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Iran plans more war games as sanctions bite

Jan 06 2012 14:35 Reuters

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Tehran - Iran announced plans on Friday for new military exercises in the world’s most important oil shipping lane, the latest in weeks of bellicose gestures towards the West as new sanctions threaten Tehran’s oil exports.

Rear Admiral Ali Fadavi, naval commander of the Revolutionary Guards Corps, said exercises next month would focus directly on the Strait of Hormuz, which leads out of the Gulf and provides the outlet for most Mid-East oil.

Iran held a 10-day drill which ended on Monday in neighbouring seas.

“Today the Islamic Republic of Iran has full domination over the region and controls all movements within it,” Fadavi said in remarks reported by the Fars news agency.

Iranian officials have threatened in recent weeks to block the strait if new sanctions harm Tehran’s oil exports, and this week said they would take action if the United States sails an aircraft carrier through it.

The United States, which has a massive naval fleet in the area that is overwhelmingly more powerful than Iran’s sea forces, said it will ensure the international waters of the strait stay open. Britain said on Thursday that any attempt to close it would be illegal and unsuccessful.

New financial sanctions signed into law by US President Barack Obama on New Year’s Eve are aimed at making it difficult for most countries to buy Iranian oil. The European Union is expected to announce tough measures of its own at the end of the month.

Most traders believe Iran will still be able to find buyers, at least in the short term, for its exports of 2.6 million barrels of oil per day (bpd). But it may have to offer steep discounts that reduce the hard currency revenue it needs to feed its 74 million people.

The sanctions are already having an effect on Iran’s streets, where prices have been rising and the rial currency is falling. Iranians have been queuing up at banks to convert their savings into dollars.

The economic hardship comes less than two months before a parliamentary election, Iran’s first since a 2009 presidential election that led to mass street protests across the country.

Iran’s rulers successfully put down those demonstrations two years ago with force, but since then the Arab Spring has shown the vulnerability of authoritarian governments in the region to public protest fuelled by anger over economic hardship.

Nuclear programme

Washington and its allies are imposing the measures to force Iran to abandon a nuclear programme which they say is aimed at producing an atomic bomb. Iran says the programme is peaceful.

EU officials say the body, which collectively buys about 500 000 bpd of Iranian oil, rivalling China as the largest market, has agreed to impose an embargo halting all imports.

EU diplomats said they are discussing how long they will give member countries to halt purchases, with France, Germany and others wanting the ban imposed within three months but Greece favouring a grace period of up to a year.

China has also cut its imports by more than half in January and February while haggling with Tehran over the size of the discount it wants in return for doing business with it.

Other big buyers, including Turkey and Japan, said they are seeking a waiver from US sanctions.

The new American law allows Obama to give temporary waivers to allies to continue to buy Iranian oil to prevent a price shock, but to receive the permits, countries are meant to show they are reducing trade with Iran.

Iran has put on a brave face over the sanctions. Foreign Minister Ali Akbar Salehi said on Thursday the country would “weather the storm”.

“Iran, with divine assistance, has always been ready to counter such hostile actions and we are not concerned at all about the sanctions,” he told a news conference.

But in a sign it is seeking to alleviate the pressure, Salehi said Tehran was interested in resuming negotiations over its nuclear programme with Western powers.

Turkey’s visiting foreign minister brought an offer from Catherine Ashton, the EU foreign policy chief who negotiates on behalf of major powers.

Talks over Iran’s nuclear programme collapsed a year ago. Iran has repeatedly offered to restart the talks since then, but has insisted it will not negotiate over its right to continue enriching uranium.

Western countries say talks are pointless unless a halt to enrichment is on the table. Enriched uranium can be used to fuel a reactor or build a bomb.

Oil prices in spotlight

After years of sanctions that had little impact, Western countries have adopted a far more direct approach in recent months, with sanctions that explicitly impact the oil industry that provides 60% of Iran’s economy.

The new US measures would cut off any institution that deals with the Iranian central bank from the US financial system. If implemented fully, it would make it impossible for most countries’ refineries to buy Iranian crude.

But Washington has to balance its determination to isolate Tehran with concern that driving its oil off markets will raise prices and hurt the fragile global economy. Brent crude futures hovered above $113 a barrel on Friday, up nearly $7 since Obama signed the new sanctions law.

To ease the impact on markets, the new US measures take effect over several months, and the leeway given to Obama to offer waivers allows countries time to find other suppliers. Saudi Arabia, the world’s biggest oil exporter and a foe of Iran, says it will make up for any supply shortfall.

Traders and analysts believe it is unlikely Iran will actually carry out its threats to block the strait.

“We’ve seen this movie before,” said Cliff Kupchan, an Iran analyst at the Eurasia Group. “Neither side wants a war. A lot of this rhetoric is overstated.”

Even if it tried, Iran could not blockade the strait for long in a direct challenge to a US fleet led by the giant supercarrier John C Stennis, accompanied by a guided missile cruiser and flotillas of destroyers and submarines.

The Combined Maritime Force protecting Gulf shipping also includes other countries such Britain, France, Canada, Australia and the Gulf Arab states, under the command of a US admiral.

Still, Iran has many ways it could provoke a Western response, from missiles within range of US targets in the region, to small boats that could attack a ship near shore, to allied militia in Palestine and Lebanon that can strike Israel.
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