private sector (regional & international); e) financial institutions (regional & international); f) multilateral institutions. Although the cooperation and consent of the governments is crucial in this project, it is important that their equal participation in the international consortium be kept at a minimum. While I acknowledge the importance of the governments’ role and the strategic and economic advantages of their presence, their strong presence in the consortium would make it more political and unworkable as has been proved in the past. The United States’ destructive attitude towards this pipeline was encouraged by the high-level political approach of the Iranian government towards this pipeline. An international consortium would probably get less attention and less hostility. The governments’ roles should be to facilitate the operation of the consortium and create a necessary legal framework for the financing and operation of the pipeline in their respective countries. The crucial role of the governments is to encourage the private sector in the region to get involved in the financing and construction of the pipeline by providing adequate guarantees for the local financing of the project and to put forward new legislation, if required, for the construction and operation of the gas pipeline. Another important role for the governments is to facilitate the hard currency financing of the project by helping to create a guarantee mechanism satisfactory to lenders. The interest of international oil and gas companies in the consortium to build the Iran-India gas pipeline would be twofold. On one hand they desire to engage in the upstream development of gas resources in Iran and on the other, to find a profitable

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market for this gas and active participation in the growing Indian energy market. The involvement of the international companies responsible for the development of gas in Iran and building the infrastructure in India would assure those who invest in this transmission consortium of timely delivery of gas and assurance of the markets. Hence, their participation in the consortium is an essential element to both the gas producers and consumers. The participation of international and regional companies involved in the business of pipeline manufacturing, compressors, construction equipment and other relevant businesses in the project would also strengthen the proposed consortium. There are possibilities for the development of many associated businesses in conjunction with construction of this pipeline such as a pipeline manufacturing and services outfit in the region. In addition, gas- based industries can be developed along the route of the pipeline in Iran. The competitive price of gas in Iran would be a major incentive for the development of these industries. The role of the private sector companies and investors in major projects has not yet been fully recognized in the region. The private sector in Iran, Pakistan and India has developed rapidly in the past ten years and is keen to participate in profitable oil and gas projects, which has always been kept aside for the international oil companies and the state oil companies. The participation of the private sector in an international consortium to export gas to India may be the beginning of a new trend in the region. The local capital markets in India, Pakistan and Iran are able to absorb a good portion of the capital needed for this pipeline in local currencies. This participation would enhance the security of supply and markets, as it would increase the pressure on all the governments to avoid unilateral acts leading to closure of the pipeline. Both the gas producers and consumers would also welcome the involvement of the international and local banks as well as local and international financial institutions in the structure of the consortium. All parties have generally accepted that more regional and international engagement in the project would reduce the risk of one-sided action to disturb the operation of the pipeline. Similarly, the involvement of multilateral institutions would add to the peace of mind of consumers, suppliers and international companies. The World Bank has already indicated that it would be ready to participate in developing an innovative guarantee mechanism for this regional project. The Asian Development Bank and the Islamic Development Bank would also be interested in participating in the proposed consortium. There have been suggestions that all hard currency financing of the project could be secured from private investors and organizations based on Islamic principle of interest free loans. If the financing of the project were carried out in this form, it would be the largest project to date by which the lenders are rewarded with the profits of the operation. This would also put further pressure on all governments to see that political disagreements do not jeopardize the shipment of gas from producers to consumers. Innovative financing would be the key to the successful implementation of the Iran-India gas pipeline project. A refined version of classic financial instruments, like bonds, could be devised in such a way as to comply with Islamic laws and regulations. This would attract a substantial amount of local currency in countries which are faced

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with high inflation to the project and reduce hard currency financing. The introduction of a convertible bond partially redeemable in dollars at a pre-fixed exchange rate conversion may be considered as one of the options in this respect. To sum up, the prospects for construction of a gas pipeline from the Persian Gulf to the India considering the future gas demand in India and huge gas resources in Iran is rapidly moving from a dream to reality. However, the implementation of this project requires the resolution of intricate political and financial issues. Pakistan and India are beginning to realize that such a project, with major international and regional ramifications, apart from economic rewards for all, would be a major step towards a mutually beneficial security arrangement between the two belligerent countries. The pipeline could be built from the Iranian port of Assaluyeh to India through Pakistan with a capacity of 30 billion cubic meters per year. The land route would maximize input from local sources in Iran, Pakistan and India and would create thousands of new jobs for each country. Along the route of the pipeline deprived areas of the region would get a chance to develop and the pipeline would enhance regional economic integration in the coming years. To bring this dream to reality, the governments must dedicate time and resources to overcome some of the security arrangements required and allow an international consortium to have ownership in the transmission network. Multinational financial institutions must be brought in to develop guarantee techniques needed and the consortium should take all the necessary steps to attract and utilize local capital and talent.

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HEARTLAND PLUS

UNVEILING IRAN

A RING OF FIRE AROUND EUROPE

A RING OF FIRE AROUND EUROPE

by Fabrizio TASSINARI

Drained by never-ending budget negotiations, the EU proves incapable of getting rid of its burden of political ambiguity and geopolitical inconsistency. The challenge of the enlargement. The Turkish and Balcanic issues. The plethora of neighbouring initiatives can’t replace a genuine foreign policy.

