Tag: nuclear

Dual-Capable Cruise Missiles: Past Performance No Guarantee of Future Results

Earlier this week I attended a very thoughtful and stimulating debate on the modernization of U.S. nuclear missiles hosted by the Project on Nuclear Issues (PONI) at CSIS. The debate addressed the merits and downsides of two planned U.S. nuclear delivery system recapitalization efforts: the Ground Based Strategic Deterrent intended to replace the Minuteman III ballistic missile system, and the Long-Range Stand-Off (LRSO) cruise missile that is supposed to replace the AGM-86 air-launched cruise missile (ALCM). The ALCM is a dual-capable missile, meaning it can carry either a nuclear or conventional payload. While the LRSO is planned to be only used for nuclear missions, in a conflict scenario it would be hard to discern between it and a conventionally-armed cruise missile until the moment of impact.

One topic raised during the debate was the effect of the LRSO on strategic stability, an important and hotly debated issue. The advocates of the LRSO downplayed the destabilizing potential of the system by pointing out that the United States has used dual-capable cruise missiles in past conflicts. Concerns about strategic stability should be kept in mind, they argued, but the United States has a track record of using dual-capable cruise missiles while safely navigating such concerns.

This argument may be technically true, but it ignores a critical fact: all past uses of dual-capable cruise missiles were in conflicts with countries that did not have nuclear weapons—not between two nuclear-armed countries. Policymakers should be wary of arguments that use historical evidence to dismiss or downplay the negative effects of LRSO on strategic stability because there are no adequate past cases to test such arguments against.

Iran and the Global Oil Glut

Today’s Iran deal is a victory for U.S. nonproliferation efforts, and while it may not be perfect, it goes a long way towards ensuring that Iran cannot develop nuclear weapons, and that the IAEA will regain crucial oversight access to Iran’s nuclear facilities. But though it is fundamentally an arms control agreement, some of the biggest impacts may in fact be felt in global oil and gas markets, as easing sanctions allow Iran’s hydrocarbon sector to reopen to the world.

Much of the text of the deal focuses on the sanctions which will be lifted in exchange for Iranian concessions on nuclear enrichment and processing. These include agreement by both the U.S. and EU to permit the import of oil and gas, as well as lifting asset freezes and bans on the export to Iran of technology and equipment for oil and gas extraction. More importantly, bans on investment, financing and service provision in the industry will be lifted, paving the way for European and American firms to provide technical services and invest in the country.

Oil prices have been volatile since the deal was announced, falling almost two percent before recovering. The initial price drop reflects the expectation that Iran may release some of its approximately thirty million reserve barrels of oil onto the market as soon as it is able. Iran also has the potential to impact oil prices in the long-term, holding the world’s fourth-largest reserves of crude oil, and second-largest gas reserves. Production has been depressed by sanctions, but once they are lifted, it is plausible that Iran could increase production to its pre-sanctions levels (2-3 million barrels a day) within several years.

Iran: From Hyperinflation to Stability?

With the announcement on Saturday night that Iran and the P5+1 group reached a tentative deal over the Iranian nuclear program, the Iranian rial appreciated 3.45% against the dollar on the black market. The rial jumped from 30000 IRR/USD on Saturday November 23rd to 29000 IRR/USD on Sunday November 24th. A daily appreciation of this magnitude is rare. In fact, it has occurred fewer than ten times since the beginning of 2013. Indeed, this indicates that the diplomatic breakthrough is having a positive effect on Iranian expectations.

Over a year ago, I uncovered the fact that Iran experienced a period of hyperinflation (in early October 2012), when its monthly inflation rate peaked at 62%. Since then, I have been actively monitoring and reporting on the IRR/USD black market exchange rates and calculating implied inflation rates for the country.

Since Hassan Rouhani took office, on August 3rd, Iranian expectations about the economy have turned less negative. Thus far, it appears Rouhani has been successful in ending the long period of economic volatility that has plagued Iran, since the US imposed sanctions in 2010. This has been reflected in the black-market IRR/USD exchange rate, which

There are three main factors at work here. The first is a concerted effort by the Rouhani administration and the central bank to curb Iran’s inflation. This stands in stark contrast to the previous regime, whose strategy was to simply deny that inflation was a problem.

The second is that that Iran’s economy has proved remarkably “elastic” – meaning that the country has ultimately adapted to the sanctions regime and has found ways to keep its economy afloat in spite of them.

The third factor in the rial’s recent stability is an improvement in Iranian economic expectations. This is where the P5+1 talks come into play. Iranians recognized that easing of the sanctions regime would be a bargaining chip in any nuclear negotiations. In consequence, their economic expectations improved as the talks progressed. Indeed, Saturday’s announcement gave these expectations a shot in the arm.

In light of the rial’s recent stability, I have delisted the rial from my list of “Troubled Currencies,” as tracked by the Troubled Currencies Project. For starters, the rial no longer appears to be in trouble. And, on a technical note, implied inflation calculations are less reliable during sustained periods of exchange rate stability.

That said, we must continue to pay the most careful and anxious attention to the black-market IRR/USD exchange rate in the coming months. Like the P5+1 agreement, Rouhani’s economic progress in Iran is tentative and likely quite fragile. Since the black-market IRR/USD is one of the only objective prices in the Iranian economy – and perhaps the most important one of all – it will continue to serve as an important weather vane, as the diplomatic process continues, and as Iran’s economy gradually moves into a post-sanctions era.