Wed, Oct 25, 2006 - Page 9 News List

Making Ahmadinejad breakfast could work better than sanctions

By Ian Bremmer

Like North Korea, the Iranian government will not shy away from a showdown over its nuclear program. Why should it? A nuclear weapon is the ultimate guarantee that the US can never do to Iran what it did to Iraq. Moreover, this struggle with the US rallies much-needed domestic support.

What, then, can the US do to undermine Iran's position? As the world's fourth-largest oil exporter, Iran has profited mightily from the tripling of global oil prices over the last four years. Its economic stability is dependent on oil revenues, so it is here that Iran's rulers are vulnerable.

US diplomats are never going to persuade the UN Security Council to impose sanctions on Iran's energy exports. But the administration of US President George W. Bush can seek ways to contain global energy prices -- and it should begin by refusing to be baited into escalating tensions whenever Iranian President Mahmoud Ahmadinejad pleases.

Ahmadinejad has proven resourceful in driving the diplomatic conflict. His government has rejected international calls to halt uranium enrichment, ignored UN-imposed deadlines, armed Iraqi militias, supplied Hezbollah with weapons for attacks on Israel, denied the Holocaust and staged military exercises near the Strait of Hormuz, through which 40 percent of the world's sea-traded oil passes. All these provocations add upward pressure on oil prices, enriching the Iranian government.

When Supreme Leader Ayatollah Ali Khamenei hinted that Iran could play the oil card, US Secretary of State Condoleezza Rice dismissed the idea.

"Let's just remember that Iran is some 80 percent dependent on oil in its budget," she said, so it is "not really able to live with a disruption."

But if Iran pulls modest amounts of its oil from international markets, price increases are likely to offset (perhaps completely) any loss in revenue from the supply cut.

In addition, threats to the Strait of Hormuz would allow Iran to force prices up without any reduction in output.

It is not an accident that virtually every public move Iran's government has made in the international arena over the past year has added risk to energy markets.

At times, the US has effectively -- if unintentionally -- undercut Iran's position. This summer, the Bush administration offered Iran direct talks. Last month, Bush made an unexpectedly low-key speech to the UN General Assembly. Resistance to sanctions from Russia, China and France has persuaded US officials to "allow more time for diplomacy" before pushing for punitive action in the UN Security Council.

All of these choices helped return slack to energy markets. Oil prices have fallen from above US$78 per barrel in mid-July to less than US$60 early this month. The drop -- due in no small measure to an easing of tensions over Iran's nuclear program -- is costing the Iranian government money, compounding the regime's domestic problems.

Inflation in Iran is rising, perhaps to as high as 20 percent. On Oct. 1, Khamenei called on Ahmadinejad to address the growing problem. There are price freezes on certain subsidized goods and services and rising inflation makes these subsidies even more expensive for the government.

Indeed, the government indicates that it may begin rationing gasoline. Unemployment stands at about 12 percent, and is probably twice as high among young people.

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