Iran’s Reintegration in the Global Oil and
Gas Market: Regional Implications and
Scenario’s
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– University of Amsterdam Graduate School of Social Sciences MSc Thesis Political Science: International Relations International Relations of the Middle East Research Project Date: June 24, 2016 Ernst Kuneman Supervisor: Mr. Dr. S. (Said) Rezaeiejan ekuneman@gmail.com Second Reader: Ms. V.C (Vidya) Marapin MSc
Abstract
In early 2016, the Joint Comprehensive Plan of Action was implemented resulting in the lift of nuclear- related sanctions on Iran. A major implication of this deal is that it allows Iran to reintegrate into the global oil and gas market. In combination with a process of reform in Iran’s energy sector this will herald a new era of Iranian oil and gas production and export. As a country with the world’s third and second largest oil and gas reserves, one of the largest economies in the region, a highly strategic geographic position and aspirations for regional and international influence, Iran’s energy reintegration may not only lead to economic recovery and growth but can also fundamentally change Iran’s position in the Middle East and beyond. In this thesis, the potential future trajectories of the Islamic Republic of Iran as a result of high energy growth are explored. This is done by analyzing current trends grounded in a multi-theoretical approach and scenario methodology, drawing on structural realism, liberal institutionalism and neo-Gramscian critical theory. The results show that increased energy growth and economic development of Iran can fuel regional tensions and conflict; result in growing mutual beneficial ties and cooperation with the West; or lead to rising regionalism and challenges to Western influences and interests. In all the scenarios, it is argued that Iran’s ties with South and East Asia will intensify. At last, I argue that the use of a multi-theoretical perspective is essential for a broader understanding of regional and international politics, and in combination with scenario methodology provides a promising tool for the field of IR.Keywords: Iran – energy – regional implications – geopolitics – international relations – scenario methodology
Contents
Acknowledgement ... vi Maps, Table, Figures, and Appendix ... vii Abbreviations ... viii Map 1: The Islamic Republic of Iran ... xi Map 2: The Middle East ... xiii Map 3: The Strait of Hormuz ... xv Chapter 1. Introduction ... 1 Chapter 2. Iran’s Oil and Gas Sector ... 6 2.1 Historic Context and Institutional Framework ... 6 2.2 Iran’s political system and the distribution of oil and gas revenues ... 10 2.3 Oil and Gas Production ... 15 Chapter 3. Theoretical Framework ... 18 3.1 Structural Realism ... 20 3.1.1 General Critique ... 28 3.2 Liberal Institutionalism ... 32 3.2.1 General Critique ... 39 3.3 Critical Theory ... 41 3.3.1 General Critique ... 47 3.4 Variables & Assumptions ... 49 Chapter 4. Methodology ... 52 4.1 The Scenario Methodology ... 52 4.2 The Scenario Typology ... 54 4.3 Data & Operationalization ... 56 Operationalizations ... 57 Chapter 5. Scenario analysis ... 60 5.1 The Neorealist Scenario — The Strive for Regional Dominance ... 60The Distribution of Power ... 60 2016–2021 Internal Balancing, Consolidation of Power & Rising Tensions in the Gulf ... 69 2021–2030 Competing Powers, Alliances, and a Rising Iran ... 70 2030–2040 Escalation of Tensions ... 72 5.2 The Liberal Institutionalist Scenario — Integration into the Liberal International Order ... 73 Economic Interdependence and Energy ... 74 2016–2021 Increasing Foreign Direct Investment, Energy Exports, and Domestic Support ... 78 2021–2030 Integration into the International System ... 79 2030-2040 The Return of an Economic Powerhouse and Structural Reform ... 81 5.3 The Critical Scenario — A Challenge to the Western Dominated World Order ... 83 Historic analysis ... 83 The Islamic Republic of Iran’s Revolutionary Ideology and its Relation to Foreign Policy ... 88 2016–2021 Increasing Material Capabilities ... 92 2021–2030 Increasing Support for Counterhegemonic Forces ... 93 2030–2040 Institutionalization and the Rise of a Counterhegemonic Bloc ... 94 Conclusion ... 98 Appendix ... 104 The Formal Power Structure of the Islamic Republic of Iran ... 104 References ... 105
Acknowledgement
I would like to thank my supervisor, Dr. Said Rezaeiejan, for his guidance and always critical reflections throughout the process of writing this thesis as well as his extra time for giving advice on possible future trajectories, not of Iran, but of my individual path. I really appreciated and enjoyed our interaction and I wish you all the best in Brazil and the years ahead. Also, I would like to thank the second reader, Vidya Marapin MSc, for her time and effort in reading and assessing this thesis. Ernst Kuneman Amsterdam, June 2016
Maps, Table, Figures, and Appendix
Maps
Map 1 The Islamic Republic of Iran xi
Map 2 The Middle East xiii
Map 3 The Strait of Hormuz xv Table Table 1 Military Capabilities of the Five Largest Military Spenders in 66 the Region in 2015 Figures Figure 1 Iran Oil Production and Consumption 1965–2011 15 Figure 2 Iran Crude Oil Supply 2006–March 2016 15 Figure 3 Gas Production, Flaring, and Injection in Iran for 2004–2013 18 Figure 4 Military Expenditure in the Middle Eastern Region by State 62 (2004–2014) Figure 5 Share of Total Regional Military Spending by Country (2014) 63 Figure 6 Military Expenditure Growth Iran 65 Figure 7 Gross Domestic Product of the Three largest Economies 75 in the Middle East (2005–2015) Figure 8 Iran’s Total Petroleum Export Revenue (Crude, Gas, Refined) 75 for 2005–2014 Figure 9 Economic Interdependence of the Islamic Republic of Iran 77 Apendix Appendix The Formal Power Structure of the Islamic Republic of Iran 104
Abbreviations