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t’s hard to say whether the temperamental

country singer Johnny Cash would have approved of this association. Yet, by looking at recent developments in and especially around Europe, one cannot help noticing that the Continent appears to be caught in what Cash called a “ring of fire”. This allusion is not accidental. There was indeed a time, some three years ago, when the European Union began to wishfully refer to its many neighbours as a prospective ‘ring of friends’. The ring encompasses North Africa, the Middle East and countries of the former Soviet Union bordering Europe. This was supposed to be an arc of well-governed states enjoying amiable relations with the enlarged EU. This image is still quite vivid among the architects and observers of European foreign policy. Over the past few months, however, the ring has started to burn hot. This is primarily because of the diverse range of problems and threats that arise from our backyard: from political instability to poverty, from organised crime to Islamic fundamentalism. Less obviously, this fire started to have more existential ramifications. This is because the way in which Europe relates to its neighbours has increasingly come to reflect the way in which Europe deals with its own values, identity, and eventually, its future. 2. When European politicians and pundits are asked to define what the EU is, answers usually share a few basic common denominators: democracy, rule of law, respect of human rights, market economy and so forth. When answers get more detailed, however, they usually vary considerably. Some of them tip the scale in favour of the ultra-federalist integrationist idea, which we can call the ‘Superstate’ option; others refer to a looser area of prosperity and stability, what detractors have dubbed ‘regional United Nations’ model. Some point at the value of the so-called European social model, which aims to protect its citizens ‘from cradle to grave’; others support the more minimalist ‘Anglosaxon’ model. Some proudly recall Europe’s secular traditions, while others underline its religious diversity. The way the European project has unfolded, however, does not quite resemble any of these options. It is neither a Superstate nor a regional UN in the making. In fact, it would be more appropriate to argue that the construction of Europe contains both options without resembling any of them. What defines Europe, deep down, is its open-ended and transformational nature,

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its ability -or inability- to contain rather than summarise Europe’s diverse political, economic and social reality. This is also the reason why it is often easier, and less controversial, to define the EU in negative terms, by talking about what Europe is not. Europe is not violent, to the point that war among its members has become virtually impossible. The EU is not poor, and has in fact lifted out of poverty those countries that have joined it over the years. Europe is not authoritarian, and has made of democracy and the rule of law the fundamental pillars of its societies. In other words, we may not be able to be very precise about what it is that we have achieved inside Europe, but we are very clear about what it is that we are not, or at least that we have managed to wipe out or avoid. This process was initially a very introspective one: Europe distanced itself from the destruction of the two World Wars, from the Franco-German rivalry, from totalitarian ideologies. Over time, however, the process has taken geographic and civilisational connotations. Europe is not ruthless like Russia; it is not poor like North Africa; more controversially, some will argue, Europe is not Muslim like the Middle East or Turkey. Because of its fuzzy nature, Europe feels free to postpone its own future and to remain ambiguous about its own final goals. It is beyond doubt that Europe ought to radically streamline its internal functioning: a structure made for 12 or even 6 member states cannot work for 25 or 27. It is also unquestionable that Europe ought to connect more to its people and leave Brussels’ ivory towers. Most importantly, Europe needs to reform its sclerotic economies, which are doomed by declining demographic patterns. Yet, at the end of the day, nobody has died after the failed referenda on the Constitutional Treaty in France or the Netherlands, or because a European Council failed to agree upon the next EU budget. In fact, not much seems to have happened at all. Judging by the tone of the debate these days, one may really wonder: “Crisis? What Crisis?”, as the British newsmagazine The Economist recently titled. Surely, all this is unwise and short-sighted. But it risks becoming outright irresponsible when the EU applies its often quixotic behaviour to its neighbours. Here is where our ‘ring’ begins to loom. 3. That Europe cannot decide where it wants to go politically may seriously jeopardise its ability to perform. That it does not make up its mind about what to do with those countries that lie at its doorsteps can affect people -both in the neighbouring countries and in Europe- here and now. As it often happened in the past, the EU has chosen to bypass its own dilemmas by being ambiguous. Its communiqués rarely say ‘no’, and are filled with ‘yes, buts’. In some cases, these are legitimate objections. In others, they have proven to be a way to buy Brussels some time. The question of EU enlargement is an egregious example of this ambiguity. The enlargement has come to resemble a sort of grand bargain. Neighbours would be offered the golden carrot of European integration, while Europe was reassured that they would go through a path of Western-styled reforms. This seems to be a fairly clear-cut choice: you adopt the infamous 80.000 pages of EU legislation, and you are in. Yet, the EU has grown increasingly conservative about future expansions, because

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it does not want to see its political project diluted. On the other hand, the enlargement has been the only successful foreign policy tool that the EU has so far managed to devise. Hence the dilemma: either Europe enlarges, and it risks becoming a ‘regional UN’; or it decides not to enlarge, and it loses the little international clout it has managed to muster so far. Current debates on future enlargements to the Western Balkans and Turkey are revealing of this situation. Another spiral of violence in the former Yugoslavia would be unbearable but not unthinkable, if the EU does not live up to the clear European perspective it has promised to them. Yet, some EU member states feel that most Western Balkans countries are still light-years away from EU membership or that the EU is not ready to embark in a new enlargement process. Likewise, should Europe eventually reject Turkey’s bid at this or a later stage, it will miss the historic chance to anchor a moderate Muslim society to Europe, as an antidote against violent fundamentalism and terrorism. And yet, not one day goes by without this or that European government declaring that Turkey is too large, too poor, too Asian, or too Muslim. Enlargement is not the only strategy that has been poisoned by ambiguity. Also those neighbours who have not been offered the golden carrot of the enlargement have been affected by it. A plethora of aid and cooperation instruments have been designed over the years to deal with non-candidate neighbouring countries. The goals and rationales of these partnership instruments vary considerably. Nevertheless, they all share two major features: first, they mark a clear line between inside and outside of Europe. While membership can be regarded as a sort of ritual of internalisation, partnership is designed to keep neighbours clearly at arm’s length from Europe. Secondly, partnership instruments have been for the most part ineffective to tackle the problems afflicting our neighbourhood. This reflects quite faithfully the image that Europe projects to the world through its impalpable foreign policy: an economic giant but a political dwarf. Until the 2004 enlargement to Central Eastern Europe, Brussels carried on with this dual strategy of either promising membership, or offering partnership. Yet, as the ‘Big Bang’ enlargement came to a close, it became clear that the EU could neither carry on enlarging forever, nor continue to provide ineffective cooperation to its vast, and now even closer, neighbourhood. 4. To come out of this blind alley, the EU devised in 2003 a new strategy: a European Neighbourhood Policy (ENP). The Policy initially looked as an ambitious attempt to deal with Europe’s ambiguity. It is meant to provide the sort of enhanced cooperation necessary to ensure that neighbours embark in a process of reforms that makes them more prosperous and stable. Country-specific Action Plans are meant to provide a framework and to monitor progress. A new financial instrument will be established to finance all the neighbours. Apart from Brussels’ characteristically bombastic rhetoric, however, this new Policy remains unsatisfactory, and is in fact bound to worsen Europe’s neighbourhood

