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Myanmar on the Brink of State Failure
Myanmar on the Brink of State Failure
A man exchanges Iranian Rials against US Dollars at an exchange shop in the Iranian capital Tehran on 8 August 2018. AFP/Atta Kenare

The Illogic of the U.S. Sanctions Snapback on Iran

The Trump administration believes that ratcheting up economic pressure on Iran will compel the Islamic Republic to curtail its disruptive Middle East policies. History suggests otherwise. Both Washington and Tehran should step off their current escalatory path.

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What’s new? A 40-year analysis of Iran’s economic performance and regional policy reveals little to no correlation between the two, as Tehran has continued to pursue policies it deems central to its national security no matter its degree of economic wellbeing at home.

Why does it matter? The Trump administration hopes that sanctions will force Iran to curb its regional activities. But data shows that outcome is uncertain as changes in Iran’s wealth have had little impact on the direction or capabilities of its regional policy. Sanctions risk empowering harder-line officials in the Islamic Republic and prompting them to lash out, exacerbating regional tensions.

What should be done? The U.S. optimally should leverage its sanctions to de-escalate regional tensions. That requires acknowledging Iran’s legitimate security concerns as long as Iran acknowledges those of its regional rivals. However unlikely at this time, the U.S., Iran and Gulf Arab states should take steps to build a more stable regional security architecture.

I. Overview

The intuitive presumption at the heart of the Trump administration’s policy toward Iran is that, by reducing its resources, economic sanctions on Iran will diminish its disruptive activities abroad. The sanctions that the U.S. Treasury Department will re-impose on Iran on 5 November are, in the words of Secretary of State Mike Pompeo, intended to push Iran into making a choice: “either fight to keep its economy off life support at home or keep squandering precious wealth on fights abroad. It won’t have the resources to do both”.

But historical data shows little, if any, correlation between the resources at Iran’s command and its regional behaviour. Rather, the extent to which the Islamic Republic feels threatened or senses opportunity in its neighbourhood largely defines its conduct. Measured against that standard, the Trump administration’s aggressive policy is likelier to spur Iran’s regional activism than to curb it. A better alternative exists. It would require the Trump administration not to ignore Iran’s regional interests, but to acknowledge that it has legitimate security concerns, and for Iran to acknowledge that as long as it pursues policies that its neighbours and others perceive as aggressive, tensions will persist and the risk of direct military confrontation will rise. A more stable region is possible only if the U.S. moves to provide Iran with viable security assurances, in return requiring that Tehran allow its non-state allies to integrate into their countries’ security and political systems and halt proliferation of ballistic missile technology across the region. Though currently a remote aim, both sides should work with other regional actors toward an inclusive security architecture.

Video: The Fallacy of U.S. Sanctions on Iran

II. Contrasting Eras of Iranian Regional Policy

Studying how Iran has devised its regional policies over the last four decades reveals that its choices have rarely been a function of its economic performance or resource availability.

A. “Forward Defence”

Iran’s regional defence policy was defined and shaped at a time of economic scarcity. Its “forward defence” policy – an effort to exploit weak states, such as Lebanon and post-2003 Iraq, where it can expand its influence and fight through proxies without direct harm or threat to itself – originated in the 1980s.[fn]For more background on Iran’s defence doctrine, see Crisis Group Middle East Report N°184, Iran’s Priorities in a Turbulent Middle East, 13 April 2018.Hide Footnote Then, the newly established order in Tehran, which aspired to export its revolution abroad, simultaneously felt besieged by foreign and domestic enemies seeking to undermine it and isolated in the face of invasion by Saddam Hussein’s Iraq, armed to the teeth by Arab and Western states.

