Iran: Sanctions, Coups, and Revolutions

Let's start with a known name, Winston Churchill.

Churchill is remembered by most as England's World War II prime minister, but there is much else to remember about him. At the time he was rallying his countrymen to oppose the Nazis, he was already in his sixties. Three decades earlier, in 1911, before World War I, he was First Lord of the Admiralty, with responsibility for the Royal Navy. Being more a visionary than a functionary, he set out to bring the Royal Navy's aging fleet into the twentieth century.

The Royal Navy still dominated the oceans of the world, but it was in danger of falling behind the Americans and, more ominously, the Germans. To keep up, Britain needed ships with the efficiencies that oil had made possible.

Most ships of the Royal Navy still burned coal, which Britain had in abundance but which was not nearly as well suited for warships as oil was proving to be. A pound or a cubic foot of the new stuff, oil, yielded far more energy, more go-power, than the same amount of coal. Oil burned without need for heavy, space-eating furnaces and required less shipboard manpower for handling. The economies of space and weight for carrying the fuel, for burning the fuel, and for feeding and berthing fuel handlers made oil essential for ships that could win wars.

Building oil-fueled naval ships would be expensive but in no way difficult for Britain. The difficulty was the oil: The British Isles didn't have any. So securing a reliable supply of oil became a matter of paramount importance to Churchill.

He also considered how technology would change ground warfare. It was still the business of armies to establish lines, dig trenches, lay barbed wire, and mass troops to attack an enemy that was doing the same things with trenches, wire, and troops. Churchill saw beyond that. He encouraged the development of armed, armored vehicles powered by internal combustion engines, vehicles that could push through barbed wire, roll over trenches, and annihilate enemy troops. Tanks (as they came to be called from British disinformation that they were water carriers) would need still more oil.

But where to get it?

The Americans were in their first oil rushes in Texas and California. That was one possible source, but American oil was an ocean away. Russia? It was a big producer but was also a rival empire, and its output was controlled by the Rothschilds, who couldn't be relied upon.

The ambitions of a Briton, William K. D'Arcy, found what Churchill was looking for. In 1900 D'Arcy, whose interest had been attracted by Persia's natural oil seeps, paid the ruler, Mozaffar al-Din Shah Qajar, -£20,000 for a 60-year concession to explore for oil in an area of 480,000 square miles, which was the entire country save for five provinces in the north. The Persian government reserved a royalty of 16 percent of the oil company's profit.

After exhausting his personal fortune in exploring the area, D'Arcy farmed out most of the concession to Burmah Oil, which spent another ^500,000 on exploration. In 1908, on the last hole their budget could cover, Burmah drilled into a major oil reserve. The following year, to exploit the mammoth opportunity the well had proven, Burmah Oil formed a subsidiary, Anglo-Persian Oil Company (APOC), which would later become the British supermajor BP.

Developing an oil field takes capital, especially in a land short on modern infrastructure. So APOC needed to raise money. In May 1914, at Churchill's urging, the British government provided the money in exchange for 51 percent of the company and the right to appoint directors to the board who would have controlling authority on any question relating to the British national interest. Additionally, the Royal Navy was guaranteed a 30-year oil supply at a fixed price.

It was a brilliant bit of maneuvering by Churchill. Britain had beaten the Germans to the first great Middle Eastern oil reservoir, and they would draw on it to win the war that started three months later.

After World War I, Reza Khan, an officer in the Persian Cossack Brigade, made himself indispensable to the shah by suppressing rebellions, establishing order, and driving out British and Soviet occupations. He became the most powerful man in the country. In 1925, he deposed Ahmad Shah Qajar and installed a compliant Majles (parliament) that declared him the head of a constitutional monarchy. Reza Khan, who had adopted the surname Pahlavi, became the new shah. The Pahlavi family would rule Persia—in 1935 renamed the Imperial State of Iran— for the next 54 years.

Reza Shah intended to be a modernizer. He planned to develop highways, railways, and a national public education system—everything needed to support large-scale industry. He would reform the judiciary and introduce European medical care. And to do all that, he needed a strong, centralized government with educated personnel. So he sent hundreds of Iranians, including his son, to Europe for schooling.

His project was costly. Reza Khan recognized that only oil revenue would carry Iran into the modern world, and that without it just keeping his personal power would be difficult. But under the D'Arcy deal, most of the enormous oil profits were going to foreigners. The shah wanted a new agreement, but the British, understandably, were in no hurry.

