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Why Gross Domestic Product (or GDP) is Grossly Inaccurate

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Gross Domestic Product (GDP) is meant to be the singular summarizing statistic of economic growth and prosperity for a nation. It is in fact an inaccurate, untimely, and vague indication of economic activity. “The economy grew at…” should never quote GDP, because GDP does not capture the entirety of economic output.

As pointed out in a Wall Street Journal article last year, economic data is highly unreliable when it is initially released. By the time the data has been revised to the point of usefulness, it is no longer useful. The first quarter of this year is a prime example: the advance print was +0.1%, second estimate was -1.0%, and the final (for now) estimate was -2.9%. Revisions take months and sometimes years, and basing decisions on a first estimate could prove disastrous.

The Economist recently showed that portions of the economy, such as illegal activity, are not counted in GDP. Some countries in Europe are expanding what is counted in GDP to include drugs and other illegal activities, which will boost their economies by anywhere from 0 to 5%. The oft cited debt-to-GDP ratio will narrow instantaneously without any change in the financial condition of the government. Of course, adding lines to GDP statistics increases the level of GDP, but it does not alter the underlying economy. More stuff gets counted, but nothing has changed in the everyday life of the economy.

What the Europeans are attempting to measure is the informal—or underground—economy. The informal economy is the economic activity not typically measured due to under or unreported income, tax dodging, legality, or otherwise. And it is not trivial. Eurostat estimates US GDP would increase by 3% if the European changes were instituted in the US.

What is the underground economy as a whole hiding? One paper estimates 18-19 percent of income is unreported to the IRS. At the end of 2013, personal income in the U.S. was $14.1 trillion. This means that somewhere in the neighborhood of $2.5 trillion is earned off the books. Apply a tax rate of 15% to that figure, and, suddenly, $375 billion appears in tax coffers. With the US deficit expected to be $583 billion, it becomes apparent why there is a need to understand the informal economy.

Possibly even more surprising than its size is the fact that the underground economy is not all drug dealers and hedonistic economic participants. California estimates only 15% of the underground is made up of illegal activity. Most of the informal economy is construction and other forms of easily concealed labor; i.e., workers doing legal things “under the table”.

The US has a lot of cash outstanding, and this encourages an underground economy. It is difficult to have a vibrant underground economy without cash or another untraceable means of exchange. As electronic forms of payment became increasingly popular, it was thought the US would be able to more easily convert informal labor to formal labor. Crypto-currencies, such as Bitcoin, may be a method of building a 21st century informal economy.

And this raises the question of whether the electronic economy can force labor to move to the formal economy. It appears not. The new “micro job” culture is being spurred by innovations in retail and nearly ubiquitous access to the internet. Some of these effects may be showing through the part-time employment figures that have been persistently high during this recovery. Understanding how to convert informal labor market participants into formal ones is critical, simply because of the massive amount of tax revenue that is at stake.

GDP does a decent job of measuring the size of the formal economy—it just takes some time and a few tries to get there. As such, it is very useful for understanding, in hindsight, what broad components of the economy drive growth or contraction. But, like most economic statistics, GDP means little without the proper context and analysis. It struggles to articulate the finer points of the economic story.

Since GDP is left exclusively to the formal sector, economists, policy makers, and business leaders are not getting the entirety of the economic picture—regardless of the eventual accuracy of the GDP report. Without having some understanding of the informal economy, decision makers are dealing with only a partial picture of GDP, employment, productivity, and wage growth. Measurement of the informal sector may have started with GDP in Europe, but it should continue to other economic measures (in some cases it already has).

Granted, if the US were to estimate the informal economy GDP, employment, and other statistics would likely suffer from larger revisions and decreased accuracy. But we would have a more thorough measure of the output, a more accurate picture of employment, and more insight into how an economy functions. At the moment, the US is only measuring part of the economy, and not even doing that very well.

Image: Flickr. 

TopicsEconomics RegionsUnited States

How to Deal with America’s China Problem: Target Beijing’s Vulnerabilities

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Recently completing a book manuscript assessing the status and outlook of U.S. relations within the broad Asia-Pacific region reinforced this writer’s opinion in an earlier article that the United States remains unsurpassed in regional influence and leadership. The Obama government’s nuanced and multifaceted rebalance initiatives mesh well with regional priorities and promise growing security, economic, and political ties. By contrast, China, the only other possible competitor for regional leadership, pursues conflicted policies at odds with key regional concerns of independence, sovereignty, and stability.

China’s recent unrelenting drive to use coercive and intimidating state power, short of direct application of military force, to advance control of disputed territory in the East China Sea and the South China Sea poses a major problem for the United States. The Chinese “salami slicing”, a term used to describe the accumulation of small changes that gradually change the strategic picture, undermines the credibility of U.S. alliances and U.S. standing as the region’s security guarantor. The Obama government has adopted a harder public line against China’s actions and has deepened security cooperation with allies and others threatened by Chinese provocations. These steps presumably pose some costs to China’s regional standing and its long-standing goal to reduce the US security presence around China’s periphery. Whatever the costs, they have not gotten the Chinese to stop.

 

Former Pacific Commander and Director of National Intelligence Dennis Blair, members of Congress responsible for national security matters, and a variety of other experienced observers urge the U.S. government to break out of the prevailing pattern of the U.S. reacting to Chinese provocations. They push the United States to take initiatives that would show China the serious costs for Beijing in its salami slicing strategy of the disputed East and South China Sea. In response, the Pacific Command is reportedly pursuing enhanced surveillance and monitoring of Chinese activities in disputed seas and possible consideration of shows of force and U.S. escorts of allied ships in disputed seas. How these and other measures will deter determined Chinese salami slicing is not at all clear, especially as it remains to be seen how strongly the Obama government will pursue such initiatives. Notably, such U.S. actions risk possible confrontation with Chinese forces at a time of serious troubles in U.S. foreign relations with Russia and protracted problems in Ukraine, and throughout the Middle East and Southwestern Asia.

Against this background, this writer judges that Chinese advances, and subsequent negative consequences on U.S. interests, have reached a point where careful consideration needs to be given to options that focus on the many weaknesses and vulnerabilities China faces in dealing with the United States. The thinking in congressional deliberations is that China’s use of coercive measures, short of military force, targets U.S. weakness in dealing with such technically non-military threats. The United States should do likewise, targeting Chinese weaknesses and vulnerabilities, which are more than those of the United States.

Most of these options can be implemented easily by U.S. policymakers and are within U.S. budget constraints. In most cases, the options can and probably should be employed without heavy publicity, strong rhetoric, direct arguments, or public confrontation with China.

Rather, Washington should continue to pursue its close engagement with China and leave it to China to react to the U.S. initiatives which will show China’s leaders the kinds of costs and risks they run if Beijing insists on pursuing policies that undermine the US position in the Asia-Pacific. Such an approach is similar to China’s recent record of pursuing expansionist policies in the disputed seas as well as economic and trade, nuclear non-proliferation, and human rights policies with profound negative implications for the United States while still seeking the positive goal of a so-called new great power relationship in US-China relations. The United States can do the same by mixing negatives and positives in U.S.-China relations.

Meanwhile, options raised in congressional hearings often do not reflect the full policy awareness and knowledge of current, and sometimes hidden, circumstances that only the U.S.executive branch experts can provide. Nonetheless, their importance will grow if China, as expected, is undeterred by prevailing US policies.