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dilemma, not to mentions the daunting challenges arising at our doorsteps. The ENP promises Europe’s neighbours “more than a partnership less than membership”, as the European Commission put it. It could hardly get more ambiguous than that, and nobody has quite figured out what this hybrid phrase actually means. The European Neighbourhood Policy puts together extremely different countries. Some of them, like our neighbours in North Africa or the Middle East, do not have EU membership prospect. In some cases, like Morocco, this prospect has even been denied explicitly. These countries can probably settle for an enhanced partnership, if this was only substantiated more clearly, without wondering about what being “less than members” actually implies. Some other countries, like Ukraine, Moldova or even the Republics in the South Caucasus, have long-term membership hopes. In the ENP, Brussels is essentially asking them to embark in major EU-styled reforms without any EU membership prospect attached. A stick without a carrot is nothing to be enthusiastic about, and these countries are consequently quite underwhelmed by what Brussels is offering them. Then there are countries that don’t want to be EU members, but don’t feel too comfortable in being partners either. This is for instance the case of Russia. Moscow has refused to be part of the ENP, primarily because it doesn’t see itself as ‘a’ mere neighbour of the EU, along with all the others. In its stead, the EU and Russia have opted for a grander “strategic partnership” which, at present, amounts to little more that an expression of good intents. Hence, no matter the instrument or the policy that is devised, the EU projects in its backyard its dilemmas and ambiguities about what Europe is and what it should be. Admittedly, much has happened since the ‘ring of friends’ phrase was first coined in late 2002. In December 2004, Ukraine had its Orange revolution that removed from power a corrupted crew of Russia-friendly oligarchs. Before that, Georgia underwent its own ‘Rose revolution’. Moreover, EU governments agreed to open accession negotiations with Turkey. Even in autocratic Middle East and North Africa, timid signs of democratisation and change have started to emerge. Elections were held in Egypt; a “Cedar Revolution” took place in Lebanon; and a new President of the Palestinian Authority has been elected. After a quick and promising start, however, most of these developments have stalled or have even experienced an involution. The action of the new Ukrainian administration led by Viktor Yushchenko has been paralysed by internal disputes. EU governments continue to squabble over Turkey’s future in Europe. The Palestinian Authority is constantly put under pressure by Hamas. It would be probably unfair to blame Brussels alone for these setbacks. Local elites and leaders have often been difficult to work with, while America’s policies in the region continue to be ‘not negotiable’ for partners and counterparts. However, it is beyond doubt that the EU, despite its limits and flaws, has a tremendous impact on its neighbours, on the strategies of their governments, and on the expectations of their people. Likewise, the neighbourhood represents a crossroad of Europe’s own future. Here is where European integration meets European foreign

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and security policy. Here the vision of Europe as a united political actor meets the one of stability and prosperity for the whole Continent. An injection of confidence and common sense is needed to make difficult choices: inclusion or exclusion; membership or partnership; hard power or soft power. Either way, ambiguity does not amount to a strategy. It will only let the fire go wild, as Cash would have put it.

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AMERICA RELEARNS GEOPOLITICS

AMERICA RELEARNS GEOPOLITICS

by David POLANSKY

As a nation that abjures foreign entanglements, the United States rediscovers the world each time it goes to war. America's strategic confusion proves Iraq to be no exception. The turbulent domestic debate. Shifting approaches towards the insurgency and Tehran. Why Bush's "new" strategy militates against withdrawal.

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t was during the First World War that

average Americans first came to know intimately the geopolitics of other countries. The 100,000-plus troops knew it firsthand, as many who had never ventured beyond the limits of their hometowns marched across the Somme. Their wives and family members knew it, as they traced the soldiers’ paths along maps at home. Following the war, with the soldiers’ return home, it was promptly forgotten, and the sense of contact with foreign geographies was erased from the national consciousness, living on only in the memories of those who fought “over there”. This process was repeated in World War II, in Korea and in Vietnam. The maps changed, the names and places grew stranger but the formula remained the same. Not having a knack for imperialism, Americans never etched their stamp onto foreign maps, thus obviating the most pressing reason for studying them. What presence remained in those countries where Americans put boots on the ground (in Japan, in Germany, in South Korea for example) was too light, relatively speaking, to focus the attention of American citizens. In effect, Americans as a whole “rediscover” the world each time they go to war, forcing a sustained commitment in another place. While war is clearly the most direct method of involving one nation in another’s affairs (and the most useful for concentrating domestic attention on foreign policy), it is a problematic one, likely to distort one’s understanding of that country. Americans have no equivalent in the Middle East of the old British and East Asia hands who had established broad and deep contacts in their fields, in a more pacific environment. What knowledge we have gained then, in Iraq, is not the result of prolonged experience or sober analysis; it is haphazardly pieced together and essentially provisional in nature. Above all, the overwhelming reality of war tends to dwarf all other salient aspects of a nation’s politics—many of which will remain after the fighting ends and US troops (hopefully) depart. Finally, there is the inclination to view all phenomena on the ground in relation to the American presence there. This is wholly natural: the result of America’s seismic effect on the country as well as the concern for American interests first. But this is related to one of our fundamental geopolitical errors: the tendency to treat other nations as though they began to exist at the moment that we turned our attention on them. And it holds as true for many of the war’s harshest critics as for its staunchest

