Some Serious Mullahs: What’s Next with Iran?

by CC February 15, 2012 1:47 pm • Commentary

With all the focus in the markets lately on Greece and Spain and Portugal etc. one can be forgiven for missing some pretty crazy developments in the Middle East and Iran. Obviously Syria is turning into a tragedy, but Iran is what I want to talk about. This could be shaping up to be the next big thing in global markets. I spoke about what’s going on internally in Iran a few weeks ago, and what it could mean as far as a reaction from the Mullahs… and now we’re starting to see concrete examples of escalation. Here’s the latest:

Washington Post

In a new show of defiance against tightened sanctions, Iran on Wednesday threatened to cut oil exports to several European Union countries and unveiled controversial advances in its nuclear fuel programs.In a day of fiery speeches, President Mahmoud Ahmadinejad and Iran’s supreme leader, Ayatollah Ali Khamenei, also lashed out at the West, condemning the recent assassinations of Iranian scientists.

Iran’s Foreign Ministry summoned the ambassadors of six E.U. states and warned at least four of them — Italy, Spain, Portugal and Greece — that they must extend their long term oil-purchasing contracts with Iran or face a cutoff, the semiofficial Mehr News Agency reported Wednesday.

France and the Netherlands, close U.S. allies in supporting international sanctions against the Islamic Republic, were told that they would no longer receive any oil at all, the agency reported.

Earlier, the official Press TV said Iran would stop exporting oil to all six countries. The announcement helped drive the price of crude to nearly $102 a barrel Wednesday, the Associated Press reported. Europe accounts for about 18 percent of Iran’s crude exports, with Greece, Italy and Spain among the main buyers, AP said.

Iran’s Oil Ministry subsequently denied the Press TV report. Another Iranian media outlet, Fars News Agency, quoted an Oil Ministry source as saying that the exports to Europe have not been stopped yet but that Iran has given an ultimatum to those countries to continue their long-term contracts. Iran’s Arabic -language state television channel al-Alam said the ministry would provide more details Thursday.

Iran’s move was aimed at preempting a European Union boycott of Iranian oil, which is scheduled to start in July.

The threatened cutoff was announced after state media reported that Iran has started loading fuel rods into an aging nuclear reactor used to make medical isotopes in Tehran and has begun operating a new generation of centrifuges at the country’s main uranium-enrichment facility at Natanz. While official media had reported that Ahmadinejad would also formally declare fully operational the underground Fordow uranium-enrichment facility, he did not mention the complex in his speech.

Ahmadinejad unveiled the nuclear projects Wednesday in a Tehran ceremony broadcast live on state television. They include a line of new carbon fiber centrifuges, which state television said have more output and enrich uranium faster than older centrifuges.

Meanwhile. There appears to be a bit of a covert proxy war going on between Israeli and Iranian intelligence services. Unofficially of course:

The Guardian

Israel‘s prime minister, Binyamin Netanyahu, has accused Iran of being behind twin attacks on Israeli targets in India and Georgia in a further escalation of tensions between the two countries.

The attacks on Monday, in which four people were injured, followed a warning from Iran’s supreme leader, Ayatollah Ali Khamenei, earlier this month that the Islamic Republic would retaliate against international sanctions and would back any nation or group that sought to confront Israel.

There was also a failed bombing in Thailand. This if course follows the ongoing assassinations of Iranian scientists associated with the nuclear program. Just a few weeks ago another one was killed in a familiar style. Fingers are now pointing towards Israeli association with Iranian domestic terrorist group the People’s Mujahedin of Iran. For their part, India is denying a link to the bombing in New Delhi and Iran. Israel says it’s Hezbollah, India says it’s domestic terrorists trying to embarrass the Indian government:

Asian Age

Indian security and intelligence agencies are examining the similarities between the explosions in Israeli diplomat’s vehicle and the Jama Masjid shooting and blast in September 2010. Incidentally, it was the Israeli security experts here who first confirmed to the Indian agencies that use of remote control explosives in moving vehicles was common in their country and targeting Israelis across the world.

It is only then that the Indian security agencies started taking the theory of a motorcyclist chasing the vehicle and sticking a remote control device to the Innova vehicle more seriously. Thus, the first and the most striking similarity between the two incidents, the use of a motorcycle by the assailants. Then, sources said, both incidents were very well-planned but could not be executed properly. For instance, in the Jama Masjid case the explosive kept in a Maruti car did not explode and similarly in Monday’s incident also it appears that the explosive was of low intensity. In fact, sources added, prima facie it appears that in Monday’s incident also, the explosive did not trigger properly as the original plan was to blast the vehicle’s fuel tank as the remote controlled device was attached close to the fuel lid. Officials associated with the investigations claim if the similarities between the two incidents as any indication to go by, then the possibility of an Indian Mujahideen module being behind the blast cannot be ruled out. Another similarity between the two incidents is that on both occasions foreigners have been targeted. While it was Taiwanese at Jama Masjid, it is Israeli diplomat on Monday. The strategy clearly was to embarrass India at a global level in both the cases.