The options include the following:

1)     US attack and missile submarines go undetected by weak Chinese anti-submarine warfare capabilities and possess the firepower to annihilate any advancing Chinese forces in the disputed East China Seas and South China Sea. The surfacing of US attack submarines near disputed areas of the East and South China Seas, perhaps in conjunction with Japanese and Australian submarines, would remind China of its serious anti-submarine limitations. In response, Beijing will doubtless seek to fix the problem. Yet to remedy China’s anti-submarine warfare limitations will require prolonged and large-scale costs and diverted resources for Chinese military planners and Chinese leaders juggling budget priorities in the period of wide-ranging and difficult change in Chinese development and governance. In sum, the solution will also incur major costs for China.

2)     Taiwan is an area of acute sensitivity for China; one where the United States has several options to raise significant costs for China. As the United States seeks to check China’s recent coercion and intimidation of neighbors, it could devote more attention to Taiwan – which has faced unbridled Chinese military coercion and intimidation for almost two decades. One option is to complicate Chinese defense plans and overall strategy toward Taiwan by allowing the sale of the 66 F-16 fighter jet long sought by the Taiwan government. The cost to China of such action involves not just the planes themselves but the significance of the substantial US demonstration of support for Taiwan in the face of China’s pressure and threats. Another option would involve a more active U.S. posture in support of Taiwanese free expression and identity represented by the so-called Sunflower Movement on the island. Beijing has shown no postive response to the rising importance of such demonstrations of Taiwan identity at odds with Chinese interests. The demonstrations tend to support Taiwan’s political opposition’s wariness on dealing with China. U.S. support for such expressions of Taiwanese identity could further shift Taiwan politics in favor of the opposition against the unpopular government of President Ma Ying-jeou. China would face costly and difficult reevaluation of its reasonably successful policy toward Taiwan, should the opposition win the 2016 presidential election.

3)     Recent demonstrations in Hong Kong – another very sensitive area for China's leadership – also foreshadow a possibly costly and delicate policy reevaluation for China. The United States could easily add to the salience of the demonstrations and the related costs for China by adopting a higher profile in support for free expression in Hong Kong.

4)     The main external reason why the North Korean problem continues to threaten the Asia-Pacific region is continued Chinese support for the brutal regime. Official U.S. rhetoric could focus more on this fact. This could add considerable weight to the reputational costs China faces as a result of its expansionism in disputed areas of the East and South China Seas, perhaps tipping the scales and compelling China to alter its practices.

5)     The United States could demonstrate a concrete response to China’s practice or to deploying conventionally armed Chinese ballistic missiles targeted at U.S. bases and forces in the Asia-Pacific over the past 20 years. These missiles are a direct threat to U.S. service personnel and US allies. The US response could involve conventionally armed multi-warhead U.S. ballistic missiles deployed in the United States or in the region in attack and ballistic missile submarines. These missiles would be ready to rapidly respond with multiple warheads were China to launch its missiles against U.S. forces. Because of China’s weak ballistic missile defense capabilities, Beijing would face an enormous cost in dealing with the new risk to its leadership and strategic structure posed by these U.S. warheads. 

This writer’s book shows that China’s recent assertiveness in disputed territory is a serious problem for the United States but not (yet) a fundamental challenge to continued U.S. leadership in the Asia-Pacific. Thus, the options listed above and others like them, focused on Chinese vulnerabilities should be used carefully and in proportion to the threat in proportion to the threat Chinese actions pose to U.S. interests. Nevertheless, the bottom line is that the threat to U.S. interests has now reached a point where the above options – and others – warrant serious consideration.

Robert Sutter is a professor at George Washington University. This article first appeared in CSIS:PACNET here

Image: U.S. Navy Flickr. 

TopicsSecurity RegionsChina

The Ultimate Guide to the SA-11 Gadfly

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Editor’s NoteHarry Kazianis, Managing Editor of The National Interest, spoke with Ivan Oelrich, a former vice president of the Strategic Security Program at the Federation of American Scientists, and presently an adjunct professor of international affairs at George Washington University concerning the SA-11 Gadfly.

Kazianis: To begin, if you could, please describe in general terms the SA-11 Gadfly system. What it its primary role? How effective is it? What countries operate it? In general terms, does it have a good reputation in terms of combat capabilities compared to the competition?

Oelrich: The 11 is a mobile surface-to-air missile SYSTEM. The emphasis is to say that it is not a rocket, it is a radar for finding targets at a distance, a command vehicle, a launch vehicle that carries the rocket and a tracking radar. So normally the big radar would detect potential targets at a distance and then assign the target to one of a few launch vehicles. The tracking radar is not as powerful so it is helped by instructions from the surveillance radar, telling it where to look. Now it is far from the preferred approach but the launch vehicle can operate autonomously, using its radar for both surveillance and tracking.

It is a Soviet system so some ex-Warsaw Pact countries still have it but it was widely exported. The 11 is fairly old now. Most of the upgrades in air defense systems would be better resistance to jamming and other electronic countermeasures. The 11 would probably not be very effective against modern air forces, the US, Britain, France, and a few others but airliners don't have radar jamming equipment, even radar warning alarms, they fly straight and level at constant speed so even an old radar will be perfectly capable against such an easy target.

Kazianis: How much more capable is this system as opposed to, say, a shoulder-fired weapons, or a MANPAD?

Oelrich: There are two major differences. First, by definition, MANPADS have to be light enough for a person to carry. This limits fuel and, hence, range and altitude. No MANPADS could reach the cruising altitude of an airliner. Second, MANPADS are not as tightly linked into an air defense net as an 11 should be but, in this case, probably was not.

KazianisIn terms of air defense systems, there are other more advanced systems like the S-300 or S-400. What is the difference between the SA-11 and say the S-300?

Oelrich: There are a lot of systems more advanced than the 11. The Russians have upgraded the 11 to a more modern 17. The 300, and its latest version, the 400, are more sophisticated still and, again, a system. The 300/400, for example, combines missiles of different ranges, so some are optimized for long-range attack but, if the attacker gets though that line of defense, it is engaged with smaller missiles optimized for close in defense.

Kazianis: There is also a updated version of the SA-11, the SA-17. What are the main differences between them?

Oelrich: Slight changes in the rocket. But the rocket is the easy part. Mostly, the difference is in more sophisticated radars and electronics to make the missile less vulnerable to radar jamming and other countermeasures. Very important on a modern battlefield, but moot when shooting down helpless civilian airliners.

Kazianis: In your own estimate, how long would it take for a crew to become proficient to use the SA-11 or SA-17? Could someone with, say, just a week’s or a month’s training be able to use such a system?

Oelrich: Ah, that is the point! Remember, this is just part of a system. It takes many months of training for the system to work. Central command centers with long-range radars get information on incoming attackers, they have to alert local surveillance radars, these guys have to find, and identify, potential targets, distinguish friend from foe and then pass that information on to launchers and assign them targets. They have to maintain very strict discipline with use of the radar. Every second the radar is on, the ground crew is broadcasting a message to every enemy airplane within hundreds of miles saying, "Please come bomb me!" The launch teams have to find the targets assigned to them, and no others, and engage them. For all that to work smoothly, everybody has to do a perfect job with extremely fast reaction times (remember that enemy aircraft may be approaching at greater than the speed of sound and their very first priority will be attacking the air-defense network, so thinking about it for a while is not an option) and it would take many months, years, to get all the crews trained up and operating seamlessly. In fact, only the most highly trained militaries can do it well at all. But your question is misleading. Obviously, based on the results, this crew was NOT proficient. For example, they apparently did not know how to operate the IFF equipment, or didn't care enough to bother. I am guessing here, but it might be possible that a crew could be taught to use the system badly, very badly indeed in this case, in just several hours.

