Showdown With Iran Looms Closer

Last Wednesday, the U.N. Security Council approved a resolution for a fourth round of sanctions against Iran, which includes prohibiting Tehran from buying heavy weapons, tightening financial transactions with Iranian banks and new cargo inspections.

The main thrust of the sanctions is against military purchases, trade and financial transactions carried out by the Islamic Revolutionary Guards Corps, which controls the nuclear program and has taken a more central role in running the country and the economy.

It also authorizes nations to conduct maritime inspections of vessels suspected of transporting prohibited items for Iran and adds 40 entities to a list of people and groups subject to travel restrictions and financial sanctions.

The resolution followed five months of strenuous negotiations between the United States, Britain, France, Germany, China and Russia.  With 12 votes in favor, it received the poorest support in the 15-nation council of the four Iran sanctions resolutions adopted since 2006.  Turkey and Brazil voted no, while Lebanon abstained.

After vehemently opposing sanctions, Russia appears to be taking a tougher line with Iran.  Officials said yesterday that Moscow would comply strictly with the new UN sanctions and signalled that a deal to supply Iran with air-defense missiles was now off.

Predictably, Iranian President Mahmoud Ahmadinejad said Israel was "doomed" and singled out U.S. President Barack Obama for derision, blaming Washington for orchestrating the sanctions. 

The Obama Administration has hailed the sanctions as a key diplomatic victory despite having its proposals watered down in order to gain Chinese support and only garnering 12 votes.  Domestically, however, the administration is reportedly working with Congress to ease restrictions.  According to the L.A. Times, administration officials have begun negotiations with congressional leaders, who are working on versions of House and Senate bills that would punish companies that sell refined petroleum products to Iran or help the country's oil industry. 

Unlike the U.N. measures, congressional action would pertain only to U.S. policies and agencies and would not be binding on other countries. Other countries and groups of nations are also considering additional measures.

For its part, Tehran has completely dismissed the sanctions.  For months, President Mahmoud Ahmadinejad has warned that Iran would respond aggressively, even militarily against U.S. and Isaeali interests in the region.  Any military action by Iran would undoubtedly be targeted at disrupting oil supplies through the Straits of Hormuz, an outcome the world hopes desperately to avoid.

Saudi Arabia, no friend of Israel, views Iran as the bigger threat.  Sources in the Gulf say that Riyadh has agreed to allow Israel to use a narrow corridor of its airspace in the north of the country to shorten the distance for a potential bombing run on Iran.

Sources in Saudi Arabia say it is common knowledge within defense circles in the kingdom that an arrangement is in place if Israel decides to launch a raid.  Despite the tension between the two governments, they share a mutual loathing of the regime in Tehran and a common fear of Iran’s nuclear ambitions.

The 4 main targets for any raid on Iran would be the uranium enrichment facilities at Natanz and Qom, the gas storage development at Isfahan and the heavy-water reactor at Arak.  Secondary targets include the lightwater reactor at Bushehr, which could produce weapons-grade plutonium when complete.
 
Israeli officials refused to comment on details for a possible raid on Iran, which Prime Minister Binyamin Netanyahu, categorically refuses to rule out.  Asked about the possibility of a Saudi flight path for Israeli bombers, Aharaon Zeevi Farkash, who headed military intelligence until 2006 and has been involved in war games simulating a strike on Iran, said: “I know that Saudi Arabia is even more afraid than Israel of an Iranian nuclear capacity.”
 
It looks like "show time" in the Middle East is at hand.  In the last several years, Tehran has built an impressive aresenal of advanced Russian-made weapons which make Iran no pushover, even with a massive military presence by the U.S. across the border in Iraq, as well as the potent military capability of Israel. 
 
Should any military action ensue, its economic effects may be life-changing for the entire planet.  Disrupting oil flow will not be that difficult, with severe repercussions for the world.  For investors, companies engaged in the production of energy outside of the Middle East ought to be huge beneficiaries.  In addition, the uncertainty caused by any altercation ought to be explosively bullish for Gold.
 
Marko's Take
 
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