The statements coming out of India may be entirely correct, although one has to take with a sight grain of salt as India has an important energy relationship with Iran:


Iran is India’s second largest crude oil supplier meeting about 11 percent of the South Asian country’s imports.

Now, given what I assumed would be this country’s disillusionment/fatigue with military occupations over the past decade in the Middle East and South Asia, Americans’ view on what should be done about Iran and its quest for nuclear enrichment kind of surprised me:

Foreign Policy

New polling from the Pew Research Center this morning suggests that Americans are in a rather bellicose mood when it comes to confronting Iran, and pessimistic about the power of sanctions to keep Tehran from obtaining a nuclear weapon.

In the survey, 58 percent of respondents said it was more important to prevent Iran from developing nuclear weapons, even if that meant taking military action. Only 30 percent preferred avoiding a military conflict even if it meant Iran going nuclear. Republicans (74 percent) were far more supportive of using military force than Democrats (50 percent), but Democratic backing was still substantial.

Around half of Americans, meanwhile, believe the United States should remain neutral if Israel strikes Iran. But, as Pew points out, more respondents said the United States should support (39 percent) Israel than oppose (5 percent) it. A majority of Republicans think the United States should back Israel while a majority of Democrats think it should stay neutral.

I would assume that the question of “military action” would produce quite different results if broken into questions about “bombing” or “invasion and occupation.” But clearly there is still some appetite in this country for military action against Iran. The fact that there is a primary going on in the Republican party may be playing into the sabre rattling of course. The key thing for all of these decisions is that we have absolutely no guarantees as to how things would turn out:

Foreign Policy

The decision on the table is remarkably complex: Should the United States launch a preventive strike against Iran’s nuclear facilities or encourage its Israeli allies to do so? To answer this question, one would need to, at a minimum, imagine and make judgments on plausible scenarios that could emerge from each choice. If the United States chose not to bomb Iran, would countries in the region eschew their own nuclear weapons and work with the United States to balance against and contain a nuclear Iran? Or would Iran’s nuclear capability drive neighboring states to “bandwagon” and ally with Iran or even seek their own nuclear weapons, undermining U.S. influence while destabilizing the region? And if the United States did successfully strike, what would be the chances that such military action would lead to an overthrow of the regime and its replacement with a government both friendly to the West and willing to forgo nuclear weapons? Or could a military strike provide a lifeline to an unpopular regime, inflame anti-American sentiment throughout the region, and unleash a wider military conflagration? And how would other global powers, such as China and Russia, react to these scenarios?

Based on our experiences — one of us a former senior policymaker, the other a historian of U.S. foreign policy — we are convinced that the “right” answer, but the one you will never read on blogs or hear on any cable news network, is that we simply cannot know ahead of time, with any degree of certainty, what the optimal policy will turn out to be. Why? Even if forecasters could provide probabilities about the likelihood of a narrow, specific event, it is simply beyond the capacity of human foresight to make confident predictions about the short- and long-term global consequences of a military strike against Iran.

In fact, as Philip Tetlock demonstrated in Expert Political Judgment, a 20-year study that looked at over 80,000 forecasts about world affairs, self-proclaimed authorities are no better at making accurate predictions than monkeys throwing darts at a dart board, and they are rarely held accountable for their errors. (According to Tetlock’s research, knowing a lot about an issue can actually make you a worse political forecaster than knowing very little.) Policymakers and elected officials, on the other hand, not only face public condemnation and the potential loss of their jobs if a decision turns out poorly, but they also carry the often heavy personal burden of responsibility for a failed policy. Understanding the different environments in which the expert and decision-maker operate is critical to understanding why expert ideas have less influence on policymaking than might be ideal.

So what does this all mean? I would put this in the Black Swan category and needs to be something that you keep an eye on from a portfolio perspective. If this keeps escalating it could continue to affect oil markets, which in turn affects global economic growth, something that the world doesn’t really need at this point. A potential  Israeli or U.S. attack on Iranian enrichment sites is a big deal. Not saying that’s about to happen, but clearly it’s not out of the question. And regardless if it comes to that the saber rattling is guaranteed to continue and possibly this covert war. We’ll continue to keep an eye on this situation ourselves and possibly offer some trade ideas in things like USO and some portfolio hedges using the VIX in case this situation deteriorates further.