How Iran could survive the war but lose the peace

A number of Iranian officials and foreign observers have stated that the Islamic Republic of Iran will not yield to pressures and deadlines from the US. Because, unlike America, Iran does not need to win the current war. All it needs is to survive the war and, by doing so, it will have won.

Iran used the same rhetoric (among others) during the Iran-Iraq War (1980-88). By its end, the conflict had devastated Iran’s economy, especially the energy sector. According to a CIA assessment produced internally four months after the conflict, ‘Iran’s oil production capacity of roughly 3 million b/d is about half what it was 10 years ago’. Meanwhile, many of Iran’s major cities and ports, such as Abadan and Khorramshahr, lay in ruins. Iran’s armed forces were greatly weakened because of Iraq’s superior weaponry as well as weapons sanctions imposed against Iran by the US and USSR. Its economy was doing terribly, due to lack of foreign exchange. Inflation had reached 28 per cent. This was the highest level of inflation in Iran since the Second World War.

Iran’s economy, after the current conflict, will also be in terrible shape. What makes the postwar period after the current conflict even more perilous to the stability of the regime is another case of applied history: namely, the internationalisation of the current conflict.

During the latter years of the Iran-Iraq War, Iran internationalised its conflict against Iraq by attacking tankers belonging to numerous countries in the Persian Gulf. This affected not only Gulf countries but also the US, which started sending warships at the behest of countries such as Kuwait, to escort their tankers. European countries also suffered economic consequences, which made them more hostile toward Iran. Even the Soviets were angry with Iran’s leadership, because its ‘tanker war’ gave the US an excuse to increase its military foothold in the Persian Gulf. This was in addition to targeting a Soviet ship. This pushed all the affected countries to increase their military and economic backing for Iran’s enemy, Iraq. They also increased their economic stranglehold.

By July 1988, Iran could no longer bear the economic and diplomatic costs of the war, worsened by its leader’s decision to internationalise the conflict. They were crippling its economy and armed forces. Thus, forcing supreme leader Ayatollah Khomeini to accept UN Resolution 598 to end the war; a decision so difficult that he likened it to ‘drinking a chalice of poison’.

Iran has repeated this mistake during the current conflict. Instead of focusing on Israel and the US, who had launched the war, it widened the conflict by closing the Strait of Hormuz and, more importantly, by attacking numerous Persian Gulf countries.

By doing so, it has created a strong coalition against itself, comprising the US and all the Gulf nations. European countries are also condemning its move by sanctioning Iranian entities and individuals responsible for blocking the strait. Wars are unpredictable by nature, but, just as with Iran’s tanker war in the 1980s, none of the affected countries will live with the reality of Iran continuing to control the Strait of Hormuz. This includes Iran’s ally, China, which has publicly called for the Strait to be reopened ‘as soon as possible’.

Unlike when the guns fell silent in 1988, this time probably over 80 per cent of Iran’s population wants the regime overthrown. They are far more unwilling to live with the high cost of war, especially if it takes a long time to rebuild.

Therefore, this time, as opposed to the period after the war against Iraq, the Iranian leadership could find that merely by surviving the war against the US, it could ultimately lose – meaning, becoming severely challenged by domestic disturbances, and even possibly overthrown, most probably because of strikes or the repetition of widespread protests. The regime could even find that it can no longer pay the salaries of the lower ranks of its security forces.

First, because of the staggering cost of the war. According to reports from Iran, the conflict has so far led to three million job losses: one million because of the war, and two million as an indirect result. Because of Iran’s ongoing decision to severely disrupt and filter the internet, 10 million Iranians have suffered economic damages and continue to do so. According to spokeswoman Fatemeh Mohajerani, 40 days of conflict had caused approximately $270 billion worth of direct damages to Iran’s economy.

It is quite possible that Iran is exaggerating this number, because one of its ceasefire conditions is payment of compensation by the US for war damages. Let’s say that the actual damage is a quarter of what Iran is claiming, and that the recent 40 days of combat caused $67 billion worth of direct damage. In contrast, Iran’s eight-year war against Iraq caused $100 billion in direct damages. The difference is staggering and could climb because fighting between the two sides could renew.

Second, because it will be very difficult for Iran to earn the required amounts to repair the war damages. Last year, Iran’s total export income was $45 billion. It will probably earn less this year because of the blockade of Hormuz by the US. This is in addition to America recently sanctioning those last remaining refineries in China still risking the purchase of Iran’s oil. Meanwhile, the recent war badly damaged Iran’s two biggest non-oil industries, namely petrochemicals and steel.

It took Iran 10 years to rebuild the damage from the Iran–Iraq War. This time, it could take longer. The best-case scenario would be for Iran to reach an agreement with President Trump for the removal of all nuclear sanctions. Even if this happens, Iran’s economy could still find it extremely difficult to rebuild itself, because Iran cannot and will not stop its anti-Israel policies. This means many of the sanctions against Iran for its support of terror groups are likely to remain. Additional ones could be imposed.

After its war against Iraq in 1988, Iran badly needed foreign investment to repair the war damages. From 1979, it had been calling for the destruction of Israel. When the PLO’s Yasser Arafat declared his intention to participate in the 1991 peace talks with Israel in Madrid, Iran’s President Rafsanjani said that Iran would accept any agreement that the PLO signed up to with Israel. Rafsanjani said this, because he wanted foreign investment in Iran to repair the war damages. This would not be possible, if Iran continued to call for Israel’s destruction and condemned anyone who wished to make peace with the Jewish state.

