As brinkmanship goes, the current hostility between the US/Europe-led West and the sovereign state of Iran is reaching boiling point. Iran may or may not be building nuclear weapons, but it is certainly pursuing a policy of developing nuclear facilities for domestic energy use and indulging in some scary rhetoric about its right to become a nuclear power in the Middle East.

For its part, having tried to slow Iran’s ability to join the nuclear club with economic sanctions for the last twenty years, the US is now enforcing more stringent measures. Meanwhile, the EU has just announced its own ban on the purchase of Iranian oil as of July 2012. Iran’s response was quick and decisive – retaliation by cutting off oil supplies to selected European powers with immediate effect and threatening to close the Straits of Hormuz, through which nearly one-fifth of the world’s oil supplies must travel. At stake is the potential for global Armageddon, either through nuclear holocaust or economic collapse. The question is, who will blink first?

Going nuclear
Recent posturing from inside Iran indicates its increasing concern that a military strike may be imminent. One official warned that any such strike would make a battlefield of “the entire Europe and the US”. The only way Iran could have the ability to carry out these threats, say observers, is if they have nuclear weapon capabilities. Iranian President Mahmoud Ahmadinejad continues to deny the allegation, however, saying that Iran does not need nuclear weapons to “cut off the hands of the United States.”

In fact, Iran’s nuclear odyssey has been rumbling on for over fifty years, largely with the help of the western nations that are now most concerned about it. It was the Eisenhower administration that launched Iran on its nuclear path in the late 1950s. Seeking to open doors for US investment in Iran, Eisenhower proposed an agreement for cooperation in research into the peaceful uses of atomic energy. In 1967 the US supplied a five megawatt research reactor which became the basis of Iran’s nuclear research and education programme.

The Shah established the Atomic Energy Organisation of Iran (AEOI) and by 1974 he had set a goal of producing approximately 23,000 megawatts of electrical power within twenty years. Lucrative contracts funded by oil revenues were signed with companies in the US, France and Germany to build reactors and uranium enrichment facilities.

Work on the programme was disrupted by the revolution in Iran and subsequent war with Iraq. Following these events, the US and Europe ostensibly cut their support for Iran’s nuclear programme, but work recommenced with assistance from new commercial allies in Russia, China and Pakistan. Support from its former allies didn’t dry up completely, however. During the Bush administration the US General Accountability Office found evidence that the US government had been funding two Russian institutes to the tune of $4m to keep scientists who were working closely with Iran on its nuclear programme on the payroll.

Alarm bells began to sound in the international community when two Iranian dissidents emerged with details of secret enrichment and heavy water facilities inside Iran. An IAEA (International Atomic Energy Agency) inspection in 2003 discovered that Iran had everything needed to produce enriched uranium which could fuel nuclear weapons and had been conducting experiments in violation of its inspection agreement. When Iran refused to comply with the UN Security Council’s demand that it suspend its enrichment programme, the Council began to impose sanctions.

Economic jihad
Ranked the seventeenth-largest economy in the world by purchasing power parity, Iran is the world’s fourth-largest producer of oil and gas, holding the largest reserves of natural gas in the Middle East. A total of 80 percent of the country’s exports are based on oil and gas which are sent mainly to markets in Europe and Asia. Of its total exports of crude oil in 2011, just under 20 percent went to the EU nations, 20 percent to China, 17 percent to Japan, 16 percent to India and nine percent to South Korea.

Despite this wealth on-tap, the government faces a number of economic challenges, including double-digit rates of both inflation and unemployment. It is running a non-oil fiscal deficit of around 16–20 percent of GDP, making the economy vulnerable to downward fluctuations in the price of oil. Inefficient public sector spending and corruption has squandered large amounts of the country’s oil wealth, while a policy of domestic price subsidies has led to an unbelievable rate of domestic energy consumption: Iran is the third-largest consumer of natural gas behind the US and Russia.

Although Iran managed to maintain positive economic growth following the global financial crisis of 2008, its projected growth of 2.2 percent over the next few years will not be enough to deal with youth unemployment, currently running at 20 percent. Between 1980 and 2000 the country’s population doubled, so that today nearly two-thirds are under the age of 30. Although the country has a strong education system, sanctions have virtually cut off the inward investment that would normally stimulate business creation to soak up the growing workforce.

Despite these challenges and the effects of international sanctions, Iran’s economy has underlying strength. Analysts at the investment bank Goldman Sachs predict that the country’s GDP could become the twelth-largest in the world by 2025. Recognising both the opportunity and the challenges facing the country, Iran’s Supreme Leader Ayatollah Khamanei has declared 2011 as the year of “economic jihad”, embarking on an ambitious plan of reforms and investment.

