Iran is one of the 15 largest mineral-rich states with more than 68 types of minerals. It is also the 17th largest state (by area) in the world and is located at a strategic point in world trade, controlling part of the Strait of Hormuz. The triumph of the Islamic Revolution in 1979 and the Iranian nuclear program have played a key role in the image of this state and overshadowed other aspects about Iran.
"What you seek is seeking you" (Rumi, 13th century Iranian poet). Recently, the Russian invasion of Ukraine has dominated the main analyses and news around the world.
However, at the same time, there is another silent but crucial dynamic that could change the regional geopolitical chessboard and even beyond the borders of the Middle East, the negotiations in Vienna and a possible nuclear agreement with Iran.
Iran is one of the 15 largest mineral-rich states with more than 68 types of minerals. It is also the 17th largest state (by area) in the world and is located at a strategic point in world trade, controlling part of the Strait of Hormuz. According to the US Energy Information Administration, Tehran has the fourth largest oil reserves in the world, representing 10% of the world's oil reserves, and Iran has the second largest natural gas reserves in the world, after the Russian Federation.
However, the triumph of the Islamic Revolution in 1979 and the Iranian nuclear program have played a key role in the image of this state and overshadowed other aspects of Iran.
After a meeting on October 27, 2021, Tehran said it would return to talks at the end of November. Negotiations to revive the agreement, also known as the Joint Comprehensive Plan of Action (JCPOA). Since November 2021, arduous negotiations have been taking place in Vienna and the main cards are being played for a possible new nuclear deal with Iran.
This article will try to shed some light on the modern historical background of this state, the why of the Iranian nuclear program, the relevance of the 2014 nuclear deal and what a new nuclear deal with Iran would mean.
In the early 19th century, Russia, the Persian Empire (ruled by the Qajar dynasty) fought for control of the Caucasus region. After the first Russo-Persian war (1804-1813), the Treaty of Gulistan was signed in 1813. The treaty confirmed the cession and inclusion of what is now Dagestan, eastern Georgia, most of the Republic of Azerbaijan and parts of northern Armenia from Iran to the Russian Empire.
However, peace between the two powers would not last long and, in 1826 to 1828, the two powers would confront each other again. This war had even more disastrous results for Persia than the war of 1804-1813. In 1828, the Treaty of Turkmenchay was signed.
In this treaty, Persia lost its last remaining territories in the Caucasus to Russia. These included all of present-day Armenia, the rest of the south of present-day Azerbaijan and present-day Igdir in Turkey. By the treaties of Gulistan and Turkmenchay.
Map 1: territorial changes of the Persian Empire/Iran during the 19th-20th century. Source: https://www.cais-soas.com/CAIS/Iran/breakup.htm
Along with this loss of territory to Iran, in the mid-19th century, "The Great Game" intensified. The Great Game was a period of intense rivalry between the British and Russian empires in Central Asia. In Iran, during 1848-1896, the Shah, Naser o-Din Shah, reigned. Naser o-Din Shah attempted to maintain the independence of the Persian Empire, taking advantage of the rivalry between the United Kingdom and Russia.
In 1856, London prevented Iran from reasserting its control over Herat and supported the incorporation of Herat into Afghanistan and extended its control to other areas of the Persian Gulf during the 19th century. Meanwhile, by 1881 Russia had completed its conquest of present-day Turkmenistan and Uzbekistan.
During the reign of Naser o-Din Shah, modernization of the country began. However, various trade concessions by the Iranian government brought economic affairs largely under British control and, by the late 19th century, many Iranians believed that their rulers were beholden to foreign interests, creating a seed for a revolt against the Persian monarchs.
In the early 20th century, Iran was in a delicate economic and political situation.
As early as 1905, a dispute over sugar prices eventually triggered the first public protests against the Shah. In 1905, the governor of Tehran ordered the caning of some sugar traders for refusing to lower their prices and the size of the protests prompted Shah Muzaffar al-Din Qajar to form an adalatkhanah (house of justice). However, the Shah, Muzaffar al-Din Qajar did not keep his word and in 1906, issued a decree calling for the formation of a national assembly in Iran and began drafting a constitution.