Ayatollah Khamenei, then Iran’s supreme leader, overruled him. On 19 October 1991, 11 days before the Madrid peace talks between Israel and the PLO began, an anti-peace conference took place in Tehran. It was called the ‘International Conference on Supporting the Islamic Revolution of the People of Palestine’. Its organiser was Iran’s former ambassador to Syria ‘Ali Akbar Mohtashamipour, one of Hezbollah’s founders. He was backed by Supreme Leader Khamenei, who addressed the conference. Its main goal was to condemn and reject negotiations with Israel, and to lend support for the continuation of the Palestinian Intifada. Senior Hamas and Palestinian Islamic Jihad (PIJ) officials attended the conference. Hezbollah leader ‘Abbas Musawi and Ahmad Jibril, the head of the Popular Front for the Liberation of Palestine-General Command (PFLP-GC), also attended.

Soon after the launch of the Oslo Peace Process, Iran’s Palestinian allies, namely Hamas and the PIJ, launched numerous suicide attacks with Iranian support. The Oslo Peace Agreement was an important foreign policy endeavour for the Clinton administration. The president was angered by Iranian efforts to derail the peace process. In 1996, the Clinton administration, frustrated by its inability to stop Iran’s support for terror groups, passed the Iran and Libya Sanctions Act of 1996. It limited the investment of international oil companies in Iran’s gas and oil industries to up to $20 million per year. This deprived Iran of billions of dollars in lost potential revenue, which it badly needed to rebuild its economy after the war against Iraq. Because it could not develop its oil sector, which was damaged during the war, and direly needed western investment, equipment and technology. All for the sake of its anti-Israel policy.

In July 2015, America and Iran agreed to the Joint Comprehensive Plan of Action (JCPOA), also known as the Iran nuclear deal. As per the JCPOA, on 1 January 2016 the Obama administration lifted the nuclear sanctions imposed on Iran in 2012. According to one estimate, they had cost Iran at least $160 billion in lost oil revenue. The removal of sanctions because of the JCPOA allowed Iran to repair the important damage caused to its economy. It was desperate for foreign investment.

But in March 2016, while Vice-President Joe Biden was visiting Israel, Iran tested two missiles. Written on the missile, in large letters, was the Hebrew sentence ‘Israel must be wiped off the face of the earth’. On the same day, a senior Iranian military officer stated that the missiles were ready to confront Israel. His words were not empty threats; the newly tested missiles had a range of 2,000 kilometres, meaning they could reach Israel from Iran’s territory. After the JCPOA, Iran increased its support for its anti-Israel proxies in the region. This included an increase in the presence of the IRGC’s Shia proxies, especially in Syria.

Iran’s obsession with Israel torpedoed the rebuilding of its economy. Because of its actions, foreign companies became concerned that it could be sanctioned again. Therefore, foreign companies invested two billion dollars between the start of the JCPOA in January 2016 and the US exit from the deal in May 2018. This was a paltry sum; according to former Iranian Foreign Minister Zarif, Iran was hoping to attract $85 billion.

If the current war ends without an agreement to lift the sanctions, within a year Iran’s economy will face hyperinflation and a very high probability of domestic disturbances and regime destabilisation.

Even if there is a deal, there could be economically related disturbances, and possible regime destabilisation, the difference being that it could take longer than in the no-agreement scenario.

The animosity towards Israel is not only ideological. It serves the business interests of a number of regime-affiliated companies. For example, Iran has various companies which produce everything from cars to tomato puree. The political hold and influence of its elite have allowed them to create monopolies in almost all of Iran’s various economic sectors.

Because Iran has been isolated and under western sanctions, such monopolies have been able to force the Iranian consumer to only buy their products.

Take Iran’s automobile manufacturing sector as an example. It is one of Iran’s major industries, dominated by two companies: Iran Khodro (IKCO) and SAIPA. Both are owned by regime-affiliated organisations. This monopoly has allowed them to sell their low-quality cars to the Iranian consumer at highly inflated prices. The quality of these cars, especially their safety features, is so low that Iranians have likened them to ‘aquariums’; they smash to pieces easily.

What angers many Iranians is that they usually pay the same price in dollars for these cars as westerners spend on comparable ones made by reputable auto manufacturers. These regime-affiliated companies also have a monopoly over Iran’s imports, which they abuse by selling imported products at astronomical prices to the Iranian consumer. For example: an imported Porsche Macan in Iran is 2,000 per cent more expensive than one sold in the UAE.

Even if sanctions are lifted, such regime-affiliated organisations are likely to sabotage the foreign investment that threatens their market share. Continuing to support anti-Israel terror groups will be a tried and tested method for them.

History has shown time and again that Iran has failed to capitalise on post-conflict periods to develop its economy and improve the livelihood of its citizens. Iran could survive the current war, but ultimately, it could lose, because of the high costs of the conflict and its unwillingness to alter its anti-Israel policies. Such policies have and will continue to deprive Iran’s economy of much needed investment. What makes them dangerous this time is that, after the current war, the patience and tolerance of the Iranian public will be challenged as never before.