Kazianis: There has been much speculation that the SA-11 or SA-17 was involved in the tragic incident involving MH17. Much has been made of the radar system of the SA-11 and that the operators of the system may have been firing blindly if the radar system attached was poor. Are there different variations of radar systems in each variant of these weapons? How would the operator of the system know if a potential target was civilian or military?

Oelrich: See above. The radar on the tracker would not normally be used alone but it can be. Even so, I do not know specifically, but would be astonished if the radar on the launcher did not have an IFF interrogator. If you want to learn more than you ever thought you needed to know about IFF systems, you can read my OTA report on friendly fire.

TopicsDefense RegionsUkraine

Putin, MH17, and the Risk of Anomie

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Vladimir Putin’s impenitent response to the killing of 298 innocent people last week crystallizes in dramatic fashion just how far his government is becoming isolated from the rest of the international community.  Disbelief and disgust in the West is being met by defiance and disdain from Moscow, with Putin seeking to shift the blame onto Kiev.  A worrying lack of intersubjectivity thus separates the two sides.  More alarming still, history shows that the implications of such estrangement, which may take years or even decades to play out, are potentially huge and extremely dangerous.

Almost all credible observers, including most western leaders and media, appear confident in two beliefs regarding the violent downing of MH17: (1) Russian military equipment was used to bring down the passenger plane; and (2) Russian-backed separatists pulled the trigger.  Although few officials are using John McCain’s language of culpability in reference to President Putin, the sentiments expressed by Barack Obama, John Kerry, David Cameron and others basically amount to the same thing—that is, unabashed criticism of Russian actions and direct challenges for Putin to take some responsibility for the attack on MH17 and do more to control his proxies inside Ukraine.

The problem is that Moscow’s response to the international opprobrium being heaped upon it has been characterized by a marked lack of contrition, resulting in a gaping mismatch between East and West over how to interpret and respond to what is, at base, a reckless act of aggression undertaken by armed insurgents against innocent civilians.  Taken in the immediate context of the civil strife in Ukraine, this failure of the world’s states to arrive at a modus vivendi is worrying enough, portending that the military stand-off on the ground in eastern Ukraine will become more entrenched instead of showing signs of abatement.  But even worse is the longer term prospect of Russia—a Great Power with awesome military capabilities and occupying a pivotal role in geopolitics—sliding into further international alienation.  A specter is haunting Eastern Europe—the specter of anomie.

Émile Durkheim defined anomie as the condition whereby the behavior of an individual becomes radically out of sync with prevailing societal norms.  Usually, any given society is able to regulate the actions of the individuals that exist within it.  Norms, values, beliefs, expectations and the anticipation of sanctions—all of these factors combine to shape and constrain the behaviors exerted by individual actors.  Logics of consequence and logics of appropriateness work in tandem.  Anomie occurs when this ability of society to order the behavior of its members breaks down.  Under a condition of anomie, individuals view society as an improper or illegitimate regulator of their actions.  Individuals become laws unto themselves—and dangerously so.

Of course, the international system (“international society”) does not exert the same level of influence over states or their leaders as domestic societies do over individual human beings.  Nevertheless, many scholars agree that a form of international society does exist—not least of all in the corpus of agreed upon public international laws that are supposed to regulate international conduct.  Even beyond codified laws, certain standards of behavior are expected of sovereign states—that emissaries be afforded diplomatic immunity or that civilians not be targets during war, for example.  States that fall short of these shared expectations suffer the consequences of being named, shamed, and potentially sanctioned and ostracized.

To be sure, many states have rebelled against the strictures of international society over the course of world history.  Indeed, norms are flouted, laws broken, rules refashioned or rejected outright with some degree of frequency.  Nevertheless, derogation from international expectations rarely is regarded as a good thing.  Nor does it tend to go unpunished.  There is even an assortment of unflattering epithets for states that defy international society wholesale or on a regular basis: “revisionists,” “spoilers,” “rogue states,” “pariah regimes” and the like.

States become targets of such vilification and are exiled from international society via a process that is partly of their own making yet partly foisted upon them.  On one hand, most statesmen crave international acceptance and the legitimacy that membership of the international community confers upon them as leaders.  Few wish to be ostracized by other leaders.  On the other hand, national leaders cannot be seen to passively respond to discipline meted out by their sovereign peers for fear of looking obsequious and dishonored in the eyes of audiences both at home and abroad.  As such, the urge to push away ones foreign detractors in a show of defiance is thus just as likely to obtain as is the impulse to make amends.  States spiral into anomie when international opprobrium and a national response of defiance work in tandem, reinforcing one other and working against a pariah state’s rehabilitation into international society.

What happens when states—willingly or not—become ostracized from international society, cut loose from its orbit and freed from its capacity to regulate their behavior?  Interwar Japan represents an interesting parallel with the contemporary Russian case.  By most accounts, Japan was a fairly responsible stakeholder of the pre-World War I international system, a trusted ally of Great Britain from 1902 and a markedly restrained rising power during the late nineteenth century.  Japan’s territorial gains in Korea, for example, while obviously anathema to Koreans, were carefully negotiated with the era’s primary Great Powers such as Britain and the United States, and Japan even agreed to check its territorial ambitions when faced with stern international opposition—for example over its occupation of the Liaodong Peninsula (Port Arthur) in 1895.  Overall, Japan’s leaders were preoccupied with a powerful desire to avoid rocking the boat in international diplomacy up until 1914.

Yet Japan began to chafe against the prevailing norms of international society in the 1920s and 1930s.  More and more, Japan’s leaders became frustrated with the perceived double standards of western states.  In 1919, Japan’s motion for racial equality was voted down at Versailles, for example.  Japan was also denied absolute control over Germany’s erstwhile colonies in the Asia-Pacific despite British wartime pledges to the contrary.  Most bothersome of all, Japan was repeatedly chastised for its meddling in China despite centuries of widespread and naked European colonialism in Asia, Africa and the Americas.  Throughout the period, Japan and the Eurocentric international order looked ripe for confrontation.

The catalyst for estrangement came in 1931, when soldiers in the Kwantung Army faked an attack on a Japanese-controlled railway in Manchuria—the so-called “Mukden Incident.”  The event was used by Japan’s leaders as a pretext for the invasion of Manchuria and the establishment of a puppet state across the region, Manchukuo.  Abroad, however, the Mukden Incident was quickly exposed as a ruse and in 1932 the League of Nations issued a report condemning Japan and denying recognition to Manchukuo.

The League’s actions were mirrored by criticism from leading states and statesmen.  The United States, in particular, issued the Stimson Doctrine to formally declare any conquest by Japan in China to be illegitimate.  Exposed and isolated, Japan departed the League of Nations in 1933 and drifted into diplomatic isolation, becoming ever more hostile towards the outside world even as it became insulated from and immune to criticism from abroad.  A radical diplomatic realignment was set in motion with Japan increasingly rejecting the international system it had once tried so hard to belong to, a process that would culminate in Japan’s invasion of China in 1937 and its fateful bombing of Pearl Harbor in 1941.