APOC Anglo-Persian Oil Company Bcm Billion cubic meters BOE Barrels of oil equivalent BP British Petroleum CNPC China National Petroleum Corporation CPEC China-Pakistan Economic Corridor CSIS Center for Strategic International Studies ECC Energy Cooperation Centre EIA U.S. Energy Information Administration FAO Food and Agriculture Organization of the United Nations FDI Foreign Direct Investment GATT General Agreement on Tariffs and Trade GC Guardian Council GCC Gulf Cooperation Council GDP Gross Domestic Product GECF Gas Exporting Countries Forum GNP Gross National Product IAEA International Atomic Energy Agency IEA International Energy Agency IISS International Institute for Strategic Studies ILO International Labour Organization IMF International Monetary Fund IO International Organization IOC International Oil Company IPC Iran Petroleum Contract IPE International Political Economy IR International RelationsIRBM Intermediate-Range Ballistic Missile IRGC Islamic Revolutionary Guard Corps IRI Islamic Republic of Iran IRIAF Islamic Republic of Iran Air Force IRP Islamic Republican Party JCPOA Joint Comprehensive Plan of Action LNG Liquefied Natural Gas Mb/d Million barrels per day MNC Multinational Corporation MPO Management and Planning Organization of Iran MTOE Million Tonnes of Oil Equivalent NATO North Atlantic Treaty Organization NDFI National Development Fund of Iran NIGC National Iranian Gas Company NIOC National Iranian Oil Company NIORDC National Iranian Oil Refining & Distribution Company NOC National Oil Company NPC National Petrochemical Company (of Iran) NPT Non-Proliferation Treaty OAPEC Organization of Arab Petroleum Exporting Countries OEC Observatory of Economic Complexity OIC Organization of Islamic Conference OPEC Organization of the Petroleum Exporting Countries OSF Oil Stabilization Fund RI Revolutionary Ideology R&D Research and Development SCO Shanghai Cooperation Organization
SIPRI Stockholm International Peace Research Institute SNSC Supreme National Security Council TNC Transnational Company TNOC Transnational Oil Company UAE United Arab Emirates UN United Nations UNCTAD United Nations Conference on Trade and Development UNODC United Nations Office on Drugs and Crime UNSC United Nations Security Council USD United States Dollar WTO World Trade Organization
Map 1: The Islamic Republic of Iran
Map 2: The Middle East
Source: University of Texas, Perry-Castañeda Library Map Collection, http://www.lib.utexas.edu/maps/
Map 3: The Strait of Hormuz
Source: University of Texas, Perry-Castañeda Library Map Collection, http://www.lib.utexas.edu/maps/
Chapter 1. Introduction
In July 2015, foreign ministers of the P5+1,1 the European Union (EU) and the Islamic Republic of Iran (IRI) reached the Joint Comprehensive Plan of Action (JCPOA) that contained measures to curb Iran’s nuclear proliferation. On the 16th of January 2016, the JCPOA was implemented resulting in the lift of nuclear-related sanctions on Iran.2 This has enabled the country to reintegrate into the world economy and global financial system while giving it direct access to unfrozen assets of up to 150 billion USD,3 thereby providing vital resources to boost the latent economic powerhouse. However, the availability of economic assets in the short-term pales in significance when compared to structural changes in the Iranian economy over the medium and long-term, which are most clearly reflected in the energy sector. Iran holds the world’s second largest gas reserves (17% of world’s total) and the world’s third largest oil reserves (10% of world’s total) and with the lift on economic sanctions, it is re-entering the global oil and gas market (EIA, 2015a).4 This provides the country with much needed foreign exchange and foreign investment to boost productivity. Although Iran has a relatively diversified economy when compared to other resource-rich countries, oil rents still account for roughly a quarter of total GDP and three quarters of total export revenue (World Bank 2016a; OEC 2015). Renewed growth in the energy sector is thereby a major driver of overall development in the country. A half year since the implementation of the JCPOA, billions of USD have already been invested in Iran’s energy sector and a range of international oil companies (IOCs) and transnational oil companies (TNOCs) have returned, including British Petroleum (BP), Total, ENI, Siemens, Linde AG (the world’s largest gas company) as well as renewed involvement of Mitsui, Sinopec, and China National Petroleum Corporation (CNPC), amongst others. The unique and paradoxical nature of Iran’s political economy make these developments highly significant not only for its internal structure but also for its role and place in the region and beyond. 1 China, France, Russia, the United States, the United Kingdom and Germany. 2 U.S. Department of Treasury, 2016. 3 John Defterios, in CNN 2016. 4 If unconventional Canadian oil reserves are excluded, Iran has the world’s third largest oil reserves.
Iran is a country that can be characterized as both affluent and poor. On the one hand, it has a well-educated workforce and large export revenue (i.e. without sanctions), foreign assets, natural resources, and domestic industries. On the other hand, its GDP growth has stagnated since the Iranian Revolution (1979) while overall productivity has declined and neighboring countries have surpassed it in terms of economic development. Heavy state intervention in the economy, trade disruptions as well as large reliance on energy resources have been some of the challenges that have faced Iran’s economy, leading to a situation of wealth and shortages at the same time (Maloney 2015, 6-7). Nonetheless, overall poverty rates have declined in the past decades as the IRI has widely extended access to basic infrastructure, education, health services, and social welfare (see Salehi-Isfahani 2009). Despite popular egalitarian promises of the IRI’s elite, however, income inequality has remained a major issue in Iranian society and has not changed substantially since the revolution (with a Gini index hoovering around 0.4). With rising energy income, inequality is likely to rise as oil and gas revenues are distributed more unevenly.5 This underscores a second paradox of the IRI, namely its simultaneous developmental and predatory approach to the economy (see also chapter 2.2).
In addition, Iran is both isolated and integrated (Maloney 2015, 9-10). It has become economically and politically isolated since the revolution due to ideologically driven isolationist policies during the early years of the IRI, regional and international conflicts, unfavorable climates for foreign investment and tourism, and the increasingly stringent international sanctions during the past years. In 2005, the International Atomic Energy Agency (IAEA) declared that Iran was non-compliant with its international obligations under the Non-Proliferation Treaty (NPT) resulting in a range of unilateral and multilateral sanctions that targeted Iran’s economy, financial sector and capacity to build nuclear arms, culminating in United Nations Security Council (UNSC) Resolution 1929 of June 2010 which tightened the international sanctions regime and based sanctions on the approach taken by the United States (US) (UN 2010).6 This resolution banned all arms sales to Iran, prohibited it from developing ballistic missiles and placed its financial and 5 Djavad Salehi-Isfahani in Al-Monitor, 2016. 6 The US approach was characterized by encompassing sanctions that not only target Iran’s nuclear sector, but also the larger economy. The EU implemented this sanction approach in 2012, thereby depriving Iran of one quarter of its total energy exports (Katzman 2016, 35).