Reza Khan was running short of cash. By 1931, price inflation in Iran's local currency (the rial) was topping 45 percent. The government needed £5,000,000 to complete the railway, hospitals, and schools APOC had promised but had failed to deliver. And, of course, Reza Khan needed money to maintain the loyalty of his army.

So he threatened to terminate the original concession unless APOC (1) gave the Iranian government a 25 percent share of the company, (2) paid a production royalty, and (3) relinquished more than half of the concession's original territory.

APOC refused. The shah then made good on this threat to cancel the concession, but it wasn't the end of the matter; it was a negotiating tactic. The shah was more than willing to grant a new concession to APOC, and APOC wanted to stay in the game. They needed each other.

In mid-1933, the two parties agreed to a new, 60-year concession. From the shah's point of view, the terms were much improved. APOC would give the government:

• An immediate payment of ¿1,000,000

• A 20 percent share of the company

• An oil production royalty, in gold, of four cents per ton

• A tax of 4 percent on net profits from operations in Iran, subject to an annual minimum of ^750,000

In addition, APOC would:

• Accept government-appointed corporate directors

• Subsidize petroleum products for local consumption

• Give up parts of the original concession area

• Give up the exclusive right to transport oil in Iran

The new deal made room for Iran to invite other companies to help develop the country's oil resources, which could mean more revenue and certainly meant an end to dependence on APOC. But whom to invite?

The Soviets offered to jump in, but Reza Khan didn't trust them. The Germans were eager to get their foot in the door, and politically they would be a counterbalance to the British. They had the technology and the money, and they were open to a 50-50 deal.

In 1935, though, he chose the Americans. The United States was a rising power, and the shah saw it as a better political proposition than the country that had just lost World War I. Hedging a little, however, the shah allowed German petroleum technicians to stay.

U.S. oil companies, including Standard Oil of New Jersey (later Exxon) and Standard Oil of California (later Chevron), were itching to get into Iran. They wanted the newly opened lands, and they planned to build pipelines to ports on the Gulf of Oman and the Persian Gulf, which would cut out the Germans and the Russians.

With all the aggressive jockeying for position within their country, Iranians built up a lot of resentment toward Britain and the United States. Nearly all the high-paying jobs went to foreigners, and almost none of the benefits the shah had led the public to expect from the oil industry materialized. With the shah's blessing, Iranian politicians stoked the resentment, painting the foreigners as thieves stealing from the people by paying so little for the oil, and as fraudsters who promised hospitals and schools they never built. But at bottom, the government was desperate for the money foreigners could deliver.

In 1939, just before the start of World War II, the British government agreed to lend the then-needy shah -£5,000,000, to be repaid out of future oil production.

The British government also had declared an exchange rate for gold different from the rate in the free market. Thus the promised "four cents" in gold per ton of oil production resulted in less gold for the Iranian government.

Reza Khan could see that he was being shortchanged by the British. So he rejected the British loan offer and canceled the concessions from which the Anglo-Iranian Oil Company (AIOC, the successor to APOC) derived its oil.

It was a bold move, and a shrewd one, because Germany was preparing for another war. More accommodation from the British was coming. Winston Churchill regarded Iranian oil as essential in any conflict with the Germans. So in October 1939, a month into World War II, Churchill began advocating a policy of giving the shah whatever he wanted.

As the war heated up, though, problems developed. Even though Britain kept agreeing to the increasing royalties the shah was demanding, the British government had doubts that the shah would deliver the oil Britain was bargaining for. In addition, Britain and its new ally, the USSR, wanted to use the just-opened Trans-Iranian Railway to move supplies from the Persian Gulf to the Soviet Union and the Eastern front, a proposal that the shah resisted.

Reza Khan was sympathetic to the Nazis, and at the outbreak of World War II, he had proclaimed neutrality for Iran. But Britain insisted that the German engineers and technicians who were still there were spies and saboteurs and a threat to British oil facilities. London demanded that Iran send them home, but the shah refused.

In August 1941—citing Reza Khan's refusal to expel German nationals—Britain and the Soviet Union invaded Iran, arrested the shah, and exiled him to South Africa. The following year, the United States sent in a military force, ostensibly to help keep the Trans-Iranian Railway running. Over the next few months, the British, the Soviets, and the Americans took control of the railway and of Iran's oil industry.

In September 1941, Reza Khan's son, Mohammad Reza Pahlavi, was allowed to accede to the throne and appoint a government congenial to the British and the Americans. He was a convenient choice, only 22 years of age, and his attitudes were secular and very pro-Western. Like his father, he planned to use oil revenue to modernize his country.

