Patience, Bluster or Escalation: How Iran Might Respond to Trump

(Bloomberg) -- By ending waivers that allowed a handful of countries to continue importing oil from sanctioned Iran, the Trump administration hopes to force the Islamic Republic into submission by starving it of revenue. The U.S. wants to shrink Iran’s military strength and its footprint in Middle East conflicts. But it has also condemned what it calls a self-serving clerical elite and denounced restrictions on ordinary Iranians. How could Tehran respond to the growing pressure?

Weathering the storm

This has been Iran’s strategy since President Donald Trump withdrew the U.S. from the 2015 nuclear deal last May and unilaterally reinstated sanctions. Sustained by the support of European powers and oil sales permitted under the U.S. waivers, the government distributed subsidized goods to protect its poorest citizens from surging prices triggered by a currency crash in the hope of outlasting the Trump presidency, betting he may be defeated for re-election in 2020.

If major buyers of Iranian oil such as China, India and Turkey now relent before American pressure and end their purchases, this could be hard to sustain, said Amir Handjani, a senior fellow at the Atlantic Council. “If Iran can’t sell its oil, then ostensibly it can’t buy medicine and food” from overseas, he said.

Iran’s Foreign Ministry said on Monday it’s holding “intensive consultations” with partners in the region and beyond to limit the impact of waivers being scrapped. China has objected to American unilateral action against Iran; while India said it would protect its energy needs and keep pushing for relief to buy Iranian oil.

Iranians Line Up at Dawn for a Sanctions Meal They Can Afford

Escalation -- and a showdown?

Iranian officials often resort to fiery rhetoric in response to external threats, but the country’s isolation in the Persian Gulf means those threats are rarely acted upon. A top Iranian commander this year warned Israel to stop “playing with the lion’s tail” after Israeli air force attacks on its interests in Syria -- yet there was no military retaliation.

Vows by the Revolutionary Guard Corps to forcibly shut the strategic Strait of Hormuz -- through which a fifth of the world’s traded oil is shipped -- if Iran can no longer export its crude could be seen in a similar light. The Guards were recently designated as a terrorist organization by the U.S.

There are “lots of costs” associated with Iran escalating tensions and “that’s something officials have to include in their calculations,” said Ali Fathollah-Nejad, visiting fellow at the Brookings Institution in Doha. “Any harsh actions in the Persian Gulf will have ramifications, the Chinese would not applaud, the Europeans would not applaud.”

Foad Izadi, a conservative foreign-policy analyst at the University of Tehran, said the U.S. move to scrap waivers was unlikely to succeed in its stated ambition of driving oil sales “to zero.” If that did happen, Iran could react by doubling down on its activities in the Middle East, he said. But “more aggressive options aren’t going to be necessary if Iran is able to sell oil.”

Netanyahu Says Israel Struck Iran Arms in Damascus Airport

Abandon the nuclear deal?

Hardline conservatives, who all along have criticized Iranian President Hassan Rouhani’s diplomatic outreach to the West, are intensifying their demands that Iran walk away from the 2015 accord.

“There’s no logic for Iran to stay in the agreement when the U.S. has officially left the agreement and Europeans have unofficially left -- they are not doing anything that is beneficial to Iran,” said Izadi. “It’s a matter of time before Iran is tired of this situation.”

Khamenei Condemns ‘Joke’ European Effort to Salvage Nuclear Deal

France and the European Union on Tuesday pledged to keep afloat their efforts to aid Iran, which so far have focused on creating a special purpose vehicle for trade designed to get around U.S. sanctions. But sweeping U.S. penalties have increased unease among global companies otherwise interested in doing business with Iran, especially banks.

Rouhani has invested enormous political capital in the deal, and abandoning it now could cripple the reformist camp he leads.

‘Cup of Poison’

Trump has said he’s willing to negotiate a new deal with Iran. But the dozen demands his administration has made -- including cuts to Iran’s missile program and ending Iranian support for key allies like Lebanon’s Hezbollah movement -- would require Tehran to acquiesce to the U.S. virtually across the board.

Talks are unlikely in the “short term” but aren’t inconceivable in the future, especially if the sporadic protests witnessed over the past year pick up and the political establishment senses it might be losing control of events, according to Fathollah-Nejad at Brookings Doha.

“If the pressure becomes too much, Iran will be forced to drink the cup of poison and engage with the U.S.,” he said. “The big questions is: When is this type of threshold going to be reached?”

©2019 Bloomberg L.P.