The other day John Brennan sent a tweet on tariffs (thoughts here) & Iran:
Using tariffs as a blunt force instrument against allies and partners is not only short-sighted but also plays into the hands of Russia and China. Same is true with bombastic rhetoric against Iran. We need to be smarter, more sophisticated, more strategic. https://t.co/bMMwsWCR2y
— John O. Brennan (@JohnBrennan) July 24, 2018
Brennan implied the Obama Administration’s Strategy on Iran was superior to President Trump’s noticeably less compliant approach:
Bombastic rhetoric against Iran is not only short-sighted but also plays into the hands of Russia and China. We need to be smarter, more sophisticated, more strategic.
Smarter, more Sophisticated, more Strategic.
Let’s see if that’s true.
We’ll take a walk through the Iranian Nuclear Deal and then fast-forward to where we stand today.
It’s worth reminding ourselves of the situation Iran found itself facing prior to the Joint Comprehensive Plan of Action – also known as the Iranian Nuclear Deal.
On February 9, 2010, Iran began the process of producing 20 percent enriched uranium.
This was a crucial step:
The Diminishing Difficulty of Enriching Uranium
In response, the UN Security Council adopted Resolution 1929 on June 9, 2010.
The Resolution expanded sanctions against Iran – tightening proliferation-related sanctions, banning Iran from carrying out nuclear-capable ballistic missile tests, and imposing an arms embargo on the transfer of major weapons systems to Iran.
The resolution contained the following language:
Iran shall not undertake any activity related to ballistic missiles capable of delivering nuclear weapons, including launches using ballistic missile technology.
States shall take all necessary measures to prevent the transfer of technology or technical assistance to Iran related to such activities.
On June 24, 2010, Congress adopted the Comprehensive Iran Sanctions, Accountability, and Divestment Act.
The Act tightened U.S. sanctions against firms investing in Iran’s energy sector and imposed new sanctions on companies selling refined petroleum to Iran.
The EU followed suit on July 26, 2010, agreeing to further sanctions against Iran:
The Council Decision provides a comprehensive and robust package of measures in the areas of trade, financial services, energy, transport as well as additional designations for visa ban and asset freeze, in particular for Iranian banks, the Islamic Revolutionary Guard Corps (IRGC) and the Islamic Republic of Iran Shipping Lines (IRISL).
On May 8, 2011, Iran’s Bushehr nuclear power plant began operations and successfully achieved a sustained chain reaction two days later:
Iran Goes Nuclear with Russian Help and Western Silence | National Review
On June 8, 2011, Iran announced intentions to triple the rate of 20 percent-enriched uranium production using more-advanced centrifuge designs:
Iran’s Uranium Enrichment Will Increase, It Says
On December 31, 2011, Congress passed legislation (see: Section 1245) allowing the United States to sanction foreign banks if they continued to process transactions with the Central Bank of Iran.
On January 23, 2012, the EU imposed a phased ban on oil purchases from Iran – with a total halt on EU importations of Iranian oil on July 1, 2012.
Iran Faces Tougher Sanctions by European Union and U.S.
On February 15, 2012, Iran announced a number of nuclear advances, including new centrifuges allowing for faster Uranium enrichment.
Iran trumpets nuclear advances, deepening standoff with West
You can see the back and forth being played by Iran during this period. These are familiar tactics and should have surprised no one.
But here’s the thing.
Those sanctions were rapidly taking their toll. The Iranian economy was coming under serious pressure.
Iran’s GDP contracted by 6.6% in 2012.
The official unemployment rate jumped to 14% in the Spring of 2012.
Ultimately, Iran’s GDP shrank by 9% between March 2012 and March 2014.
Iran’s economy was later estimated to be 15-20 percent smaller than it would have been without the 2011/2012 round of sanctions.
The U.S. Treasury stated that sanctions cost Iran $160 billion between 2012-2015. More than $120 billion in Iranian reserves held in banks abroad were inaccessible.
As a result, Iran’s currency, the rial, utterly collapsed:
In the first ten months of 2012, the Iranian currency, the rial, lost more than 80% of its exchange value. In a single day, on October 1, 2012, it dropped by 15%.
The collapse of the rial caused inflation to spike from an already uncomfortable 20.6% in 2011 to 27.4% in 2012. Inflation in Iran would peak at 39.3% in 2013.
Iran was under enormous economic pressure.
On August 30, 2012, the IAEA reported that Iran increased the number of centrifuges installed at the Fordow enrichment plant and was continuing to produce uranium enriched to 20 percent in excess of its needs for the Tehran Research Reactor.
IAEA report: Iran blocking access as it doubles number of centrifuges at Fordo, covers Parchin
The step from 20% enriched uranium to weapons-grade uranium is actually rather small:
If Iran decides to produce weapons-grade uranium from 20 percent enriched uranium, it has already technically undertaken 90 percent of the enrichment effort required.