The new shah's Western leanings disturbed much of the country, especially Iranians averse to modernization. After the war, there were protests against the shah's government, and an anti-Western movement—which among other things advocated nationalizing the oil fields—gained strength.

Meanwhile, neighboring Azerbaijan broke with Iran and became a Soviet republic.

The young shah remained loyal to the British and American governments that had installed him and that he believed would protect him from this new threat on his northwestern border. He resisted all proposals to amend the oil concessions to Iran's advantage. Despite his vow to act as a constitutional monarch deferring to the parliament, through the 1940s he increasingly sought to dominate parliament. He concentrated on reviving the army and ensuring its loyalty to the monarchy.

His primary postwar opponent was the nationalist parliamentarian Mohammad Mosaddegh.

Mosaddegh was the scion of a wealthy family and the first Iranian to obtain a PhD in law from a European university. He imagined Iran as a fully sovereign, modern democracy with control of its own resources, including its vast oil fields, its export facilities, and the giant Abadan refinery. He saw oil revenue as the key to eliminating poverty and restoring the country to greatness. While studying in Paris, he absorbed the French disdain for the British, an attitude that reinforced his differences with the shah.

Mosaddegh became popular with the Iranian people, who saw him as a liberator. In 1951, the parliament chose him to be prime minister. He promptly resigned, complaining that the shah had denied him authority to appoint the minister of war and other senior officials. Public protests followed, and the shah quickly reinstated him to his post, with all the powers he had demanded.

Mosaddegh set about nationalizing the oil industry, to pull Iran free from Britain and the United States. The shah opposed him, fearing that the West would respond with an oil embargo that would leave Iran in economic ruins.

But Mosaddegh pressed on, with the parliament's near-unanimous approval. When the shah tried to replace him, much of the public— seeing the hand of foreigners in their politics—joined in riots. Fearing a mutiny in the lower ranks if he ordered the army to suppress the riots, the shah fled the country, but he had not abandoned his throne nor his confidence that the British and Americans would stand by him to protect their oil interests.

Events proved the shah correct. The British government shut down the Abadan refinery, where all oil from Iran's fields was processed. Concurrently, Britain and the United States began a boycott of Iranian oil and pressed their allies to join. With no buyers, production soon stopped, as did the cash flow.

As if that weren't enough, the British and Americans shut the Strait of Hormuz. That hindered all seagoing trade with Iran. The economy was crippled.

The U.S. government was interested in more than the dollars and cents of the oil. It was the height of the Cold War. Mosaddegh's program of nationalization and interference in markets and his attempt to rule by decree invited the picture of a proto-Communist who might align with the bear. So for political as well as economic reasons, he had to go.

Britain and the United States plotted how to get what they wanted in a country bordering the Soviet Union without starting World War III. They decided on a coup, rather than an invasion. It seemed the best course for several reasons.

First, if the British invaded Iran, the Soviets likely would respond by invading the northern provinces. That could lead to a shooting war in which the Soviets would have a huge logistical advantage. They might push the British and Americans to the south and possibly out of Iran, and that would position the Red Army to directly threaten neighboring Turkey. The Soviets also would gain direct access to the Persian Gulf, something Russians had dreamed of since Peter the Great. From there, the Soviet navy could enter the Indian Ocean.

However, a coup that returned the shah to his throne would be much less of a provocation to the Russians. And a grateful shah could be expected to yield further concessions to American oil companies.

And finally, though the Western powers would deny any involvement in the coup, other Middle Eastern governments would know whodunit. The show of U.S . strength and cunning would help keep those governments oriented toward the West.

Given CIA assurances of his safety, the shah returned to Iran, and the United States set about organizing and funding supposedly spontaneous demonstrations against Mosaddegh. They paid clergy, politicians, army officers, and even street thugs to join in the campaign of protest. Given the hardships brought on by Iran's economic isolation, protests were easily pumped up into riots.

The coup came in August 1953, but despite all the planning, it didn't come smoothly.

The shah dispatched the military to the prime minister's residence to take Mosaddegh into custody. But the Imperial Guard colonel attempting to carry out the arrest was himself arrested by supporters of Mosaddegh. However, the CIA had already hired a string of Tehran mobsters to incite pro-shah riots. Other CIA-franked men were brought into Tehran in buses and trucks and took to the streets. Between 300 and 800 people died in clashes between them and Mosaddegh supporters.

A pro-shah mob paid by the CIA marched on Mosaddegh's residence and succeeded in arresting him. He was tried and convicted of treason by the shah's military court. In December 1953, he was sentenced to three years in prison, after which he was placed under house arrest, where he remained until his death 14 years later, in 1967. Other Mosaddegh supporters were imprisoned, and several were executed.

