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Iran and US edge towards détente as deal looks possible

Tehran and Washington may be nearing a political deal. But don’t count on a sharp rise in the country’s oil exports just yet

As the US, Iran and five other states prepare for more negotiations in Kazakhstan on 5 April, the mood between the sides has shifted. Senior Iranians now talk of a possible end to the deadlock. US President Barack Obama believes a “practical solution” is possible. Some sanctions relief has been offered. Hopes for a deal are high. 

The rough shape of the terms is now visible. Iran would be allowed to enrich some uranium, but agree to stringent oversight from the International Atomic Energy Agency (IAEA). It may have to shut the Fordow nuclear complex, near Qom. In exchange, the embargo on Iran’s economy would begin to be lifted. In a message sent on 19 March to Iranians celebrating Nowruz, the Persian new year, Obama reaffirmed this stance, saying an agreement would allow “access to peaceful nuclear energy while resolving once and for all the serious questions that the world has about the true nature of the Iranian nuclear programme”.

In an interview with Bloomberg on 20 March, Iran’s ambassador to the UN, Mohammad Khazaee, said earlier talks between the sides in Kazakhstan had marked a “turning point” and he could see the “possibility for a breakthrough”.

This would be momentous stuff, not least for the oil market. The sanctions have crippled Iranian exports. In February, production was around 2.72 million barrels a day (b/d), compared with about 3.8m before the embargo, according to the International Energy Agency.

Imports of Iranian oil actually rose in February to around 1.3m b/d - but are probably on their way down again, thanks to new US sanctions implemented in the same month. So any breakthrough would send at least 1m b/d onto world markets. Bears, eat your heart out. No one should get too excited, though, because, despite the toned down rhetoric from both sides, the obstacles to a genuine deal are immense. Oil prices would surely deflate as the threat of war on Iran abated. But even if a political agreement were reached, the sanctions could take years to unwind.  

The first barrier is the Iranian presidential election on 14 June. No substantial breakthrough is possible before it for two reasons. First, the P5+1 countries (the five members of the UN security council - the US, UK, Russia, France and China - and Germany) want their Iranian interlocutors to have the support of the next president. But no one is sure who that will be.

The second reason is pure Iranian politics. Ayatollah Ali Khamenei, Iran’s supreme leader, is loth to hand any kind of political victory to the incumbent president, Mahmoud Ahmadinejad. Relations between the two leaders have disintegrated and Ahmadinejad, who cannot run for a third term, has been excluded from Khamenei’s ruling circle. “Ahmadinejad would love to do a deal to put his name in history,” says Gerald Butt, an analyst at Petroleum Policy Intelligence (PPI), a consultancy. “He’s much more pragmatic and ready.” But he’ll be gone soon and his imprimatur on any agreement could fundamentally undermine it in Iran. The election itself is also a risk to negotiations.

The US and Iran were close to a deal in 2009, after Obama’s election brought an offer to deal directly with Iran. But the disputed Iranian presidential elections that year, and the regime’s repression of the opposition Green Movement, eventually forced the White House to condemn the rulers in Tehran, freezing the diplomatic progress. (The US also later rebuffed an Iranian overture, sent via Brazil and Turkey, to revive the talks, saying it needed to make its offer direct.)

For the sake of the negotiations, that leaves the US in the awkward position this time of hoping a conservative with Khamenei’s backing wins Iran’s presidency. Analysts expect that outcome, and say Iran’s middle class are in any case too tired and beaten down to launch any significant protests, although Ahmadinejad’s broad support among working-class Iranians could still cause some problems for Khamenei. Assuming a Khamanei candidate wins a convincing victory in June (avoiding a second vote, which would lengthen the hiatus before talks could progress again), late summer would be an optimum time for Washington and Tehran to do a deal, says Shashank Joshi, a research fellow at the Royal United Services Institute in London.

But then things could get trickier, for other reasons. Any deal-making would be “graduated”, says Joshi. That would involve much-mooted “confidence-building measures”, but not a wide-reaching agreement. For Iran, that means loosening the embargo beyond the offer already on the table, which for now only promises an easing of sanctions on petrochemicals and gold trading (Turkey had been paying for Iranian gas with gold). Western governments could, for example, allow Iran access to Swift, the international banking network. In exchange, the Western powers would want evidence that Iran had halted uranium enrichment and was allowing verification of its nuclear industry by the IAEA.

At that point, Israel’s hawkish stance on Iran would come to bear on the process, too. Prime minister Benjamin Netanyahu’s chief foreign-policy aim is to stop Iran from acquiring the means to make a nuclear bomb - and his threshold is far higher than the Western powers’.

