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Shell… recently confirmed a $10 billion investment in Iran

From the Soviet collapse, a lesson on reining in Iran

Roger Stern and Bernard Haykel

  • Last Updated: September 28. 2009 12:27AM UAE / September 27. 2009 8:27PM GMT

Since Mahmoud Ahmadinejad rose to power in 2005, European and Saudi policy towards Iranian nuclear weapons development has been straightforward: fatalism. For countries who would be directly threatened if Iran gets its bomb, this is baffling.

Europe and Saudi Arabia have enormous leverage over Iran in the form of trade and energy investment sanctions. Their failure so far to use it has divided what should be a natural alliance to moderate the Iranian regime.

Instead, Europe prefers to talk. This would be fine if Iran were negotiating in good faith, but as we discovered at the weekend, this is not the case. As things stand so far, by indulging Europe’s love of talk, Iran has met its apparent objective, which is to buy time to develop nuclear weapons.

Alarmingly, despite the growing belligerence of Iran’s government, Europe seems more anxious than ever to make new energy investments in Iran. European energy firms such as Shell and Spain’s state-owned Repsol recently confirmed a $10 billion investment in Iran. Italy’s ENI and Norway’s Statoil, as well as many private companies, have also made large energy investments. In return, Mr Ahmadinejad blamed Europe for the civil unrest in Iran after the recent elections.

Europe must cut off its energy investments immediately if Iran continues to default on its obligations for transparency under the Nuclear non-Proliferation Treaty (NPT). Such an investment ban would spare Europe a spectacular humiliation. If it does not draw the line with Mr Ahmadinejad soon, it may find itself making energy deals with the Islamic Revolutionary Guard Corps itself.

That is the stick, but there must also be a carrot. Europe needs to sweeten the pot for Iranian compliance, since previous incentives have been miserly. Iran’s reward for better behaviour should be the promise of massive European investment in the biggest energy prize in Iran: modernising its obsolete gas-powered electricity generation infrastructure. There is no faster, cheaper way to free up more Iranian gas for power generation and export.

Such incentives will also allow Iran to save face, since all along it has insisted its nuclear programme is about electric power.

Saudi Arabia could play an even larger role. Though it has gone almost unnoticed, the Kingdom has become a powerful moderating force in the Middle East. By outspending Iran and Syria in the Lebanese elections this summer, the Saudis engineered victory for the moderate Saad al Hariri. This displaced Iran’s militant proxy, Hizbollah, from its total command of Lebanese politics.

Next, the kingdom should reprise its greatest peacemaking performance: the 1986 oil price collapse. Saudi Arabia has been given little credit for this effort, which secured western victory over the Soviet Union in the Cold War. Here’s the story: while some other Opec members cheated on their quotas by overproducing in the early 1980s, Saudi Arabia cut its production to defend the price of oil. In 1985, after years of sacrifice, the Saudis reversed course and opened the taps to regain market share. The consequent price collapse bankrupted the Soviet Union, which relied on oil for its only hard-currency earnings.

Iran’s situation now is like the Soviet Union’s then. If it does not comply immediately with international demands for transparency on weapons development, Saudi Arabia could force a drastic reduction of Iran’s revenue by producing some or all of its four million barrels a day of spare capacity. Iran’s Opec production quota violations have approached historic highs, so there is a strong precedent for such a Saudi production increase.

Of course, Saudi Arabia relies on oil earnings just as Iran does, but it has nearly half a trillion dollars of currency reserves, more than enough to defend its budget even if revenues decline for a while. Most Gulf states enjoy comparable finances. Iran, by contrast, spends almost all its revenue trying to buy off dissent. Any revenue decline is a threat to the emerging Iranian police state.

Some Saudis might argue that forcing a price reduction would be a self-defeating revenue sacrifice. Yet the aggressive path to which Iran is now committed will lead to much higher prices as a result of regional instability, and there may be more to fear from that than from low prices: it would slow the global economy, reducing oil demand even further. In addition, if Israel is the agent of war against Iran, Saudi Arabia will lose face in the region. The time to bring Iran’s radicals to heel is now, while it can still be done peacefully.

Saudi Arabia, like Europe, is not in the habit of leadership. This has left the job of containing Iran to the US, and American sanctions alone are not enough to offset Europe’s investments. Saudi reluctance to act may be an aspect of its static defence strategy of the past six decades: reliance on US military might.

But this strategy offers little or no protection against a nuclear weapon in the hands of Iranian radicals. Fear of precisely this might explain recent state visits to Tehran by the Sultan of Oman and Qatar’s prime minister, who affirmed their belief in the validity of the Iranian elections.

The Saudis have taken a strong first step in confronting Iran politically in Lebanon. Economic confrontation is the next step. Whether it does so publicly or not, Saudi Arabia should co-ordinate with Europe to constrain Iran now, with an oil price reduction and energy investment sanctions respectively.

Many seem to think that, as a last resort, an Israeli attack might reverse Iran’s path towards nuclear weapons. Long before such a disastrous step is even contemplated, Saudi Arabia and Europe have it within their power to make it unnecessary.

Roger Stern is research fellow in oil and energy with the Middle East Project at Princeton University, where Bernard Haykel is professor of near eastern studies

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