-  By Simon Watkins

• * The U.S. is using a "carrot and stick" approach to deter Iran from escalating attacks on Israel.
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• * Economic pressure on Iran, including its growing budget deficit and the decline of oil revenues, limits the country's ability to fund proxies like Hezbollah and Hamas.
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• * Diplomatic signals from Iran, particularly after the election of a more moderate president, suggest potential willingness to negotiate a new version of the JCPOA.

From the moment that Iranian proxy terrorist organisation Hamas launched multiple coordinated attacks on Israel on 7 October last year, the primary fear of further escalation in the region has centred on how Iran might escalate the ongoing Israel-Hamas War. On 13 April, Iran directly attacked Israel from its own territory for the first time in a series of missile and drone launches following the Israeli bombing of the Iranian embassy in Syria. Israel’s Iron Dome aerial defence system destroyed 99 percent of the weapons. However, no further major direct attacks from Iran against Israeli territory have followed, after later – and arguably much more serious – operations by Israel on Iran. A rocket strike on a playing field in the Israeli-occupied Golan Heights on 27 July killed 12 children and young adults, but this came from the Iranian-backed Lebanese terrorist organization Hezbollah. It was Hezbollah again – not Iran directly – that fired over 320 rockets into Israel on 25 August following Israeli operations against Hamas and Hezbollah on 30 July and 31 July. And it was Hezbollah one more that launched rocket and missile attacks on Israel over the weekend. So why has Iran so far refrained from further major direct attacks on the same scale against Israel?

One of the two main reasons for this – the ‘stick’ in this ‘carrot and stick’ approach by the U.S., Israel, and Western allies – is the threat of overwhelming military action against Iran, of course. The U.S. has made it very clear to Tehran that any major attack on Israel directly by Iran could lead to a huge conventional weapons retaliation against key military targets across the country, followed by a widening out of the target profile if deemed appropriate at the time. This is precisely the same warning issued to Russia in its actions in Ukraine by the U.S. that has also proven equally effective in preventing the initially-considered use by Moscow of tactical (‘battlefield’) nuclear weapons in Ukraine in the event that local battles in certain areas had reached a standstill. As former CIA director and retired four-star army general David Petraeus put it: “We would respond by leading a NATO – a collective – effort that would take out every Russian conventional force that we can see and identify on the battlefield in Ukraine and also in Crimea and every ship in the Black Sea.” The scale of retaliation against Iran would start at a much lower level than this, given that it would not involve the detonation of a nuclear device against an ally, a senior figure in the European Union’s (E.U.) security complex exclusively told OilPrice.com last week. “However, the capability is there, and the resolve to use it if required, and Iran knows it,” he added.

Related: Oil Steadies Amid Israeli Bombardment of Southern Lebanon

The other main reason for Iran’s avoidance so far of any major direct attack on Israel is the ‘carrot’ of a new iteration of the 2015 Joint Comprehensive Plan of Action (JCPOA, or colloquially ‘the nuclear deal’). “Iran has a growing budget deficit, runaway inflation, and a depreciating currency, and it’s only thanks to its oil and gas exports that it’s kept functioning economically, and therefore politically, at all,” said the E.U. source last week. However, with oil prices still looking soft, even this economic lifeline is looking increasingly frayed, which raises specific difficulties for the Islamic Revolutionary Guard Corps (IRGC), he added. “As the economy keeps shrinking, the IRGC’s funding falls, and that means a reduction in its ability to do all the tasks it’s required to do,” he said. “One of these is to spread Iran’s vision of Islam across the globe, which it does in part through proxies, who it needs to pay, and the other is to undermine the enemies of Iran, which it does through other proxies, who it also needs to pay, and they only take [U.S.] dollars and gold,” he told OilPrice.com.

A signal that Iran is prepared to discuss a new version of the JCPOA came with the election on 5 July of Iranian President, Masoud Pezeshkian, following the death in a helicopter crash of his predecessor Ebrahim Raisi on 19 May. He is widely seen in the West as a ‘moderate’ in the same mould as former President Hassan Rouhani, under whose leadership the JCPOA as forged and then implemented, before the U.S. unilaterally withdrew from it in May 2018. That said, Rouhani was not a moderate in the truest sense of the word, as detailed in my latest book on the new global oil market order. Certainly, he was keen to re-engage with the West, but this was founded on economic and financial considerations for Iran and not on some deeper ideological basis that might have included embracing anything other than the notion of Iran as a true Islamic state. In this sense, there was no difference in Rouhani and his group of supporters to the more overtly Islamic elements in Iran’s political and religious architecture, including the IRGC, who are commonly referred to as ‘hardliners’. All these groups – political, religious and military – are firmly rooted in and supportive of the Islamic and revolutionary ideals that were the foundation stone for the creation of the Islamic Republic of Iran in 1979. The only difference between them was the nature of their engagement with the West, which itself is a function of how willing any of these groups are to ‘play the game’ with the U.S. and its core allies.

However, truly moderate or not, the new Iranian president may well be given indications that a route is open for his team to engineer a new version of the JCPOA for Iran with the West, according to the E.U. source. “Holding this up as a possibility for Iran has been done before at key moments in politics or in the energy markets when Tehran’s compliance in some matter was needed, only for it to fall foul of the same thing,” he said, “and that’s the FATF.” The Financial Action Task Force (FATF) comprises 40 active criteria and mechanisms in place to prevent money laundering -- an activity vital to the IRGC’s activities across the world, as also analysed in my latest book on the new global oil market order. The FATF also has nine criteria and mechanisms in place to do the same for the financing of terrorism and related activities -- again, a core of the IRGC’s role in promoting Iran’s brand of Islam around the globe. The FATF additionally has swingeing powers to wield against individuals, companies, or countries who transgress any of its standards and is extremely aggressive in using them by degrees, depending on whether the sanctioned entity is on its ‘grey’ or ‘black’ list. In sum, depending on whether the U.S. wants Iran’s compliance in some matter or another at any given time, it will either waive aside the centrality of Iran meeting the key parts of the FATF or rigorously insist that they all be met in full. As was seen in Rouhani’s presidency, the FATF is a no-lose tool from the U.S.’s perspective: either progress was made by Rouhani’s government on moving towards eventual FATF membership (which were aimed at the gradual destruction of the broader power of the IRGC), or the sanctions reduction elements of the JCPOA would be frozen and perhaps reversed (which were aimed at the gradual destruction of Iran’s economy).

The balancing act on the U.S. side has become more delicate in recent weeks, with strong suspicions that Iran has been receiving wide-ranging assistance in its ongoing nuclear weapons development programme from Russia, in exchange for missiles and drones from Tehran for Moscow’s use in the Ukraine War. The United Kingdom, France and Germany jointly warned two weeks ago that Iran’s stockpile of highly enriched uranium had grown significantly to a point where it had accumulated enough to make four nuclear devices. During an even more recent visit to London, U.S.  Secretary of State Antony Blinken said that U.S. intelligence had concluded that the first batch of high-speed Iranian Fath-360 ballistic missiles -- with a range of up to 75 miles – have now been delivered to Russia.

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Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for Credit Lyonnais, and later Director of Forex at Bank of Montreal. He was then Head of Weekly Publications and Chief Writer for Business Monitor International, Head of Fuel Oil Products for Platts, and Global Managing Editor of Research for Renaissance Capital in Moscow.