The Japanese case shows that it is not just small states like North Korea or Iraq under Saddam Hussein (rogue states par excellence) that can reside outside of the bounds of international society.  Great Powers, too, can find themselves exiled from the broader international community.  When that happens, their destructive behavior can intensify as they find themselves free of social constraints that might otherwise have been exerted upon them.

Japan’s interwar experience also highlights the importance of catalytic events—in Japan’s case, the Mukden Incident and its controversial annexation of Manchuria.  Other examples abound.  The vilification of Benito Mussolini following his invasion of Abyssinia (Ethiopia) in 1935, for example, was instrumental in pushing Italy outside of the orbit of London and Paris and into the arms of Berlin.  For Adolf Hitler and Nazi Germany, it was the abrogation of the Munich Agreement and the invasion of Czechoslovakia in March 1939 that finally marked Germany’s irrevocable departure from European society.

Today, there is a huge risk that Russia is headed in the same direction as interwar Japan, Italy and Germany.  Although not totally isolated on the international stage, Putin’s actions in Crimea and eastern Ukraine visibly trouble his counterparts in the west, drawing both the ire and the exasperation of foreign leaders.  With Putin sticking to a defiant and bellicose tone even withstanding such a blatantly hostile action as the downing of MH17, the future of east-west relations looks ominous.  Anomie is at the door.  And the worst could still be to come.

Image: Office of the President, Russian Federation. 

TopicsMH17 RegionsRussia

Time for a Strong U.S. Effort to Cripple the IRGC

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Though a final deal over Iran’s nuclear program is unlikely to take shape in Vienna before Sunday’s self-imposed deadline, the U.S. should make it clear in the negotiations over an extension of the diplomatic talks that Iran’s Revolutionary Guards Corps cannot stand to benefit from sanctions relief.

In the delicate diplomatic game with Iran over its nuclear ambitions, the IRGC are seen as hardliners, and for good reason. As Syria’s Bashar al-Assad found himself threatened by a popular uprising, it was IRGC training, personnel, and financial assistance that saved the Syrian dictator. The IRGC is the conduit for Iranian support to terrorist groups in the region and beyond. The Syrian-made missiles being fired on Israel by Hamas are transferred to Gaza by the IRGC. They’ve propped up Hezbollah in Lebanon. They’ve helped establish and train Shi’a militias in Iraq that for years contributed to a sectarian bloodbath. In addition, IRGC companies are at the forefront of Iran’s clandestine procurement efforts for Iran’s nuclear and ballistic missile programs, both key components of Iran’s military industrial complex.

At no point in time, whether during the course of negotiations over an extension to the diplomatic talks or in a final accord, sanctions relief should be constructed in a manner that benefits the IRGC. All relief must be designed to keep the IRGC, its leadership, and its financial and business enterprises under sanctions to deprive them with the opportunity to continue to pursue their nefarious activities.

Sanctions enacted by legislation and executive order allow U.S. negotiators to provide concessions while making an exception for the IRGC. The language was included because policymakers in Washington understand that the IRGC plays a key tool in Iran’s ongoing state sponsorship of terrorism, that they are a tool of oppression and human rights’ violations, and that they are a key instrument in Iran’s ballistic missile program.

European sanctions against Iran, however, are mostly targeted against Iran’s nuclear program and will gradually dissipate once a final agreement is reached. This stands to free the IRGC of impediments to procure technology and benefit from the foreign investment and business opportunities that a deal will usher in.

To protect against that eventuality, ratcheting up sanctions against the IRGC should be a priority for the U.S. government today – especially since, as the EU will relax its restrictions, U.S. secondary sanctions may soon become the only bulwark against Iran’s cheating.

The U.S. can use existing sanctions against the IRGC to target hundreds of IRGC companies that have so far eluded sanctions. Targets should include all IRGC-owned businesses listed on Iran’s stock exchange, the ones that are not publicly traded, and the companies where the IRGC has a minority stake. Their senior personnel should be targeted with asset freezes and travel bans on all senior managers, board members, and C-suite executives. They are the backbone of IRGC, trusted people who make both daily calls and long term strategic decisions for the IRGC’s financial empire.

Critics will no doubt say that expanding sanctions at this critical time in negotiations – or insisting that such stringent measures be passed after an agreement is signed – would doom any compromise to failure. Yet, these critics are usually quick to point out to the ongoing battle between Rouhani and the IRGC as evidence of Rouhani’s moderation.

A strong U.S. effort to cripple the IRGC would have the added benefit of testing if the conventional wisdom of Rouhani’s supposed moderation. Rouhani’s ongoing confrontation with the IRGC is in part a power struggle over influence and state resources. It may also stem from a genuine desire to weaken the IRGC because of its nefarious role in Iran’s economy, its foreign policy, and domestic matters. By showing that the proper nuclear concessions will yield benefits to those who embrace moderation, not those who foment extremism, the U.S. could empower Rouhani with more ammunition to put IRGC out of business.

Besides, denying the IRGC any benefits from sanctions relief stands to yield additional policy advantages even if it were not to boost moderate forces inside Iran. The market value and revenues of IRGC companies would decline, thus reducing their role in Iran’s economy and denying the IRGC access to funds for their terrorist and proliferation activities. The exclusion of the IRGC from the expected windfall that Iran will enjoy from sanctions relief is also bound to weaken their political influence domestically.

The primary goal of the sanctions architecture has been to give negotiators leverage. But they are also a tool to deny proliferators access to wealth and technology. There is nothing to suggest that the IRGC will renounce its designs under any circumstances – and there is good reason, therefore, to deny them the benefits that sanction relief will yield for Iran in exchange for its compliance.

Emanuele Ottolenghi is a Senior Fellow at the Foundation for Defense of Democracies; Saeed Ghasseminejad is a Ph.D. candidate in Finance at City University of New York.

Image: Flickr. 

TopicsIran

A BRICS-Centered World Order?

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This week’s BRICS summit in Brazil largely has been overshadowed by the violent exchanges between Israel and Hamas, yet the summit’s keynote announcement has managed to make headlines: the agreement to create a global financial institution to rival the IMF and World Bank. Upon inspection, however, even this highly conspicuous and grandiose diplomatic move probably will mean less than its architects intend.

The deal signed in Fortaleza by the leaders of Brazil, Russia, India, China and South Africa was to create an international fund (rumored to be titled the New Development Bank) capable of issuing major infrastructure loans to developing countries.  Such an institution, of course, would be in direct competition with the World Bank (as well as regional institutions like the U.S. and Japanese-led Asian Development Bank and China’s Asia Infrastructure Investment Bank). 

Reports also suggest that the new bank will engage in financial bailouts, with a $100bn fund being put at its disposal in order to insulate the BRICS—and any other countries which may choose to join the new financial institution—from reliance upon the IMF in times of crisis.  All of this has led some to suggest that the BRICS are seeking to replace the western-centered international financial system.