In the midst of this turbulence, 1907, the two great powers, the United Kingdom and Russia decided to divide Iran into spheres of influence; the agreement sealed Russian supremacy in the north and British supremacy in southern Iran. In 1908, the Anglo-Persian company (part of the "Seven Sisters") was formed following the discovery of crude oil on Persian soil.
After World War I, Iran was in a delicate economic and political situation. As a result, in 1923, the last Shah Qajar appointed Reza Khan as prime minister and in 1925, Reza Khan assumed the position of Shah (Persian for king), creating the Pahlavi dynasty.
During Reza Khan's reign, economic reforms were implemented to modernize Iran. On the one hand, education was made compulsory for all Iranians and hundreds of schools were built. It is worth mentioning that, in 1934, the University of Tehran was created. On the other hand, the Anglo-Persian company continued its operations and in 1938, the Trans-Iranian Railway, which linked the Persian Gulf with the Caspian Sea, began operating.
Reza Khan had established strong cultural and technological ties with Germany and during the first years of World War II, Iran remained neutral. Iran's geostrategic importance led the Allies to have Reza Khan abdicate and his son, Mohammad Reza Pahlavi, accede to the throne.
In the 1940s, parliamentarism re-emerged in Iran and in 1951, the shah appointed Mohammad Mossadeq as prime minister. Mossadeq followed through with his plans to nationalize the oil industry and the National Iranian Oil Company was created. This move provoked unrest in the UK and in 1953, British MI-6 and the CIA launched Operation Ajax, overthrowing Mossadeq and an absolute monarchy was installed, which provoked social unrest and was repressed by the SAVAK.
During the 1960s, the shah implemented the White Revolution. On the one hand, land reform, the nationalization of forests, the sale of state enterprises to the private sector, a profit sharing plan for industrial workers and the formation of a Literacy Corps to eradicate illiteracy in rural areas were implemented.
On the other hand, starting in 1957, Iran established its nuclear program with the help of the U.S. In 1959, the Tehran Nuclear Research Center (CINT) was created. Also, in 1968, Iran signed the Non-Proliferation Treaty (NPT) and ratified it in 1970.
In the Non-Proliferation Treaty, specifically in Article IV, each state has the right to develop, research and produce nuclear energy for peaceful purposes. However, in the foreword of the treaty, it limits the other states to use nuclear energy for "peaceful purposes". In addition, only the five permanent members of the UN Security Council (France, United Kingdom, USA, China and Russia) may possess nuclear weapons, as agreed in Article VI.
This White Revolution led to economic growth, but was opposed by the clerics, in particular Ayatollah Khomeini.
In the 1970s, the U.S., France and West Germany were key to the development of the Iranian nuclear program. For example, in 1974, Iran signed a contract with the German company Kraftwerk Union (a subsidiary of Siemens) to build two reactors at Bushehr. Another example was the signing of an agreement between the French government subsidiary Cogéma and Iran, greatly facilitating the nuclear breakthrough. Also, Israel assisted in this program before 1979.
Thousands of rural immigrants and the unemployed were crowded into the big cities and received no assistance from the state, and the Shiite clergy were able to exploit this situation to their advantage. Economic inequalities increased and the first to demonstrate peacefully against the regime were the middle class professionals (lawyers, doctors, engineers) and they were joined by students, political parties and the clergy. Protests became increasingly violent and social discontent grew and, in 1979, the Islamic Revolution under the leadership of Khomeini triumphed.
Image 1: Ayatollah Khomeini returns to Iran after fourteen years in exile in France. Source: https://www.lavanguardia.com/historiayvida/historia-contemporanea/20190531/47312521326/jomeini-el-hombre-que-cambio-iran.html
During the early days of the Khomeini regime, Iran's nuclear program was halted and economically, the Marxist dogma of the 1960s that sought an economy centered on "social justice" was adopted.
On February 14, 1979, less than a month after Ayatollah Khomeini came to power, the US embassy was occupied by armed Iranian guerrillas (The Iran hostage crisis), where the current Ayatollah, Ali Khamenei, played a key role in the negotiations and, in 1980, Jimmy Carter broke diplomatic relations between Iran and the US and, since this year, Switzerland is the protective power of the US in Iran. At the same time, Washington has been imposing sanctions on Iran since the 1980s.
