Iran's Nearing Dire Straits

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Forecast: Iran may threaten maritime trade going through the Strait of Hormuz in coming weeks as U.S. economic pressure against the regime reaches an all-time high. Senior regime officials have threatened to close the Strait of Hormuz in the event that the U.S. successfully cuts off Iran’s oil exports. These threats to close the Strait follow an increase in senior Islamic Revolutionary Guards Corps (IRGC) commanders’ visits to key strategic islands in the Persian Gulf near the Strait of Hormuz as well as an increase in the number of military drills and exercises near the Strait. Tehran’s provocative military gestures near the Strait picked up following the reimposition of U.S. oil-related sanctions against Iran in November 2018 and may indicate that Iran may make good on its long-standing threat to close the Strait. As U.S. economic pressure against Tehran mounts and Iranian oil exports continue to sink, Iran may leverage its military assets near the Strait in an effort to exact economic concessions and sanctions relief from the U.S. and the international community, potentially setting the stage for direct military conflict between Iran and the U.S. near the Strait of Hormuz.

U.S. secondary sanctions could potentially reduce Iran’s oil exports to a point the regime can no longer tolerate. Reimposed U.S. secondary sanctions following the U.S. withdrawal from the Joint Comprehensive Plan of Action (JCPOA) in May 2018 have dropped Iranian oil exports and battered Iran’s already-fragile economy. The Iranian regime has already readied itself for reduced oil exportations in the face of mounting U.S. economic pressure on its oil economy. Supreme Leader Ayatollah Ali Khamenei issued a governmental decree to reduce the amount of oil revenue allocated to Iran’s National Development Fund for Iran’s final budget. He made the change with the expectation that Iran’s oil revenues will drop because of significantly-reduced oil exports over the next year. Iran exported approximately 1.1 million barrels per day (bpd) of oil in March 2019, more than 50 percent below its export levels in April 2018. Europe is no longer importing Iranian oil and China (the regime’s largest buyer of oil) is importing less Iranian oil despite its sanctions waiver from the U.S. Treasury Department.

The Trump administration has vowed to cut off Iran’s oil exports entirely. Trump administration officials have signaled that they will not reissue waivers to the eight importers of Iranian oil in May 2019, after the current waivers expire. Recent reports suggest that the U.S. will extend waivers to four of the original eight waiver recipients. It is unclear how many, if any, sanctions waivers will be issued, however.

Mounting U.S. economic pressure on Iran’s oil economy could force Iran’s oil exports to a point the regime no can longer reasonably tolerate—a point above zero oil exports. Even if the U.S. reissues waivers to some exporters of Iranian oil in May, Iran could still experience an existential economic crisis. Some analyses indicate that Iran’s “breaking point” is 700,000 bpd. According to a recent S&P Platts report, if the U.S. extends waivers only to China, India, South Korea, and Turkey, Iranian oil exports will dip below 800,000 bpd in June 2019. The U.S. could force Iranian oil exports to drop even lower, potentially as a low as 500,000 bpd if the U.S. allows waivers for South Korea and Japan to expire. Iran could very well experience a financial crisis and economically-motivated protests at that point. Economic protests in Iran have a tendency to become political and quickly devolve into protests against the regime, potentially forcing the regime into survival mode.

Iran may seek to use its perceived leverage over commercial traffic through the Strait of Hormuz to exact economic concessions and sanctions relief to cool a domestic crisis. Senior regime military and political officials have threatened to close the Strait of Hormuz since the U.S. withdrew from the JCPOA in May 2018 (and, periodically, long before that). IRGC Sarallah (Greater Tehran) Operational Base Deputy Commander Brig. Gen. Esmaeil Kowsari *declared on July 4 that if the U.S. blocks Iranian oil exports then Iran “will not allow the [flow] of oil to other points in the world via the Strait of Hormuz.” President Hassan Rouhani *reissued a similar threat more recently in December 2018, days after Iran test fired a ballistic missile. Rouhani implied that Iran would close the Strait of Hormuz, stating that “if [the U.S.] wants to one day block Iran’s oil, then no oil will be exported from the Persian Gulf.”

Such statements are not unusual—Iranian officials, especially those in or close to the IRGC, regularly threaten to close the Strait. But these threats have coincided with an increase in military exercises near the Strait of Hormuz and official visitations to key strategic islands near the Strait, particularly after the reimposition of oil sanctions on Iran in November 2018.

The U.S. has already sensed an increase in provocative Iranian military actions in recent months and has moved naval assets to counter a potential Iranian attempt to close the Strait. The USS John Stennis Carrier Strike Group (CSG) arrived in the Persian Gulf on December 22, 2018. The Stennis CSG arrived in the Gulf during a joint IRGC-Artesh Ground Forces exercise in the Persian Gulf and was reportedly pursued by 30 IRGC fast boats upon its arrival. More recently, in late March 2019,  U.S. and Oman signed a naval agreement permitting the U.S. access to Arabian Sea ports in Oman, that are located outside of the Persian Gulf but near the Strait of Hormuz. The locations allow the U.S. Navy freedom of navigation and greater flexibility in the event Iran tries to close the Strait of Hormuz. It is unclear if Iran will ever make good on its threats to close the Strait. Increased regime military activity near the Strait, rhetorical threats from senior IRGC and political figures to block commercial traffic, and mounting economic pressure on Iran are setting the conditions for a potential military confrontation between the U.S. and Iran, possibly in the coming weeks. The Trump administration’s designation of the IRGC as a foreign terrorist organization (FTO) on April 8 increases this potentiality. IRGC Commander Maj. Gen. Mohammad Ali Jafari *warned that U.S. armed forces personnel in western Asia “will not have calm,” if the U.S. decides to designate the IRGC as a FTO. The designation will bring additional economic pressure against Iran as Iranian oil exports continue to drop.

Iran cannot actually close the Strait if the U.S. chooses to fight to re-open it but can disrupt shipping through it for weeks or longer. The American military, along with its allies, is capable of keeping the Strait open, even in the face of Iran’s acquisition of the Russian S-300 air defense system. Iran could mine the Strait, conduct small-boat attacks on ships, and fire missiles at naval targets—of which the mining would be the most serious challenge largely due to the paucity of minesweepers among American and allied militaries. The military effort to re-open the Strait could be large, however, requiring the significant reinforcement of U.S. air, sea, and missile-defense assets in the Persian Gulf and the Gulf of Oman. The risks of further escalation of such a conflict, including attacks by Iranian proxies on American forces and personnel in Iraq and Afghanistan, are high. 

The likelihood of Iran actually trying to close the Strait fully remains low but is rising.  The likelihood of increased tensions in the Strait is much higher. The dangers inherent in either scenario warrant this warning despite the long-established pattern of Iranian threats to close the Strait and exercises aimed at demonstrating the ability to do so.