Iran-US Rapprochement: Historic Opportunities Beckon

The tentative rapprochement between Iran and the US, which began in the second half of 2013, has the potential to become a world-changing development, and unleash tremendous geopolitical and economic opportunities, if it is sustained. Tehran and Washington have been bitter enemies since 1979, when the Iranian Revolution overthrew the pro-American Shah and replaced him with a virulently anti-Western Islamist regime. Since then, Iran has been at the vanguard of countries actively challenging the US-led world order. This has led to instability in the Middle East, and Iran's relative isolation in international affairs. Yet, if Iran and the US were to achieve a diplomatic breakthrough, geopolitical tensions in the Middle East could decline sharply, and Iran could come to be perceived as a promising emerging market in its own right.

Iran's Strategic Location Makes It A Crucial Country

Iran is a tremendously important country owing to its strategic location between Turkey, the Arabian Peninsula, the Persian Gulf, the South Caucasus, and South and Central Asia. Iran also has a large population of 75mn, a big military, and considerable energy resources. In addition, Tehran punches above its relatively low economic weight, due to its very active foreign policy and intelligence service. Furthermore, because Iran is a challenger of the status quo and threatens Israel, and because it supports disaffected Shi'a Muslim populations in several Sunni-dominated Gulf states, it is seen as a destabilising actor in the region.

Therefore, if US President Barack Obama or any future president can persuade Iran to drop or at least moderate its 'radical' foreign policy stance and mend relations with Washington, and perhaps even Israel, then this would be a tremendous foreign policy achievement, one that would reduce the risk of conflict in a crucial region of the world. (BMI in fact discussed the possibility of a rapprochement back in January 2013, when President Obama began his second term (see January 28, 2013, 'Iran Rapprochement Could Bolster Obama's Legacy').)

Iran also has considerable economic potential, and could eventually catch up with Turkey, economically (see June 18, 2013, 'Iran Has Long-Term Catch-Up Potential With Turkey'). In 1980, according to IMF data, Iran had a GDP of US$93.8bn and a GDP per capita of US$2,445, whereas the figures for Turkey were US$94.3bn and US$2,235. In other words, the two countries were of comparable economic status. By 1990, Turkey's economy, at US$202bn, was more than twice as big as Iran's, at US$85bn, and its GDP per capita was more than twice Iran's. Essentially, Iran suffered a 'lost decade', due to revolutionary domestic turmoil, the eight-year war with Iraq (1980-1988), and international sanctions. By 2010, the ratio between Turkey's and Iran's GDP and GDP per capita had narrowed slightly, but was in Turkey's favour by a factor of almost two. If changing geopolitical circumstances allowed Iran to end its isolation, it could attract considerable foreign investment, helping it narrow the gap with Turkey.

Geopolitics Of The Middle East Would Be Transformed

At present, Iran supports several 'anti-status quo' forces in the Middle East, mainly Shi'a organisations or populations in Sunni-dominated countries. For example, Iran backs the Shi'a militant organisation Hizbullah (which is fiercely anti-Israeli) in Lebanon and champions oppressed Shi'a populations in pro-American Gulf Arab countries such as Saudi Arabia and Bahrain. Iran also supports the Assad regime (which hails from the Alawaite Shi'a sect) in Syria, which some Western and Sunni countries would like to see overthrown.

If Iran and the US were to move towards accommodation, Tehran could reduce its backing for such groups. Israel's security would improve, and the US could also cooperate more closely with Iran on stabilising Afghanistan (Tehran has been against the Afghan Taliban for longer than the US). Iran could also become a bulwark against an increasingly dysfunctional Pakistan. Finally, a friendly Iran could also join international efforts to maintain security in the north-western Indian Ocean, which has seen considerable piracy.

Yet, not all countries would welcome an Iran-US breakthrough. If the two were to start working together to resolve regional disputes, then the geopolitical importance of Saudi Arabia, Bahrain, Turkey, and even Israel could diminish somewhat. Unsurprisingly, Saudi Arabia and Israel are among countries most sceptical about the current Tehran-Washington dalliance. They fear that the White House, in its enthusiasm to re-embrace Iran as part of President Obama's legacy, could treat Tehran too softly on the nuclear dispute, thus compromising Riyadh's and Tel Aviv's security interests.

Russia, too, could lose out from an Iran-US rapprochement, because Moscow has traditionally regarded an anti-Western Tehran as a de facto counterbalance to Washington in the Near East. An Iran free of the threat of US or Israeli attacks could seek to exert greater influence in the South Caucasus, which has traditionally been in the Russian sphere of influence. Furthermore, China might not welcome a detente between Iran and the US, given that this could undermine Beijing's own ambitions to gain influence in the Persian Gulf.

Rapprochement Far From Guaranteed

Of course, we emphasise that a durable rapprochement between Iran and the US is far from guaranteed. The dispute over Iran's nuclear programme is merely the biggest bone of contention at this time. As noted, Tehran and Washington have been at odds since 1979, long before the nuclear issue emerged as a major concern in the early 2000s. A diplomatic breakthrough would require bold leadership on both sides.

For Obama, the risk of failure is considerable. For example, if Obama met Iran's leaders and they subsequently reneged on any agreements that were signed amid great fanfare, or if the rapprochement broke down within a few years, his reputation would be tarnished. Obama would also face a dilemma over what to do if Iran's now 'friendly' leaders faced a new popular uprising and cracked down violently.

There would also be political risks for Iranian leaders, given that many top officials have spent decades espousing radical anti-American views. Anti-Americanism is one of the core beliefs of the Islamic revolution, and the top clerics' hardline credentials would be undermined in the eyes of their supporters. Iran would also be at risk of losing geopolitical influence in the Middle East, since much of its 'influence' is derived from supporting radical groups, which the regime may be forced to abandon under the terms of a rapprochement. Tehran will certainly be aware that Russia lost substantial influence in the early 1990s once it mended its relations with the West. Russia made many concessions, such as withdrawing its troops from eastern Europe, while receiving little in return.

Nonetheless, the rewards of a rapprochement would be considerable for both sides. The lifting of sanctions would boost Iran's economy, paving the way for substantial foreign investment that has been on hold due to Tehran's pariah status. The oil and gas industry would be the obvious beneficiary, but so too would infrastructure projects such as ports and railways, as Iran is finally integrated into the emerging Eurasian 'silk road'.

Special Report Content

In our special report, we outline three scenarios for how the tentative Iran-US rapprochement could play out over the course of 2014, and their impact on the global oil market, with our core forecast being a gradual improvement in relations. We also discuss Israeli perceptions of Obama's outreach to Iran, and we argue that the Jewish state is unlikely to attack the Islamic Republic for as long as Tehran and world powers appear to be making progress on the nuclear dispute. Elsewhere in the region, we also assess how a loosening of sanctions on Iran could boost economic growth in the United Arab Emirates (mainly Dubai) and Oman due to their status as hubs for re-exports into Iran. Finally, we discuss how Saudi Arabia could be a 'loser' in the Iran-US rapprochement, especially given that the Kingdom has found itself increasingly at odds with Washington over political developments in Egypt and the civil war in Syria since 2011.


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