During 1980-1988, Iran and Iraq fought a long and bloody war. This contest provided a convenient excuse for the expansion of the state sector and the precipitous fall in living standards in general. Meeting the demands of major combat initially boosted Iran's manufacturing output. But the oil sector never fully recovered to pre-1979 levels.
After the war there were three crucial changes within the ayatollah regime. The first of these was on the economic side. The 1988 decision to accept a cease-fire with Iraq also reflected the recognition that the country could not afford the cost of war to the economy or society. In 1989, the death of Khomenei and the ascension of Khamenei to the helm of Iran would turn economic policy around.
The newly elected Iranian president, Akbar Hashemi Raftsanjani, advocated a fundamental reordering and liberalization of the Iranian economy, along with efforts to reverse Iran's international isolation. Postwar investment and the relaxation of government restrictions helped generate strong growth in gross domestic product, government revenues, and employment.
The second was the importance of "asymmetric warfare." Tehran knows that it cannot match the United States in a conventional confrontation. Thus, within the regime, it began to finance and provide terrorist groups such as Hamas (1987) and, above all, Hezbollah (1982). These groups would make it possible to expand Iran's sphere of influence in the Middle East and to achieve an exit to the Mediterranean ("shia arc").
At the same time, this war made Ayatollah Khomeini restart the Iranian nuclear program as the only way to secure the Islamic Revolution against the US and Israel. To develop this program, Iran needed foreign assistance. In 1990, Tehran and Beijing signed a nuclear cooperation agreement and, in 1995, Russia began to rebuild one of the reactors at Bushehr. At the same time, since 1990, Israel warned about this program.
From 1995, U.S. sanctions would include a complete and comprehensive embargo on bilateral trade and, a year later, these sanctions would be aimed at isolating Iran from non-U.S. energy companies.
In response to this move and low crude oil prices in 1992, Rafsanjani rescheduled part of the foreign debt, reinstating foreign exchange restrictions and shelving infrastructure plans, as well as any measures to rationalize subsidies. However, the leadership's ambivalence toward market-based reforms hampered Iran's competitiveness.
In 1997, Mohammad Khatami took over the presidency. Khatami was faced with the onset of a global recession and a deep drop in oil prices. He also faced persistent inflation, unemployment and mismanagement. To this end, Khatami achieved a solid start to serious economic restructuring. These included: unifying the exchange rate, establishing an Oil Stabilization Fund as a cushion against market volatility, licensing the first post-revolutionary private banks, pushing through some improvements in the foreign investment framework.
Between 1999 and 2002, Tehran conducted centrifuge tests using the Beijing-supplied UF6. These tests constituted violations of Iran's verification requirements under the NPT. Since the 2000s, Israel has sought to prevent Iran from becoming a military nuclear power and overt and covert operations have increased due to Iran's growing arsenal of long-range missiles. In 2001, Iran secretly began building a large subway enrichment facility near the city of Natanz.
A year later, the National Council of Resistance of Iran, an opposition group to the ayatollahs' regime in exile, revealed the construction of two secret nuclear facilities: in Natanz and Arak.
In 2003, the IAEA visited Iran's new nuclear facilities and Britain, France and Germany (EU-3) succeeded in getting Iran to verifiably suspend its uranium enrichment activities and implement the Additional Protocol to the Non-Proliferation Treaty and, in 2004, Iran and the EU-3 signed the Paris Agreement, extending the temporary suspension of Iran's nuclear activities.
Khatami's reforms failed to build and maintain public support for his program, and in 2005, former Tehran Mayor Mahmoud Ahmadinejad won the election and became president.
Ahmadinejad promised to distribute oil revenues to the entire population and pointed to his modest lifestyle compared to his rivals. Ahmadinejah also addressed distortions affecting Iran's economy, such as subsidies and state dominance. However, this privatization mainly benefited state-affiliated companies, especially those associated with the Revolutionary Guard, whose retirement funds took a majority stake in the state-owned telecommunications company in 2009.
Tehran voluntarily stopped implementing the Additional Protocol in 2006 and refused to respond satisfactorily to IAEA questions. This led the US and EU in 2006 to start working together to develop new sanctions in the United Nations Security Council (UNSC)-UNSC resolutions 1737 (2006), 1747 (2007), 1803 (2008) and 1929 (2010). A factor in Ahmadinejad's favor was the rise of Asia, specifically the People's Republic of China, as a commercial counterweight to Iran's historic trading partners in Europe, allowing the impact of US and UN sanctions to be cushioned.