At face value, the creation of a “BRICS bank” does indeed appear like a serious challenge to the U.S.-led order.  But there are several reasons for skepticism.  First, organizations set up to rival western-led international institutions have a history of failing to meet expectations (or even materializing).  In Latin America, the so-called Bank of the South was created in 2009 (at the chief behest of Venezuela) for similar reasons to those touted in Fortaleza this week: to free developing economies from reliance upon the IMF and, by extension, the United States.  Yet five years later that institution only exists on paper.

Even attempts to rival the west spearheaded by the BRICS themselves have left much to be desired.  Russia’s much vaunted Eurasian Economic Union, for example, which is set to come into being in January 2015, took around 20 years to get off the ground.  Even so, analysts doubt whether the Union—argued to be more a political move than a serious plan to integrate national economies—will have much of an impact.  In the security realm, too, the Shanghai Cooperation Organization, which includes both Russia and China, has failed to grow into a real counterweight any western-led security organization or alliance.

Second, the BRICS bank will be hamstrung by its relatively small initial capitalization ($50bn) and the fact, as Daniel Drezner points out, the bank will be limited to expanding in size only so far as its weakest link (South Africa) can afford because of the BRICS countries’ preoccupation with equality (in this case, in terms of making contributions to the fund) and consensual decision-making.

This latter point leads to a third and final reason to doubt the durability of BRICS efforts to undermine the international status quo.  Although they are united by a common desire to hasten the general trend in world politics towards greater multipolarity, the BRICS actually have relatively few specific interests in common.  In important areas, the BRICS are actually at odds with one another on the world stage; a common vision of what should replace the U.S.-led international system certainly is lacking.  Movement beyond this week’s bombastic announcement, then, is destined to be slow and piecemeal—at best.

Together, the BRICS do have the potential to rival the United States and its allies in world politics and economics—mostly, it has to be said, because of China’s immense economic power.  But the BRICS rarely do work together.  While this week’s announcement is of real symbolic value, and may prove to be a meaningful bargaining chip vis-à-vis negotiations over the future of the IMF and World Bank, a BRICS-centered world order is not yet in sight.

Image: Office of the President, Russian Federation. 

TopicsBRICS

Why Finland and Sweden Should Not Join NATO

The Buzz

“All the long years of my reign, my colleagues, the monarchs of Europe, have paid no attention to what I have to say. Soon with my great Navy to endorse my words, they will be more respectful.” It would be wise to reflect on these words spoken by Kaiser Wilhelm II on the eve of the First World War—especially as the centennial of the outbreak of that war approaches. During his reign, the Kaiser felt underappreciated and scorned.

This gave the Kaiser all the more reason to launch his war—a war that would bring him respect by the sword. Individuals matter in history and there is no individual more important to Russia today than its president, Vladimir Putin. Although the comparison with the Kaiser is certainly not perfect, Vladimir Putin does feel underappreciated and scorned by the West, like the Kaiser. The worst thing the West can do is add fuel to Putin’s fire and give him a reason to demand respect by coercive means.

Specifically, this means that Finland and Sweden should not join the North Atlantic Treaty Organization (NATO). Finland and Sweden are already part of NATO in all but name. They conduct military exercises with NATO and allow their troops to be part of NATO’s rapid-reaction force. Both deployed soldiers to Afghanistan and Sweden assisted in the air campaign during the 2011 Libyan War. Although joining NATO would allow Sweden and Finland to engage in the organization’s decision-making process, the benefits of such a move would largely be minimal.

The costs, on the other hand, would be huge—just as were the costs of the West’s blind embrace of Ukraine before the Maidan Revolution. Sergei Markov, a high-level advisor to Putin, has been quoted as saying that an enlargement of NATO to include Finland and Sweden could trigger World War III: “anti-semitism started World War II, Russophobia could start the third.” The West has nothing to gain by making Sweden and Finland officially part of NATO when the alliance already benefits from military coordination with these countries. What is worse is that the Kremlin knows this and will see such a move as antagonistic. If the West wants results from its foreign policy—and specific results like the cooling of tensions between Russia and the United States or stabilization in Ukraine—then it should note that military posturing by enlarging NATO to Finland and Sweden will not bring it any closer to these desired outcomes.

To be sure, the West should make it clear to Finland and Sweden that it is not ignoring their security concerns by leaving them out of the alliance. But the Finns and the Swedes do not need Article 5 of the NATO charter to be convinced of Western support in the case of a Russian invasion or attack because such a move would be so outrageous that the EU would be forced to respond. In fact, the 2007 Lisbon Treaty among EU countries states that in the event of “armed aggression” against a member state, “the other member states shall have towards it an obligation of aid and assistance by all means in their power”—and if the EU gets involved, so too will America in some way or another.

Even more telling, the people of Sweden and Finland do not want to join the NATO alliance. Polls conducted during the March 2014 Crimean crisis showed that only 22 percent of Finns supported joining NATO. Likewise, in a March 2014 survey, 31 percent of Swedes approved membership while 50 percent opposed the move. In Finland’s case, no political party actually supports membership in NATO even though the sitting president, Sauli Niinistö, has indicated his personal support. Most Finns, including former Presidents Tarja Halonen and Mauno Koivisto, have opposed joining NATO precisely because they feel Russia has no design on their countries. Indeed, Finns and Swedes do not share the sort of ethnic ties to Russia that Ukraine and other former Soviet socialist republics have, which would heighten Russia’s interest in them.

Put differently, Putin has no interest in antagonizing Finland or Sweden because relations with both countries need to be strong for Russia’s economic growth. Sweden and Finland for their part can work to strengthen military ties with each other—as they already are doing—so that they are capable of working together to cope with shared security risks. The more independent they are from NATO, the more Russia will take them seriously and not see them as part of some larger Western plan to contain Russia.

One hundred years ago, the Kaiser called Western alliances—culminating in the Entente—a form of “Einkreisung” or encirclement. Let’s not allow Vladimir Putin to say the same thing today.  

Image: Wikicommons. 

TopicsNATO RegionsEurope

Atomic Anxieties: How Dangerous is North Korea's Nuclear Program?

The Buzz

The death last week of General Jon Pyong-ho, aged 88, chief architect of the North Korean nuclear program, raises the tantalizing question, “where to from here?.” We’ve become accustomed to a North Korean nuclear program that limps rather than runs. Two factors have constrained the program: a shortage of fissile material and a lack of nuclear testing. Deals cut in the 1990s and at the Six Party Talks (SPT) have also slowed proceedings; twice now the small 5MWe gas graphite reactor (the source of all the North’s current stockpile of plutonium) has been mothballed—and subsequently de-mothballed. But with that reactor being restarted last October, and a new 25MWe light water reactor (LWR) coming on-stream, are we about to see a generational shift to a new, more energetic North Korean nuclear program?

The short answer is ‘no’. The longer answer is more complicated. Broadly, fissile material shortages seem likely to hamper the program for some time yet. Estimates vary as to the size of the current North Korean plutonium stockpile. The US Congressional Research Service figure of between 30 and 50kg (enough for five to eight bombs) seems reasonable, but that figure could be lower if the third nuclear test involved a plutonium device rather than a uranium one (something we don’t know). If the 5MWe reactor is now running smoothly again, Pyongyang can use it to produce about one-bomb’s-worth (6kg) of plutonium per year. But the process is slow, beginning with construction of suitable fuel rods for the reactor, irradiation of the fuel in the reactor, removal and cooling of the fuel, and reprocessing to extract the plutonium.

