Nobody Puts Mullahs in A Corner! What’s Going on in Iran?

by CC January 6, 2012 1:25 pm • Commentary

If you’re looking for the next black swan in the market it may be time to put down your European Sovereign Debt For Dummies book and start looking to what’s going on over in Iran. Iran’s Green Revolution was arguable the beginning of the Arab Spring (with the caveat that Iranians aren’t actually Arab and that it didn’t manage to topple the Government like some of the Arab Spring uprisings.) Since then, the world has focused on massive upheaval in places like Egypt, Algeria, Libya and more recently Syria amongst others. But Iran is starting to enter our collective consciousness again. So what’s going on and how could it play out? Well, there are alot of moving parts. Let’s start with the general. From Reuters:

New financial sanctions signed into law by U.S. President Barack Obama on New Year’s Eve are aimed at making it difficult for most countries to buy Iranian oil. The European Union is expected to announce tough measures of its own at the end of the month.

Most traders believe Iran will still be able to find buyers, at least in the short term, for its exports of 2.6 million barrels of oil per day (bpd). But it may have to offer steep discounts that reduce the hard currency revenue it needs to feed its 74 million people.

The sanctions are already having an effect on Iran’s streets, where prices have been rising and the rial currency is falling. Iranians have been queuing up at banks to convert their savings into dollars.

The economic hardship comes less than two months before a parliamentary election, Iran’s first since a 2009 presidential election that led to mass street protests across the country.

Iran’s rulers successfully put down those demonstrations two years ago with force, but since then the Arab Spring has shown the vulnerability of authoritarian governments in the region to public protest fueled by anger over economic hardship.

Iran has responded with continued saber rattling:

Iran announced plans on Friday for new military exercises in the world’s most important oil shipping lane, the latest in weeks of bellicose gestures towards the West as new sanctions threaten Tehran’s oil exports.

Real Admiral Ali Fadavi, naval commander of the Revolutionary Guards Corps, said exercises next month would focus directly on the Strait of Hormuz, which leads out of the Gulf and provides the outlet for most Mid-East oil.

Iran held a 10-day drill which ended on Monday in neighboring seas.

“Today the Islamic Republic of Iran has full domination over the region and controls all movements within it,” Fadavi said in remarks reported by the Fars news agency.

Iranian officials have threatened in recent weeks to block the strait if new sanctions harm Tehran’s oil exports, and this week said they would take action if the United States sails an aircraft carrier through it.

The United States, which has a massive naval fleet in the area that is overwhelmingly more powerful than Iran’s sea forces, says it will ensure the international waters of the strait stay open. Britain said on Thursday that any attempt to close it would be illegal and unsuccessful.

More here.

Iran is planning to hold new “massive” naval exercises near the strategic Strait of Hormuz within the next few weeks, the country’s Fars news agency has said, as Tehran’s tensions with the West continue to escalate following threats of new sanctions against the Islamic Republic over its controversial nuclear program.

Iranian Defense Minister Ahmad Vahidi was quoted in the Fars report as saying the Islamic Revolution Guards Corps was planning to conduct “its greatest naval war games” near the Straight of Hormuz in the near future.

The announcement came just days after the Iranian navy completed its 10-day naval exercises near the Strait of Hormuz. The drills were held after the Islamic Republic threatened to block the waterway, where an estimated 40 percent of the world’s seaborne oil passes, in response to Western plans to ban oil imports from Iran. The Islamic Republic derives some 60 percent of its budget revenues from oil exports.

The newly announced Iraninan drills, codenamed The Great Prophet, may coincide with major naval exercises that Israel and the United States are planning to hold in the Persian Gulf in the near future. AP quoted on Thursday a senior Israeli military official as saying the drills would be held in the next few weeks.

The exercises, called Austere Challenge 12, which both Israeli and U.S. officials have described as the largest-ever joint drills by the two countries, are designed to improve missile defense systems and co-operation between the U.S. and Israeli forces.

The United States on Saturday approved sanctions targeting Iran’s oil industry, and the European Union will consider banning Iranian oil imports during a meeting of EU foreign ministers in late January.

And more positive developments From Reuters:

Turkey has delivered a Western offer to Tehran to renew negotiations over its nuclear programme, Foreign Minister Ahmet Davutoglu said on Thursday, expressing hope talks stalled a year ago could soon be revived.

As new sanctions from the United States and the European Union added pressure on the Iranian economy, Iranian Foreign Minister Ali Akbar Salehi said Tehran was also interested in returning to the negotiating table.

Speaking at a joint news conference with Salehi, Davutoglu said Salehi had “responded in kind” to “an expression of willingness by the West to resume negotiations” that he had brought.

“We are waiting for a good result coming out of the willingness of the two parties to go back to the negotiating table,” Davutoglu told the news conference, carried live on Iran’s Press TV with English translation.

“As far as negotiations over Iran’s peaceful nuclear energy programme, we hope that we will gain good results and the unfavorable conditions that have emerged, we hope that they will go away. On the international arena we hope that Iran will be able to have good ties.”

Salehi confirmed Iran was ready to return to talks with the permanent members of the U.N. Security Council and Germany (P5+1) at a time and place agreed by both sides.

He said the EU’s foreign policy chief Catherine Ashton, who heads the P5+1 delegation, had suggested to Turkey that it host the talks and that Ankara had agreed.

“Personally I think that Turkey is the best place for the talks to take place,” Salehi said.