The sanctions imposed by the UN Security Council did not bring about a change in Iranian politics. In 2010, Tehran began to enrich its uranium from 3.5 to 20% at Natanz. Consequently, in 2010 and 2012, the US imposed new sanctions, increasing pressure on Iran by forcing foreign companies and banks to withdraw from Iran.
In 2010, Iran reported that the Stuxnet virus destroyed hundreds of centrifuges used to enrich uranium at the Natanz nuclear enrichment facility. The virus was reportedly developed jointly by Israel and the US.
While India, South Korea, Japan and the EU, under the weight of the sanctions, reduced their presence and investments and pulled out of Iran, Russia and China took advantage of the opportunity. It is worth mentioning that in 2011, Beijing and Tehran signed an agreement granting China exclusive rights over several Iranian oil and natural gas fields until 2024.
In 2013, the tables were turned with the election of Hassan Rouhani as Iran's president.
One of Rouhani's priorities was to end the confrontation with the West (US and EU) that would free Iran from international sanctions. In November 2013, Iran, the US, China, Russia, the UK, France and Germany, plus the EU announced the Joint Plan of Action (JCPOA).
On July 14, 2014, the Joint Comprehensive Plan of Action was announced. This agreement will suspend and eventually remove major sanctions imposed on Iran. In return, Iran will limit its nuclear program, address past nuclear weapons issues, and enhance the ability of inspectors to detect undeclared nuclear work through the implementation of the Additional Protocol.
However, in the JCPOA, limitations on Iran's nuclear-related imports end in year 10, just as the breakout deadlines begin to decrease, meaning that Iran's nuclear program can more freely import a wide range of goods. In addition, Iran could deny the IAEA access to sites, information or people on the grounds that they are military in scope.
Figure 1: Iran, Islamic Republic: Breakdown of GDP composition. Source: http://mecometer.com/infographic/iran/gdp-composition-breakdown/
Thanks to this agreement, Iran regained access to the international financial system, repatriated billions of dollars of frozen assets and returned to the oil market. Rouhani called for an increase in non-oil exports, setting a target of USD77.5 billion in annual non-oil exports in 2015.
Israel was the actor that showed the strongest rejection of this agreement. Former Israeli Prime Minister Benjamin Netanyahu fiercely opposed it during its adoption by the UN Security Council (UNSCR) in July 2015 (UNSCR 2231). Moreover, Netanyahu considered this nuclear deal as "a historic mistake".
Another actor that also showed concern about this pact was Saudi Arabia. Since the Arab revolts of 2011, the regional leadership contest between Riyadh and Tehran reached a new level, with proxy wars in: Syria, Iraq and Yemen; where Tehran has gained greater regional weight.
Riyadh fears that Iran has the capacity to improve its economic position, and the ability to create a nuclear weapon. The JCPOA entered into force for a relatively short period of time, 15 years, and would not destroy Iran's technical capabilities to maintain a nuclear program. Both of these outcomes would strengthen Iran and its allies in the region. Consequently, Riyadh has forged new alliances and would not rule out developing its own nuclear program.
This deal also caused controversy within the heart of the Republican Party in the U.S. During a 2016 presidential debate, former U.S. President Donald Trump described the Iran nuclear deal as a "horrible deal."
Two years into his presidency, Rouhani's most notable economic achievement was to reverse Iran's GDP contraction and reduce inflation. The economy grew by 3% in 2014 and inflation dropped to 15.6% in early 2015. Since 2015, the main players started to move their cards. To prevent the US and to a lesser extent the EU from gaining leverage on Iran, in 2016, Chinese President Xi Jinping paid a state visit to Iran. In it, the two leaders signed 17 economic and technological cooperation agreements.
On the EU side, since 2016: automotive companies Citroen, Peugeot, Renault, Scania and Volkswagen announced investments to expand production in Iran, Italian company Danieli signed several contracts to supply heavy machinery for steel production, British company Quercus announced a €500 million deal to develop the solar energy sector in Iran and French company Total, China National Petroleum Corporation and NIOC signed a USD4.7 billion deal to develop production in the South Pars gas field. In addition, in 2017, Irancell signed a contract with Ericsson for assistance in developing its 5G network.