Fearing an empowered Iran, Arab Gulf states would also oppose any loosening of the economic screws on the country, say analysts.In fact, thanks to high oil prices, which helped Iran amass foreign currency reserves of around $110bn, according to the CIA, and the relatively small share of oil exports in Iranian GDP (thought to be around a quarter), its economy under sanctions may be faring better than thought. Iran’s economy has weathered economic hardship before. The latest crisis has given the government an opportunity to cut fuel subsidies, for example, and the de facto part-privatisation of the oil sector - handing contracts to individuals to avoid the tighter sanctions on state-controlled entities - has helped, too.  

That leaves Iran’s economy ready for a “boom period” if and when sanctions are lifted, says PPI’s Butt. “That is what the Arab Gulf states are worried about.” Indeed, a mainstay of conspiracy theories in the region is that the West and Iran will eventually do a grand bargain at the expense of the US’ Arab allies. Rumours abound of Western executives - and even Israelis - already doing business in Iran. Even if some Nixon-in-China moment arrives for the US and Iran, though, bigger obstacles are likely to emerge back in Washington.

Of the many international sanctions now affecting Iran, the most onerous are those stemming from the US Congress - and for any lasting agreement between the two countries, the Capitol will have to play ball, too. But if the high-level politics are shifting, Congress has not caught the mood. Lawmakers this year have already introduced tougher new sanctions on Iran.

Ever-tighter screws may be a necessary precursor to political compromise later. But even if Obama and Khamenei make some kind of breakthrough this summer, unpicking the edifice of sanctions erected over many years will be difficult. The president could provide some sanctions relief by executive order. But his remit does not cover the measures that have been imposed by Congress.

Before the most stringent parts of the US embargo could be de-legislated, says Thomas Laryea, a partner at Denton, a law firm in Washington, Obama would have to present a certification to Congress showing that Iran had ceased all its efforts to acquire nuclear-weapons capability. That may put Congress’s threshold for an agreement closer to Israel’s than to the White House’s. If Obama finds negotiations with Tehran tough, persuading Congress to bring Iran in from the cold could be just as difficult, especially given the power of Gulf Arab and Israeli lobbying on the Hill.

Nor could Obama simply extend waivers to sanctions, allowing more Iranian oil to flow. As a negotiating position it is a non-starter for Tehran, says Joshi, because such waivers could be easily reversed, whereas the concessions Iran would need to get them - shutting down Fordow, say - would be more permanent. So even if the politics all go swimmingly in the coming months, the end of the sanctions is not nigh. Removing sanctions tends to take far longer than imposing them.

Whether Iran would have the patience to do its half of the deal and wait for Obama to win over US Congress is debatable. The intervening period would, in any event, leave plenty of time for decades-long mistrust between the two sides to poison things. Iran’s activities elsewhere in the Middle East - backing the Assad regime in Syria; its influence in Iraq; support for Hizbollah in Lebanon; and meddling in Yemen - continue to make the West nervous. Some of Congress’s sanctions on Iran relate as much to the country’s activities around the Middle East as they do to its nuclear programme. Meanwhile, analysts say Iran’s leaders still suspect the US government’s real aim is regime change in Tehran. The example of Libya, where Colonel Qadhafi renounced his weapons and was later killed during a Nato-backed uprising, hardly encourages them.

Meanwhile, an enmity that has lasted three decades also has its own institutional momentum. As great as the rewards for Iran and America - for the latter, not least a sharp fall in oil prices as Iranian crude returned to market - there are many people whose careers now depend on the twilight war between the two countries; and some businessmen in Iran who have thrived under sanctions. “There are good reasons for thinking that, rather than adjusting its nuclear policy to remove the sanctions, the regime will continue to adjust its economic policy in order to adapt to them,” said a recent report from the International Crisis Group (ICG). The ICG added that the impact of sanctions had “in many cases acquired a life of its own, one that will outlast the measures themselves. This is because important trading and consumption patterns already have changed.

Companies and countries that have shifted away from Iran – often at considerable expense – are unlikely to rush back, at least short of solid assurances that any decision to remove the penalties will be lasting rather than temporary.” That does not mean diplomacy cannot work.

The alternative is the kind of disintegration experienced in the 1990s by Iraq, the last country to suffer similarly onerous Western sanctions. That did not end well - and such a prospect would probably make Iran more, not less, likely to pursue the bomb. “The stakes are so high that a deal has to happen eventually,” says Butt. Joshi rates the chances of an agreement later this summer at 50%. But the breakthrough is likely to be small, he says, with a long road ahead of it. Iran’s shuttered oil exports are not likely to hit the market any time soon.

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