Courcy’s Intelligence Brief

The recent collapse in the value of the Iranian rial currency has raised hopes that sanctions are at last having the required effect on Iran.  There is no doubt that Tehran is feeling the pressure, but we can see no indication that the pressure is decisive.  And, besides, there has been some good news for Iran in the past week as well.

The main point for Iran is that neither Russia (see this week’s main briefing) nor China appear to be deserting it.  On 7 October, for instance, China’s official Xinhua news agency published a report arguing that more sanctions could not resolve the Iran crisis.  This was in response to the call by US Defence Secretary Leon Panetta for more sanctions to be imposed and the European Union’s additional threat to impose a ban on Iranian gas exports to Europe.

Xinhua argued: “Past experiences show that sanctions and sabre-rattling cannot bridge differences but only inflame animosities and trigger tit-for-tat actions.”  It said that it was as a result of sanctions that Iran has accelerated its nuclear programme.

Sanctions, Xinhua said, “have failed to change Tehran’s nuclear policy”.  On the contrary, “anti-Western sentiment in the Iranian public keeps rising, aggravating the antagonism between the two sides”.

Xinhua concludes: “The West should realize that blindly ratcheting up pressure on Iran cannot resolve the crisis.  The correct way is to stop threatening fresh sanctions and return to the negotiating table.”

The second bit of encouragement for Iran this week was the IMF forecast that Iran would return to growth next year despite sanctions.  The IMF report forecasts a contraction of 0.9% this year after 2% growth in 2011 but a return to 0.8% growth in 2013.

On the balance of payments, one of the most obvious casualties of the sanctions regime, the IMF says that there will be a surplus on the current account of 3.4% of GDP this year and 1.3% in 2013, down from 12.5% in 2011 but not a sufficient collapse to precipitate a balance of payments crisis.

The IMF expects inflation to moderate to just under 22% in 2013 from over 25% in 2012.  However unemployment is forecast to go up to 15.6% next year from 14.1% this year and 12.3% in 2011.  None of this is comfortable, but nor (say the hardliners in Tehran) is it regime threatening.

An indication of Iranian thinking was given on 4 October by an interview with Foreign Minister Ali Akbar Salehi by Germany’s Spiegel Online.  Salehi was in Frankfurt on his way back from the UN General Assembly in New York.  As a leading Iranian official who has studied in the West (he gained a PhD in engineering from MIT in 1977) and a former head of Iran’s nuclear programme, he is worth listening to.

Asked about the European Union’s plans to toughen sanctions on 15 October, Salehi said: “Not a big deal.  The sanctions create inconveniences.  For over 30 years now, we have been living with boycott measures that ultimately make us independent and strong...Iranian society is used to living with hardships.”

We have little doubt that this is the current view of the regime.  They are worried, but not sufficiently worried to buckle.  Salehi’s comments on Israeli threats to attack Iran are equally likely to reflect the authentic view of the regime.

Asked about Israeli Prime Minister Binyamin Netanyahu’s warnings that Iran will be attacked if it goes beyond the ‘red line’ he outlined to the UN General Assembly, Salehi replied: “If the Israelis had wanted to attack us, and if they could have done so, they would have done so long ago. In 1981, they destroyed an Iraqi reactor without warning.  But they have been threatening us for years, on every occasion and publicly.  They know what would happen if they attacked. We don't want war, but we will defend ourselves.  Aggressors will pay a high price.”

The important point about this comment is that it is a sober restatement of sentiments that have been increasingly expressed by the more volatile elements in Iran’s political and military establishment in recent weeks.  It reinforces the view that we expressed in our 26 September analysis that Iran has reached the conclusion that Israel will not attack.

It is this fact, allied to the continuing support from China and Russia (certainly at a sufficient level to protect it within the UN Security Council) and the fact that its economy is suffering but not unbearably so (Salehi suggested to Spiegel that Greece was in a worse position than Iran), that explains why Tehran is still displaying little sign of serious stress.