Why Washington and Tehran Are Headed For a Showdown

Eurasia Group president Ian Bremmer assesses the world's number one political risk

Ian Bremmer, President, Eurasia Group

The international dispute over Iran's nuclear ambitions will be the greatest source of political risk for global market stability over the next 12-15 months. Iran is the fourth-largest oil supplier in the world. It exports more than 2.5 million barrels per day and is believed to hold about 10% of the world's proven reserves. Any action that removes substantial amounts of that oil from the marketplace would have a significant near-term impact on oil prices-and therefore global growth. The current standoff, and the growing likelihood that the United States and Israel might eventually resort to military action against Iran's nuclear program, threaten to do exactly that.

The Islamic Republic's conservative leadership remains adamant that the Nuclear Non-Proliferation Treaty gives Iran the right to develop a full nuclear fuel cycle, and that its program is intended only for power generation. The United States and the so-called EU3 (Britain, France, and Germany) argue that such a civilian program could easily be adapted to military use and that Iran's history of hiding its nuclear assets proves that its government cannot be trusted.

In October 2003, the EU3 reached agreement with Iran for a freeze on uranium enrichment and related activities. But in August 2005, Iran restarted uranium conversion, in preparation for enrichment. In November, Russia offered to enrich the Islamic Republic's uranium gas and to send it to Iran as needed for civilian power generation. Iran rejected the offer and, on January 10, upped the stakes in the standoff by breaking IAEA seals on its research facility at Natanz and restarting enrichment. In March, the 35-nation governing board of the International Atomic Energy Agency voted to refer Iran to the UN Security Council. That's where we are today.

It is increasingly likely that the United States and/or Israel will launch a military strike on one or more Iranian nuclear sites in the first half of 2007. To understand why this is so, we must answer three questions. Why is Iran driving the conflict despite considerable international pressure? Why is the United States unlikely to simply accept a nuclear Iran? What role will China and Russia play in the diplomatic process?

Why won't Iran back down?

First, Iranian leaders appear convinced that international thirst for the country's oil and gas will cripple Washington's ability to impose sanctions – through either the Security Council or bilateral diplomacy. Simply stated, with its "oil card" in reserve, Tehran believes it is holding a winning hand.

More to the point, Iran's conservatives are driving the conflict because the regime badly needs an issue that bolsters its domestic popularity. Nearly 70% of Iranians have yet to celebrate their 24th birthday. They are not old enough to remember US support for the Shah's repressive regime or the struggle to drive him from power. For a growing number of Iran's people, the revolution is simply a subject taught in history classes, its virtues extolled by religious fundamentalists whose heavy-handed authority many Iranians deeply resent.

The country's alienated youth pose virtually no near-term threat to their government. The ruling clerics have withstood pressure for liberalization over the last decade by marginalizing moderate former President Mohammad Khatami, and by demonstrating again and again that they can "manage" Iran's electoral process. They used the Guardian Council – a group of 12 unelected theologians and jurists – to exclude undesirable candidates from parliamentary elections in 2004 and the presidential election in 2005. Conservatives now have majority control at every level of Iran's government. Though he is not a cleric, Iran's new president Mahmoud Ahmadinejad is both socially conservative and loyal to supreme leader Ali Khameini, Iran's real powerbroker. For the moment, most of the country's moderate voters and politicians have simply withdrawn from the political scene.

But much of Iran's current domestic tranquility depends on high global energy prices and the revenues the regime draws from them. This income allows the regime to invest in social stability via public works projects and social services – and in domestic repression where necessary. The country's leadership knows that government-organized demonstrations arouse nothing like the fundamentalist, patriotic fervor they once did and that if energy prices fall, the regime's mandate might be more openlychallenged.

As a result, Iran's conservatives need an issue that rallies all Iran's people – traditionalists and modernists alike – to their government. Defense of the country's nuclear program, a powerful symbol of Iran's independence and international clout, offers just such a cause. International opposition to the program offers another. Each new threat from the West gives Iran's conservatives a new opportunity to win broad domestic support.

Iran's rulers believe resistance to international pressure will bring other rewards, as well. If the United States or Israel launches a military strike on Iran's nuclear program, the aftershocks will likely be felt across the border in Iraq. Many of the spiritual and political leaders of Iraq's majority Shia would likely respond with a call for the immediate withdrawal of all foreign troops from the country. If Washington ignores the call, Shiite militia groups might add new fuel to the Sunni-dominated insurgency. For Iran, an opportunity to fill the vacuum left in Iraq by departing US and British troops may well outweigh the costs of a military strike that can delay-but not destroy-its nuclear program.

