This file photo taken on January 2011 shows a general view of the nuclear heavy-water facility at Arak southwest of the Iranian capital Tehran. Photo: Hamid Foroutan / ISNA / AFP

Nationwide protests over the Iranian government’s decision to cut subsidies on food and basic staples and the ensuing hyperinflation have diminished, but a kerfuffle involving the Islamic Republic and the International Atomic Energy Agency (IAEA) has heightened tensions globally, driving the US dollar to historic highs in the Tehran market, and rendering the prospects of the revival of the nuclear deal dimmer than ever.

The UN nuclear watchdog’s 35-nation Board of Governors passed a resolution on June 8 rebuking Iran for its limited cooperation with the IAEA and the traces of uranium at three nuclear sites about which it has provided insufficient explanations to the world body. Of the IAEA member states, only China and Russia voted against the resolution, and three others, India, Libya and Pakistan, abstained. 

Before the recent admonition, the IAEA had issued only one resolution critical of Iran for inadequate transparency and undeclared nuclear activities since 2012; that resolution was adopted in June 2020.

The new resolution was perceived as a humiliation for the hardline administration of President Ebrahim Raisi, whose adventurism is reminiscent of the intransigence of Mahmoud Ahmadinejad, president of Iran between 2005 and 2013, blamed by his critics for his impulsive foreign policy and ill-advised nuclear brinkmanship. 

In response to the IAEA’s denunciation, Iran decided to remove 27 surveillance cameras installed by the agency to monitor its nuclear activities and communicated its decision to start rolling out two new cascades of IR-6 centrifuges at the Natanz facility. IAEA director general Rafael Grossi described the moves as near-fatal blows to the chances of reviving the Joint Comprehensive Plan of Action (JCPOA), as the Iran nuclear deal is officially known.

Nuclear deal on precipice

A war of words between Tehran and the IAEA is in full steam as the board-member countries urge Iran to live up to its JCPOA commitments and refrain from taking escalatory steps, while Iran chides the chief of the UN watchdog for being an Israel stooge and taking orders from Tehran’s arch-nemesis. Iranian authorities insist the recent resolution wouldn’t have been proposed without Israel’s intelligence-sharing and lobbying.

More than any time since the transition of power in Tehran and the anointment of President Raisi in August last year, the JCPOA, once lauded as a milestone in international diplomacy and an exemplary achievement in nuclear non-proliferation, is close to demise, with mammoth ripple effects on the economy of the country that now bears all the hallmarks of a failed state.

The markets’ reception of the recent standoff has been characterized by anguish and distress. The US dollar picked up after the Islamic Republic unveiled its retaliatory measures and soared to an all-time high of 328,700 rials as of Monday. Consumer goods, still adjusting to dwindled demand after the government-directed hyperinflation, were attached with new price tags as producers reacted to the forex vacillations. 

Economy in dire straits

Over the past weeks, protests have been raging across the country after Raisi decided to cut subsidies on food and most basic goods and stop allocating preferential foreign currency to the imports of wheat, cooking oil, corn, poultry and medicine, which translated into the prices of such items as bread, eggs, pasta, chicken and dairies tripling and quadrupling.

According to recent reports by the Ministry of Cooperatives, Labor and Social Welfare, nearly 30 million Iranians making up 35% of the population live under the poverty threshold. This is while independent experts estimate some 70% live in relative poverty after the Statistical Center of Iran put this year’s inflation rate at 40.2%.

After coming to power, Raisi pledged to take swift action to give a facelift to the desolate state of national economy, uproot extreme poverty within months, and ensure people’s livelihoods were not conditioned on the outcome of the JCPOA talks and the fluctuations of global trade. But near the end of his first year in office, it is dawning on the hardline cleric that the economy does not function according to sentimental speeches and fiery rhetoric. 

A country that is dependent on imports for much of its day-to-day needs and requires foreign investment to prop up its energy, transportation, civil-aviation, communications and health-care sectors will crumble if it remains cash-strapped for an extended period, and even escapists such as Raisi who consolidate their power through defiant hyperbole recognize this.

Some experts believe the recent IAEA squabble that put the nuclear crisis on steroids and the government’s subsequent swagger point to a possible referral of Iran’s dossier to the United Nations Security Council, which will then probably take action to reinstate the overwhelming sanctions that were terminated as part of the Resolution 2231 that endorsed the JCPOA. That would be the apocalypse of the deal and the genesis of a new cycle of international isolation and augmented economic woes for the Islamic Republic.

“It is getting hard to see how the Iranian nuclear file doesn’t end up at the UN Security Council, one way or another, though it may take many months to get there,” said John Krzyzaniak, a research analyst at the London-based International Institute for Strategic Studies.