At the time, Iran suffered extreme economic hardship due to revolutionary turmoil, the devastating war with Iraq and falling global oil prices. Yet as shown in Graph 1, Iran’s creation of Hizbollah in Lebanon in 1982, the bombing of the U.S. Marine barracks in Beirut the following year, and a series of targeted terrorist attacks in Europe (in which Europeans saw Iran’s hand) occurred amid falling oil revenues and economic downturn.[fn]“Outlaw Regime: A Chronicle of Iran’s Destructive Activities”, Iran Action Group, U.S. State Department, September 2018.Hide Footnote A wealthy Iran may well have acted even more aggressively insofar as it would have had more resources at its disposal. But the point is that economic deprivation did not moderate the Islamic Republic’s conduct, make it more inwardly focused or lead it to rein in its regional proxies.

Graph 1: Iran's GDP growth and oil revenue (1980-1988) IMF

The ensuing decade (1988-1998) was marked by post-war reconstruction amid rising oil revenues (due in part to heightened global oil prices in the aftermath of the first Gulf War) and runaway inflation. None of this, however, appears to have produced any tangible change in Iran’s backing for Hizbollah in Lebanon or Hamas and Islamic Jihad in Palestine. Nor did the 1997 Asian financial crisis that caused oil prices to collapse and Iran’s oil revenue to fall from $16.7 billion in 1997 to $9.7 billion in 1998. In other words, the trajectory of Iranian foreign policy was essentially impervious to the fluctuations in its economic wellbeing.

B. Pragmatism and Diplomacy

Iran’s destabilising activities declined in the early 2000s when, as shown in Graph 2, both oil proceeds and gross domestic product (GDP) were on the rise. During this period Iran significantly improved its relations with its Arab neighbours, helped the U.S. in working on the post-Taliban order in Afghanistan, and briefly suspended its nuclear program in negotiations with the Europeans – though it admittedly continued to support Hizbollah and other non-state actors in the Levant.[fn]Howard Schneider, “Saudi pact with Iran is sign of growing trust”, Washington Post, 17 April 2001; James Dobbins, “Negotiating with Iran: Reflections from Personal Experience”, The Washington Quarterly (2010), pp. 149-162; Crisis Group Middle East Report N°18, Dealing with Iran’s Nuclear Program, 27 October 2003.Hide Footnote

Again, this hardly demonstrates that Tehran acts more responsibly when its economy performs better; non-economic reasons – notably the more pragmatic perspective of Iran’s reformist government at the time and concerns about a possible U.S. attack after its 2003 invasion of Iraq – can help explain Iran’s behaviour. But it underscores that realities other than the resources at its disposal determine Iran’s policy choices.

Graph 2: Iran’s GDP growth and oil revenue (1998-2003) IMF, Central Bank of Iran

Between 2003 and 2011, Iran had two key priorities. First, it worked to ensure that in the aftermath of the U.S. invasion of Iraq a central government would emerge in Baghdad that, while strong enough to keep the country together and secure its borders with Iran, was not so strong as to once again pose a threat. Second, it aimed to push U.S. forces out of its western neighbour’s territory. To achieve the former, it relied on relationships it had cultivated for decades with Iraqi leaders (particularly Shiite Islamists and Kurds); for the latter, it trained and equipped several Shiite militias that targeted U.S. forces in Iraq. This period coincided with the nuclear standoff and imposition of a panoply of unilateral, multilateral and international sanctions. But Tehran was nevertheless flush with money thanks to high oil prices. Again, this shows that its policy of backing non-state actors has remained largely consistent in good economic times as well as bad. As a senior Iranian official put it, “when you rely on a [‘forward defence’] strategy for your survival, you rely on it come hell or high water”.[fn]Crisis Group interview, Tehran, February 2018.Hide Footnote

C. Regional Escalation

As evidence that economic downturns do not necessarily curb Iranian regional activism, the most telling period is 2011-2015 (see Graph 3). A stifling web of multilateral and international sanctions inflicted maximal harm on the country’s economy, which shrank at the rate of 7.7 per cent in 2012 as oil exports declined by half, the currency fell by 200 per cent and inflation rose to almost 40 per cent. Yet this period coincided with what many consider the most significant expansion of Iran’s military intervention in the region, a product of the uprising in Syria, Tehran’s growing rivalry with Riyadh and the fight against the Islamic State.

