TEHRAN (Reuters) - The sanctions noose is tightening on Iran as Washington and its European allies press the Islamic Republic to halt what they see as a covert nuclear arms programme, despite Tehran's denials.
But with global crude prices comfortably above $100 a barrel, the world's fifth biggest oil exporter says it can withstand the pressure. The United States and the European Union have not completed moves to hamper Iranian oil sales. Tehran believes they will not do so while their economies are so weak.
The storming of Britain's embassy in Tehran, in reaction to new sanctions announced by London, showed the sensitivity of the issue and once again exposed rifts within Iran's conservative ruling elite: the Foreign Ministry expressed regret for the attack, but the parliament speaker appeared to condone it.
That split, with President Mahmoud Ahmadinejad and his advisers under intense criticism from rival hardline cliques, may well intensify ahead of a March parliamentary election.
SANCTIONS, ECONOMY AND RELATIONS WITH WEST
With a U.S. presidential election less than a year away, anti-Iran rhetoric has increased in Washington where Congress passed legislation this month aimed at blocking payments by foreign countries for Iranian oil.
President Barack Obama has yet to sign that into law and his officials have expressed concern that restricting Iranian oil flows will raise global prices and hamper a fragile U.S. recovery, but the bill has already rattled Asian oil buyers.
Britain's largely symbolic decision to ban transactions with Iran's central bank, ahead of any joint move with its European Union partners, was the spark that led to the ransacking of its embassy and the evacuation of all British diplomats.
The attack, carried out by hardline Basij militia members whose anger against Britain overflowed during a planned protest outside the embassy, dragged relations with the EU to a new low. Britain closed the Iranian embassy in London and several EU states withdrew their ambassadors temporarily in protest.
Distracted by its struggles to rescue the euro, the EU has yet to put in place new sanctions that would ban EU countries from buying the 450,000 barrels per day of oil they import from Iran. That represents 18 pct of Iran's 2.6 million bpd exports.
Existing sanctions have made it increasingly difficult to move money in and out of Iran and have fuelled inflation, officially just under 20 percent, which was already rising due to Ahmadinejad's efforts to phase out food and fuel subsidies.
Inflation and financial sanctions have also stimulated demand for hard currency, pushing the market value of the rial more than 20 percent below the official rate.
WHAT TO WATCH:
- Any U.S. and EU sanctions on oil exports
- Any rise in protests about jobs and the economy
- Pressure on the rial, possible devaluation
RIFTS AT THE TOP
A police raid on the offices of Ahmadinejad's press adviser in November illustrated the pressure on the president's clique from rival forces at the top of the Islamic Republic.
Ali Akbar Javanfekr, who also heads Iran's state news agency IRNA, avoid arrested during the raid, which occurred as he gave news conference a day after he was reportedly sentenced to a year in jail and banned from journalism for three years.
Ahmadinejad has come under fire from rivals in the judiciary and parliament who say he is in thrall to a "deviant current" aiming to dilute Iran's Islamic character and the clergy's role.
Ahmadinejad's vulnerabilities, as well as the rifts among hardline factions, have come to the fore since he crushed the opposition "green movement" in the months after its huge protests against his re-election in 2009.
With the reformists all but silenced after the 2009 protests and their leaders under unofficial house arrest, Iran's main political battles are between conservative factions.
Khamenei has suggested Iran could scrap the position of an elected president, a change which would end squabbles between government and parliament, but which former President Akbar Hashemi Rafsanjani said would undermine "the republican aspect" of the Islamic Republic and certainly strengthen the already powerful position of the supreme leader.
Khamenei's proposal casts doubt on whether the 2013 presidential election will take place, but some commentators it was meant more as a warning to Ahmadinejad or other potentially headstrong presidential candidates.
WHAT TO WATCH:
- Any parliamentary move to impeach Ahmadinejad
- Further moves to arrest his aides
- Possible reformist boycott of 2012 election
Iran hopes to be a winner from the Arab uprisings it calls an "Islamic awakening" but it risks losing its one true ally in the region if President Bashar al-Assad falls from power in Syria.
The fall of U.S.-backed autocrats could see Iran's influence in the region rise and perhaps rekindle relations with powerful Arab countries like Egypt and Libya. But tensions with main Gulf rival Saudi Arabia have increased due to unrest in Syria and Bahrain.
Tehran's support for Assad has been tempered with calls for him to respect his people's "legitimate demands", but Iran still hopes his government can survive the protests and has warned the West against military action.
Along with the Arab League, Turkey has turned on Assad, angering Tehran, which has accused its secular Muslim neighbour of doing the bidding of its NATO ally Washington.
Relations between Tehran and Ankara, which were warm a year ago, became so strained that Iranian Foreign Minister Ali Akbar Salehi had to reassure his Turkish counterpart that Iran did not plan to bomb Turkish missile defences that form part of a NATO missile shield, after threats to that effect from several Iranian political and military figures.
WHAT TO WATCH:
- How events in Syria unfold and impact on Iran
- Tensions with Saudi Arabia, other Gulf Arab states
- Moves to rebuild ties with Egypt, Libya
The world's number five oil exporter and home to its second-largest gas reserves, Iran needs foreign capital and technology to modernise and expand the energy sector, but sanctions have forced Western firms to pull out and made others wary.
Oil Minister Rostam Qasemi's view that Iran needs no foreign involvement is viewed with scepticism abroad.
An investment by Russian oil company Tatneft announced on December 18 was the exception rather than the rule.
WHAT TO WATCH:
- Search for investment cash
- Home-grown drive to expand oil output and develop gas resources
(Editing by Alistair Lyon)