For decades, both the CIA and MI6 refused to admit they'd been involved.

Having saved Britain's bacon in Iran, the United States pressed AIOC to share its rights to the oil fields, mostly with American companies. British ownership was reduced to 40 percent, and American ownership was set at 40 percent. Royal Dutch Shell received 14 percent, and the French company Total S.A. got 6 percent. The Iranians were granted a 50 percent cut of the profits, but no rights of ownership to the fields.

Post-coup, the shah grew increasingly authoritarian. More and more of the oil revenue went into his own pocket, leaving less for the projects he'd promised. And there was friction with the big oil companies. The shah's government accused them of lowballing their reported earnings, to understate the profits to be shared with Iran.

The forces that had made Mosaddegh their point man hadn't dissipated with his removal. Resentment of the shah's rule—and of secularization and modernization in general—continued to build. In 1979, it boiled over as an Islamic revolution. The Shi'a clergy took power and allowed a student faction to seize the U.S. embassy and take 52 Americans hostage. Oil was about to be nationalized once again.

The U.S. government judged it futile to try to reinstate a pro-Western regime. So it turned its back on the shah and encouraged an invasion of Iran by Iraq. Saddam Hussein, the secular Iraqi dictator, went to war against his neighbor, supported by money and weapons courtesy of the United States.

American reasoning was straightforward. Washington decided that the best strategy for ensuring the flow of oil from the region was to encourage conflicts that tended to neutralize the parties. If Iraq and Iran were at each other's throats, they wouldn't be able to trouble Saudi Arabia, the United States' principal oil supplier.

The plan worked—for a while.

Once Shi'a fundamentalists gained the upper hand in Iran, conflict with neighboring Iraq was probably inevitable. Although Iraq is majority Shi'ite, in 1980 it was ruled by the Sunni minority, headed by Saddam Hussein.

Iraq invaded Iran in September 1980, citing a long-simmering border dispute. But the real reason was Saddam's fear that Iran's Islamic revolution would inspire Iraqi Shi'ites, who were concentrated in the southern portion of the country bordering Iran, to rise up against him.

The bloody conflict lasted eight years, until August 1988. An estimated half-million combatants died, along with a similar number of civilians. Hussein used chemical weapons against the Iranians and in his own country against Kurds sympathetic to Iran. The war ended with the border between the two countries unchanged.

Iran lost much of its oil and gas production in the war. To make matters worse, in 1980 the U.S. government organized economic sanctions against the country to retaliate for the previous year's hostage takings, and in 1995, suspecting Iran of developing nuclear weapons, it expanded the sanctions. The UN Security Council imposed a series of harsher sanctions, beginning in 2006, after Iran refused to suspend its uranium enrichment program. The European Union layered on its own trade restrictions.

Although there are many leaks in the sanctions regime, there's no question that they hurt the country. Oil output still hasn't recovered to prewar levels of 6 to 7 million barrels per day. Access to outside capital is hindered, which slows the building of pipelines and other productive infrastructure. And Western investment has become a when-hell-freezes-over prospect.

Though Iran may be isolated from the United States and Western Europe, Tehran still has allies. Venezuela has advanced $4 billion for joint projects, including a bank. India has pledged to continue buying Iranian oil because Tehran has been an accommodating vendor for New Delhi, which struggles to pay. Greece opposed the European Union sanctions because Iran was one of very few suppliers willing to sell oil to the bankrupt Greeks on credit. South Korea and Japan are pleading with the United States for exemptions because of their reliance on Iranian oil. Economic ties between Russia and Iran have gotten stronger every year since Putin became president in 1999.

Iran is even making nice with Iraq's national government, now tenuously controlled by the Shi'ite majority. Its largest gas deal to date is going to its new BFF. Iraq needs natural gas, and lots of it, to power refineries, pipelines, and other infrastructure for exploiting its oil. The deal would feed Iraqi refineries over 700 million cubic feet of Iranian gas per day, which is a lot, about $4 billion worth a year under the terms of the deal. And there's talk of doubling the flow.

Finally, there's China. Iran's energy resources are a matter of national security for China, as Iran already supplies 15 percent of China's oil and natural gas. That makes Iran more important to China than Saudi Arabia is to the United States. China needs to protect its two-way trade with Iran, which is expected to hit $50 billion in 2015, so don't expect China to join U.S. and EU sanctions. China doesn't object to the West's effort to keep Iran from selling oil. In fact, China likes it, since it makes Iranian oil and gas that much cheaper to buy.

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