Graph 3: Iran’s GDP growth and oil revenue (2011-2015) IMF, Central Bank of Iran

According to the Stockholm International Peace Research Institute, Iran’s arm transfers to allies in Syria and Iraq peaked in this period.[fn]SIPRI Arms Transfers Database, available at https://www.sipri.org/databases/armstransfers.Hide Footnote Resource scarcity at home neither prevented Iran from extending a multibillion line of credit to Damascus nor from mobilising Shiite militias from Afghanistan, Pakistan and Iraq to fight in Syria. Iran also stepped up its support for Yemen’s Huthi rebels, training and equipping them.

D. Post-Nuclear Deal Boon?

Critics of the 2015 Joint Comprehensive Plan of Action (JCPOA) contend that Iran grew more belligerent in the aftermath of the nuclear accord, which provided it with billions of dollars in unfrozen assets. Yet it is hard to point to anything Iran did after the deal – from supporting Yemen’s Huthi rebels to propping up the Syrian regime – that it was not undertaking prior to the agreement.

There was one notable change: a nearly 30 per cent increase in the country’s military budget.[fn]Clare Foran and Nicole Gaouette, “Trump repeats misleading claim on Iran's military budget”, CNN, 13 May 2018.Hide Footnote Even that should be assessed in the right context. As shown in Graph 4, the 2016 bump brought spending back to 2009 levels – not to a new high. More importantly, Iran was broadening its regional involvement at a time when it was spending less on its military (2011-2015), suggesting that this expansion is a product of opportunity or perceived necessity, not economics, and that the increase in defence spending does not necessarily have a discernible impact on the ground.

Graph 4: Iran’s Military Expenditure per GDP Percentage (2007-2017) World Bank

Besides, Tehran’s military expenditure likely is not in and of itself a main U.S. concern. In 2017, Iran’s annual defence spending of $16 billion paled in comparison to Saudi Arabia’s $76.7 billion.[fn]SIPRI Military Expenditure Database, available at https://www.sipri.org/databases/milex.Hide Footnote Iran spent less than 3 per cent of its GDP on defence (where sectoral spending ranks fourth in per capita terms after social insurance, education and health), not excessive for a country of its size.[fn]راستی‌آزمایی: بودجه نهادهای نظامی در ایران چقدر است؟” [“Fact checking: What is the budget of Iran’s military institutions”], BBC Persian, 13 August 2017; Mark Perry, “Putting America’s enormous $19.4 trillion economy into perspective by comparing US state GDPs to entire countries”, American Enterprise Institute, 8 May 2018.Hide Footnote

Iran’s activities in the region are inherently – and deliberately – inexpensive and thus largely impervious to economic fluctuations. The Trump administration contends that Iran has spent $16 billion to project power in the region since 2012. If accurate – though the figure is likely inflated – that makes for an average of $2.6 billion per year. This is not an onerous expense for a country that, even under sanctions, will reap more than $25 billion in oil revenues in 2019 and holds more than $100 billion in foreign reserves.

III. The Perils of a Sanctions Backlash

Iran may well choose to tactically retreat or halt certain activities, as it has in the past. It is likewise logical that when it has additional resources it can continue expanding its regional footprint. But nothing in the history of the Islamic Republic suggests that sanctions will prompt a substantive shift in its foreign policy. To believe otherwise is to misunderstand the sources of Tehran’s conduct, predicated on the notion that strategic depth, achieved through backing allies, partners and proxies, is vital for its national security. Israel’s invasion of Lebanon in 1982, the U.S. invasion of Iraq in 2003 and the Saudi-led war in Yemen since 2015 allowed Iran to exploit chaos and deepen its clout. In all these cases, it took advantage of its adversaries’ mistakes and filled security vacuums created by failing states.