energy sector under international sanctions, leading to a near total ban on Iran’s energy exports while denying the country access to foreign capital and investment. This severely affected the Iranian economy —which entered a recession in the period of 2012 to 2014— leading to strong currency depreciation, structural deficits, high inflation, high unemployment levels (especially under the youth) and increasing poverty rates, further enhanced by declining oil prices (World Bank 2016b). Also, corruption and rent-seeking behavior increased as the inflow of petrodollars and foreign exchange declined (Farzanegan 2013, 15).7 Despite economic pressures due to sanctions as well as additional regional and transnational tensions resulting from the Arab Uprisings during the same period, the IRI proved to be highly resilient and remained relatively stable. During these years of economic and political hardship the IRI even managed to maintain its role on the international sphere by hosting summits (e.g. the Non-Aligned Movement in 2012) while actively participating in regional and international institutions such as the Organization of Islamic Conference (OIC), Shanghai Cooperation Organization (SCO), and the United Nations (UN), reflecting its historic aim for “a leading role in the regional and broader international arenas” (Maloney 2015, 10). These aims are furthermore reflected by Iran’s activities in the Middle East. Currently, Tehran has a strong military and political grip in Iraq; serves as the patron of Hamas and Hezbollah to pressure Israel while tightening its control on Lebanon; maintains a sphere of influence in Afghanistan and is fighting a proxy-war with Saudi-Arabia on two fronts as it is politically and militarily backing Assad’s regime in the Syrian Civil War and the Houthis in Yemen. As Hadian (2015, 3) states, “Iran is central to nearly all issues of importance to the region, including the Palestinian-Israeli conflict, nuclear proliferation, terrorism, Persian Gulf security, energy, and the future of Iraq, Syria, Lebanon, and Afghanistan.” The centrality of Iran is reinforced by its strategic geographic position, connecting the Middle East with Central and Southwest Asia while bordering the Caspian Sea and the Persian Gulf; two regions where most energy reserves are located. Furthermore, it borders the Strait of Hormuz (see map 3) through which roughly 20% of the
7 The Islamic Revolutionary Guard Corps has especially benefited from increased illegal trade activities. See chapter two for
world’s annual oil trade is transported, thereby making it the most important chokepoint in the world (EIA 2015a). With one of the largest population and economy in the region (see table 1 and figure 7 respectively), one of the world’s largest energy reserves, a highly strategic geographic position, aspirations for regional and international influence, and a high dependence on the energy sector, Iran’s reintegration in the global oil and gas market may not only lead to economic recovery and growth but may also fundamentally change Iran’s position in the Middle East and beyond by providing the material basis for increased regional and international activity. The aim of this thesis is to analyze how Iran’s regional position may change and what the possible implications for the region are by conducting a scenario analysis based on both primary and secondary data
where international relations (IR) theories provide the theoretical input and direction for each scenario. The theories used here are structural realism, liberal institutionalism and neo-Gramscian critical theory. Ergo, the following question is formulated: How can we analyze the regional implications of Iran’s reintegration in the global oil and gas market as a result of lifted international sanctions? Why choose Iran as the object of study? First, Iran is the only oil exporting country so far that has experienced a process from integration to isolation, and now again towards reintegration in the global energy sector. Second, as mentioned earlier, Iran holds one of the world’s largest oil and gas reserves and, moreover, has a large potential for further development of its upstream, midstream and downstream sectors (see next chapter). This makes Iran an interesting case as reintegration may profoundly change the developmental trajectory of the country. Third, Iran is a state with assertive influence in the Middle East and has used its energy resources in this process (Maloney 2015). These points indicate that reintegration and the ensuing opportunities for further development of Iran’s energy sector may have a substantial effect on the region, and this makes Iran a suitable case for this type of research.
Knowledge on this topic is also politically relevant as Iran’s reintegration in the global market may shift the political-economic balance in the Middle East thereby influencing —among
others— the probabilities for cooperation, conflict and political (in)stability. This study thereby entails strategic and political risk management by providing a framework for policy-making and for anticipating on emerging opportunities and risks. Indeed, this is the practical value of scenario methodology (Han 2011, 49). In addition, by conducting a scenario analysis where both data and IR theories are used, this study fills a methodological and scientific gap by grounding the scenarios on elaborated theoretical foundations which most energy studies focusing on future implications (i.e. scenario’s) lack. The focus is thereby shifted from a plain demand, supply, and energy security analysis towards the broader political impact of energy production, trade, and growth in a geopolitical context. Every single theory thereby provides a specific set of assumptions and variables, which are used as theoretical input for each scenario.
On a theoretical level, I argue against the tenet of IR scholars that perceive the world from a one-dimensional ontological view by showing that because each theory provides valuable insights within its domain, none gives a full picture of the complex world we live in and seek to understand. For the field of IR this implies that knowledge is inherently bound to perspective and therefore, one should be able to change between perspectives in order to get a fuller picture of reality. Consequently, a multi-theoretical approach is taken in this thesis (Checkel 2013, 224). It is for the same reason that a scenario methodology is used here as it provides the tools to explore a wide range of future trajectories and outcomes without limiting oneself to a single perspective. Instead, scenario analysis enables a multi-perspective view on future implications, which is all the more relevant for a country characterized by internal and external paradoxes such as Iran. In the next chapter Iran’s energy sector and the links with Iran’s political economy are analyzed in more detail. In chapter three, the theories mentioned earlier are elaborated concluding with a set of assumptions and variables that are used in the analysis. In chapter four, the scenario methodology is explained, choices and assumptions are made explicit, the data used are outlined and the variables are operationalized. In chapter five, the structural realist, liberal institutionalist and critical scenario are worked out. Subsequently, in the last chapter substantive conclusions regarding Iran’s future trajectories are drawn and theoretical and methodological implications of the approach used in this thesis are given.
Chapter 2. Iran’s Oil and Gas Sector
This chapter explains in more detail the challenges and opportunities currently facing Iran’s energy sector, and analyzes how Iran’s energy sector is situated in the political structure of the IRI and plays a crucial role for both the economy and for financing the state. Indeed, the sector is highly politicized and is both shaped by and shaping national politics. The next section provides a short historic context, outlines the institutional framework of the energy sector, and identifies challenges and opportunities. Section 2.2 elaborates on Iran’s political structure and the distribution of oil and gas revenues whereas in section 2.3 production and consumption patterns and their future potentials are analyzed. I argue that the political will for reform in the energy sector combined with the lift of sanctions heralds a new era of energy production and export in Iran. Since knowledge of domestic developments in Iran’s energy sector as well as its embeddedness in the economic and political structure is imperative in order to identify (and extrapolate) trends, the findings of this chapter —combined with the theories of the next—serve as the primary input for chapter five. The degree to which the findings of this chapter are integrated in the scenarios depends on the specific theoretical input. As will be explained in the theoretical framework (chapter three), neorealism does not give attention to domestic factors other than those that influence the material power of the state while liberal institutionalism and (especially) critical theory also take state-society relations into account. In either case, knowledge of Iran’s energy sector is crucial for insight in Iran’s broader potential future trajectories as the major driver of political and economic development.
2.1 Historic Context and Institutional Framework
The energy sector has played a vital role in Iran’s modern political and economic history. In the 1970s Iran’s energy sector experienced substantial growth; mainly due to the nationalization of the oil industry, the shah’s efforts to obtain more favorable agreements with the IOCs, and stark price hikes due to the oil embargo of the Organization of Arab Petroleum Exporting Countries (OAPEC), which the shah exploited to increase export and market share. The oil revenues, in turn were directly used to increase Iran’s military capabilities and regional role, as well as for excessive domestic development projects that increased oil dependency, inflation, corruption,unemployment and inequality in the country (Maloney 2015, 66-68). A range of socio-economic and political grievances, as well as the perceived illegitimacy of Pahlavi rule resulted in large-scale demonstrations throughout the country in 1978, eventually leading to the overthrow of the shah —in which oil workers played an important role as their strikes brought the economy to a virtual standstill— and the emergence of the Islamic Republic (Sepehri 2000).8
The new regime derived a major part of its legitimacy from its resistance to foreign influence, which was felt most heavily in Iran’s energy sector where Western oil companies had been able to reap a significant part of the benefits from oil production through the consortium agreement that essentially granted IOCs 50% ownership over Iran’s energy resources, and was signed by the Iranian government in 1954 only after U.S. and British intelligence services had overthrown the democratically elected Prime Minister Mohammad Mossadegh in 1953, who wanted to fully nationalize Iran’s energy sector (Jarecki 2008, 146).9 The IRI cancelled this agreement and furthermore codified restrictions on “foreign involvement in the energy sector” in Article 83 and 153 of its constitution, and later in the Petroleum Act of 1987 (Maloney 2015, 374). Consequently, for the first time in history Iran had full control over its energy resources that it sought to use for both political leverage on the international level and for the popular goal of domestic development that would benefit society at large (Ibid, 369). Yet, after the Iran-Iraq War (1980-1988) it was realized that the affected energy sector could not provide either without foreign expertise, technology, and investment to increase efficiency and competitiveness. The resulting duality of aversion and need of foreign involvement has been a central paradox that has characterized Iran’s energy sector and continues to shape and divide national politics and political groups to this day (see section 2.2 and the critical scenario in chapter 5.3). In order to address this problem, the IRI created the “Buy-back” contract in 1995, which has enabled limited foreign investment in Iran’s energy sector where the state remains in full 8 In chapter 5.3, this process is explained in more detail. 9 The shah made significant progress on bringing the country’s energy resources under national control, culminating in the 1974
Petroleum Act, which made foreign companies mere contractors and shifted ownership to the state (furthermore reflecting increased leverage of oil producing countries after the 1973 oil shock) (Shahri 2010, 118). This could not stem unrest under the population, especially under the peasantry and urban middle class who did not share the country’s increasing oil wealth and came to see the shah as the symbol of foreign occupation. At the same time, the consortium agreement remained effective as it was signed for 25 years back in 1954.