Size matters. Pyongyang’s problem is that the facility is just too small to allow greater production. Had it completed construction of either its 50-MWe reactor or a 200-MWe reactor, both of which it began building some years back but subsequently abandoned, the equations would look much more unsettling. The 50-MWe reactor would have created enough plutonium for ten bombs per year; the 200-MWe reactor enough for 40 bombs per year.

True, Pyongyang might choose to pursue simultaneously a second path to fissile materials—as the U.S. did during the Manhattan Project. If it used its uranium-enrichment facility solely to produce highly-enriched uranium (HEU), it could produce about 40kg per year. The IAEA defines 25kg of HEU as a “significant” quantity, so let’s say that 40kg equals a capability to make one and a half bombs. But the enrichment facility must spend some time creating low-enriched uranium-oxide fuel pellets for the new LWR. And each new nuclear test will subtract one bomb’s worth of material from the stockpile.

Won’t the LWR provide an alternate source of plutonium for Pyongyang when it begins operations? Yes. Depending on how it chooses to run the reactor and how often it wants to—or can—refuel it, Pyongyang could use it to produce plutonium. Estimates vary about how much. Charles Ferguson, from the Federation of American Scientists, has recently argued that Pyongyang could extract 30–40 kg of plutonium each year (enough for five to seven bombs) from just that facility. That seems a high figure; others suggest lower ranges. Siegfried Hecker suggests a plutonium figure of 10–15kg per year might be more realistic.

The LWR isn’t an ideal producer of weapons-grade plutonium for Pyongyang. The fuel is in the form of ceramic pellets, each fuel-load requires low-level uranium enrichment (unlike the Magnox fuel being fed into the small reactor) and the plutonium reprocessing facility has previously been set up to reprocess metallic fuel, not ceramic. Some analysts—Hecker for example—argue that the LWR’s inherent proliferation-resistance means the North will probably use the LWR for electricity production rather than plutonium production. Further, the fact the North’s restarted its small reactor suggests it wants to retain its present plutonium path.

Still, the possibility for misuse of the LWR—while low—is sufficiently concerning that getting a handle on the program is becoming more important. Recent developments have certainly not been lost on the South Koreans, who have stated that a freezing of the North Korean program at its current level should be a precondition for any resumption of the SPT. Hecker used to champion a proposal called ‘the three nos’: no more bombs, no better bombs, and no export. If Pyongyang keeps going in its current direction, the first two nos seem unlikely to be satisfied.

What can Australia do? Unfortunately, not much. We don’t control the supply of uranium to North Korea, we can’t influence how Pyongyang uses its nuclear infrastructure, and we can’t shape its decisions about missile and nuclear weapon testing. Our intelligence community might be able to lead an effort to clarify stockpile numbers, which would be valuable but not game changing.

Despite the concerns of the international community, Pyongyang in recent years has constructed a new reactor and enrichment facility, tested longer-range missiles and nuclear devices, and declared that it’s a nuclear-armed state. It isn’t about to turn over a new leaf. But its nuclear program still lives on Struggle Street—and will for some years yet. That certainly doesn’t make it irrelevant; further testing, for example, could help North Korea miniaturize its weapons. Still, it buys us a little time—if we can find a way to use it.

Rod Lyon is a fellow at ASPI and executive editor of The Strategist, where this piece first appeared

Image: Flickr. 

TopicsNorth Korea RegionsAsia-Pacific

Understanding UNRWA

The Buzz

The Palestinian refugee issue has been around since 1948. UNRWA, the United Nations institution dedicated to their preservation, has been in existence since 1950.

With the recent re-approval of UNRWA’s mandate for more than three years, it is worth asking: how long have Western policy makers understood that UNRWA was a tool for Palestinians and Arab states to perpetuate the “refugee crisis” and that Palestinians would never accept anything except repatriation to Israel, an attitude that guarantees hostilities in perpetuity? The answer is, since the beginning. That is why after more than sixty years, British diplomatic documents on UNRWA and the Palestinians are still classified by the Foreign Office.

UNRWA was established to “carry out in collaboration with local governments the direct relief and works programmes as recommended by the Economic Survey Mission.” This mission, under the leadership of former Tennessee Valley Authority administrator Gordon Clapp, had recommended vocational training and regional development as the means to facilitate “reintegration” of Palestinian refugees, either through repatriation to Israel or resettlement in surrounding countries. Arab states clamored for regional development aid, hinted repeatedly that they would accept Palestinians, and throughout the 1950s, billions were poured into aid schemes that improved their infrastructure. But no Palestinians were ever resettled.

The game was apparent early on. In May 1952, the Foreign Office received a remarkable report forwarded by British diplomat Sir Edwin Chapman-Andrews that noted “Everything has been sacrificed to [UNRWA director John Blandford’s] lone effort to “sell” the three-year plan to the Arab states—and SYRIA in particular—while measures which might influence the success of the negotiations are left undone.”

The report lamented UNRWA’s lack of educational and vocational training programs, the lack of a public-relations effort, or any successful agricultural programs in Jordan. Refugee relief was well-organized, but anything related to reintegration was subject to “stagnation, waste and misuse of money and manpower.”

The report concluded, “much stress has been laid by the Director on how the three year plan should be described. It has been called successively ‘Reintegration,’ ‘Resettlement,’ ‘Self-Support,’ … The play with words hoodwinks nobody…” Everything not related to relief was understood as “settlement”—that is, relocating Palestinians to Arab states.

The British representative to UNRWA, Sir Henry Knight was unimpressed and in a handwritten note commented, “This is a poor report.” According to the covering note, the report had originated with “the Friends friends,” pointing to a Quaker group, American Friends Service Committee, which had provided refugee relief in Gaza from 1948 to 1950.

But the rest of the report was taken out of the National Archives in 1982 by the Foreign Office, which for over a year refused to declassify it on the grounds that “it remains sensitive under Section 23 of the FOIA (information supplied by, or relating to, bodies dealing with security matters).”

Finally, after a year of Freedom of Information Act requests, a redacted page was provided with two or three words blacked out, the name of an intelligence source who passed on yet more rumors regarding an underground organization, this one urging Syrian dictators Shishakli and Selo to arm the refugees. Whether the source was Quaker remains known only to the Foreign Office.

But the problem for the Foreign Office is not long-dead intelligence sources named in an ancient memorandum. Rather, it is the fact that the Foreign Office, and indeed all Western chancelleries, knew by the early 1950s that UNRWA could only maintain the Palestinians in stasis.

Then, as now, Palestinian refugees would accept nothing other than full repatriation to Israel. In the interim they demanded loudly that “The world owed them a living,” as a variety of UNRWA officials put it at the time. Indeed, a banner displayed at a 1949 Gaza protest demanded “1. Send us back home. 2. Compensate us. 3. Maintain us until we are refreshed.”

If there were any misapprehensions the Foreign Office had only to listen to Lt. General Sir Alexander Galloway, the retired British High Commissioner for occupied Austria, who had become UNRWA’s head in Jordan in 1951.