For now, banking on the remaining signatories to the JCPOA’s effort to provide it with an economic lifeline in the face of unilateral U.S. sanctions, Tehran appears to be pursuing a relatively cautious path in the region.[fn]In May, Crisis Group published a list of recommendations aimed at preserving a certain degree of trade between Europe and Iran as means of preserving the JCPOA. Some of those suggestions, including the development of “specially purposed vehicle” to conduct financial transactions, are close to materialising. Crisis Group Middle East Report N°185, How Europe Can Save the Iran Nuclear Deal, 2 May 2018; “EU mechanism for Iran trade to be symbolically ready on Nov. 4: Diplomats”, Reuters, 24 October 2018.Hide Footnote It has largely refrained from responding militarily to more than 200 Israeli strikes on its assets in Syria and engaging in skirmishes with the U.S. Navy in the Strait of Hormuz.[fn]“Israel says struck Iranian targets in Syria 200 times in last two years”, Reuters, 4 September 2018; “Iranian boats mysteriously stop harassing U.S. Navy”, Daily Beast, 8 October 2018.Hide Footnote

Paradoxically, however, Tehran could become less risk-averse if Washington were to succeed in crippling its economy. As a senior Iranian official put it, “if the economy spirals out of control, the leadership in Tehran will welcome a crisis that could change the subject domestically and rally the population round the flag”.[fn]Crisis Group interview, New York, September 2018.Hide Footnote Given the high level of friction between Iran, the U.S. and their respective allies in the region, such a clash could easily spiral into a disastrous conflict.[fn]These flashpoints can be monitored on Crisis Group’s Iran-U.S. Trigger List.Hide Footnote

If its goal is to constrain Iran’s regional reach, the Trump administration would be wiser to address the political drivers of conflict.

Indeed, there are early signs that the U.S. approach might be backfiring. The Trump administration has accused Iran of targeting U.S. diplomatic facilities in Baghdad and Basra through its allied Shiite paramilitary groups. If true, these attacks would constitute an escalation unseen in Iraq since 2011 and indicate that tightening the noose of sanctions has made Iran more, not less, aggressive. Equally risky is a scenario in which Iran’s economy stays afloat and U.S. sanctions fail to curb Iran’s regional policy. This could prompt U.S. allies in the region to provoke a confrontation between Washington and Tehran that would significantly weaken their regional foe on their behalf. As an Israeli official put it, “my distinct impression is that [Prime Minister Benjamin] Netanyahu is pushing toward actual use of force by the U.S. against Iran. Unclear of what scope – a single attack, a broader move?”[fn]Crisis Group interview, Tel Aviv, October 2018.Hide Footnote

If past is prelude, the Islamic Revolutionary Guard Corps, which is primarily responsible for implementing Iran’s regional policies, will again benefit – both politically and economically – from sanctions. Its influence expanded markedly amid the nuclear standoff and mounting pressure of sanctions (from 2006 to 2013). It controls the smuggling networks and embezzles billions in public funds through complex shell games purportedly aimed at skirting U.S. sanctions. At the same time, the middle class, which tends to drive social protests and exerts a countervailing pressure on the state, will shrink and suffer from critical shortages of food and medicine.

If its goal is to constrain Iran’s regional reach, the Trump administration would be wiser to address the political drivers of conflict, which are informed by local factors. To leverage the pressure it has managed to accumulate against Iran to produce a shift in Tehran’s policy, it would need to acknowledge Iran’s legitimate security concerns, namely its comparatively inferior conventional military capabilities. Tehran is unlikely to agree to compromise its national security assets for economic incentives. The U.S. optimally would signal its willingness to address these concerns and provide viable security assurances to Iran’s leaders. In parallel, it would work with other regional actors toward a broader security architecture that includes Iran. That said, such a policy shift is hard to envision given the administration’s current posture toward Tehran.

For its part, and regardless of what Washington does, Tehran should take steps to address its neighbours’ concerns – most importantly to recognise that the more its security doctrine promotes expeditionary warfighting, the more it will provoke aggressive pushback by its adversaries. In the same vein, Iran should encourage the integration of its non-state allies into their countries’ security bodies under the direct and effective control of their central governments, and it should stop proliferating ballistic missile technology around the region.

The alternative to both sides taking a step back from their escalatory path is a sanctions regime that penalises Iran and the Iranian people, but does not enhance peace and security in the region and could well lead to war.