ownership and control.10 Under the Buy-back contract, IOCs get remunerated by a fixed return rate and are not compensated for higher investment risks but for investment costs, thereby limiting foreign investment in potential projects and disincentivizing cost minimization while the risk of fluctuating oil prices is placed on the shoulders of the national oil company (NOC). Moreover, the Buy-back contract extends to a maximum period of eight years where IOCs are “only involved in exploration and development, not production” (IEA 2014, 91). This disincentives IOCs to use state-of-the-art technologies which are much needed in Iran’s energy sector. So far the results have been suboptimal due to lack of a proper time horizon and long-term commitment. Consequently, the contract has been criticized by both IOCs and Iran’s NOCs and has limited foreign investment as projects in other countries have been more attractive (IEA 2014, 91).
Over time, Iranian authorities improved the conditions of the contract in order to attract more investment and attain political goals. This is most clearly seen by the privileging of Chinese TNOCs in the first decade of the new century, who reportedly invested over 100 billion (USD) in Iran’s energy sector during this period and whose investment was used to fend off western pressure and “splinter the increasing coherence of the international effort to isolate Tehran” (Maloney 2015, 407). In 2009, China was Iran’s largest export market for crude oil with a share of 20%. In the years that followed Chinese TNOCs became the major foreign players in Iran’s energy sector as sanctions prohibited most other companies from investing in or importing from the country, resulting in 50% of Iranian oil exports going to Chinese markets by 2014.11 Problems arose within the Sino-Iranian energy relationship as 1) the U.S. threatened with repercussions if the Chinese were to fill the vacuum left by European companies, therewith impeding Chinese investment in Iran’s upstream sector; 2) Chinese TNOCs could not fill the technological gap left by the IOCs, therefore delivering substandard quality; 3) the IRI felt too dependent on the Chinese for export revenue; 4) the contractual terms under the Buy-back model proved to be hard for the TNOCs (BMI 2013, 23; Maloney 2015, 410).12 10 Its main tools are the Ministry of Petroleum and its NOCs, consisting of the National Iranian Oil Company (NIOC), National
Iranian Gas Company (NIGC), National Petrochemical Company (NPC), and the National Iranian Oil Refining & Distribution Company (NIORDC) that all have multiple affiliates or subsidiaries in the upstream, midstream or downstream sectors.
11 The Observatory of Economic Complexity, 2015. 12 Benoît Faucun in the Wall Street Journal, 2014.
These issues reflect some of the broader and interrelated challenges that have faced Iran’s energy sector, particularly its unfriendly investment climate and lack of key technologies. As sanctions are now lifted, Iran can attract IOCs (besides Asian TNOCs) to invest in its energy sector, serving the triple purpose of diversification of export destinations, expansion of export markets, and renewed access to high technologies and expertise. The Iranian government is aware of the need hereof and has come up with a new contract to attract foreign investment: The Iran Petroleum Contract (IPC). Under this contract, the Ministry of Petroleum retains full ownership of the reserves, production, and the contractor’s assets (through a joint venture arrangement). In turn, foreign companies can participate in production, are remunerated by a maximum 50% share of extracted commodity revenue and are rewarded by an additional return based on production level, thereby incentivizing the contractor(s) to use best-practices and technologies.13 This is further stimulated by an extended contract period of 25 years, enabling long time horizons and larger investments on part of the foreign company.14 The IPC is currently replacing the Buy-back contract and —in the absence of the sanctions regime— provides the basis for Iran’s reintegration in the global oil and gas market. However, contractual terms and foreign investment have not been the only problems facing Iran’s oil and gas industry. Other problems include economic mismanagement, a bloated workforce, corruption, and high domestic consumption due to subsidies. Moderate President Rouhani has made reform of the energy sector one of his top priorities and his first efforts have been directed at reversing former President Ahmadinejad’s policies by bringing back skilled technocrats in the sector, reinstating Bijan Namdar Zangeneh as minister of Petroleum, and rolling back the influence of the Islamic Revolutionary Guard Corps (Habibi 2014a, 4). Moreover, Rouhani aims to bring more competitive elements in the economy with the goal to improve productivity and efficiency, for instance by adjusting existing labor laws and making these more employer-friendly.15 Due to high domestic energy subsidies, Iran belongs to one of the most inefficient energy consumers in the world which forces “the oil industry to allocate an ever-growing portion of its 13 Reza Yeganehshakib in Al-Monitor, 2016. 14 Fareed Mohamedi in The Iran Primer, 2015. 15 Djavad Salehi-Isfahani in The Brookings Institution, 2016.
output to domestic consumption”, thereby decreasing the amount available for export and limiting revenue (Ibid, 6). Zangeneh and Rouhani have made this a central issue of domestic reform in the sector and have so far made initial progress in cutting subsidies and raising domestic energy prices, although these still remain far below the international level.16 In addition, the government has focused (amongst others) on improving the public transport sector, financed by the oil ministry, with the goal to reduce domestic energy demand and enlarge export revenue (Habibi 2014a, 6). In Iran’s 6th Economic Development Plan (2016-2021) the goal is set to reduce energy intensity by 15%, while gains in productivity will account for one-third of a projected annual economic growth rate of 8% (MPO 2015). Even though Iran’s energy sector faces important challenges, the combination of lifted sanctions and the willingness of reform in the energy sector by a moderate government provide the key ingredients for high growth rates and increased (export) revenue. The next section looks at how these revenues are distributed in Iran’s political system and how this is subjected to factional rivalries that characterize Iranian politics.