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supporters. Hence the paradox: concern for American interests causes us to view the situation at hand from an American perspective; yet, those same interests may require a broader approach, which takes into account factors which have little to do with the US. It is fairly simple to determine those interests which are directly related to America —Iraqi oil production and peripheral basing. Both have receded into the background for the time being. One of the major original causes for invasion —the threat posed by Ba’athist Iraq— no longer exists. Another —the hope of creating a viable democratic regime which might act as an example and an antidote to the poisonous political culture of the ‘Greater Middle East’— remains in the distant future, if ever. What has emerged is an attempt to create a reasonably functioning state that will not collapse into civil war or provide a haven for international terrorism upon US withdrawal. This in turn requires the complex balance of power among Iraqi groups on the ground to hold steady; the creation of a military that can combat a bloody insurgency (which is primarily made up of Sunni Iraqis of various stripes); some form of agreement with Iraq’s neighbors, particularly Iran. None of these directly involves the United States (though all of them require US involvement of some sort). All this is obvious to the point of banality, but it is worth reiterating just how long, since the fall of the Ba’athist regime in April 2003, it took us to reach these conclusions; assuming they are all possible, we are still figuring out how to accomplish them. 2. To understand why it took so long to reach this point, it is necessary to turn to the American domestic political scene. A ‘blogger’ and critic of the Bush administration recently highlighted the unintentional comedy of Bush’s repeated statements on Iraq, beginning with a pronounced “Mission Accomplished” in May 2003, moving on to a “Strategy for Victory” outlined last month and now the “Plan for Victory” put forth this past week at the Naval Academy. This superficially but adequately reflects the administration’s confusion over the situation in Iraq and, more pointedly, its inability to articulate its goals, much less a strategy for achieving them. Any examination of the current domestic debate has to begin here: the intellectual flabbiness and general muddle of our national discussion on Iraq are the result of the lack of a solid core. This is not to say that the administration has not been steadfast in its way. Bush has not wavered from his promise to ‘stay the course’. It is the meaning of that undefined phrase that has shifted. Part of this is inevitable. In waging a counter-insurgency while trying to prop up an embryonic government in a chronically unstable region, flexibility is a must. Furthermore, the situation on the ground changes according to the actions of Iraqis—not Americans. Yet the truth is that the administration is learning incrementally what its aims are and even more slowly, how to achieve them, and frankly its attention on these matters has not exactly been unwavering. Bush’s recent speech at the US Naval Academy represents the most updated version of its Iraq policy. The speech had two key points: a repeated pledge to build up the Iraqi military so that it may “stand up as we stand down”, and a new description of the insurgency as being divided between terrorists who aim to create a caliphate in Iraq and Ba’athists who seek to restore the

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dictatorship (both of which groups must be wiped out), and ‘rejectionists’ who have genuinely political aims and who can perhaps be negotiated with. Alongside these is a third unmentioned development: Bush’s authorization to Zalmay Khalilzad to conduct negotiations with the Iranians over Iraq. These elements, taken together, roughly and vaguely comprise the present American goals in Iraq. It is where the administration stands after two and a half years of American occupation. Meanwhile, many of its critics have been lagging even further behind. The nadir was reached following the revelations of the Plame scandal (a subject that is no more within the scope of this article than stem-cell research), when the Democrats forced the Senate into a closed session at the beginning of November to advance an investigation on prewar intelligence. While such is not an illegitimate subject for discussion, it has too often tended to come at the exclusion of serious argument over future policies. Further along the fringe is the anti-war left, which over the course of the summer coalesced into the Cindy Sheehan movement, behind the mother of a slain marine. The radicalism of their repeated demands for immediate withdrawal from Iraq (not to mention impeachment of the President, public apologies at the UN, etc.) help explain why Bush’s position is more stable than it might seem, despite his plummeting poll numbers. Along more serious lines is the call among a number of Democrats and some Republicans for the implementation of a concrete timetable for troop withdrawal, over the course of the next year. This is a subject that the administration has been loath to touch. Most recently, John Murtha, a hawkish Democratic congressman from Pennsylvania and decorated war veteran—the furthest thing from a fringe politician—has called for complete withdrawal within six months time. Murtha had originally supported the invasion, and actually visited the Anbar province of Iraq before making his pronouncements. No timetable has yet been set, and attempts to do so have been voted down, but the Senate (with a Republican majority) has voted 79-19 for 2006 to be “a period of significant transition to full Iraq sovereignty”. After all the Sturm und Drang of the past few months, it was these events that probably precipitated Bush’s most recent address on Iraq. 3. A couple of things bear mentioning. First, despite many of the criticisms of the administration’s handling of Iraq, there is significant agreement between the executive and legislature over the future, above all in the desire for an exit. Second, the majority of these initiatives has to do not with Iraq but with America. Clearly, the call for immediate withdrawal has little to do with an analysis of the situation on the ground in Iraq. The more nuanced attempt at a discussion of timetables, however, is likewise not about geopolitics. It is about domestic politics. This is not intended as a slur. While there are surely those who see the administration’s weakness on Iraq as a chance to gain leverage in next year’s midterm elections (not to say the 2008 presidential race), all members of Congress have an obligation to their respective constituencies. Those in turn have friends and family members in Iraq, and are far more interested in having them come home than in propping up an Iraqi military.