Washington/Brussels, 2 November 2018

Army officers detain a man during a protest against the military coup in Yangon, Myanmar, 2 March 2021. REUTERS/Stringer
Speech / Asia

Myanmar on the Brink of State Failure

In a briefing to the UN Security Council’s 9 April 2021 'Arria-Formula' Meeting on the situation in Myanmar, Crisis Group’s Myanmar expert Richard Horsey warned that the country stands on the brink of state failure, and argued that there is every justification for the Council to impose an arms embargo on the regime.

Madam Chair, Members of the Council, Distinguished Speakers,

Thank you for this opportunity to speak today. You have heard a powerful presentation from a civil society leader and you will hear shortly from a senior representative of the Committee Representing Pyidaungsu Hluttaw (CRPH). As an independent observer, I can perhaps best contribute to this discussion by situating the current crisis in the country’s broader context.

To put it simply, Myanmar stands at the brink of state failure, of state collapse. This is not hyperbole or rhetoric. It is my sober assessment of a likely path forward.

Since launching its coup on 1 February, the Myanmar military should have learned what voters also conveyed clearly at the ballot box in November: that the vast majority of the population does not want military rule and will do whatever it takes to prevent that outcome. Yet the military seems determined to impose its will, as shown by its use of ruthless violence against civilian protesters, medical first responders and the general urban population.

The problem for the regime is that, unlike in 1988 or the 1990s or the 2007 suppression of the Saffron Revolution, the violence is not producing its desired results. Despite the bloodshed, people continue to demonstrate in the streets, a large proportion of public sector employees refuse to work for the regime, a general strike of key private sector staff continues. Army violence is not effective at convincing scared bank staff or truck drivers to return to work. Violence cannot restore business confidence. A military rampage on the streets and in the homes of Yangon and Mandalay and other towns appears a desperate attempt to terrorise the population into submission; instead, it has created chaos. Various forms of violent urban resistance to the regime are also emerging.

The regime has not been able to gain effective control of the government bureaucracy, or of local administration in the country.

The upshot is that the coup has not yet succeeded and the regime has not been able to gain effective control of the government bureaucracy, or of local administration in the country. It is able to deploy violence, but not provide any semblance of law and order. This has important policy implications: close engagement with the CRPH, with those who are protesting in the streets, and with other legitimate representatives of the people, is vital. The military regime is not constitutional or otherwise legal, and countries and organisations should not pre-empt the situation by recognising its de facto authority when the coup is not a fait accompli.

But in the midst of all this horror, the transformative nature of the resistance against the military has to be acknowledged and applauded. A new generation of political action has emerged that has transcended old divisions and old prejudices, and gives great hope for a future Myanmar that embraces, and is at peace with, its diversity.

The actions of the regime are not just morally reprehensible. They are also extremely dangerous. Not only has the military been unable to consolidate its attempted coup and effectively govern the country, but also its actions may be creating a situation where the country becomes ungovernable. That should be of grave concern to the region and to the broader international community.

The precise contours of state failure are hard to predict, depending not only on what goes wrong, but also in what order. But the trajectory is alarming:

  • First, the banking system is at a virtual standstill, and has been for two months now. That means businesses can’t make and receive payments, individuals cannot access their cash, and payrolls aren’t being processed. The regime has been threatening private banks to get them to reopen branches, but many staff are unwilling to go to work, and with the military perpetrating random violence on the street, others are afraid to do so. Just last week, a local employee of a Korean bank in Yangon was fatally shot in the head by soldiers, while she was travelling home in a company vehicle. The attempted coup has resulted in a hard stop in economic activity, precipitating an economic crisis that will push millions into poverty.
  • Second, supply chains are breaking down. Most imports and exports have come to a halt as customs staff and port workers have gone on strike and containers are backed up at the docks. Domestic haulage has mostly stopped, with truck drivers unwilling to take the risk of driving around the country. Imports of essential agricultural inputs have slowed. Markets are becoming dysfunctional, and many people are without income or access to cash, leaving them unable to buy what food is available. A hunger crisis looms.
  • Third, the health system has collapsed. Many public hospitals are shuttered as medical staff refuse to work for the regime. Other hospitals in key city locations have been taken over by soldiers as forward operating bases, with patients evicted. Medical first responders have been targeted by troops when they attempt to render assistance to injured civilians. There is hardly any COVID-19 testing and treatment, and the vaccination program is far behind schedule. Regular childhood vaccinations are in jeopardy. Critical imported pharmaceuticals are in short supply. Public health experts are worried, for example, about Myanmar’s large caseload of multi-drug-resistant tuberculosis patients. A health crisis is coming.
  • Fourth, armed conflict is rising. Myanmar is home to some twenty ethnic armed groups fighting for greater autonomy, as well as several hundred militias of various sizes that are loosely aligned with the Myanmar military. Some ethnic armed groups who have observed ceasefires for years are being drawn into renewed conflict with the army, as they try to protect their civilian populations from violence, give sanctuary to protest leaders and resist army aggression. Others are expanding their areas of control or pressing territorial claims against rival groups – taking advantage of a security vacuum while the military tries to assert its control over the main cities.
  • And lastly, it needs to be acknowledged that much of Myanmar’s natural wealth is in the hands of unregulated actors. Over recent years, the civilian government has had little success in asserting its control over them. If the centre implodes as a result of the army’s misguided and heavy-handed response to the protests, criminal economic forces could be unleashed that would be impossible to contain.

Collectively, these crises will trigger large population displacements, as people go on the move because they have lost their livelihoods, or are facing hunger, or are escaping violence in the cities or armed conflict in ethnic areas. It is already happening. Several hundred thousand migrant workers have fled Yangon in recent weeks due to joblessness and insecurity. Thousands of villagers in Kayin State have been displaced, some across the border to Thailand, following air raids on territory controlled by the Karen National Union armed group.

Over the decades, Myanmar has faced many different challenges, including ongoing armed conflicts, banking and economic crises, refugee crises, anti-military protest movements and the brutal expulsion of the Rohingya in 2016-2017. These have come at great cost – to human rights, livelihoods and the economy. But throughout, successive governments have remained in power and the Myanmar state has continued to maintain basic order and provide public services, at least in the centre of the country. In short, Myanmar has somehow managed to muddle through.

The glue that has long held the fractured country together is coming unstuck.

It is no longer clear that it will be able to do so. The glue that has long held the fractured country together is coming unstuck. The world faces the prospect of chaotic state failure in a country with myriad armed groups, a large and well-equipped military that is unlikely to capitulate, and a huge illicit economy backed by transnational criminal organisations that will exploit the situation as they have done for years. All this will have immediate consequences for the region, and will have an impact on international peace and security.

Madam Chair, if I may, I will end with two concrete suggestions for the Council:

  • First, the regime currently appears determined to try to consolidate its grip on the country, whatever the costs. It has shown no inclination toward dialogue or compromise. But this must be continuously tested. Unequivocal Council backing for the UN special envoy remains important, as does the role of the Association of Southeast Asian Nations (ASEAN) and other regional actors who have access to the regime. The Council’s unity to date has been welcome, and important. These channels can be used to express clear opposition to the coup, condemn subsequent state violence and warn the military that the trajectory they are on risks catastrophic state collapse. These channels can also help outside actors to identify and pursue any future openings for diplomacy and mediation.
  • Second, some Council members have voiced opposition to coercive measures. But it is hard to see a viable alternative path that can have any impact. In particular, there is every justification for the Council to impose an arms embargo on Myanmar. In the absence of a UN embargo, like-minded countries could agree to a coordinated list of prohibited items – not only arms, but also technologies for surveillance and repression – and share information on their efforts to block transfers on a voluntary basis. This would create a framework for other states to coordinate restrictions on Myanmar. Like-minded countries should also continue to coordinate the imposition of targeted economic sanctions. None of these are likely to have as much impact as either the regime’s own policy failures or the deliberate actions of the civil disobedience movement. But they have an important signalling effect – to the regime, as well as to those resisting its violent attempts to usurp state power.

Thank you.