2.2 Iran’s political system and the distribution of oil and gas revenues
In order to understand how Iran’s revenues from energy resources are distributed, it is imperative to take a closer look at the structure of its internal political system. In Iran, there are no political parties but allegiance is based on factions consisting of “loose coalitions of groups and individuals” that align on shared ideas relating to “economic, socio-cultural, and foreign policy issues” (Rakel 2008, 58,60). There are as of now roughly three political factions: the reformists, the pragmatists, and the conservatives (Rakel 2008, 76).17 Even though the reformist- 16 Energy subsidies have been a central way for the IRI to deliver on populist promises and have been difficult to cut back. Former (neo-conservative) President Ahmadinejad sought to replace subsidies with the so called “oil-to-cash” transfer program, which failed to fully replace subsidies, increased inflation and put additional pressure on the state budget. Under President Rouhani, the government is trying to reverse the economic damage of these policies, although this highly depends on economic gains such as increasing employment and economic growth in order to avoid popular resistance, with the lift of sanctions these efforts have a much larger chance to succeed (Nikou & Glenn 2015). 17 While all political factions agree on three foreign policy principles: “independence, equality, and a greater role for Iran in international relations”, they differ in approach. The conservatives focus on shared identities and take the Islamic revolutionary ideology as guiding principle, therefore Iran must be on good grounds with Muslims both in- and outside Iran, partnerships with Muslim countries should be maintained or improved, and there should be no reconcilement with the United States. Reformists and pragmatists, on the other hand, take a more pragmatic and rational approach, stressing the importance of integration, international trade and good diplomatic relations with foreign countries as well as the U.S. in order to pursue Iranian interests (Rakel 2007, 154).
pragmatist camp (who align on economic, foreign policy and more or less on socio-cultural issues) currently has a majority in parliament (i.e. the Majlis), the conservatives have most state power as they fully control the religious supervisory bodies (see appendix). The Guardian Council (GC) —for instance— oversees the executive, may overrule the executive’s actions or decisions, and is accountable only to the supreme leader, who appoints half of its 12 members. Moreover, the Council may effectively rule out opposition in parliament by its vetoing power over election candidates while the supreme leader has final authority over the whole process and determines the qualifications for presidential candidates and has to confirm each president’s election (Cleveland & Bunton 2013, 356).18 In addition, the conservatives control the religious foundations (i.e. the bonyads), which act as the propagators of Iran’s revolutionary ideology, control over one-third of Iran’s gross national product (GNP), and are directly appointed by the supreme leader.19 In turn, the bonyads have the authority to appoint the heads of the judiciary, the Armed Forces of the IRI, the Islamic Revolutionary Guard Corps (IRGC),20 and the Law Enforcement Forces. Consequently, the conservatives control a major part of the economy and are in direct control of all state institutions that hold significant structural power, whereas the pragmatist and reformist factions have only limited power in a few republican institutions (i.e. parliament, the presidency, and the Council of Ministers), which are always subordinate to the sway of the supreme leader and his supervisory bodies while furthermore depending on restricted elections (Rakel 2008, 53). Indeed, the reformists and pragmatists have been denoted as the ‘discourse elite’ as their influence resides mostly in shaping political discourse, while they have limited administrative
18 In this way, all political factions are part of and operate within the religious establishment. The moderate opposition has
sometimes been termed as liberal. Yet, this should be placed within the framework in which they operate. Groups and people that adhere to ideologies that may threaten the system -such as secular and progressive (Western) liberalism- have been banned from participation in Iranian politics. 19 After the revolution, Khomeini introduced the velayat-e faqih (Supremacy of the Jurist) system, “which is the basic principle of the IRI, grants supremacy on all policies to the supreme leader and therewith undermines democratic processes in Iran” (Rakel 2008, 24). The pragmatists support this political system, while reformists are more critical and are in favor a limited role of the Supreme Leader (Idem, 76). Pragmatists can therefore balance between reformists and conservatives and cooperate with both as they see fit. 20 The Islamic Revolutionary Guard Corps —a military organization with strong ties to the Iranian economy and political system- was founded by Iran’s first Supreme Leader, Ayatollah Khomeini, to safeguard the Islamic Revolution from both foreign and domestic enemies, and is a powerful and conservative organization that owes direct allegiance to the supreme leader. It has 100,000+ ground forces and 20,000+ naval forces including 5,000 marines (IISS 2016, 328). Besides being a military organization and directly controlling parts of industry and business, it also operates as a covert transnational network that engages in illegal smuggling and trade activities. As the IRGC is mandated with internal security and controls all borders, it has effectively created a large shadow economy totaling tens of billions USD annually.
power and are not represented in Iran’s so called ‘inner circle elite’, which is dominated by the highest clerics and occasionally includes religious lay persons (Ibid, 61-63).
However, the pragmatist-reformist camp is not powerless as it has the popular vote, currently dominates parliament (with a slim majority), the presidency (the second highest rank in the IRI), and largely fills minister posts (including the Ministry of Petroleum) and thereby has much influence over legislation and the national budget. While the supreme leader has to approve of and sign all legislation (including foreign policies) he cannot rule by absolutist authority and has to some degree concede to popular demand in order to preserve legitimacy. In fact, the IRI is based on competing institutions and factions where some can dominate but none have undisputed power, and this has given it both its strength as well as its intransparent character (Maloney 2015, 498). The result is that since 1989, the political system of the IRI is best characterized by authoritarian populism with (limited) democratic elements, or semi-theocratic as it combines theocratic rule with republican institutions (Rakel 2008, 32). Due to its strategic importance, the energy sector has been a central arena for factional rivalry, which is reflected the by extensive “oversight and interference by the Majlis, the supreme leader, and the security organizations (such as the IRGC)” in the Ministry of Petroleum, which is the official owner and directing body of Iran’s oil and gas industry (Habibi 2014a, 7). Although the major outlines of energy policy are developed by the Cabinet of Iran and the Ministry of Petroleum, the supreme leader has to sign each bill and has final authority over the spending of Iran’s oil and gas revenues.21 In the fiscal year of 2011/2012, just before the sharpened sanctions regime became effective, Iran’s export revenue from oil and gas totaled 118 billion USD. A year later, this amount dropped to 63 billion USD, and in 2013/2014 it declined to 56 billion USD (EIA 2015a). The parent company of Iran’s energy industry, the National Iranian Oil Company (NIOC), retains only 14.5% of total profits of oil and gas revenues, while the other 85.5% goes directly towards the state (RWI & VCC 2014). This gives the central state of Iran a major influx of foreign oil rents, which last year accounted for nearly half of its total government budget.22
21 Karim Sadjadpour in The Iran Primer, 2015.
22 Saeed Kamali Dehghan, in The Guardian, 2015. While the Iranian government has praised itself that tax payments for the first
time in 50 years have caught up with oil rents in terms of government income (in earlier years oil rents made up 60%-80% of government income), this should not merely or necessarily be seen as a result of less oil dependency, but also in light of low oil
Consequently, Iran can be characterized as a rentier state, where a major part of the government’s income is generated by relatively few people and is paid for by foreign rents, which makes the government less dependent on its citizenry for income and thereby less accountable on how its revenue is spend (Ross 2001). However, due to Iran’s history of foreign interference, accountability on the spending of (energy) revenues has become part of the IRI’s legitimacy (see also the critical scenario in chapter 5.3).