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Ultimately, everything turns on the American people. Contrary to popular belief, they are not averse to casualties per se, but they are averse to seemingly needless ones. The administration’s difficulty in articulating a clear strategy combined with the fact that little seems to be accomplished by our troop presence has exacerbated this tendency. In fact, a great deal has happened in a comparatively short period of time (two and a half years is a blink of an eye, particularly in a region as stagnant as the Middle East). The problem is that what has been accomplished remains ambiguous, and furthermore, it is unusual for the people of a large democracy to maintain sustained interest in the turbulent and confusing geopolitics of a nation halfway around the world. So where then do we stand on the ground? The Bush administration’s most recent plan provides as a good a gauge of success as any. Firstly, it must be said that US troops have had if anything underreported success in combating the insurgency. They have achieved decisive military victory in nearly all open clashes, and are proving able to adapt to a continually adapting guerilla warfare. Though over 2,000 Americans have now lost their lives in Iraq, the rate has greatly decreased, and it is in fact a grisly measure of their success that Iraqis are being targeted in such high numbers by the insurgency, as they make for easier victims. Much will tell over the next several months, as the military shifts to its strategy of securing ground rather than targeting insurgents. As for the Iraqi military, it simply does not exist, where a functioning military must be capable of waging war without foreign assistance. This is where the problems of seeing Iraq for itself, rather than in relation to American needs, come into play. A military is a function of a more or less cohesive society, whose members view their nation as something tangible and worth dying for. The Iraqi military is being forced in its infancy to fight against Iraqis. It is easily penetrated by insurgents themselves, and increasingly has become a medium for Shia revenge killings against Sunni Iraqis. The notion of the Iraqi military “standing up as we stand down” is theoretically sound, but essentially hinges more on our need to eventually stand down, then on the willingness or capacity of Iraqis to stand up. Bush’s initiative of more openly engaging Iran has been put forth too recently to have yet borne fruit. However, we have had long-standing backchannels with its government, which have not yielded tremendous success. Whether one engages or rebuffs Iran, certain fundamental obstacles exist between us. While Iran has been greatly weakened on the international stage by President Ahmadinejad's diplomatic blundering, its geopolitical weight in Iraq remains more or less a permanent reality. Furthermore, Khalilzad’s mandate from Bush is likely a relatively narrow one: he will be negotiating solely on Iraq, without the authority to link agendas. Meanwhile, Iran’s influence on Iraq has not lessened and there is little that negotiations may change over the fact that the Iranians will aim for maximum control over their neighbor, and which we will attempt to limit to nothing, despite the fact that the most decisive factor is already a reality: Shia domination of any Iraqi state. As for the overall effort of calibrating military and political objectives, particularly with regard to splitting the insurgency, seeking success in this arena actually militates

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against a swift withdrawal, for two reasons. First, withdrawal would be taken as a victory by the insurgents, and their efforts would only redouble. Those who argue that American troops add fuel to fire may have a point, but again they err in viewing its aims through the prism of the American presence there. The insurgency is fundamentally an Iraqi power struggle. It is not about seeking revenge on Americans (however gratifying) but part of a battle over who will control the future Iraqi state and in what measure. Secondly, a continued American presence creates the opportunity for negotiation in the first place, and limits the Shia’s political (and potentially military) revenge on the Sunni. Thus, all three of Bush’s primary objectives demand a prolonged (for the time being) involvement rather than a swift withdrawal. Balancing against Iran, combating the insurgency while building up the military and holding the political balance of power all demand American troops on the ground. The truth is that those objectives are reasonable. The difficulty in achieving them at this point comes less from American inability to pursue them well than from the sheer magnitude of the task itself, beginning with the original invasion. Without a change on the ground, any exit strategy in the meantime would simply be an exit without a strategy (effectively going out as we went in). This is the most unpleasant aspect of analysis, when one is forced to resort to arguing for “muddling through”. However, it must be said that Americans have a long history of precisely that. The status quo is undeniably woeful, yet, at least as far as American interests in a noncombustible Iraq are concerned, it has more to recommend itself than any strategies yet proposed. 4. The remaining factor is again not an Iraqi one. How long will America stick, as progress remains elusive? While Americans dislike being in Iraq, barring a catastrophe, they dislike leaving a disaster in their wake even more. Until someone can sell withdrawal to them in placating terms, as Nixon did with Vietnamization, they will be both against our presence there and against pulling out, which is to say the status quo will be maintained, with perhaps a marginal withdrawal following the December 15th elections (perhaps 20,000 troops, most of which were added as a result of the elections anyway). Beyond this, the cold truth is that, as long as we can minimize troop losses, which is to say as long as Iraqis rather than Americans are dying in large numbers, the call for troops to come home will be muted. Even if the Democrats retake Congress next year, it is unlikely that they will have the numbers to make a sea change in policy. It will probably not be until the 2008 presidential race that external factors (as opposed to results on the ground) will strongly affect our presence in Iraq. In the meantime, we will likely continue as we have gone, tinkering with strategy here and there, hoping for the best and awaiting the day when our maps of Iraq may go as forgotten as those from the First World War.

