Inside Iran: War by other means

Iran announced this week that it is set to transfer responsibility for part of its oil sales to three newly established private consortiums. This move is intended to counter an EU ban on importation, shipping and purchase of Iranian oil, which went into effect on July 1.

The ban is the latest element in the sanctions program intended to force Iran to abandon its push for a nuclear weapons capability. It looks set to cost Tehran a decline in revenue from oil exports of billions of dollars per month. The EU move came together with tightened US penalties on countries that do business with Iran’s Central Bank.

The announcement by Iranian Oil Exporters’ head Hassan Khosrojerdi regarding the establishment of private consortiums to circumvent the sanctions, meanwhile, is the newest example of the creative campaign being waged by Iran to reduce the impact of international moves.

This campaign is being coordinated by the increasingly powerful Iranian Revolutionary Guard Corps (IRGC), which controls the commanding heights of the Iranian energy industry.

The energy sector is Iran’s richest source of revenue, accounting for around 80 percent of the country’s exports. As of last April, Iran’s oil minister is Rostam Ghasemi, a senior member of the Revolutionary Guard. The energy minister, another Revolutionary Guardsman, is Majid Namju. The IRGC is the largest single contractor in the Iranian oil and gas sectors today.

Thanks to its growing political power, the economic and development wing of the IRGC, known as Khatam al-Anbia (Seal of the Prophets), has in recent years obtained a series of multi-billion dollar contracts in the energy sector in Iran.

These include, for example, a $2.5 billion contract for the development of phases 15 and 16 of the massive South Pars gas field, which straddles Iran and Qatar. The Guard is also set to build a 900-kilometer gas pipeline for transporting natural gas within Iran – a project worth $1.3b.

Through its control of the relevant ministries, the IRGC in effect awards these projects to itself. No process of competitive tender takes place.

In addition to its political and economic activities and its conventional military capabilities, the IRGC is also the primary Iranian agency for the conducting of clandestine warfare. It is this part of its skills which is being demonstrated in its efforts to circumvent sanctions.

The Revolutionary Guard maintains a complex and constantly shifting network of front groups. These are being employed in sanctions-busting. Khatam al-Anbia, according to one report, has 812 affiliate companies. Iran has proved adept at the swift creation of new shell companies in order to outrun the watchful eye of US sanctions enforcers. The advantage of the network maintained by the Revolutionary Guard is that companies working with it often have no formal, organizational connection to it, or to the Iranian state. Rather, genuine private companies established by trusted IRGC veterans work in close cooperation with the Guard, with few traceable or visible links.

Another element in Iran’s attempt to circumvent or reduce the impact of sanctions is the flourishing economic relationship with China. Again, this is largely administered by companies and semi-governmental bodies maintained by the IRGC. Chinese trade with Iran accounts for nearly 18% of Iran’s commerce.

Beijing has slowed investments to avoid inclusion in US sanctions legislation. But the Chinese relationship with Iran’s economy remains huge, particularly in the areas of import of Iranian crude oil and export of finished petroleum products to Iran.

Because of restrictions on Iran’s financial sector and the plummeting value of its currency, barter is playing an increasingly important role in Iran’s transactions. China already “pays” part of its oil debt to Iran through bartered goods. Iran has sought to trade oil for wheat with both Pakistan and Russia. India, the second largest purchaser of Iranian exports, pays up to 45% of its oil bill in rupees into a special account set up for Iran at a state-owned Indian bank.

Such unorthodox transactions play havoc with the Iranian economy and are an obvious impossibility for regular, private firms. For semi-public entities such as the Revolutionary Guard, however, arrangements of this kind work very well.

Conveniently for the IRGC, it also controls the smuggling industry into Iran. According to a recent report by the Iran Energy Project, smuggling enables Iran to secure much of the technology and equipment needed to service its energy sector. The report notes that Dubai is a central site for the transshipment of goods to the Islamic Republic.

The growing importance of smuggling means that while the IRGC seeks to restrict the affect of sanctions, it also benefits from the desire of middle class Iranians hit by the restrictions to buy goods on Iran’s black market. The IRGC, which takes a cut on all smuggling activities, profits from the demand by middle class Iranians for goods only available illegally.

Sanctions are hitting the Iranian economy hard. Yet there are no signs that they are causing the regime to think again regarding its nuclear program, or regarding its interference in political processes across the Middle East.

One explanation for this is that ideological regimes such as that of the mullahs simply perform their cost-benefit analysis in a way different from that of more pragmatic governments. The nuclear program and the push for regional hegemony are cardinal strategic goals. Hence they will be pursued even in the face of impoverishment and critical damage to the economy.

However, an additional element should be added to this picture. While the sanctions are having a generally detrimental effect on Iran, they are paradoxically benefitting certain sectors closely associated with the regime.

The Iranian Revolutionary Guard Corps is waging a war-by-other-means to offset the affect of the sanctions. The damage to the Iranian economy and the fight against the sanctions are serving to increase both the wealth of the IRGC, and its growing centrality and importance in the power structure of the Iranian regime.