In 2000, the Oil Stabilization Fund (OSF) was established by the then incumbent and reformist President Mohammad Khatami to ensure counter cyclical investment in the economy and negate negative effects of sudden and high cash inflow.23 Nonetheless, during Mahmoud Ahmadinejad’s presidency (2005-2012) the fund was fully exploited —even during the oil price hike of his first term— as he rapidly increased public spending to deliver on populist promises while neglecting the adverse economic consequences as propounded by his advisors (Habibi 2014b, 11). In addition, part of the OSF’s reserves went directly to the bonyads and the IRGC while roughly 150 billion USD of oil revenue remained unaccounted for as former President Ahmadinejad restricted transparent flows of information (Heuty 2012, 6). At the same time, Ahmadinejad (a neo-conservative and himself a prominent IRGC member) put IRGC officials at the top of the oil ministry and used a privatization program to grant upstream and downstream oil and gas projects to companies affiliated with the IRGC, totaling tens of billions USD, moreover questioning how truly ‘private’ these companies are.24 His promise to combat corruption thereby prices and decreased energy export due to sanctions, which has resulted in declining government revenues and a lower share of oil rents hereof. 23 Reza Akhlaghi in Foreign Policy Association, 2014. 24 After the revolution, nationalization of industries and sectors expanded substantially (including foreign trade) as it was seen by the Islamic republic to bring social and economic justice, moreover, all rules and regulations regarding economic activity were placed in a framework of Islamic principles. The private sector was not abolished altogether, but served a supplementary role in Iran’s economy. Privatization and liberalization efforts started in the late 1980s under Rafsanjani’s presidency to tackle inefficiency and mismanagement (thereby signaling a pragmatist turn in Iranian politics), yet did not lead to significant results as the program encountered “political, economic, administrative, and legal” constraints (Azad 2010). In 2004, privatization took a new turn as legal barriers were largely removed due to a revision of Article 44 of the constitution. During former President Ahmadinejad’s term, privatization was characterized by favoritism to fuel and strengthen a neopatrimonial network. While incumbent President Rouhani has repeatedly stressed the importance of economic liberalization, the Iranian economy remains to this day largely state controlled where private and public interests are conflated and a major part of the economy is controlled by the bonyads and security and military organizations such as the IRGC (Azad 2010). This has resulted in a form a state capitalism where each state actor and political group tries to increase its own share of the economy, which is a major impediment to economic efficiency and growth. As Rakel (2008, 64-65) explains, conservatives are strongly interlinked with the traditional sectors of the economy (such as the bazaaris), religious foundations, and furthermore use official state tools (taxes, state enterprises) for revenue, while pragmatists and reformists rely solely on the latter. In the past this has formed the basis for fierce debate and rivalry between Iran’s factions on economic ideology, yet as Maloney (2015, 500) explains, after “Ahmadinejad’s
resulted merely in the replacement of one patronage system “with his own circle of crony capitalists” most of whom had no experience in the oil and gas industry (Maloney 2015, 404), thereby eventually losing crucial support of the Supreme Leader Ali Khamenei.
In 2009, the supreme leader ordered the replacement of the OSF (which was fully depleted by 2012) by the newly created National Development Fund of Iran (NDFI) that was to receive 20% of all oil and gas profits. Additionally, it was determined that 2% of profits would go to impoverished provinces (Heuty 2012, 5). The percentage of funds going to the NDFI has slightly increased in the past years as it currently receives 30% of oil and gas profits (mainly coming from export revenue), whereas 53.5% goes directly towards the state and 14.5% is retained by the NIOC. To this day, the NDFI serves as a quasi-development bank with the goal to use oil and gas profits for productive investment in the private and non-governmental sector and invests billions in both the energy and non-energy sectors. It is headed by a board that has full authority over the allocation of funds and its members are chosen by a Board of Trustees that includes incumbent ministers as well as the president (RWI & VCC 2014, 2). While there is a solid institutional structure surrounding the NDFI, much is unclear about the rules, processes, and strategies of investment and fund withdrawal as these are not made public (Ibid, 7). In addition, while a supervisory board and parliament function as overseers, the IMF has reported that some of the Fund’s activities are excluded from its balance-sheet as to inhibit parliamentary inquiry (IMF in RWI & VCC 2014). Due to lack of transparency in the Iranian political system, it is hard to accurately follow oil and gas revenues. What is clear however, is that Iran’s energy revenues are distributed through a conflation of formal institutions and informal clientelistic networks, thereby fueling rent-seeking behavior and corruption. This sketches a more dismal picture of Iran’s energy sector than the initial revolutionary goals of bringing the country’s oil wealth to the population.25 Yet, as explained in the former section, President Rouhani is taking concrete steps —with support of mismanagement, there is widespread agreement among almost all sectors of the Iranian elite on the basic framework for the economy, including support for previously contentious measures such as privatization and international economic integration.” 25 As mentioned earlier, when oil wealth has been ‘brought to the population’, such as by subsidies and cash programs, this has either led to inefficient use of energy resources, continued protection of inefficient industries, or inflationary pressures by direct injection of money into the economy.
Supreme Leader Khamenei— to improve the situation. Whilst far from perfect, funds from the NDFI are being used for investment projects, signaling a turn towards more sustainable use of the country’s energy wealth, and more importantly, more than half of all oil and gas profits directly flow to the state accounting for roughly half of its total budget, therewith providing the financial means to pursue both domestic and foreign policy objectives. Besides oil prices, energy income obviously depends on production capacity and consumption patterns and these will therefore be shortly analyzed in the next section.
2.3 Oil and Gas Production
As can be seen in figure 1, oil production declined severely after 1979 and still has not caught up with pre-revolutionary levels. Gains in production that had been made since the end of the Iran-Iraq war were disrupted again when tightened international sanctions became effective in 2012, dropping production to nearly 2.5 mb/d at its lowest point in 2014 (see fig. 2) while 1.8 mb/d were consumed domestically, leaving an approximate net export value of only 700 kb/d (EIA 2015a). Production has steadily increased since then and has taken off with the lift of sanctions in January, reaching 3.3 mb/d in March and nearly 3.6 mb/d in April, which is almost as high as in 2011 before European sanctions came into effect (IEA 2016b). This already significantly boosts Iran’s export revenue. The IEA has projected that Iranian oil output will rise to roughly 6 mb/d by 2030 (Iran’s 1974 peak) and 8 mb/d by 2040, thereby becoming the second largest OPEC Figure 1. Iran oil production and consumption 1965–2011.producer under Saudi Arabia (with a projected marginal growth towards 14 mb/d by then under this scenario) (EIA 2013, 31).26 In its 6th Development Plan (2016-2021), the Iranian government has laid out its aims to increase oil production to 4.6 mb/day by 2021, which is roughly in line with the projection of the EIA (MPO 2015). Yet, some predict that Iran’s oil output will already reach 4mb/day by 2017, indicating possibilities for even higher growth rates by the end of 2021.27 More than 12 billion barrels of oil equivalent (BOE) of investment projects have currently been opened and will facilitate Iran’s aims.28 Large investments are also made in Iran’s downstream sector, where the government’s goal is to improve both quality and quantity of products, increasing output from the current 1.8 mb/day to 2.7 mb/day by 2021 (MPO 2015).