One of the government’s first reform measures was to cut the domestic energy subsidies, an inflationary move that is proving unpopular with the people. However, a recent analysis from the International Monetary Fund notes, “While the subsidy reform is expected to result in a transitory slowdown in economic growth and temporary increase in the inflation rate, it should considerably improve Iran’s medium-term outlook by rationalising domestic energy use, increasing export revenues, strengthening overall competitiveness and bringing economic activity in Iran closer to its full potential.” In this context, the capacity for generating nuclear energy to supply domestic needs makes economic sense. But is that the limit of Iran’s ambition for its nuclear programme?

Will there be a bomb?
The 2003 IAEA report on Iran’s non-compliance stated that no evidence was found to relate undeclared activities with a nuclear weapons programme, but went on to say that it was unable to conclude that Iran’s nuclear programme was exclusively peaceful. The US took the position that an oil rich nation has no need for commercial nuclear power, arguing that it would cost Iran more to produce a kilowatt of electricity from uranium than from petroleum. Iran countered with the fact that the country does not have sufficient refining capacity to meet domestic needs and the sanctions have prevented it from acquiring the technology and equipment needed to build refineries. As a result, Iran has to buy back refined petroleum for its own domestic use.

The issue has become a matter of pride for the Iranian people, who believe they have a right within the NPT (Non-Proliferation Treaty, to which Iran is a signatory) to develop an end-to-end nuclear process. When the UN suggested in 2005 that Iran should scrap all of its fuel reserves and enter into a contract to purchase nuclear fuel from France, President Mahmoud Ahmadinejad had this to say: “International precedence tells us that nuclear fuel-delivery contracts are unreliable and no legally binding international document or instrument exists to guarantee the delivery of nuclear fuel. On many occasions such bilateral contracts have either been suspended or stopped altogether for political reasons.

Therefore, the Islamic Republic of Iran, in its pursuit of peaceful nuclear technology, considers it within its legitimate rights to receive objective guarantees for uranium enrichment in the nuclear fuel cycle.”

But the rhetoric coming out of Iran on the subject of building nuclear weapon capacity has not always been consistent. In June 1974 the Shah is reported as saying Iran would get nuclear weapons “without a doubt and sooner than one would think”, although his officials worked quickly to defuse the remark and the anxiety it created in the international community. Much later, the Shah’s former head of the AEOI, Akbar Etemad, told Le Figaro that he had instructed a special research team to “give the country access to all technologies, giving the political decision-makers the possibility of making the appropriate decision and doing so while time permitted them to build a bomb if that is what was required.”

Still, the West is struggling to prove the existence of such a programme. The initial ‘evidence’ was apparently contained in some incriminating documents found on a laptop obtained by the CIA in 2003. Although subsequent US policy has been based largely on this material, neither the documents nor the laptop were released for scrutiny by the IAEA until 2011.

The IAEA’s latest report, issued earlier this year, suggests that Iran has tripled monthly output of uranium refined to a level ‘close’ to that from which nuclear weapons can be made. But it takes more than purified uranium to make a bomb, and despite reports that Iran has been modifying missile launchers to carry nuclear warheads, The New York Times recently reported that the US’s 16 intelligence agencies agree that Iran actually abandoned its nuclear weapons programme in 2003.

Whatever the truth of the situation, there is grave concern in diplomatic circles about what Israel might do. Former CIA analyst Bruce Riedel has been quoted as saying: “Israel has enjoyed a monopoly on nuclear weapons in the Middle East… for at least four decades.

That is a strategic and geopolitical position that is obviously to Israel’s advantage.” The twitching finger positioned closest to the trigger right now is Isreal’s. “If you don’t want me to attack now, I want guarantees,” Israeli Prime Minister Benjamin Netanyahu told US officials in January. Worried US and European diplomats are scrambling to find effective non-military interventions to defuse the situation.

Bludgeoned with sanctions
The US first imposed sanctions in protest at the 1979 seizure of its embassy in Iran, lifted them when the hostages were released in 1981. Amid concerns that Iran was sponsoring international terrorism, the US reimposed sanctions in 1984 and has used its concern over Iran’s alleged ambition to build nuclear weapons as the basis for progressively ramping up the scope and severity of its embargoes since the early 1990s.

Not all players in the international community agree with the policy, but when Iran failed to comply with UN demands to stop enriching uranium in 2006 the UN Security Council expressed its disapproval by passing a resolution imposing multilateral sanctions. There have been a total of six UN resolutions since tightening the restrictions affecting trade in oil, weapons and nuclear technology, as well as movements of money, control of financial assets and freedom of movement of certain individuals.

Those who back the sanctions have stated clearly that the intention is to target the regime in Iran, not the Iranian people, but the ripple effect from each individual measure is inevitably trickling down to spawn a deepening resentment against the ‘bullying’ nations of the West. In the last 12 months, the rial has nearly halved in value, leading to higher domestic inflation, which has been further aggravated by higher costs of importing goods.

Sanctions that hit a number of Iranian port operators caused disruption that led to an explosion in smuggling activities. Ironically, this puts the regime in a stronger position domestically because the smugglers need its protection.