Why won't the United States back down?

When India and Pakistan tested nuclear weapons in 1998, Washington was swift to impose sanctions. But September 11 and the challenges of the global war on terror convinced the Bush administration that the United States needed a strategic partnership with Pakistan. China's political, economic, and military expansion persuaded the White House that better relations with India were imperative. On March 2, Bush essentially welcomed the country into the international nuclear club with a landmark agreement that would provide India with nuclear fuel, material, and expertise. In short, Washington has accepted a nuclear Pakistan and a nuclear India.

The White House has also learned to live with a nuclear North Korea. China has proven unwilling or unable to use its leverage with Pyongyang to help the United States dismantle North Korea's nuclear program. Lacking a viable military option, Washington is left to press for compliance from a regime to which it cannot apply meaningful pressure.

If the United States has adjusted to the risks posed by these states, why can't Washington live with a nuclear Iran? In part, it is because these states have gone nuclear that the Bush administration feels it must play hardball with Tehran. A line must be drawn somewhere, US officials reason, and Iran is the right place to do so. Ahmadinejad has said Israel should be "wiped off the map." Iran has well established ties with terrorist groups (Hezbollah, Palestinian Islamic Jihad, and the newly empowered Hamas). Washington also fears that a radical Shiite regime with nuclear weapons will further destabilize an already volatile Middle East by forcing its Sunni Arab rivals (Saudi Arabia, in particular) to develop their own nuclear weapons to deter threats of nuclear blackmail. If the West is not prepared to make the Islamic Republic's nuclear development as costly, difficult, and dangerous to achieve as possible, would-be nuclear states beyond the Middle East may also be persuaded to follow Iran's lead.

Each new threat from the West gives Iran's conservatives a new opportunity to win broad domestic support.

Then there's the threat to Israel. Israeli leaders do not fear that Tehran will fire a nuclear missile at Tel Aviv. Iran knows that Israel would respond in kind. Israeli leaders are worried, however, that Iran will one day become unstable. Should the regime eventually collapse under the weight of its domestic unpopularity, Israelis fear it might lose control of its nuclear assets, sending them flooding onto the international black market. Like the Bush administration, they also fear further proliferation in the Middle East. Israel hopes that, as a last resort, a precision strike on Iranian nuclear facilities would delay its enemy's nuclear progress and demonstrate for the international community that the program poses an existential threat to the Jewish state that cannot be ignored.

What will China and Russia do?

The conflict has now reached the Security Council, where the Bush administration hopes to initiate a process of diplomaticcoercion to force Tehran to back down. But China and Russia, both of which have substantial commercial interests in Iran, can veto the imposition of sanctions.

China hopes to establish more stable and predictable relations with the United States and European Union. But China believes that its national security depends on economic growth – and that continued growth depends on access to global commodities, particularly oil and gas. Much of that oil and gas will come from Iran. As a result, Beijing would like to delay (if not avoid) the day it is forced to take sides on sanctions. But when that day arrives, Beijing will probably vote to protect its own economic stability.

China imports about 11% of its crude oil from Iran. In 2004, Chinese and Iranian officials signed a memorandum of understanding on an estimated $100 billion deal that would send 250 million tons of Iranian natural gas to China over the next three decades. The Chinese energy company Sinopec is now working to finalize an agreement to develop Iran's untapped Yadavaran oil field, one of the world's largest.

Much of China's recent success in securing long-term energy supplies and other commodities lies in its readiness to do business with resource-rich states that Washington prefers to isolate – Burma, Venezuela, Zimbabwe, and others. Protection from US pressure is an implied part of what these countries buy from Beijing in return for their natural wealth, as evidenced by China's obstruction of UN sanctions against energy-rich Sudan. Chinese leaders fear that, if they were to support sanctions against Iran, these states might hedge their bets and shift some of their resources toward other, more reliable, customers.

Russia may prove even less willing than China to support tough action on Tehran. In early March, Moscow briefly floated a plan that would have allowed Iran to pursue limited enrichment activity on its own territory, slowing its nuclear progress but allowing it to eventually develop its own fuel cycle. The Bush administration, caught off guard by the proposal, quickly persuaded Moscow to drop the idea. But the Russian offer had already signaled that Moscow is willing to accept a nuclear Iran, weakening the US negotiating position.

