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- Offering a Private/Public Sector Dialogue

Iranian Scenarios  -Possible Actions and Reactions

March 21st, House of Lords

Summary of Discussion

Introduction

There is a  necessity for dialogue and engagement as the best chance to resolve conflict (similar position experienced with the IRA: militarily it could be contained, also weakened, but in order to solve the conflict one had to engage).

Possible Scenarios

Engagement has been tried for years but has so far failed. There are a number of different scenarios which are set out in the attachment.

The view from Washington

The US attitude towards Iran has shown signs of increased flexibility. Negotiation seems to be moving forward. Saudi diplomatic efforts are proving helpful. The Saudi royal family is influential in Washington and the Bush administration/family.

Sanctions, though only unilaterally imposed, are having an impact on the Iranian economy. Russia’s suspension of the nuclear contract is in part triggered by failure to make payments but also reflects a desire engage with international action over Iran’s flouting of nuclear requirements. 

The most likely scenario: an escalation following some sort of minor incident, a mid or late summer renewal of the crisis. There is a possibility of a "surgical" military action seeking to inflict significant damage on Iran nuclear capabilities. Risk of an armed conflict is thought to be low, but should it happen, then military action would expand to military sites across Iran.

Military Options

An US air strike could cause serious damage to Iran’s defence and paralyse the economy but it is unlikely to be successful in destroying the nuclear installations which are widely disposed and in some cases well protected. Even if US bombed 200 sites which have some link to the nuclear programme, they would be unlikely to destroy the nuclear programme completely.

Iran are in a position to exact a heavy price for such an attack. Possibilities include:

–        More overt support for Shia militia in Iraq.

–        To block energy shipping in the Straits of Hormuz

–       Involvement of Hezbollah in attacks on Israel

Military action would not have any beneficial effect.

French Analysis

The Iranian populace is worried. The UN resolution of last autumn came as a surprise, US economic sanctions are working. The US Treasury has instructed Western banks not to operate in Iran and Iranian banks do not have easy access to Western banks

There is no coherent economic programme to create growth in Iran with more employment. The Iranian administration seeks to buy support through subsidies out of the national oil revenues. President Ahmadinejad more and more criticised by reformists and general public. He is criticised in press, media and parliament. Ahmadinejad is challenged and weakened, 150 MPs lately proposed to shorten his mandate. As a result Iran will become more open to discussions.

The Chinese dimension

China is against nuclear proliferation, out of self interest. It is worried about the domino effect and does not want a nuclear Japan in response to North Korea.

On the other hand Chinese energy needs are huge as its economy expands with supply coming from the Middle East, Iran is an important supplier which China does not wish to upset.

There is a tension as China needs a stable international market to grow which means avoiding confrontation with the US.

Aviation Concerns

In the event of an attack on Iran, airspace  would ideally need to be closed before the attack. If Iran were to close air space immediately, foreign aircraft would either be asked to leave or forced to land. Civilian airplanes will have to take a different route, most likely south (the Russians in the north are difficult to deal with). Iran’s second biggest source of foreign currency (after oil) comes from civil aviation paying for flying over Iran.

If there was military action then there is a danger of increased terrorist threat. Not enough airlines follow procedures to avoid liquid IEDs (Improvised Explosive Devices). If airlines were to implement recommendations of international airline protocols the chances of terrorist attacks being successful would be very low.

Strategic Energy Reserves

Reserves are significant. There are 4 billion barrels of stocks (strategic and commercial) but just the 1.5 billion of strategic stocks could offset Iran for nearly two years. Iran may cut off supplies but there are sufficient reserves to meet this risk. Please see attachment for further information.

 Impact on Financial Markets

One possible scenario. In this model Iran would be attacked by Israel, it would not (be able to or want to) retaliate in the Gulf by closing the Gulf of Hormuz, but there would be intense missile attacks on Israel for up to 3 weeks. In this case, oil would go up to 65-80 $ a barrel, but not more.

There would be a jump for safe haven currencies. The Swiss franc would go up (not involved with conflict), possibly Chinese yen as well. The Turkish Lira would weaken. Other countries to suffer, possibly Mexico, Hungary, South Africa but Turkey the most. Gulf capital markets most likely to be volatile with some effect on the US and Britain.