Oil revenues are no longer secure as the number of countries willing to continue buying Iranian oil and risk US wrath is dwindling. Japan and South Korea have already indicated they will work with Washington. China and India have said that they will not boycott Iranian oil, but may be using the current crisis as an opportunity to negotiate a price discount. And in January, the EU announced its own embargo on Iranian oil, starting this summer.

But it is the sanctions against financial operations that may have the most far-reaching effects. In its latest move, the US enacted a bill aimed at cutting off Iran’s central bank from the world’s financial system. That forces customers for Iranian oil to work through a complicated and expensive network of financial intermediaries. Payments in the tens of millions of USD from both China and India have been seriously delayed as a result.

The recent EU sanctions also cover marine insurance, which may force shipping lines to reconsider carrying cargo sourced in, owned by or bound for Iran. Banks, which have bypassed earlier restrictions on direct business deals with Iran by working through correspondent banks, are now having to cut all ties with any institution doing business in Iran. The restrictions have even made it difficult for Iranian families to transfer money to relatives living abroad.

Ahmadinejad’s response to these recent sanctions was predictable. The BBC quoted him as saying: “It is the West that needs Iran and the Iranian nation will not lose from the sanctions.” However, results of a Gallup Poll taken just after the sanctions were announced tell a different story: 65 percent of Iranians said they believed the sanctions will affect their lives.

Deals in the dark
As rumours of the impending EU oil embargo circulated in January, the Iranian government became increasingly bellicose. A Foreign Ministry spokesman hinted that the US was plotting to bring down an already weakened euro by pressuring the EU to join the sanctions. Iran’s OPEC governor added that it would be ‘economic suicide’ for Europe to join the sanctions at this time. What they were referring to was the imbalance of dependence on Iranian oil within the EU. While Britain and France source one percent and three percent of their domestic requirements respectively from Iran, in Greece that figure is 30 percent.

One reason for the delay in implementing the EU’s announced embargo was to give the governments of Greece, Italy and Spain time to negotiate new contracts with other suppliers, likely to be Saudi Arabia. With full knowledge of this vulnerability, Iran announced that it was terminating exports to the EU with immediate effect – but softened the blow by starting with the two strongest economies. “Exporting crude to British and French companies has been stopped… we will sell our oil to new customers,” was the blunt statement from spokesman Alireza Nikzad, on the Ministry of Petroleum website. No further details were given to identify the ‘new customers’, but Iran has been working hard to develop markets and allies outside the sphere of American influence.

In January, President Ahmadinejad made a whistle-stop tour of Latin America, visiting Venezuela, Nicaragua, Ecuador and Cuba. The reason, according to Iran’s state-run Press TV, is that the Latin American region is one of the top priorities of the country’s foreign policy. Iran has even launched a Spanish TV network to “strengthen cultural ties between Iran and the Spanish-speaking community,” according to network manager Ali Ejaredar.

The unlikely friendship – only 25 percent of more than 20,000 residents in Latin American countries said they viewed Iran as ‘good’ or ‘very good’ – is not new.  President Ahmedinejad and Venezuelan President Hugo Chavez have been forging a relationship between their two countries since 2005, but this year there is a clear message to the US. “The countries of Latin America are saying to the world that they have sovereignty and independence,” says Nicmer Evans, a political science professor at the Central University of Venezuela in Caracas. “They are not subordinate to the dictates of the international policies of the United States. The visit by Ahmadinejad to Venezuela and the rest of the countries reinforces, on Iran’s part, that they are not isolated,” he continues. “They are demonstrating it publicly.”

Backed into a corner
Talks are being held in the important Asian market, too. China, which gets up to one third of its oil imports from Iran, has been scaling back its purchases. However, Suzanne Maloney of the Brookings Institute suggests this may have more to do with an attempt to get price discounts than to toe the line with US-ordained sanctions. Other sources have reported negotiations between Iran and China to bypass currency restrictions by arranging a bartering deal to trade Iranian oil for Chinese goods and investment in infrastructure projects. India, which is also having trouble settling up to $5bn of its oil debt to Iran, has less non-oil trade with the country but talks are on-going to find other ways of getting around the currency restrictions, including payments in gold.

So will the stranglehold of sanctions achieve its objective of behaviour change in Iran?    Gary Sick, a specialist on Iran at Columbia University, doubts it. “It’s important to turn around and ask how the US would feel if our revenue was being cut off, our scientists were being killed and we were under cyberattack,” he has said. “Would we give in, or would we double down? I think we’d fight back, and Iran will, too.”

The former AEIO scientist Akbar Etemad agrees. When Maziar Bahari asked him in 2008 if he believed the Iranian government is trying to build nuclear weapons, he replied: “I’m not a mind reader. The Iranian government says that it doesn’t want to build bombs. But if you ask me, the way the west is isolating Iran leaves it no choice but to build nuclear weapons. Iran has nothing to lose and nothing to fear from sanctions any more. When Israel threatens to attack Iran, it dares to do so because it has nuclear weapons and Iran does not. The Iranian government may now see them as the only way they can defend themselves.”

So the question still remains: who will blink first?