The question is not simply whether Russia prefers that Iran not have a nuclear program. It is 'how far is Russia prepared to go to stop it?'

Some analysts argue that Moscow will ultimately block the program because a nuclear Iran is simply not in Russia's interest. Yes, Russia would prefer that Iran give in – just as China would prefer that North Korea dismantleits nuclear weapons. The question is not simply whether Russia prefers that Iran not have a nuclear military capability. It is "how far is Russia prepared to go to stop it?" It's increasingly clear that Russia does not intend to sacrifice commercial interests to support tough sanctions. Russia is Iran's leading supplier of conventional arms. If the country is able to establish a full fuel cycle, Russia will likely win contracts to build new reactors, just as Russia is helping finish construction of the $1.2 billion reactor at Bushehr in southwestern Iran.

Finally, Russia is the world's second largest exporter of oil and the largest supplier of natural gas. It is unlikely to try to head off a confrontation between Washington and Tehran because, unlike the United States, the EU3, Japan, India, and China, the Russian government benefits from high energy prices.

What happens next?

By the fall of 2006, once the Bush administration decides it cannot use the Security Council to impose meaningful pressure on Iran, it will likely try to recruit a "coalition of the willing" of countries willing to cut commercial ties with Tehran. This strategy is unlikely to succeed because even the states most willing to follow Washington's lead will not be able to do so indefinitely as rising oil prices damage their economies. The United States and Israel could then try to use covert operations to try tosabotage Iran's program, by targeting key bits of nuclear infrastructure or even Iran's atomic scientists. But the US and Israeli governments are more likely to decide that their only remaining option is to launch surgical air strikes on one or more of the country's nuclear sites

Iran is the world's greatest source of political risk over the next year and a half, not simply because a military strike would provoke a sharp spike in oil prices, but because every step along the way puts upward pressure on energy prices. The great irony of the current conflict is that the only thing on which the United States and Iran agree is that oil makes for a good weapon. Whether Iranian energy is pushed from the market by sanctions or pulled by Iran's defiant conservatives, global supply will be hard pressed to keep pace with rising demand. An added source of price pressure comes from all the uncertainty – which isn't going to go away any time soon.Eurasia Group Top 8 Political Risks for 2006

#1 Confronting a nuclear Iran

  • Tehran has good reason to drive the conflict.
  • The United States and Israel are unlikely to back down.
  • China and Russia will have their say.
  • The conflict adds significant upward pressure on global energy prices.

#2 U.S. Protectionism

  • National security is an election-year wedge issue
  • CNOOC and Dubai Ports World triggered a fight
  • CFIUS reform and the redefinition of critical infrastructure
  • Implications extend beyond the Arab world and China

#3 Prospects for social unrest in China

  • China faces significant civil unrest.
  • Official mismanagement exacerbates the problem.
  • Beijing is acting forcefully to impose its will.
  • China's role in the region helps drive the instability.

#4 The continuing risk of avian flu

  • H5N1 poses risks for animals and food supplies.
  • H5N1 could jump to humans.
  • Human-to-human transmission poses enormous risks.
  • Many states are ill-equipped to handle the threat and unwilling to acknowledge its presence.

#5 New challenges from the left in Latin America

  • Elections across Latin America will produce mixed results for markets.
  • Good economic conditions reinforce pre-existing political trends.
  • Some elected leaders face fewer market and institutional constraints.
  • Leftists deny US market access to several Latin American states.

#6 Another tough year in Iraq

  • Iraq is struggling to form a unity government.
  • That government will struggle to draft a new hydrocarbon law.
  • Resource sectarianism threatens stability.
  • Local divisions could empower hardliners.

#7 A fraying Nigeria

  • Obasanjo is pressing ahead with plans for a third term.
  • The arrest of Asari Dokubu has splintered the Niger Delta militias into competing groups.
  • Dokubu's sentencing could exacerbate tensions.
  • Christian-Muslim tensions raise the stakes.

#8 Transformation of global terrorism

  • The threat from al Qaeda has declined.
  • But the threat from Qaeda-inspired groups is growing.
  • Russia is at greatest risk.
  • Iraq is the pivot.