Using 20 percent enriched uranium as a feed, 250 kg UF6 can be turned to weapons-grade material in a month’s time.
Iran began 20 percent enriched uranium production in early 2010.
By late 2012 Iran had produced enough 20 percent enriched uranium to produce weapons grade uranium in roughly one month.
In other words, Iran already had weapons grade uranium capability in 2012.
Iran’s problem was lack of a delivery system – a medium or long-range ballistic missile.
Iran’s 2012 ballistic missile capability was outlined in a December 6, 2012 Congressional Report, Iran’s Ballistic Missile and Space Launch Programs:
Iran must rely on others for certain key missile components and materials in its MRBM [medium-range ballistic missile] program. Export controls and sanctions have made it increasingly difficult, but certainly not impossible, for Iran to acquire the best of such items.
It is increasingly uncertain whether Iran will be able to achieve an ICBM [intercontinental ballistic missile] capability by 2015 for several reasons:
- Iran does not appear to be receiving the degree of foreign support many believe would be necessary.
- Iran has found it increasingly difficult to acquire certain critical components and materials because of sanctions.
- Iran has not demonstrated the kind of flight test program many view as necessary to produce an ICBM.
Sanctions had severely impaired Iran’s ballistic missile program – to the point that medium-range ballistic missile production was severely limited.
ICBM’s were simply not attainable.
In late 2012 Iran found itself in the following situation:
- Iran had achieved 20 percent-enriched uranium production. Stockpiles were now sufficient to produce weapons-grade uranium.
- Iran was facing intense International pressure regarding its nuclear ambitions.
- The Iranian economy was on the verge of collapse.
- Iran’s ballistic missile technology – the nuclear delivery system – was lagging, underfunded and component constrained due to economic sanctions.
- Sanctions were costing Iran tens of billions each year.
- Iran had no access to significant overseas cash reserves.
On June 14, 2013, Hassan Rouhani was elected president of Iran. Rouhani was a former nuclear negotiator.
Three days after his inauguration, Rouhani called for the resumption of negotiations with China, France, Germany, Russia the United Kingdom, and the United States.
On September 27, 2013, Obama personally called Rouhani – marking the highest level contact between the U.S. and Iran since 1979.
Talks began in October 2013 in Geneva.
On November 23, 2013, Obama announced the first round of sanction relief for Iran. Congress had been pushing for further tightening of sanctions in front of negotiations.
Obama’s sanction relief was significant:
$3 billion in cash, plus another $16-17 billion [in gold, petrochemical and automotive sanction relief], totaling $20 billion in sanctions relief giving a staggering 25 percent boost to Iran’s total foreign exchange reserves.
The announcement by Obama translated to a flood of Trade Delegations visiting Iran – including ten in the first two weeks of January 2014.
Iran’s economy began to recover almost immediately. Iran’s GDP grew 3% in 2014. Inflation fell from 39% to 17%.
As the Iranian economy began growing again so did Iran’s negotiating power.
On July 14, 2015, the United States, Russia, China, United Kingdom, France and Germany reached an agreement with Iran.
The Joint Comprehensive Plan of Action lifted all economic sanctions and allowed Iran to access $120 billion in reserves held in banks abroad.
The JCPOA also contained a fatal flaw – Sunset Clauses:
The sunset clauses permit critical nuclear, arms, and ballistic missile restrictions to disappear over a five- to 15-year period.
Tehran must simply abide by the agreement to soon emerge as a threshold nuclear power with an industrial-size enrichment program.
There was another problem.
The JCPOA’s Key Requirements noted the following:
For eight years the ballistic missile restrictions will remain in place.
This assertion was repeatedly put forth by the Obama Administration. But several notable changes were made to the language on ballistic missiles.
Buried deep within the JCPOA, on page 99 (of 104 total) in Annex B (3) resides the actual language:
Iran is called upon not to undertake any activity related to ballistic missiles designed to be capable of delivering nuclear weapons.
Called Upon. Designed to be Capable.
Note the crucial differences versus the original language contained within Resolution 1929:
Iran shall not undertake any activity related to ballistic missiles capable of delivering nuclear weapons.
These slight variances would prove crucial.
Since the JCPOA went into effect, Iran has worked diligently to bolster its ballistic missile capabilities.
Since the conclusion of the JCPOA, Iran has launched as many as 23 ballistic missiles.
Iran has also been masking ICBM development through it’s Space Launch Program.
As noted in a letter sent by UN Ambassador Nikki Haley to the Chair of the Iran Sanctions Committee:
On July 27, 2017, Iran launched a Simorgh space launch vehicle, inconsistent with UNSCR 2231. The Simorgh is a space launch vehicle system that, if configured as a ballistic missile, would have a range of well over 300 kilometers (km) and has enough payload capacity to carry a nuclear warhead.
