The Road to Tehran Runs Through Oslo

The United States could more successfully steer Iran’s behavior in a cooperative direction if both countries agreed to move their battleground away from the flow of Iran’s oil to the global markets. There is a way to do this.

Norway’s successful experience in translating its natural oil wealth into high standards of living for its people by means of a sovereign wealth fund, which shields politics against the corrupting effects of state control over concentrated oil income and protects the economy against the “Dutch disease”—the appreciation of the national currency to the detriment of domestic production of tradable goods in nonenergy sectors—is viewed with envy by Iranians across the political spectrum.

Oman has had friendly relations with Iran, both before and after the Islamic revolution, and has mediated on multiple occasions between Iran and the United States. Given Iran’s military superiority, neighboring Oman could never afford to betray Iran’s trust with its national wealth.

If Washington wishes to defuse the current standoff, the United States could request that Oman and Norway play the role of independent third and fourth parties in a negotiated agreement with Iran. Iran would be invited to negotiate the replacement of U.S. oil sanctions with equivalent constraints on the allocation of income from oil exports—both crude oil and natural gas—for domestic expenditure.

A national Iranian oil fund could be established as the sole point of sale of Iranian oil for export markets. The oil fund could then be incorporated as a blind trust in Switzerland, with Iran being the beneficiary and Oman being the trustee. The management of the oil fund would be shared by Oman and Norway. Oman would take charge of brokering the sale of Iranian oil to the highest bidder, while Norway would put its global sovereign wealth fund in charge of investing Iran’s surplus oil income in international capital markets. The operational cost would be covered by Iran’s oil income according to a schedule, mutually set by Iran, Oman, and Norway.

The United States could then lift its sanctions against investment in Iran’s energy sector and issue a general license, exempting the sale of Iranian oil via the oil fund from its new sanctions. The United States and Iran could negotiate a repatriation cap as the amount of income from oil exports that Oman would return to Iran on a regular basis, sending the remainder to the oil fund’s account with the Norwegian sovereign wealth fund.

Washington and Tehran could further agree to engage in future bilateral negotiations to trade increases of the repatriation cap as well as the removal of the rest of U.S. sanctions for behavioral changes by Iran. As a designated terrorist organization, the Islamic Revolutionary Guard Corps (IRGC) would continue to be subject to U.S. sanctions. The agreement would further require Iran to end commercial activities of the IRGC in the oil business before the implementation of the agreement.

Iran would accept the authority of a Norwegian court to enforce a system of financial penalties, payable from the reserves of the oil fund to the United States, against any Iranian violation of the agreement. The United States and Norway would give Iran the guarantee that the reserves of the oil fund would be entirely immune against seizure for any reasons other than Iran’s violation of the agreement.

To further assure Iran, the agreement would give Oman the power and the responsibility to terminate the oil fund’s contract with the Norwegian sovereign wealth fund and return all sale proceeds to Iran if the Norwegian court failed to secure that guarantee. Iran would have the freedom to transform the oil fund from a blind trust into an independent fund under its sovereign control if and when the U.S.-Iranian dispute is resolved with a grand bargain.

The state-owned National Iranian Oil Company and its sister companies earn income both from the external and internal sale of oil. The income is then divided into two parts. One part is kept by the oil company to finance the maintenance and upgrade of existing oil wells and the exploration and development of new oil fields. The other part is paid to the treasury both as royalty and taxes.

Freeing Iran’s oil industry from sanctions would increase the oil income from internal sales. That increase would be offset by the repatriation cap, restricting Iran’s access to the oil income from external sales. Thus, the total oil income available for public spending and reinvesting in the oil business would remain at the pre-oil fund level.

The repatriation cap would offer the opportunity of trading a short-term relief for a long-term constraint. It would be negotiated by a team of U.S. and Iranian economists. How low it could be negotiated down would be a function of how much the new sanctions against oil sales, which will go into force in early November, actually cut Iran’s oil exports.

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Iran’s biggest vulnerability is not its high unemployment rate, which is an economic problem as old as the Islamic Republic. It is the rapidly rising fiscal deficit of Iran’s social insurance programs that constitutes the biggest risk to the country. In recent years, Iran’s industry pension funds have been going bankrupt one after another, forcing the government to pick up their bills.

