Cutting Iran Down to Size

Cutting Iran Down to Size

Strategic masters or fumbling mullahs?

Ask an average Iranian what they think of Britain and the British and the responses will vary from cunning to cutthroat to clever. As a journalist based in Iran several years ago, I would often hear middle class Iranians rail against the British in one breath, and in the next breath, describe them as strategic masters controlling the world and goading, Rasputin-like, their overmuscled, impressionable “American friend” into wars and quagmires.

There is, of course, history here, when the British have been, well, cunning and cutthroat and clever in overthrowing rulers, buying off politicians, securing mineral concessions on exploitative terms, and generally meddling in Iranian affairs. But times have changed, and coups are harder to organize in the gentlemen’s club, whiskey glasses clanking. British diplomats posted in Iran, often frustrated by the stifling nature of the political environment and their inability to achieve their aims, would often marvel at their reputation. As one British diplomat told me: “I only wish half of it were true. Life would be much easier for us.”

But dig further and there is a grudging respect inherent in the accusation: Ah, those clever British, the undercurrent of the narrative goes, they may be constantly exploiting us, but they understand Iran better than anyone. Enter British Prime Minister David Cameron, who seemed to utter an essential truth of today’s Iran, one that might leave ordinary Iranians shaking their heads in wonder at those “clever” British while angering Iranian government officials.

In Parliament last week, the Conservative leader ridiculed the oft-repeated Western fear narrative that the Islamic Republic of Iran is a country “run by genius politicians who are strategic masters.” Using terms like “basketcase” and pointing out that Iranians “can’t even refine enough of their own oil” and noting their widespread use of the death penalty, Cameron concluded that “we should be describing the regime as much more backward rather than bigging them up.”

Indeed, Cameron is right. When the Islamic Republic of Iran falls, many secrets will be spilled, of human-rights abuses, of torture, of election fraud, but one of the worst-kept secrets of all—one that all Iranians understand but few Westerners pay much heed to—is the general incompetence of the regime to deliver on the basics: a strong economy, adequate infrastructure, environmental security (i.e pollution-choked Tehran), moderate food prices. Ordinary Iranians spend far more time concerned about the price of tomatoes than the state of the country’s uranium enrichment.

Let’s start with the most obvious example: the oil sector. Oil accounts for some 80 percent of hard currency earnings and 50 percent of fiscal revenues. Handled wisely, the Iranian state should have a large oil sovereign wealth fund, a thriving sector, and possibilities for endless future growth. Clearly, this is a sector that Iran’s “strategic masters” should handle well. Instead, it is dramatically underperforming its potential and headed for a decade of steady production declines.

Today, Iran produces less than two-thirds of what it was producing before the revolution in 1979 when production peaked at 6 million bpd. That graph is steadily moving down, with Iran producing in the 3.6-7 million bpd range today and declining. In fact, an Iranian Parliament report last year warned that unless production increases and domestic consumption decreases, Iran will have virtually no oil to export within a decade.

Despite the skilled work of technocrats in Iran’s oil ministry and in the fields (most international oil players give them high marks), the Islamic Republic’s political strategic masters repeatedly get in the way of an efficient, well-managed sector. Increasingly, contracts are politicized and awarded to entities affiliated with the Islamic Revolutionary Guards Corps (IRGC), who have little or no experience in managing complex exploration and production. Tales of corruption within the oil ministry are rife. The National Iranian Oil Company (NIOC) is the second-largest oil company in the world; it also happens to be among the seven most corrupt, according to Transparency International, joining ranks with state oil companies from the likes of Nigeria, Angola, and Congo. It’s not the engineers and geologists who are corrupt, but the strategic masters in politics.

Further, Iran’s nuclear program, coupled with a confrontational foreign policy, has led to a raft of United Nations and unilateral state sanctions that have spooked most global energy majors into retreating from the Iran market. Chinese state-owned companies are the last ones standing in Iran, and even they have shown themselves far more willing to sign multi-billion dollar contracts and far less willing to actually expend those billions. “The Chinese are dragging their feet,” is an oft-spoken lament of Iranians in the oil sector.

Cameron’s references to Iran being unable to refine its own oil? Years of strategic masters’ mismanagement has meant that Iran’s refining capacity is weak, causing it—a country with the world’s third largest oil reserves—to import some 25 percent of its gasoline needs.

Clearly, the oil sector is in trouble. But it doesn’t end there. Iran also holds the world’s second-largest natural gas reserves, an important industrial fuel for hungry Asian economies. Iran could be making a mint if it managed its gas sector well. Not only Asian buyers, but also its neighbors are hungry to import Iranian gas; there have even been several discussions about gas pipelines to nearby Persian Gulf states. But, alas, Iran can’t get enough gas out of the ground to meet their demand. In fact, the Islamic Republic imports more natural gas than it exports, with Moscow laughing all the way to the bank as its main potential competitor sputters.

Speaking of Moscow, Iran’s strategic masters can barely see the games that Moscow is playing with them: on the one hand, feigning an alliance, on the other hoping that Iran will never become a major gas exporter, stringing it along with promises of air defense systems, only to pull the rug out from under Tehran at the eleventh hour. Qatar, the other major Persian Gulf gas player, is taking a page from Moscow’s book, playing nice to Iran but undermining them every chance they get. As Qatari Prime Minister Hamad bin Jassim bin Jaber al-Thani said (via Wikileaks) regarding his policy toward Iran: “It’s simple: we lie to them and they lie to us.”

Iran’s strategic masters have created an environment of crony capitalism and an inefficient economy (once described as “sick” by the former President Mohammad Khatami) that has been excellent at producing inflation and far less adept at producing growth.

For seasoned observers of Iran, this is, of course, not a revelation. After all, Tehran has been punching far below its potential economic weight for decades and its much-feared military is, according to most analysts, a collection of second- and third-rate technology.

As for Iran’s influence in Iraq and Afghanistan? While much of the reporting is accurate, it’s worth remembering that Iran successfully exploited an opportunity provided by the U.S. military rather than create one of its own. And there is no reason to believe that Tehran will be as adept at the long-term influence game in those states as the doomsdayers seem to believe. Further, whatever one might think, Iran—even an underperforming, limping Iran—will always be a regional power. Think of underperforming, limping Brazil in Latin America in the 1980s.

And now, the strategic masters are at each other’s throats. No, it’s not the Green Movement versus the hardline conservative clique of President Mahmoud Ahmadinejad and Ayatollah Khamenei. That is so first quarter 2011. It is now a full-scale public battle for influence between Ahmadinejad and the Supreme Leader, one that is getting nastier by the day (for daily updates, see the excellent press summary on the indispensable Tehran Bureau web site). Khamenei is far ahead in this battle, but it’s not over yet.

Thus, the strategic masters find themselves in several binds: economic, political, and foreign policy. The reality, of course, is that the rulers of the Islamic Republic are not strategic masters—but this does not mean they are about to fall either. The truly “clever” and “cunning” analysis would have added that they are survivors.

They have survived a brutal eight-year war with Iraq in which virtually the entire world sided with Saddam Hussein. They have survived several waves of challenges to their rule. They have survived domestic factionalism, sanctions, increasing international isolation, and now a battle royale between the president and the Supreme Leader.

American policy makers ought to rightsize the Iranian state in this more appropriate framework: survivors who manage to muddle through, but whose main resource that has helped them muddle through—oil—is under severe stress.

Image by Marcello Casal Jr\ABr