Galloway was fired at the demand of the Jordanian government the next year when he refused to dismiss Western employees and hire locals. In August of 1952, he published a blunt op-ed in the Daily Telegraph and Morning Post that lambasted UNRWA, the Arab states and the refugees themselves:

What is the solution? Of course the problem is difficult. Refugee settlement, except under dictatorship, is a long, expensive business. Somehow or other the Arab Governments, the United Nations, UNRWA and some of the refugees have got to face facts. There is a need of a change of heart and a better atmosphere. There is need to distinguish between a tempting political manoeuvre and the hard, unpalatable fact that the refugees cannot in the foreseeable future return to their homes in Palestine. To get this acceptance is a matter of politics: it is beyond the function of UNRWA. Second, a determined effort should be made to get the ‘host’ countries to take over relief from the Agency, thus freeing it to get on with the much more important task of resettlement.

Since then, rather than admit UNRWA was a failure and publicly confront an historically unprecedented situation—a group of refugees who refuse to relocate and host countries who refuse to permit refugee resettlement—the West has simply accepted the devolution of UNRWA into a vast and expensive welfare mechanism. This is a role that UNRWA enthusiastically embraced.

Privately, some clarity prevailed, at least at the outset. But it was accompanied by decades of lying to Western publics that foot the bill for UNRWA about the temporary nature of the project, and then about its supposedly vital and permanent reality. Alternatives, notably turning over responsibilities and funding to Arab states and the Palestinian Authority have never been seriously contemplated.

Lies to the Palestinians also abound—about their own responsibilities, as well as those of their Arab hosts. That the “right of return” remains one of the central obstacles to an Israeli-Palestinian agreement (along with Palestinian recognition of Israel as a Jewish state) demonstrates that little has changed in sixty years. In the meantime, UNRWA has thrived as the internationally funded health, education and welfare system for the Palestinians, something sacrosanct and permanent rather than provisional and temporary. By embracing its role as provider to generations of Palestinian “refugees”, UNRWA forestalled the Palestinian encounter with reality.

Claims about UNRWA’s permanence or indispensability no longer go unchallenged, but British and American policy makers are, if anything, less honest today about UNRWA than they were in 1952. Keeping an ancient report classified is symptomatic of this larger dishonesty. The recent renewal of UNRWA’s mandate is too.

Alexander Joffe is a Shillman-Ginsburg Fellow of the Middle East Forum. Asaf Romirowsky is an adjunct fellow at the Middle East Forum. Romirowsky and Joffe are co-authors of Religion, Politics, and the Origins of Palestine Refugee Relief.

Image: Flickr. 

TopicsUNRWA RegionsPalestinian territories

Iran, Russia, and the Ukrainian Crisis

The Buzz

The Ukrainian crisis poses a threat to cooperation between Russia and the West on many issues of international security and, above all, to the dialogue on Iran’s nuclear program. The dialogue with Iran is led by the P5+1 (the United States, Russia, Britain, France, China and Germany) with the goal of preventing Iran from creating an atomic bomb. In November 2013, thanks to the election of the moderate Hassan Rouhani as President of Iran, these negotiations achieved their first success:  an interim agreement called the “Joint Action Plan.” The parties are scheduled to complete work on and then sign a comprehensive agreement in July 2014.

The crisis in and around Ukraine, in which Western sanctions have already been applied against Russia and relations between Russia and the West have started to resemble the Cold War, could seriously complicate further negotiations. There remain in Iran influential political groups and organizations that aim to reach the “nuclear threshold” and continue to advance toward this goal, using any conflicts between the countries of the P5+1 to their advantage.

Dilemmas of Russian policy

Russia is undoubtedly against Iran developing nuclear weapons. Russia is also not a supporter of Iran’s uranium enrichment program, as it wants to sell Iran its own nuclear fuel for Iran’s Russian-built nuclear power plants (one reactor was put into operation at the Bushehr power plant, and a minimum of two more, and in the long term up to eight, reactors are planned). In 2006-2010, Russia voted in favor of six UN Security Council resolutions (including four with economic sanctions) designed to punish Tehran for continuing its nuclear program.

However, Moscow has never officially shared opinions about the military nature of the Iranian nuclear program and always prioritized diplomacy rather than economic sanctions or, especially, military force for resolving this issue. During the last several years, Moscow as aimed to play the role of a mediator between Iran and the United States, convincing Washington that it could incline Tehran to make concessions. This was one of the Russian political “trump cards” in relations with the West. However, in actuality, Iranian concessions came as a result of the election of a new president under conditions of economic crisis created by the oil embargo and financial sanctions of the United States and Europe.

During all the previous years, the Iranian issue was the subject of an intense struggle within Russia between enemies of the West, supporters of traditional ties with Iran and other Asian neighbors, and advocates of cooperation with the U.S. and strengthening the nuclear nonproliferation regime.  It is clear that, due to the Ukrainian crisis, the position of the latter group has weakened significantly.

Today the fundamental dilemma of Moscow’s policy lies in whether it is worth cooperating to achieve a comprehensive agreement with Iran under conditions of confrontation with the West over Ukraine. After all, such an agreement would primarily be a success for the United States and its allies’ policies, and would improve their relations with Tehran and sharply increase their influence in the Near and Middle East. In the course of a new Iranian president and in public sentiments, after over thirty years of isolation, pro-American attitudes and hopes for wide cooperation with the West are growing (according to a poll from September-October 2013, 80-90% of Iranians consider the reestablishment of relations with the United States necessary).

Furthermore, the removal of sanctions against Iran and the appearance of Iranian oil and gas in the world market would lead to a decrease in hydrocarbon prices or, at a minimum, would create serious competition for Russia. And hydrocarbons are Russia’s main export product, the fundamental source of its budget income, and the most important instrument of its foreign policy, including during the Ukrainian crisis.

On the other hand, the breakdown of negotiations with Iran would even more severely strain relations between Russia and the West, and would likely lead to a new war in the Persian Gulf—with extremely destructive economic and political consequences for the region and the entire world, including Russia. And, apart from the threat of war, the continuation of sanctions against Tehran harms Russian economic interests in Iran. Finally, the negotiations’ failure would not bring back Russia’s political “trump card” of a special relationship with Iran.

Historical background of relations

One must not forget that relations between Russia and Iran are much wider than the question of Iran’s nuclear program and have several hundred years of history.  Iran is the main state in the extremely unstable region neighboring Russia. Tehran has significant influence over events in the Near and Middle East, the South Caucasus, and Central and South Asia (including Afghanistan). Developments in this wide zone directly affect Russian national security, for which Islamic radicalism and terrorism remain a top threat. Additionally, Iran is a country with a largely young population of 80 million people, significant potential for economic development, and enormous reserves of oil and gas.

Shia Iran is regarded in Russia as the only counterbalance in the region to the increasing influence of the United States, Turkey, and Sunni extremism (Wahhabism and Salafism), which is particularly active in the Russian North Caucasus and in neighboring Central Asia. The unprecedented current tension in relations between Russia and the U.S./NATO has made the value of Iran as a partner even greater in Moscow’s eyes.

Additionally, Tehran is Moscow’s only ally in supporting the government of Syria, where the United States, its European partners, Turkey, Saudi Arabia, Qatar, and Al Qaeda all take the side of the armed Sunni opposition. From the beginning of the Syrian crisis until 2013, Iran provided the regime of Bashir al-Assad (an adherent to Alawi Islam, a form of Shiism) financial assistance of $17.6 billion, including a loan for purchasing Iranian oil. Tehran also provides Damascus with weapons, and military specialists from the Iranian Islamic Revolutionary Guard Corps command operations by units of Lebanon’s Hezbollah in Syria.