On August 22, 2017, Iran’s atomic chief Ali Akbar Salehi shocked the International Community by stating that Iran needs only five days to ramp its uranium enrichment back up to 20 percent.
Iran says only 5 days needed to ramp up uranium enrichment
Salehi: If we make the determination, we are able to resume 20 percent enrichment in at most five days.
Recall the situation Iran found itself in 2012:
- Iran had achieved 20 percent-enriched uranium production. Stockpiles were now sufficient to produce weapons-grade uranium.
- Iran was facing intense International pressure regarding its nuclear ambitions.
- The Iranian economy was on the verge of collapse.
- Iran’s ballistic missile technology – the nuclear delivery system – was lagging, underfunded and component constrained due to economic sanctions.
- Sanctions were costing Iran tens of billions each year.
- Iran had no access to significant overseas cash reserves.
The JCPOA effectively solved all of Iran’s’ problems:
- Iran, by their own admission, managed to retain full capability to resume 20 percent uranium enrichment almost instantaneously.
- The JCPOA preserved Iran’s nuclear capability. It was not materially reversed, merely suspended. International pressure abated.
- The Iranian economy immediately rebounded with the lifting of sanctions.
- The JCPOA materially loosened restrictions on Iran’s ballistic missile advancement. Iran’s ballistic missile program is far more advanced today.
- Foreign investment flooded back in.
- Iran was allowed access to $120 billion in cash.
At the time of JCPOA, the New York Times summed the situation perfectly:
Mr. Kerry described an Iranian capability that had been neutralized; the Iranians described a nuclear capability that had been preserved.
Clearing Hurdles to Iran Nuclear Deal With Standoffs, Shouts and Compromise
Iran had taken its Nuclear Program to the limit of what would be allowed by International bodies – and basic finance.
The Iranian Economy was on the verge of collapse.
Iran’s missile technology lagged far behind.
Iran negotiated solutions to its problems with a compliant (read: complicit) Obama Administration and emerged with its Nuclear Program slowed – but essentially intact.
In return, Iran was given access to a huge pool of overseas cash and a flood of foreign investment.
Iran could rebuild its economy and focus on what it lacked.
A reliable nuclear weapons delivery system.
Fast forward to the present.
On May 8, 2018, President Trump withdrew from the Iran Nuclear Deal.
As a result, snap-back sanctions on Iran are set to take effect.
The first round of sanctions – targeting the Iranian automotive sector as well as trade in gold and other metals – become effective on August 4, 2018 – just nine days from now.
On November 4, 2018 a second round of sanctions will become effective. These will target Iran’s energy sector and the Iranian central bank.
Reminder: Markets are forward looking. All markets.
Here is the black market rate for the rial:
The Iranian #rial is plummeting. Since yesterday, the black market rate has remained at 93,000 IRR/USD. pic.twitter.com/Hf9sYXwHWQ
— Prof. Steve Hanke (@steve_hanke) July 26, 2018
The officially stated rate for the rial (43,950) is meaningless. Nothing trades at these levels.
Iranian authorities have been supplying essentially no hard currency through official channels. Free market trade simply went underground.
Here is Iran’s Implied Inflation Rate – extrapolated from the rial’s black market trading levels:
#Iran‘s annual inflation rate measured for 7/26/18, is 151%. pic.twitter.com/2PbTWA9rgp
— Prof. Steve Hanke (@steve_hanke) July 26, 2018
There have been numerous reports of Iranian officials resigning and feeling the country:
#BREAKING#Iran‘s economy is devastated under the mullahs’ regime.
Various cases of enormous embezzlement are unveiled now & then.
What remains under the rug are resignations & officials leaving the country.
Here’s a report on this very sensitive subject.https://t.co/DwH3hlkWKr— Heshmat Alavi (@HeshmatAlavi) July 26, 2018
Then we have this bit of news:
“Senior figures in the Turnbull Government have told the ABC they believe the United States is prepared to bomb Iran’s nuclear capability, perhaps as early as next month, and that Australia is poised to help identify possible targets.” https://t.co/5AcAheGnxs
— Nilo Tabrizy (@ntabrizy) July 26, 2018
I’m not sure how much faith I put in the ABC report. But Iran is reeling under U.S. pressure.
I’ll leave it to you as to whose policy is more effective.
But then I guess that depends on what outcome you were rooting for…
Obama’s Iran Nuclear Deal saved the rial & the Iranian economy.
Thus saving the Iranian Mullahs.
This is what’s happening in advance of the Aug 4 sanctions being re-imposed by President Trump.
The Iranian Mullahs are in serious trouble… https://t.co/SYxA3DZglB— Jeff @ themarketswork (@themarketswork) July 26, 2018
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