Concerning gas, the IRI has steadfastly increased production (mainly coming from Iran’s vast offshore South Pars field that it shares with Qatar in the Persian Gulf), rising from 8.2 billion cubic meters (bcm) in 1979 to 160.7 bcm in 2014 (IEA, 2015b) which amounts to an average annual growth rate of 8.8%.29 However, domestic consumption has risen with roughly the same rate (and is still rising), negating any potential for higher net exports (in 2013 domestic gas consumption in Iran amounted 156.7 bcm) (IEA, 2015b). This has been part of Tehran’s strategy to replace domestic refined petroleum consumption with gas in order to export larger volumes of crude oil and decrease dependence on gasoline imports.
At the same time, Iran sees an important role for itself in becoming a central player in the global gas trade by supplying large parts of Europe and Asia both via pipelines and liquefied natural gas (LNG), tapping into its large reserves and strategic geographic position. Price disputes, turbulent political developments in the region, and the sanctions regime have limited pipeline projects and foreign investments in Iran’s LNG sector in the past (Maloney 2015, 411-420). This is currently changing as various foreign companies are eager to return or become involved in Iran’s gas sector where projects comprising roughly 17 billion BOE have been opened to investment.30 Besides Iran’s huge South and North Pars gas fields, its Tabnak field, and Kangan-Nar field, roughly 60% of Iranian gas reserves have not been developed yet, “indicating great 26 This is a likely although not inevitable projection, and is therefore the main assumption on which this thesis draws. 27 Wood Mackenzie, 2016. 28 Ibid. 29 (((160.7/8.2)^(1/35))-1)*100= 8.872.. 30 Wood Mackenzie, 2016.
potential for future gas development” (ECO 2016, 10). In its 6th Development Plan (2016-2021), Iran aims to more than double gas output to 1.1 bcm/day by 2018, the major part coming from the South Pars field. LNG exports are also to be doubled, to 1mb/d by 2020. If these plans succeed, Iran will indeed become a major gas player in the near future (MPO 2015). Still, this depends largely on Iran’s capacity to curb domestic demand and improve efficiency (roughly 7% of gas production in Iran is wasted through flaring, see also fig. 3). In addition, a significant part of total gas production (i.e. roughly 12%) is used for reinjection in Iran’s oil fields to improve oil recovery rates, and the amount of gas used for this purpose is likely to increase in the coming years as the reserves age and become more depleted (EIA, 2015) (see figure 3, next page). One issue that might limit both investment and export revenue in the short term is the low oil price (currently 50 USD/barrel) as a result of oversupply, which will increase with Iran’s reintegration in the global oil and gas market, thereby further pressurizing the commodity price. However, as Iranian oil is of premium quality and its production costs are among the lowest in the world, this will have less effect on Iran.31 Moreover, oil prices are highly influenced by geo-political and economic factors, have fluctuated throughout history and are not likely to remain low forever. Especially when considering that each year “the world needs 4 million new barrels per day of oil production: 1 million barrels to meet growing demand, and 3 million barrels simply to replace production declines at old, tired oil fields”,32 and indeed growing demand and disruptions in upstream production facilities elsewhere have already driven the crude oil price up from under 30 USD in January to the current height.33
As discussed in this chapter, domestic reform, access to technology, and foreign investment are the key challenges that have faced Iran’s energy sector. The post-JCPOA era heralds a critical point in time in which these challenges can be addressed together and Iran’s energy sector can grow towards its full potential for the first time since the Iranian Revolution in 1979. Improved contractual terms, market reform, and lifted sanctions provide the key ingredients for the realization hereof. The starting point of the subsequent chapters is therefore that the Iranian energy sector will enter —what has elsewhere been termed— a “thunder” 31 ENI, 2015. 32 Keith Johnson in Foreign Policy, 2016. 33 Barani Krishnan & Dmitry Zhdannikov in Reuters, 2016.
Figure 3. Gas production, flaring, and injection in Iran for 2004–2013. Source: (figure derived from EIA 2015a)
scenario of high production and productivity growth, domestic improvements, and increased exports (Abbaszadeh et al. 2013). This will not only touch Iran itself, but also its relation towards the Middle East and the rest of the world, having both direct and indirect implications for (its role in) the region and beyond. The goal here is to analyze and explore these implications. Therefore, in the next chapter three theories are discussed that each provide a different view hereupon.
Chapter 3. Theoretical Framework
In this chapter, three prominent international relations theories are elaborated on: structural realism, liberal institutionalism and critical theory (as developed by Robert W. Cox). As shown, each theory provides a specific set of assumptions and variables with which to analyze Iran’s regional behavior where energy growth leads to different outcomes. Structural realism and liberal institutionalism draw on rational choice models whereas critical theory challenges this approach by providing an alternative analytical framework that draws on a socio-historical model. Why these theories? First, both structural realism and liberal institutionalism aim not only to explain, but also —as they are rational theories— to predict, and this is useful when one wants to gain insight into possible future implications. Moreover, both theories stress different andimportant aspects of Iranian foreign policy and state behavior that are linked with Iran’s energy sector. Whereas structural (or neo)realism emphasizes the importance of security issues, military power and survival, liberal institutionalism stresses the gains that can be obtained from international cooperation. Although it has its limits, the neorealist account of politics in the Middle East and Iran’s involvement herein makes a strong case, not the least because of the presence of oil, conflict and a substantial level of continuous threat in the region (Hinnebusch 2002, 1; Landau 2012). On the other hand, liberal institutionalist theory has more to say about the ability of Iran to overcome collective action problems and live up to its economic potential, which has been a long-term objective of the Iranian government and has indeed been one of the prime reasons to reach a nuclear deal.
At last, critical theory relativizes the former two theories by drawing on a historicist epistemology and analyzes the potential for change on both the state and the system level. It draws attention to the power constellation of social forces that underlie Iran’s domestic and foreign behavior and stresses the importance of ideational besides material factors. It is with critical theory that the dynamic relations between state, society and the international system are explored in more detail and Iran’s dominant perception of (its role in) international politics becomes clear. As explained in chapter two, Iran’s energy sector is tightly linked with government action and policy. The theories chosen here thereby each give a unique view about Iran’s role in the Middle Eastern region and the possible implications of its reintegration in the global oil and gas market, emphasizing conflict and security, interdependency and cooperation, and structural change and counter-hegemony, respectively.34 The first section outlines structural realism and its critique, the second section elaborates on liberal institutionalism and general critique. The third section outlines neo-Gramscian critical theory in more detail, as well as its general critique. At last, in the fourth section the variables and assumptions of each theory are extracted.
34 In this thesis a broad definition of the geographical extent of the Middle East is taken, including the following countries that border Iran: Turkey, Afghanistan, Pakistan.
