The Ayatollah’s Windfall

Co-authored by Saeed Ghasseminejad 

If any proof was needed that the nuclear compromise hammered out in Geneva last month between Iran and the six world powers is a mistake, look no further than the psychological impact it had on Iran’s sanctions’ battered economy. Evidence of such boost is already available: Within hours, Iran’s currency, the Rial, appreciated by 5% and shares of petrochemical companies soared on Tehran’s Stock Exchange, a sure sign that the agreement provides an economic lifeline to the Iranian regime in exchange for no meaningful or irreversible concessions.

Rather than claiming that the international community is offering modest and reversible sanctions’ relief to Iran, Western negotiators should be more candid and admit that theirs is a self-defeating proposition. The main beneficiaries will not be the ordinary Iranians for which Western policymakers constantly express concern when they fret about their own sanctions’ impact. The benefits will instead flow to Iran’s military-industrial complex, the Iranian Revolutionary Guards’ Corps (IRGC) and the Supreme Leader – those most invested in the nuclear program and least inclined to renounce their nuclear quest for economic incentives.

By relaxing sanctions against the petrochemical and automotive industries, the United States and Europe are giving them a cash bonanza. By committing themselves to no nuclear-related sanctions in the six-month interim period established by the agreement, Western governments will also enable Iran to exponentially expand the impact of sanctions’ relief. In practice, the deal authorizes business with the sanctioned IRGC through the backdoor.

Take the petrochemical sector — a key export area for Iran but also a sensitive industry due to the dual-use nature of the technology it requires.

Military involvement in this sector is mainly through the Parsian Oil and Gas Company (POGC), which is controlled by the IRGC through Ghadir Investment Company (80.18%), the Bahman Group (1.1%) and Kia Mahestan Company (1.66%), with a total market value of approximately $3.83-billion. The IRGC also controls Pardis Petrochemical (worth $2-billion), Kermanshah Petrochemical worth ($527-million) and Shiraz Petrochemical (worth $922-million).

The price tag for IRGC-controlled assets in the petrochemical industry is $7.3b-illion. Add to that Pars Oil and Behran Oil, the two companies controlled by the Supreme Leader through Rey Investment Group, Tadbir Group and the Mostazafan Foundation, which are worth a total of $625-million. Since Iran’s petrochemical sector is worth almost $25-billion; in practice, one third of the industry — $8-billion — is controlled by the two Iranian centres of power in charge of nuclear proliferation.

The car industry is no less problematic — although U.S. sanctions against the automotive sector did not specifically target it on non-proliferation grounds, Iran has used it to procure needed items and materials for its nuclear and ballistic missile programs over the years. Khodro and Saipa, the two main players in the car industry, are government-controlled; their procurement networks raise concerns, given that the car industry, much like the petrochemical industry, relies on sensitive dual-use technology and raw materials.

Besides, the regime benefits from its revenues. Of its main players, the Bahman Group is controlled by the IRGC — its main shareholder is the sanctioned Bonyad Ta’avon Sepah — a company linked to Iran’s Revolutionary Guards. As recently reported by Saeed Ghasseminejad in The Times of Israel, Rey Investment, an entity directly controlled by the Supreme Leader, Ayatollah Ali Khamenei, owns several spare car parts companies, and has the exclusive dealership for the German car-maker, BMW in Iran. As for Iran Khodro, its main shareholder — Iran’s IDRO — is a government entity under sanctions.

The Obama administration will no doubt argue that there is no sanctions’ relief for the IRGC — but most of the aforementioned companies are not designated yet. If the U.S. President were to target them under existing executive orders, Iran would denounce such a move as a violation of Western commitments not to impose new sanctions. If Western or Asian companies were punished for conducting financial transactions with IRGC companies in the petrochemical sector, Iran’s rulers would scream murder. The administration may not have thought through this loophole — but it is unlikely to jeopardize a deal it hails as historic.

The agreement does not constitute an incentive for Iran to comply with its international obligations. To the contrary, it offers much needed relief to its procurement efforts, a cash windfall to its channels of proliferation, and financial profit along the way. And given that little is expected of Iran in return, it is hard to believe Western powers thought this was a good idea.

This is a great deal — for Iran. But if the West wishes to prevent Iran from crossing the nuclear finish line, this is definitely not the way forward.

Emanuele Ottolenghi is a senior fellow at the Foundation for Defense of Democracies. Saeed Ghasseminejad is a Ph.D candidate in finance at City University of New York.