Syria under the leadership of Assad is one of Russia’s few remaining political partners in the Middle East, buys its weapons, and provides the Russian Navy its only international base in both the Mediterranean Sea and the world (Tartus).

Economic interests

Trade and economic relations with Iran are of great interest to Moscow. In the years before the Islamic Revolution of 1979, more than 60 large infrastructure projects including hydro- and thermal power plants, gas pipelines, metallurgical factories and machinery plants were built in Iran with the help of the USSR. In recent years economic relations between the two countries plummeted due to UN, EU and U.S. sanctions. Iran's share of Russia's foreign trade has dropped to historic lows, and in 2013 amounted to less than 1% ($ 1.6 billion). Major oil field development projects were canceled by Russian companies including Lukoil, Norsk Hydro and Gazprom Neft.

The interim P5+1 Agreement with Iran from November 2013 and prospects for a comprehensive agreement along with the complete lifting of sanctions offer an opportunity for Moscow to significantly expand economic relations with Tehran. Russian exports to Iran are dominated by metals (46%), food (28.2%), machinery and equipment (6.4%). Russian imports from Iran consist mainly of agricultural raw materials (71.2 %) and chemical products (10.8%) with a plan in place to buy oil products in exchange for manufactured goods (to start at 500,000 barrels a day - 12% of Iran’s oil production). A permanent bilateral commission has been created to coordinate economic relations between governmental agencies and companies in both countries.

For the future, priority has been given to the energy sector. Russian companies are planning major investments in the development of Iran’s large gas fields in order to strengthen the global position of Gazprom in competition with U.S. shale gas exports. Russia also plans to continue aiding in the development of Iranian nuclear energy, having achieved a unique position as Iran’s partner in building the Bushehr nuclear power plant during the county’s international isolation over the last decades. Deals totaling $10 billion have already been outlined for the construction of hydro- and thermal power plants. Space cooperation also looks promising, as Iran has no carriers for launching satellites into orbit and expects to cooperate with Russia on this like many other countries do. Another attractive possibility is investment in the expansion and modernization of Iran's railway infrastructure, an area in which Russia has vast experience and technical capacity.

Arms trade

Military technology cooperation has been of particular importance for Moscow. The sale of arms and military equipment, including nuclear technology and materials, and missiles and aircraft engines is just a portion of Russia’s high-technology exports. However, this trade is about more than money for Russia. It provides international prestige and distinguishes Russia from the community of petro-states.

Starting in the mid-1960s, the Soviet Union supplied Iran with large deliveries of armored vehicles and artillery, and built factories for the repair and production of military equipment (in Isfahan, Shiraz, Dorude, and near Tehran). After the Islamic Revolution of 1979, Russia's share of Iran’s military imports rose to 60%, and in the 1990s Iran became, along with China and India, a major buyer of Russian weapons, including fighter aircraft (MiG-29, Su-24), helicopters (Mi-17), anti-aircraft missiles (S-200, TOR-1), Kilo diesel submarines, tanks (T -72) and infantry fighting vehicles (BMP-2).

However, military-technical cooperation between the two countries has not always run smoothly. In 1995, during the Russia-U.S. summit, President Boris Yeltsin gave in to pressure from President Bill Clinton and pledged not to enter into new agreements with Iran, a promise which was then formalized in a secret memorandum signed on June 30, 1995 by Prime Minister Viktor Chernomyrdin and U.S. Vice President Al Gore. Since 2000 when Vladimir Putin came to power, Russia has refused to adhere to the Gore-Chernomyrdin protocol but Russian military sales to Iran have not reached their earlier volume.

Another blow to cooperation between Moscow and Tehran stems from a 2007 agreement according to which Russia pledged to sell Iran the famous Russian anti-aircraft missile system S-300 for $800 million. In June 2010, the UN Security Council adopted Resolution 1929 imposing new sanctions on Iran's nuclear program. As a result, Russian President Dmitry Medvedev issued an order to cancel the deal with Iran. The Kremlin made ​​this political decision in the context of the "reset" of relations with the U.S. and the signing of a new START Treaty, which resulted in Tehran seeking international arbitration and a penalty of $4.2 billion from Moscow for having violated their deal. So began a new downturn in relations between Russia and Iran, while Moscow's image as an arms trade partner suffered in the eyes of countries that import Russian weapons. Iran still demands the restoration of the S-300 agreement as a condition for the resumption of military-technical cooperation with Russia.

Future alternatives

It is clear that the hope for rapid growth of economic and military-technical cooperation between Russia and Iran depends on the collective withdrawal of UN sanctions and the unilateral sanctions of the U.S. and its allies. For this reason, Moscow remains interested in concluding a comprehensive agreement on the Iranian nuclear program. The economic expectations of Russian big business and government agencies outweigh their fear of widening Western influence in Iran and increased competition from American, Chinese, European and Japanese companies in the Iranian market and over Iranian hydrocarbons.

However, if worsening relations between Russia and the West over Ukraine lead to “crippling” economic sanctions against Moscow, the latter will side with Iran in its quest to ease restrictions on its nuclear program. This will particularly apply in negotiations of an agreement on the acceptable scale of Iran’s uranium enrichment program (Iran insists on the right to have 50 or even 190 thousand centrifuges - ostensibly to provide fuel for Bushehr and future reactors, although Russia is contracted to supply this fuel). It would also affect the closing of the Fordow underground enrichment facility and efforts to answer questions about Iran’s past nuclear activities, its rocket program, and other issues. In such a situation, if the U.S. does not separately reach an agreement with Iran, negotiations will hit an impasse, and a third Gulf War will be inevitable. Moreover, Russia and the West, as during the Cold War years, would be on opposing sides of the front line.

In the case of de-escalation of the Ukrainian crisis, Russia will seek to play the role of a mediator between Iran and the West in negotiations on the nuclear issue. Counting on the growth of cooperation with Iran, Moscow will try in advance to provide itself with the most favorable political background for relations with Tehran. In the current environment, one can hardly expect from Russia (or China) a hard line in unity with the United States and its European allies to achieve the maximum concessions from Iran on the permissible quantity of centrifuges and other issues—even if it does not allow for the achievement of a comprehensive agreement by the planned date of July 20.

This goal was also apparent during Russian Foreign Minister Sergei Lavrov’s visit to Iran at the end of 2013, when he said "The main thing is to do is everything we’ve agreed upon, not to seek an extended or narrowed interpretation of this agreement." President Putin's upcoming visit to Iran in 2014 is likely to give new impetus to reaching an arrangement with Tehran for the period after sanctions are lifted.

For Russia, in addition to future economic benefits, the development of relations with Iran furthers a major political goal. According to Moscow’s plan, Iran (after the resolution of its "nuclear issue”) and Syria (after the restoration of peace there) shall be the two main pillars of Russian influence in the Middle East. Together with the dominance of Moscow in the post-Soviet space and the development of relations with China, this is considered essential for the revival of Russia as a global power. This is the principal strategic objective of the Kremlin’s current domestic and foreign policy.

Alexei Arbatov is a scholar in residence at the Carnegie Moscow Center.

Image: Office of the President, Russian Federation. 

TopicsSecurity RegionsIran

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