3.1 Structural Realism
Since their inception realist theories have sought to explain how and why states behave in the international system, focusing on power, anarchy, survival and the potential of conflict. In response to the idealistic paradigm that was dominant during the interwar period and that failed to explain aggressive state behavior, scholars such as Edward H. Carr [1939] (2001) and Hans J. Morgenthau [1948] (2005) came with alternative positivist theories that are currently referred to as ‘classical realism’ (Waltz 1979). 35;36 Realist theories start from the ontological premise that from a rational point of view, the world is imperfect. Classical realists ascribe this imperfectness to human nature and argue that statesmen are inherently power-seeking (Morgenthau [1948] 2005, chap.1). While assumptions are made on the individual level, the state is the main unit level of analysis; it is composed of power-seeking agents. With power as the explanatory variable and the focus on the individual and the state, classical realists were successful in explaining politics during the interwar period, such as the rise of Nazi Germany.37 Yet, their strong assumptions and focus on human nature provided more grounds to explain domestic rather than international state behavior and this became mostly clear in their failure to account for the relative stability in the bipolar world order that emerged as the Cold War succeeded WWII.
In his Theory of International Politics, Kenneth N. Waltz criticized theories that solely focus on the individual and unit-level to explain international phenomena (he termed these ‘reductionist theories’) on grounds that they leave too much variation in possible causes to explain single and recurrent outcomes (e.g. war) (Waltz 1979, 67-68). He therefore developed a realist theory that 35 The idealistic paradigm was largely influenced by the Wilsonian worldview, which translated into what Ikenberry (2009, 73-76) terms ‘Liberal International Order 1.0’. This order was based on liberal ideas and principles, but provided few constraints for states to act against these principles. Collective security and free trade (its domain) were aspired to be organized by rule of law and multilateral norms without sufficiently obliging security commitments and norms of compliance. In Ikenberry’s (2009, 75) words: “a thin set of institutional commitments. . . . [Were] built on the assumption that a thick set of norms and pressures . . . would activate sanctions and enforce territorial peace.” Underlying this order was the idealistic thought that morality and common moral values would bring security and prosperity. In response, realism stressed the importance of rationality and power in international relations. 36 The roots of classical realism can be traced back to Thucydides and later Machiavelli and Hobbes. 37 Morgenthau [1948] (2005, chap. 1) broadly defines power as “anything that establishes and maintains the control of man over man. . . [and] covers all social relationships that serve that end, from physical violence to the most subtle psychological ties by which one mind controls another.”
focuses on systemic causes to explain stability and conflict in the international system.38 However, Waltz (1979, 68) acknowledged that not all outcomes can be justified by systemic factors alone and argued that causes at both the unit and system level interact where the latter act as constraints on the former. The system is composed of a structure and it is this structure that Waltz used to explain stability and conflict in the post-WWII order. His theory has therefore been termed as ‘structural realism’ (or neorealism). Contrary to classical realism, structural realism does not presume that states seek power due to the individual nature of statesmen, but stipulate that its causes lie at the system level. In other words, neorealism narrows down the role of agency in IR while emphasizing the role of structure by adding the system level to the analysis (which constrains state action), and this has been its major contribution to IR theory as it enabled scholars to explain international phenomena by a relatively simple set of assumptions and variables that are grounded in social theory. As explained in the next subsection, this has also been the main ground for criticism and debate on the role of agent and structure in international relations theory.
What is this system’s structure made of? Waltz (1979, 82) discerned between three components: the ordering principle, the specification of differentiated units, and the distribution of capabilities. For structural realists there is no supranational authority that can subordinate states to its will and punish those who do not obey; states are equal and none is entitled to either lead or comply. Therefore, the principle that orders the international structure is —contrary to domestic structure— anarchy (and decentralization) (Ibid, 88).
States are the main units in neorealist theory and their interactions are part of the international structure (hence reflecting an individualist ontology). This does not imply that non-state actors do not exist or are not relevant in neorealism, it does imply that states are seen as the most important actors in the system on which analysis is based (Waltz 1979, 94). In this regard, a non-state organization such as Hezbollah is less seen as an independent actor than as an extension of Iranian state power and interest. This empirical implication is less far from reality
38 Conflict is defined here as hostile interactions between governments of different units (i.e. states) as a result of one or more
than one would expect considering the oversimplification of focusing solely on states in the international system.39 States are seen as sovereign entities that face similar tasks and functions but may differ in form and capacity (Waltz 1979, 96). Consequently, what distinguishes states in a structural perspective is how they stand in relation to each other and this is determined by the distribution of power, i.e. the distribution of capabilities among the units of the system (which are analyzed for the Middle Eastern region in chapter 5.1) (Ibid, 97).40 Mearsheimer (2006, 72–3) discerns two forms of power and the focus herein lies on material factors that can be measured, as quintessential for a positivist approach. The first form is (direct) power and is indicated by the actual amount of military assets a state disposes of (e.g. armored vehicles, fighter jets, nuclear warheads, troops); the second form is latent power measured by the socio-economic resources of a country that are needed to compete with other states and with which military capacity can be built (such as size of population, wealth, technological capability, etc.).41 For neorealists, energy production and the availability of energy resources comprise some of the most vital latent capabilities as they not only drive economic development, but also enable industrial production, including military assets. Energy growth can thereby fuel both latent and direct power, and it is the growth in power that is the main objective of states in the neorealist world. 39 Due to longtime support, Iran has been able to shape Hezbollah’s development and has used it for foreign policy purposes, using the organization for proxy attacks to enlarge its range of targets such as the 1983 attack on American and French soldiers during Lebanon’s Civil War, which left approximately 300 soldiers dead and resulted in the withdrawal of the Multinational Force Lebanon. Iran directly commanded Hezbollah to carry out this attack in their support of the Syrian regime, which had been a crucial ally for Iran. In other instances, Iran was able to constrain Hezbollah when the latter acted in such a way that Iranian interests in the region could be harmed (Devore 2012). This indicates that although Hezbollah had some degree of independence (contrary to realist theory), in the end Iran was able to use the organization as an extension of Iranian state power in line with its state interests. A recent example would be Hezbollah’s instrumental role in Iran’s efforts to keep Assad in power in the Syrian Civil War. 40 The distribution of power determines the polarity of the system and it is the shift from a multipolar towards a bipolar system that Waltz used to explain the enduring stability between great powers in the post-World War II order during the Cold War, as leaders of a bloc in a bipolar system rely more on their own power for security and less on alliances to pursue strategic goals (Waltz 1979, 168-170). Neorealists differ in their views on what configurations of power in the international system are more or less likely to cause major war (see for instance Copeland’s dynamic differential theory on page 25). Moreover, where Waltz initially solely explained international stability by the polarity of the system, its critics argued that military technology, i.e. the nuclear revolution of international politics, has played a crucial role in the post-WWII peace as both the Soviet Union and the United States possessed second-strike capabilities that acted as constraints against major war by increasing the potential cost-benefit ratio on both sides should war occur (Powell 1994, 332-3). Indeed, in a later essay Waltz (1988, 625) argued that “nuclear weapons reverse or negate many of the conventional causes of war” and “dramatically increase the difficulty” for war to occur. 41 Although realists agree in general that power is primarily defined by military capacity and its required resources, they may differentiate between and focus on different aspects of (military) power (such as offensive and defensive capability). In this thesis, Mearsheimer’s definition of power is used.