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LESSONS OF HISTORY IN IRAQ

LESSONS OF HISTORY IN IRAQ

by Sean MCBRIDE

When confronted with unknown enemies, the US traditionally tend to overreact, over-stating the threat and formulating strategies that require recalibration. The American public's attention deficit disorder. George Kennan's lessons for today's Democrats. The significance of Tehran and Damascus.

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olitical pundits churned out presidential

obituaries in late October with a speed not seen since the darkest days of the Clinton presidency. With special prosecutor Fitzgerald throwing out baseball analogies, Democratic strategists celebrated what they thought was a political grand slam: imminent Plamegate indictments, a right wing revolt against the Mier’s Supreme Court nomination, lingering questions about Bush’s leadership during Katrina, and continued violence in Iraq. But what has become all too obvious to strategists in both parties is that the War in Iraq is the prism through which all other political issues are seen; Iraq is the political alpha and omega, the single cause whose effects are widespread and far reaching. A recent Washington Post/ABC News poll placed Iraq atop the list of voter’s concerns. But before Democrats uncork the champagne, they need to realize that turning Bush’s political misfortune into substantive electoral gain requires that they both understand how Iraq informs domestic debate and formulate their own coherent policy toward the war. After all, the public’s political memory is short lived. A Republican Party, whose wise men were embroiled in the Iran-Contra Affair in 1987, still managed to pull off a stunning presidential election victory the following year. Neither the controversy surrounding the outing of CIA agent Valerie Plame nor the horrendous hurricane season will weigh heavily on the voter’s minds in 2006 unless the Democrat’s manage to manipulate the message such that the issue becomes not about the particulars of the individual controversy but about endemic flaws in administration policy. They certainly cannot count on a still politically astute GOP to aid them in that process. The administration has learned several important lessons about Iraq from the Miers nomination. The Miers nomination was the ill-conceived brainchild of Bush and White House Chief of Staff, Andrew Card. Surprisingly, it was not Democratic threats of filibuster but rather concerns by conservative elements in the GOP over Miers’ qualifications that truly doomed the nomination. And while some inside-the-beltway conservatives decried her lack of judicial experience, others, namely the religious right, saw her as on the wrong side of their hot bottom social issues (abortion, gay rights, etc). What the Miers nomination served to do was to reveal the mechanics behind the maintenance of a unified GOP. The neoconservative element of the party has mainly concerned itself with issues international, namely democratization of the Middle East. And while it has

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been willing to pay lip service to religious conservatives, social issues are not its primary concern. Conversely, social conservatives, since their political ascendancy, have salivated at the possibility of appointing justices willing to overturn Roe v. Wade and fight movements toward the normalization of homosexual relationships. Yet they will oblige (although some remain opposed—see Patrick Buchanan) neoconservative dreams of democracy in Iraq as long as neoconservatives parrot their concerns about American cultural amorality. In addition to this political quid pro quo, the image of Bush as an effective wartime president helped to cement the aforementioned alliance. Within the party ranks, questioning presidential leadership on any issue, even domestic, was tantamount to treason, especially during last year’s election. But with Bush firmly ensconced in his second term, the “rally round the leader” effect has evaporated. Political debt needs to be repaid and the religious right was expecting it in the form of a Scalia-like nominee. With the January 2005 Iraqi elections failing to squelch the insurgency, Bush had lost his wartime invulnerability. It was now safe for the religious right to allow private dissatisfaction with the Miers nomination to become public. After all, Iraq was never their pet project. The increasingly obvious truth about Bush is that, for him, the religious right has always been a means to a political end. Talk of a “culture of life” is simply that, talk. He has no great investment in overturning Roe or in outlawing gay marriage. What drives Bush, what he truly cares about, is democratic transformation in the Middle East; his religious fervor is projected abroad. But in order to remain politically viable at home, he needs a unified GOP, hence the reversal on Miers. The nomination of 3rd Circuit Court Judge Samuel Alito assures him of that. A unified GOP gives Bush the political capital he needs to continue the campaign in Iraq. The question remains though, how should the Democrats respond to the Alito nomination? For the foreseeable future, the issue that will engage the electorate is not the social mores at home but the military morass abroad. The public is primed to receive a uniquely Democratic message about the Global War on Terror (GWOT). Because of that, the Democratic Party does not need to distract itself and help unify the GOP by filibustering the nomination of Judge Alito. 2. But the public would not even begin to countenance a change in GWOT strategy unless it viewed the person articulating that change as a strong leader. The image of Bush atop the rubble of the World Trade Center seared into the collective mind of the electorate the impenetrable notion that George W. Bush was a true leader, impervious to the poll driven policies of the Clinton administration. Post-September 11th America desperately needed a man who projected unflappable leadership with a healthy dose of moral certitude. Bush’s born again psychology and his aides’ neoconservative ideology provided just that. On the other hand, the Kerry campaign could neither convince the public that their man was a capable leader nor convince them that Bush wasn’t. As a result, when Kerry spoke, nobody listened. But more recently, the issues surrounding the federal government’s response to Hurricane Katrina, rightly or wrongly, have done something that Kerry failed to do: call into question Bush’s leadership.