According to estimates by the Iranian parliament, in about 10 years the wave of bankruptcy will likely reach the Social Security Organization, Iran’s largest social insurance program that covers 52 percent of the population. Coincidentally, that is about when the key restrictions on Iran’s nuclear program under the 2015 deal begin to expire.

In this situation, the renegotiability of the repatriation cap for behavioral changes would enable current and future U.S. administrations to harness Iranian self-interest to achieve U.S. policy objectives. The day after the oil fund agreement is signed, the United States could begin making public offers to Iran to trade, for example, a 5 percent increase of the repatriation cap for the extended freeze of Iran’s nuclear program for another five years or the freeze of Iran’s ballistic missile program for three years or any other demands.

The Iranian people, as beneficiaries of insolvent social insurance programs, would pressure their rulers to meet U.S. demands to ensure their livelihoods. As that pressure builds up, at some point, the Iranian leadership could no longer afford the political risk of ignoring and rejecting such offers.

The current strategy of maximum economic pressure may or may not produce an Iranian capitulation or implosion. But it is an absolute certainty that Iran has a rising fiscal gap and that people respond to incentives. A partial deviation from the current strategy, limited to the energy sector, to allow for the parallel execution of the strategy of maximum fiscal enticement would be a significant net gain, as it would enable the United States to make the most of Iran’s fiscal vulnerability and constantly induce it to change its behavior in favorable ways.

U.S. Secretary of State Mike Pompeo has stressed that the Trump administration is after behavioral change in Iran, rather than regime change. The administration recognizes the tension that exists between these two policy objectives and gives priority to the former over the latter. However, at the same time, the administration recognizes that pressuring Iran might produce implosion before it produces capitulation and takes the position that the U.S. policy for Iran should not be blind to the likelihood of such an outcome. The view is that given the possibility of political change from within, the United States need not and should not rule out “supporting Iranian voices” while seeking to contain Iran’s threats to the outside world.

The proposed oil fund agreement would be absolutely silent on which policy objectives Washington should aim to achieve. It would just add a flexible tool—the renegotiable repatriation cap—to the U.S. policy toolbox, which would allow the United States to offer sanctions relief of any size with strings attached of any sort. It would be the prerogative of current and future U.S. administrations to set their priorities and choose their degree of toughness on Iran.

They could use the new tool to extract concessions on Iran’s nuclear and missile programs while turning a blind eye on what is happening inside Iran, or if they thought it would advance U.S. national interests by accelerating the process of political change in Iran, they could use the power of the new tool to demand the respect of human rights for the Iranian people.

Moreover, the oil fund would not constitute an abandonment of sovereignty by Iran. By accepting the oil fund agreement, Iran would not be transferring its ownership claims over the oil wealth to Oman or Norway. Oman and Norway together would only act as a provisional custodian for Iran’s national wealth while Iran would be exercising its sovereign rights over the development and the operation of oil.

Oil sanctions are now constraining Iran’s power to benefit from its oil wealth. The oil fund agreement would just give Iran the choice to replace that constraint with a negotiable repatriation cap. Since the new constraint would be set with Iran’s consent, it could not possibly be more restrictive than sanctions in the long run.

The balance of the oil fund would represent the oil wealth that otherwise, due to sanctions-induced shortage of investment or demand, would have remained in its natural form deep underground or would have been extracted from shared oil fields by Iran’s neighbors. Even if the oil fund agreement didn’t entail the creation of hundreds of thousands of new jobs in the energy sector, ending the nonstop loss of potential wealth from shared oil fields would suffice to justify the agreement for Iran.

The rationale for establishing the oil fund as a blind trust, until the U.S.-Iranian dispute is resolved, is that if Iran were given control of the fund, then it would have new leverage on the international stage to buy influence with investment money—something it would not have with the oil that otherwise under sanctions could not be extracted and sold.

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The biggest merit of the oil fund agreement would be a permanent change in the dynamic of the U.S.-Iranian relationship. Right now, the United States does not have any effective leverage over Iran, and that’s why it finds changing Iran’s behavior a hopeless endeavor. It is this hopelessness that causes the current overuse of sanctions and the recurring talk of regime change.

But if Iran accepted the deal, then Americans would have good reasons to trust their ability to influence Iran’s behavior through engagement. More opportunities to trade behavioral change for sanctions relief would hardly be a bad thing for Iran. The country’s leaders would likely end up making choices that are presently unthinkable, but any concession they make would be in return for something they value more.