The year 2018, brought a new twist. On January 12, 2018, former U.S. President Donald Trump issued another Iran sanctions waiver saying this was "to secure agreement from our European allies to fix the terrible flaws in the Iran nuclear deal."
In March 2018, the International Atomic Energy Agency (IAEA) stated that Iran was in compliance with its commitments under the JCPOA.
Former US President Donald Trump was clear on two aspects of his Middle East policy: Iran is the source of the region's ills and sanctions are the main tool to counter it.
Accordingly, he advocated that the JCPOA gave Iran the leverage to carry out "malign activities," and consequently withdrew the U.S. from the JCPOA in May 2018. Donald Trump imposed economic sanctions on Iran and adopted a tougher policy against Tehran.
This move by Trump at first was questioned by the EU, France, UK (at that time still part of the community club) and Germany criticized this measure and re-initiated talks with Tehran. This new policy of former US President Donald Trump and domestic mismanagement meant a contraction of Iranian GDP by 6.03% in 2018 and, 6.78% in 2019. Iranian oil exports have fallen by around 60%.
This economic blow has led to protests erupting since 2017, harshly repressed by Iranian authorities, by low and middle-income communities angered by growing poverty.
Despite the economic blow, starting in 2019, Iran announced that it will resume some of its nuclear activities, thereby breaking the commitments agreed to in the JCPOA. By 2021, Iran would expand its uranium enrichment beyond the 20% purity threshold at the Natanz plant and, Tehran may have surpassed 60%, the International Atomic Energy Agency said.
China managed to carefully capitalize on the US, EU and Indian withdrawal from Iran. It is worth mentioning that, in 2019, Iran joined the One Belt and Road initiative and, in 2021, China and Tehran signed a 25-year strategic partnership agreement.
Through this agreement, Beijing will invest a total of USD400 billion in the banking, transportation and development sectors in Iran, where telecommunications will also play a prominent role. The Chinese company, Huawei will develop Iran's 5G network and, China will receive Iranian oil at deep discounts for the next 25 years. The Chinese are also expected to gain considerable influence over Iran's Persian Gulf ports and islands. At the same time, China and Russia gave the go-ahead for Iran's membership in the Shanghai Cooperation Organization.
The SARS-CoV-2 pandemic further affected Iran's economy. Tehran experienced the worst outbreak in the Middle East, with more than 6.2 million officially confirmed cases of infection and 131 thousand deaths by December 10, 2021 and, the inflation rate increased to 36.5% in 2020. Despite this, Iran's economy grew by 1.5% in fiscal year 2020-2021, outperforming most of its neighbors except Turkey.
Crude exports doubled between August and September 2020, according to TankerTrackers. In the fourth quarter of 2020, the oil and gas sector grew by 4.9%, while the manufacturing sector grew by 3.1%, according to the Statistical Center of Iran.
Current U.S. President Joe Biden intends to restore the 2015 nuclear deal with Iran. Accordingly, in April 2021 talks resumed in Vienna after a week's break, its chief negotiator, Robert Malley, is beginning to develop a roadmap on how to get there. In the same period, Seyed Abbas Araghchi, who was a political deputy in Iran's Foreign Ministry from 2017 to 2021, held a trilateral meeting with Russian and Chinese envoys.
Image 2: Negotiation venue in Vienna. Source: https://www.reuters.com/world/middle-east/iran-nuclear-deal-possible-shortly-if-us-accepts-tehrans-points-iranian-2022-03-07/
The Vienna talks remained stalled until November 2021. In November 2021, Ali Bagheri Kani, a confidant of the Iranian supreme leader has been Iran's chief nuclear negotiator in Vienna.
The negotiations in Vienna are arduous due to three key issues: the extent of the withdrawal of international sanctions, potential guarantees that the US will not leave the pact and, unlike in 2013 and 2014, the US and Iran are not negotiating directly, but through third states, France, UK, Russia and China.
A key approach to the signing of a nuclear pact was when Seoul released $1 billion in assets frozen by international sanctions, as an "initial step" to resolve the dispute between the two countries. Likewise, at the end of February 2022, Iran and the US were willing to carry out a prisoner exchange soon.