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More than anything, public support for Bush’s strategy in Iraq rests on his perceived leadership skills. The erosion of support for the war has more to do with deaths in the bayous of Louisiana than on the battlefields of Iraq. The public is willing to follow the logic of a man it views as strong and capable; here, the emotional tail wags the logical dog. But the public grows incredulous of administration rationales for war as the myth of Bush’s leadership crumbles. Polls reflect this phenomenon. A recent CNN/Gallup Poll shows that the percentage of the public that believes that the Iraq War was “worth fighting” has slipped seven points since Katrina. One would be hard pressed to say that this is because conditions in Iraq have gotten appreciably worse since early September. What has changed? The public perception of Bush’s leadership. Because of Katrina, the public is now primed to receive a new message regarding the GWOT. The controversy surrounding the Plame investigation has provided the pretense for a reinvigorated discussion of wartime strategy. But while Democrats can use the Plame investigation to motivate a new national debate, the debate must avoid the tempting red herring that Plamegate provides. It is fashionable in Washington to view the investigation of the outing of CIA agent Valerie Plame as a recapitulation of the fight over the rationale for war. It would be a mistake for the Democratic Party to, once again, re-fight that battle. As an electoral strategy, it is not viable. If the public were prepared to turn out the Republican Party because of faulty intelligence, it would have done so in 2004. Besides that, most congressional Democrats are faced with the vexing problem of trying to criticize the pre-war rationales despite their support for the October 2002 war resolution. The GOP has used this fact to successfully mute Democratic protests in the past. Finally, there is very little in the Plame investigation that suggests a pre-war conspiracy designed to dupe the American public into supporting military action against Iraq. Knowing this, the Democratic Party must simply use the investigation as a pivot point; the agenda is theirs and they must use it to make bold strategic proposals. But to date Democrats, both in and out of congress, have failed to reach anything approaching consensus on alternative strategies. Some look to historical parallels for inspiration. Peter Beinart of The New Republic has drawn one such parallel, comparing our current predicament to that of the period immediately after World War II, a time when American policymakers were, as now, searching for novel strategies to confront a new threat. Beinart uses such a comparison to urge the Democratic Party to adopt a Truman-like muscular militarism. But while Beinart’s basic analogy to the debate over American post-war Soviet policy is correct, his specific conclusions are wrong. The policy for the Democrats to emulate is not the Truman Doctrine but rather one that had its genesis in the writings of George F. Kennan. Arguably, it was Kennan who did the most to shape immediate post-war American foreign policy. In his famous essay “On the Sources of Soviet Conduct” and later writings, Kennan outlined several crucial ideas concerning the perceived Soviet menace. One theme to which he repeatedly returned was the idea that internal fractures existed within what was perceived by many to be a monolithic Communist threat. In Eastern Europe he saw the emergence of Titoism as an encouraging trend. He believed

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that American policy towards communist states should encourage the widening of these natural fissures. It was Kennan’s thinking that led to NSC 48/2, which concluded, in the wake of the Chinese Communist victory, that “the United States should exploit, through appropriate political, psychological, and economics means, any rifts between he Chinese Communists and the U.S.S.R.” But care had to be taken in pursuing such a policy openly for, as Kennan concluded, the United States had “no need to make a gratuitous contribution to the Soviet propaganda effort by assuming responsibility for a process of disintegration which communism had brought upon itself and for which it had no one but itself to blame.” Kennan assumed American relations with the Soviets would exist as “a sort of long-range fencing match…where the strength and health of our respective systems…is decisive…and will determine the issue.” This overall policy of encouraging steady inevitable disintegration of the Communist movement through deft diplomacy was relatively benign and avoided the bane of any great power—overreach. Unfortunately, in 1949 and 1950, something approaching a panic had overtaken American policymakers. The simultaneous “loss of China,” Soviet atomic test, and North Korean invasion of the South sent shockwaves through the diplomatic establishment. Suddenly, Kennan’s carefully calibrated strategy of encouraging divisions within the Communist movement seemed too tame, giving way to the more alarmist rhetoric of NSC 68. The diplomatic historian, John Lewis Gaddis, has boiled NSC-68 down to several key points: a pre-occupation and presumption of American weakness vis-à-vis the USSR, fear that short term cooperation between adversaries was more imminent than any fissure between them, and the assumption that the public was too simple minded to grasp gradations in strategy. Thus, because of relative American weakness, it could not afford to risk a strategy of passive encouragement of intra-communist differences; it had to view a “defeat of free institutions anywhere as a “defeat everywhere.” The enemy was monolithic and everywhere encroaching. This effectively ended any hope of rapprochement with China and opened up a new era of overextension with American involvement in dozens of inconsequential communist insurgencies, most notably, Vietnam. Anytime the United States is the victim of unanticipated events, it tends to cast a wide net when it comes to identification of its adversaries. As a corollary of this, it views itself as woefully ill-equipped to handle threats from such adversaries. This leads it to formulate a strategy destined to over-extend, demand a defense budget that causes it to over-spend, and use political rhetoric that tends to over-state the threat. Such was the case in 1949-50 as it is today. Ironically, the psychological shock accompanying perceived shifts in international politics leads to policy miscalculations at exactly the time when precision is most important. Thus, there is an inevitable lag time between events and a proper calibration of means to ends. During the Cold War, this policy re-evaluation occurred only after the disastrous Vietnam intervention and not until the election of Richard M. Nixon as president in 1968. By that time, thanks in large part to the inflamed political rhetoric used to sell NSC-68, public opinion had become an impediment to shifts in strategy. Thus it took a rabid red-baiter from the 50s to talk the electorate off the anti-communist ledge.