With engagement becoming rewarding for both sides, the marginal benefit of seeking nuclear bombs and long-range ballistic missiles as deterrence against a U.S. invasion would decline and so would the marginal benefit of keeping the rest of U.S. sanctions. As a result, the grand bargain offered by Pompeo after the U.S. withdrawal from the nuclear deal—consisting of behavioral changes by Iran on 12 matters of U.S. concern for the full normalization of diplomatic and economic relations—would increasingly become a possibility, rather than remaining a mere aspiration. With the oil fund agreement, the Islamic Republic could potentially create a less belligerent version of itself that is ever amenable to compromise but is better fit to survive.

The oil fund agreement would be exceptionally enforceable. Any potential violation by Iran could be deterred by prohibitively high penalties, administered by a Norwegian court. To enforce the repatriation cap, Iran would be prohibited from selling its oil outside the oil fund mechanism or levying special taxes on oil companies. Heavy penalties payable from the reserves of the oil fund to the United States—let’s say, in the amount of five times the value of violation—could easily enforce the repatriation cap.

Since the agreement would decouple Iran’s oil exports from the repatriation of its proceeds, Iran would be tempted to manipulate the flow of its oil to the global markets and cause fluctuations in oil prices. But there would be an easy fix. The agreement could include a provision that regulates the weekly or monthly rate of change in the volume of Iran’s oil export within Iran’s OPEC obligations. Prohibitively high penalties for any violation of that requirement could deter such abusive behavior by Iran.

Iran’s offers of discounted oil to its few allies need not conflict with the oil fund. Iran could be given a limited value of discount coupons, which it could then give away to whomever it wishes. Also, it might be cheaper for Iran to finance the development of new oil fields with newly generated oil income. The National Iranian Oil Company could be permitted to borrow money from the oil fund at a certain rate, provided any positive effects on Iran’s treasury were taken out by setting the repatriation cap at a lower level.

Requiring Iran to end the IRGC’s commercial activities in the oil business would be the agreement’s biggest obstacle. But apparently that is what Iran’s supreme leader, Ayatollah Ali Khamenei, wants. This year, the country’s defense minister announced that the armed forces had been instructed by Khamenei—also Iran’s commander in chief—to start the process of divesting from the economy and selling commercial holdings “irrelevant” to their main function.

The IRGC was allowed to conduct commercial activities after the end of Iran-Iraq War in 1988 to help with reconstruction; today, it controls almost 15 percent of the economy. There is now a consensus among Iran’s political elite, seemingly including the supreme leader, that allowing the IRGC military-commercial complex has been a grave policy mistake. This also entails a risk to Iran’s clergy. In Iran, the clergy and the IRGC have a symbiotic relationship while being competitors at the same time. The IRGC’s independent power base in the economy has caused an imbalance in that relationship, jeopardizing the long-term position of the clergy, headed by the supreme leader. Therefore, requiring an end to the IRGC’s involvement in the oil business might not be an insurmountable political obstacle.

Under the oil fund agreement, foreign investment in any oil project with the IRGC’s involvement would be subject to U.S. sanctions, as it is now. The authority of the Norwegian court to administer penalties could also be used to enforce Iran’s requirement to keep the IRGC out of the oil business.

There would be some other welcome side effects of such an agreement. First and foremost, sanctions-free access to the fourth-largest proved reserves of crude oil and the second-largest proved reserves of natural gas would benefit the global economy. New opportunities to make lucrative deals to develop Iran’s oil fields after almost four decades would benefit U.S. oil companies. The possible extension of Iran’s gas pipeline to Turkey into Europe would be a strategic advantage for the West, as it would significantly reduce Europe’s reliance on Russia for its energy needs. And finally, the trans-Atlantic rift over the U.S. withdrawal from the Iran deal would greatly improve.

If the United States makes this offer to Iran, it would become the subject of discussion in almost every Iranian household overnight. Iranian citizens by and large would view the offer as an opportunity to open a way out of their desperate situation. They would likely form opinions about it based on its effects on their livelihood, rather than on an absolutist notion of national sovereignty.

Oman and Norway would probably be seen as two friendly countries seeking to help Iran reintegrate into the world, not as two countries that conspired with the United States to steal Iran’s oil wealth. As U.S. pressure intensifies even more after November, calls for accepting the offer would become louder and louder. At some point, the Iranian leadership might decide to accept it.