So that’s the news on the surface. But what’s really going on and how is this likely to play out? Here’s one less than optimistic take from Vali Nasr that got alot of attention. His point is that we’re backing the Iranian regime into a corner and the results will not be good (Nobody puts baby in a corner!):

The latest warning by Iran, that a U.S. aircraft carrier that recently transited through the Strait of Hormuz should not do so again, is a sign to the West that should be well-observed. It tells us the regime in Tehran is ready for a fight.

Tensions between Iran and the U.S. are so high, a conflagration could be tripped off without either country intending it. This latest spiral of hostility began after the U.S. and its European allies responded to the International Atomic Energy Agency’s report on Iran’s nuclear activities by imposing and threatening additional, tougher sanctions. New U.S. measures may drastically cut Iran’s oil revenue.

That, in turn, may threaten the Iranian regime’s hold on power. Predictably, then, the ruling clerics are responding with shows of strength to boost solidarity at home. And they can be counted on to accelerate Iran’s nuclear program, which they see as a deterrent to foreign intervention.

To escape this self-defeating outcome, the Western powers should imagine how the situation looks from Tehran…


Obama administration officials think Iran is weak and isolated. They focus on the country’s shambolic economy, its faltering relations with Europe, and the effect the Arab Spring has had in turning public opinion in the Middle East against Iran.

But Iran’s rulers have a different outlook. Here’s what they see: The U.S. and Europe are economically weak and extremely vulnerable to high oil prices. China and Russia have broken with the U.S. and Europe over Iran. The U.S. is hastily leaving Iraq and abandoning the war in Afghanistan. U.S. relations with Pakistan are unraveling.

Iran’s rulers believe the new Middle East is a greater strategic challenge to the U.S. than to Iran. For the U.S., the region will be far less pliable under rising Islamists than it was under secular dictators. As those Islamists take control of governments from Morocco to Egypt, new opportunities arise for Tehran to forge diplomatic and economic ties.

Consequently, the Iranian regime thinks it can counter international pressure on its nuclear activities long enough to get to a point of no return on a weapons program.

Rather than discourage this aggressive Iranian position, U.S. policy is encouraging it, making a dangerous military confrontation more likely. There are no easy options for dealing with Iran, but not persisting in a failing strategy is a good place to start.

Hmm. Depressing. Here’s another take from the capital markets perspective. From UBS (via ZeroHedge)

From UBS Financial Services

Show Me The Money – Iran continues to make headlines (and roil the crude market) with its threats to blockade the Strait of Hormuz. Observers feel the threat is primarily a reaction to the trade sanctions which are beginning to pinch, and pinch tightly. While the people are not exactly in the streets yet, the business community appears to be in an all out scramble. That shows up in the recent frantic trading in the currency black market. Here’s a bit of what the sharp-eyed Bob Hardy wrote on the topic on his nifty GeoStrat blog:

Despite all of the tough talk and threats coming out of Teheran as it wrapped up its ten day naval maneuvers, one only has to look at the dramatic fall in the black market value of the Iranian Rial versus the U.S. Dollar, to know that the country is under a tremendous amount of pressure. The leaders of this military dictatorship cloaked in a theocracy, may threaten to close the Strait of Hormuz if its oil is sanctioned or if it is attacked militarily. They may test fire new missiles and warn the U.S. to keep its aircraft carriers out of the Persian Gulf, but the people understand the risks, and they are voting with their money.

The locals are dumping their Rials for Dollars at such as dizzying rate that the banks are no longer cashing letters of credit at the official rate, which leaves businessmen in the lurch and continues to weaken support for the regime. Multiple media sites are reporting that moneychangers are no longer even advertising rates on their white boards, as they cannot keep up with the fall in the Rial’s value.

The currency has fallen out of bed ever since President Obama signed a defense bill on Saturday, December 31st, which included a provision to sanction companies that used the Iranian Central Bank to buy that country’s oil. By Monday, January 2nd, the Rial was widely reported to be trading down 12% in the black market from Saturday’s rate, and Mehr news service reported that housing prices had tumbled 20% during the last few weeks. As a point in fact, we understand that many hard assets that are not absolutely necessary, are being sold so that people can invest in the U.S. Dollar and other foreign currencies.

This drop was on top of the 10% hit the currency took after Teheran announced that it was cancelling all trading with the UAE several weeks ago, but it soon rescinded that decision. The Rial was trading at 17,800 Rials to the Dollar on Tuesday, January 3rd, which represents a fall of about 17% from the street rate on Saturday before the sanctions announcement. Compare that rate with the official rate displayed on the Central Bank’s website of 11,100 Rials to the Dollar, and one can see why the Central Bank has been holding daily emergency meetings. On Wednesday the decline continued in spite absurd comments from the Iranian government that the decline in the Currency had nothing to do with the new U.S. sanctions, because they have not yet taken effect.

So the thing to look out for here is whether this pressure brings Iran to some sort of negotiating strategy, despite the continued saber rattling. Or do the Mullahs just go all in out of fear that they are losing the grip on their power. If they are scared of an Arab Spring type uprising sometimes the best way to consolidate your grip on power is to pick an outside enemy. Or do they never get a chance? Does the Green Revolution take advantage of this weakness and bubble up again. And then what happens? The first scenario is a continuation of the status quo as far as world oil and stock markets are concerned. But the latter two scenarios could really rattle those markets. So how will this play out? We’ll see in the coming weeks and months.