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Modern Democrats might balk at the idea that the strategy of a disgraced Republican President that could lead them to electoral success, but the path is clear. It was Nixon, with the help of his invaluable National Security Advisor, Henry Kissinger, who was the first to implement many of George Kennan’s ideas. The Nixon Administration was the first to exploit the Sino-Soviet split as a method for handling the Soviet threat. As a very simple matter, it helped reduce the number of adversaries the US faced, alleviating some of the overextension brought about by the previous strategy and allowing for gradual withdrawal from Vietnam. More importantly, it gave the US another method by which to manipulate Soviet behavior and apply pressure to Moscow. As the historian, John Lewis Gaddis, notes, “for the first time [the Soviet Union] faced rivals more determined to contain them than to contain each other.” Suddenly, it was the Soviets whose resources were taxed in having to confront two powerful foes. “It is difficult,” Gaddis claims, to envision a move that would have “produced a more dramatic shift in world power relationships of greater benefit to the United States at less cost.” 3. In a nutshell, 2008 will be 1968 with the roles reversed. As before, we have a party bogged down in a war that resulted from an exaggerated response to an adversary whose strength we have overestimated and whose internal tensions we have ignored. In fact, the menace from Islamofascism, the enemy as defined by the likes of Christopher Hitchens, is not of the existential nature that the Soviets posed. Yet in defining it as such, we have made palatable policies that are as quixotic as those we pursued in the early decades of the Cold War and with similar consequences. The viability of a grand strategic policy is only as good as the links between its means and ends. The link between the invasion of Iraq and the democratic transformation of the Middle East was so tenuous as to be meaningless. Yes, democratic transformation is a viable end goal, but the invasion was not the means by which to catalyze it. Instead, the Democratic Party must recognize the lessons inherit in Cold War history and advocate for a new détente. The fissure in Islamic radicalism that is to be the starting point for such a strategy is obvious; it has been overlooked only because the US has spent the last two years in Iraq trying to mend it. The sectarian divide between Sunni and Shiite radicalism is the division the United States must now exploit. Ayman Zawahiri, the chief strategist of al Qaeda, in his intercepted October letter to Abu Musab al-Zarqawi, recognizes this as al Qaeda’s principle weakness. The first step in exploiting this weakness is a reinvigorated attempt by the US to engage the Iranians. Just subsequent to the Sept 11th attacks, the Bush administration chose to lump Iran into the group of Islamofascist threats facing the United States and since then has pursued an official policy of tempered hostility towards Tehran. But in the current quagmire in Iraq, Iran is a natural ally of the United States in opposing a radical Sunni insurgency. Recent comments by President Ahmadinejad of Iran reinforce the notion that a strong Shiite government in Baghdad is in Iranian national interests. In the short term, an officially sanctioned US-Iranian partnership would hopefully compel the Iranians to cajole the Syrians into truly securing their border with Iraq, cutting off supplies to the insurgency. After all,

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ties between the minority Shiite regime in Damascus and Iran have traditionally been close. Additionally, it will allow for the coordination of security operations between Iranian backed Shiite militias, Iraqi government forces, and the US military. True coordination with Iranian backed security elements may free up US military personnel for operations in the Sunni triangle. As for the Iraqi central government, the US should encourage the trend toward closer ties with Tehran. All of this may ultimately mean stomaching a more Shiite Islamist regime in Baghdad but, assuming assurances of religious toleration, this is a small price to pay for the stability that may ultimately allow for US withdrawal from Iraq. Would the Iranians oblige the US in pursuing rapprochement? Cleary, the economic incentives of a closer relationship would benefit a financially strapped Iran. And a Shiite-dominated Iraq would give Iran strategic depth. More importantly for the United States, this new détente places a radical Iranian Shiite regime in direct opposition to a radical Sunni insurgency. In the long term, any rift in Islamic radicalism causes a diversion of al Qaeda’s already limited resources. Recruiting of young Muslims to radical, anti-American causes becomes more difficult if the radical Iranian regime is seen as nominally supporting US interests. Furthermore, from a public relations perspective, closer ties with Iran help to dispel the widely held notion in the Middle East that US policy is directed against Muslims. Finally, forcing al Qaeda into open confrontation with Iranian backed Shiite Muslims deals the organization a tremendous tactical blow, given its stated goal of Islamic unity. As a corollary of this strategy, the United States should refrain from destabilizing the Syrian government. The fall of the Assad regime could easily result in the rise of a radical Sunni government in Damascus, one more likely to aid the insurgency and less likely to bend to Iranian pressures. The United States must also work to restart significant Israeli-Palestinian negotiations. The unresolved Palestinian question acts to unify Islamic radicals and gloss over internal fissures. The US must truly and publicly pressure the Sharon government to withdraw from the West Bank while simultaneously providing the Israelis with the requisite security guarantees. This strategy, if pursued, should help expedite US withdrawal from Iraq and seriously weaken al Qaeda’s drive to expand its political influence in the Middle East. This is the strategy the Democratic Party must advocate. The Bush Doctrine, borne partially out of fear of some radical Islamic monolith, must for the most part be discarded. The administration overestimated the enemy and ignored its natural divisions. The hopeless obsession with democratic revolution blinded the United States to the strategic importance of détente with Iran. The overriding goal in the GWOT must be the destruction of al Qaeda and its subsidiaries. Engaging radical Islamic regimes is not incompatible with that goal, just as engaging Communist China was not incompatible with the goal of containing Soviet Russia. The United States need not fear Islamic theocracy. Sectarian differences between Islamic states will prevent any grand unification scheme on the part of al Qaeda. And if anything, the attainment of power by various Islamic radicals tends to temper terrorist tendencies; Iranian backed Hezbollah has never threatened the mainland US. Meddling in the internal affairs of Arab nations only allows the Arab public to assign

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proxy blame for their misery onto the United States. The United States can rest assured that ultimately Islamic theocracy will prove itself as inept at governance as the Soviet Union and will find itself in a similar historical dustbin. What the Democratic Party must do is identify a leader capable of convincing the public of the strategy necessary to assure such a conclusion. As was said before, the American public will only countenance a change in strategy if it is articulated by a Democrat who is viewed as a decisive and capable leader. The question then becomes, where, oh where, is the Democratic Dick Nixon?

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