On March 3, 2022, the Director General of the International Atomic Energy Agency (IAEA) met in Tehran with Iranian Foreign Minister Hossein Amirabdollahian and nuclear chief Mohammad Eslami. The two sides reached an understanding for mutual cooperation, whereby the IAEA will receive further documentation from Iran by the end of May 2022.
For Iran, time is a key factor to avoid the same mistakes as the 2015 agreement. Also, Khamenei is interested in a renewed nuclear deal, as the current Iranian president, Ebrahim Raisi, maintains the same hard line and, the current Iranian government would reap all the political and economic benefits for Raisi's government.
Iran's return to the international market would allow Tehran to address mismanagement, corruption, inflation, youth unemployment, brain drain and solve the legal limitations of women in the labor market. Only 14.9% of Iran's labor force in 2016-17 was composed of women.
For China and Russia, this agreement is key, as, a nuclear Iran could further destabilize the Middle East region. Moreover, both actors believe that, if the Biden administration returns the United States to the JCPOA, a Republican victory in the 2024 elections could bring back the same policies that Trump enacted in 2018.
For Washington and Brussels, a new nuclear deal with Tehran could restrict Iran's nuclear program through a diplomatic agreement would mitigate a major source of regional instability. Currently, with the Russian invasion in Ukraine, Iranian oil and natural gas would play a key role in reducing the market share in the U.S., and especially within the EU, of Russian crude and gas.
Iran has tens of millions of barrels of oil stored in tankers that it could ship to customers quickly and Tehran could restore about 1 million barrels of daily crude production within a few months (2-3) of a deal, according to traders and analysts. It could return to its peak capacity of around 3.7 million barrels per day by next year. Iranian crude would ease pressure on Asian and Mediterranean markets reluctant to buy Russian oil.
However, Israel views the signing of a new nuclear agreement with Tehran with suspicion and caution. In January 2022, former Israeli Prime Minister Naftali Bennett stated that Israel would not be bound to any nuclear deal with Iran and would still consider itself free to act "without restrictions."
Israel's great fear would be that sanctions relief would pave the way for Tehran's leaders to devote resources to Iranian society and development and, that some of that money would go to enhance the military capabilities of Shiite militias in the Middle East, especially the terrorist group, Hezbollah and Iran's access ("Shia corridor") to the Mediterranean Sea.
This same concern is shared by the Gulf states, especially Saudi Arabia and the United Arab Emirates. There are fears in these states that Iran's new access to money would be used to finance its proxies in the region, which would further destabilize the Middle East. This could lead to further rapprochement between Israel and the Gulf states, already effective since 2020 with the Abraham Accords and possibly the official recognition of Israel by other Gulf states; in view of the greater geostrategic importance to the US of the Asia-Pacific and not so much the Middle East.
Another actor that looks askance at all the talks in Vienna and little talked about is Turkey.
Ankara and Tehran have conflicting interests in Syria and in the Caucasus. It should be mentioned that Turkey was a key ally for Baku in the war between Azerbaijan and Armenia in 2020. This increased Turkish relevance in the Caucasus could allow Ankara to become an alternative east-west conduit for trade in energy and other goods with Europe, bypassing the current routes dominated by Russia and Iran.
These past few months, Moscow has been demanding that the U.S. ensure that the sanctions it faces over the Ukraine conflict do not harm its trade with Iran. This demand could delay Iran's return to the crude oil market and increase Russian energy revenues. In a change of heart a few days ago, Moscow confirmed that it had such written guarantees.
Recently, the UK announced the release of USD 530 million of its debts to Iran prior to the release of two British-Iranian prisoners (Nazanin Zaghari-Ratcliffe and Anousheh Ashouri).
It will remain to be seen what the terms of a future nuclear agreement are and its impact on the interests of each actor involved. This document will bring about a change in the dynamics of the Middle East and in the energy markets, at a time when the Russian invasion of Ukraine occupies all lines of analysis. Only time will tell how events surrounding Iran will evolve.
Suggested readings:
Robinson, K., 2021. What Is the Iran Nuclear Deal?. [online] Council on Foreign Relations. Available at: https://www.cfr.org/backgrounder/what-iran-nuclear-deal
The World Bank. n.d. Islamic Republic of Iran. [online] Available at: https://www.worldbank.org/en/country/iran/overview#1
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