“The censure of Iran at the IAEA Board of Governors meeting was already intended to lay the groundwork for a future referral, and Iran’s immediate response suggests that the tit-for-tat escalation is going to continue.

“It is possible that both sides will climb down the escalation ladder and move quickly to sign the agreement on the table in Vienna, but each new action and reaction makes that outcome less likely,” he told Asia Times.

Yet the costs of maintaining the status quo and hurtling toward a new scenario involving the activation of the JCPOA’s snapback mechanism and the introduction of Security Council resolutions will be immensely high for the beleaguered government. 

The country cannot remain a single-client oil producer while China remains its only official customer, and its other industries cannot survive without fresh capital. At the same time, even absent further surges in the value of foreign currencies and provided the administration can stave off prospective cycles of inflation, the middle class is hard-pressed to compete with the spiraling prices.

The general impression after the government decision to slash subsidies and stop the procurement of preferential forex to importers is that it has nearly given up on the success of the JCPOA talks and the economic windfall the removal of the sanctions was expected to bring about, so it has resorted to austerity measures to acclimatize itself to a long-term harmony with sanctions.

Frederick Deknatel, the executive editor of Democracy in Exile, the journal of Democracy for the Arab World Now (DAWN), tells Asia Times that running a country of 85 million under ballooning sanctions won’t be sustainable.

“Public anger is only going to rise, fueling more protests and, in turn, more repression. The current Iranian government doesn’t seem interested in the bargain that [former president Hassan] Rouhani achieved through the JCPOA, and it’s an open question how long it can keep cracking down on dissent and investing in coercion, without addressing the root causes of its economic crisis,” he said.

“Regime talk of a resistance economy and self-sufficiency doesn’t mean much when people are rioting over bread. There’s also widespread distrust among the Iranian public that the government is competent enough to solve their day-to-day problems, given corruption and mismanagement,” he added.

Diplomatic failure

The Raisi administration, despite radical steps to undertake a “grand economic surgery,” still appears to be interested in seeing the JCPOA regenerated and the sanctions lifting, benefiting an economy that has been asphyxiated since then-US president Donald Trump exited the JCPOA in 2018, but as Raisi indicated in his recent remarks, negotiations with the world powers is not a priority any more. 

Even when engaged in diplomacy, the negotiating tactics of Raisi’s squad are fundamentally different from those of Rouhani’s US- and UK-educated diplomats who were able to strike a deal with the least costs despite the limitations they had to navigate in talking to six world powers, including the United States, with which the Islamic Republic doesn’t maintain diplomatic ties. The new negotiating team has been widely described as inexperienced and unfit for the mandate.

“The Raisi administration is apparently willing to rejoin the JCPOA, the restoration of which is being stalled by other issues than nuclear concessions, for example Iran’s demand that the US lifts the Foreign Terrorist Organizations designation of the IRGC and Iran’s refusal to agree to mirror that with similar concessions on its own,” said Riccardo Alcaro, the research coordinator and head of the Global Actors Program of the Istituto Affari Internazionali.

“The Raisi administration’s calculus is that it has to show it can achieve more than the previous Rouhani government did, but it must have internalized now that the risk of this strategy is that no JCPOA restoration may be in sight. If they are willing to run that risk it must be because they have calculated they can sustain the economic pressure that would follow a definitive collapse of the deal,” he told Asia Times.

Banafsheh Keynoush, an international-relations researcher and non-resident scholar at the Middle East Institute, says Iran has developed an imperfect sanctions-proof economic policy and has failed when it comes to diversifying its trade.

“The economy seems to be serving political goals in Iran, not the reverse, to the extent that sanctions are a consequence of Iran’s political tensions with the world powers.… The Iranian economy is shock-absorbent due to its need to adapt to a relatively isolated state of existence caused for decades by sanctions,” she said.

“No one can say when shock absorbency will no longer work, as much will depend on the dynamics between internal Iranian economic realities and the global economy, and the interactions between the two, given the rising global conflicts and uncertainties in the energy markets,” she told Asia Times.

Even so, there are observers of Iran affairs who maintain the country will be able to survive under long-term sanctions without being disintegrated, but it should forget about meaningful economic growth.

“It can survive for a long time, perhaps forever, but not grow and thrive in any dramatic fashion which one can write home about, under conditions of being sanctioned,” said Mohamad Forough, a research fellow at the German Institute for Global and Area Studies (GIGA).

“Both its history and that of other sanctioned countries show that survival is certainly possible, especially for a country like Iran, whose geography is not as limited as Cuba’s or North Korea’s, and whose geopolitical dynamics are much more vast and more potent than those countries,” he said. 

Follow Kourosh Ziabari on Twitter @KZiabari