Iran: On the Cusp of a Nuclear Deal

Published on March 13, 2015
SGH Insight
"If, defying the skeptics, there is a substantive agreement on a framework by the end of March, as we expect, the next deadline will be July 1 for a comprehensive agreement."
Market Validation
(FT 03/24/15) "The prospect of a wave of Iranian crude exports has already hit internationally traded Brent: after rebounding to $60 a barrel last month, it now hovers around $55 a barrel amid expectations of a deal by March 31."

Another critical deadline in the tortuous negotiations between the “P5+1” (US, France, UK, Russia, China, and Germany), and Iran, over Tehran’s nuclear development program is fast approaching at the end of this month.

Yet even as the negotiators are feverishly struggling to close the last major gaps that remain for the high stakes agreement, a group of 47 US Republican Senators, in sympathy with Israel’s hawkish Prime Minister Benjamin Netanyahu, sent a highly confrontational and controversial letter addressed directly to Iran’s Supreme Leader Ayatollah Ali Khamenei threatening Congressional rejection.

*** The pressure and bitter attacks from conservatives in Congress on President Obama’s Iran policy will hang ominously over negotiations and are guaranteed not to go away, almost no matter the result. But if anything, the unprecedented Republican and Israeli interventions look to have backfired, and indeed, we believe, have actually helped clear much of the political underbrush in bringing the US, its P5+1 allies, and Tehran even closer to delivering a “Framework Agreement” to a nuclear deal by the end of March. We believe the odds for such an agreement could now be as high as 75%. ***

*** In Tehran, the Supreme Leader for his part appears to remain firmly committed to bringing the negotiations to a successful conclusion. Even though the Republican letter could now be used to pin any failure of a deal on the hardliners on Capitol Hill and Tel Aviv rather than Tehran, Khamenei  continues to lend his support to the moderate Iranian President, Hassan Rouhani. Khamenei’s measured response to the latest salvo has been very much in the spirit of keeping negotiations on track during this critical phase to the end of the March deadline on the Framework Agreement. ***

*** That said, however, there is some concern among Iran analysts and intelligence services that the even harder-line conservatives in Tehran are also digging in like their counterparts in Washington and Tel Aviv to derail the deal, especially given ongoing rumors about Khamenei’s health and a possible looming generational transfer of power in Tehran. They point to a little noticed 47-26 victory of a relative hardliner, former head of the judiciary Ayatollah Mohammad Yazdi, in internal elections on March 10 over the well-known pragmatist Ali Akbar Hashemi Rafsanjani to lead the shadowy Assembly of Experts that is constitutionally charged with appointing a new leader. ***

*** But we would downplay those concerns. We understand the regime to be more united than not when it comes to the nuclear negotiations issue, and that includes, crucially, a growing tacit support for a deal from the Revolutionary Guards. And in the richest of ironies, the pushback from Congress adds credence to the argument that President Obama is in effect offering Iran an extremely equitable deal that could be the best there is to be had. ***

When it comes to the Western negotiators, with oil prices as low as they are, the tendency and incentive we believe will be to ease up first on commercial, financial and investment restrictions than on oil exports. And certainly for one of the negotiators on the other side, Russia, an imminent easing of Iran’s oil sanctions would be downright unwelcome. A deal would nevertheless accelerate market expectations for an eventual increase in the supply of oil out of Iran.

The Deal on Enrichment and Sanctions

When it comes to the actual terms under negotiation, the two sides appear to be extremely close on four of seven key issues – limitations on the number of active centrifuges, the treatment of enriched uranium stockpiles, research and development, and the duration of a moratorium in enrichment.

And for all the mistrust and harsh rhetoric, US sources with access to intelligence briefings privately concede that Tehran has so far appeared to deliver on virtually every promise made to date aimed towards fostering an atmosphere of trust for an ultimate deal.

The remaining contentious issues appear to surround additional “PMD” (Possible Military Dimensions) of the nuclear program, including the treatment of the Parchin military base, and from the Iranian side, around what pace the P5+1 will ease sanctions once a framework deal is in place.

Negotiations over a full inspection regime are also awkward in that for all the denials and fatwas against nuclear weapons, it is fairly clear Tehran has in fact been aiming at militarization for years. A full inspection regime will require more than an element of “don’t ask, don’t tell” on past sins if it is to ever succeed.

But for all that, it is much less now the mechanics of an actual nuclear deal, but rather the pace of the quid pro quo release from sanctions which are so critical to oil markets and the Iranian economy that is the focus of Khamenei’s remaining demands.

The blanket easing as demanded by Khamenei of what are still the West’s strongest leverage points on enforcement — oil, insurance, and financial sanctions — is simply not going to happen. But even any partial easing will in the end probably be welcomed in Tehran.

After a Framework

Khamenei may still hold out on his end for what may appear to be impossible demands, and he has been known to make considerable domestic sacrifices in pursuit of his “red lines.”

But we think that unlikely.

There is enormous interest on all sides at this point in achieving an agreement on the Framework by March, which is both a self-imposed deadline and one that Congress has threatened to respond to with further sanctions if there is no deal.

If, defying the skeptics, there is a substantive agreement on a framework by the end of March, as we expect, the next deadline will be July 1 for a comprehensive agreement. And we would not be surprised if some of the final contentious details at this next stage could be extended if need be and negotiated past that deadline.

But any such delay at that point would represent a minor setback to the tailwinds of an historic agreement on a major framework for the gradual de-escalation of military and economic, even if not yet political, hostilities between Iran and the West.

Iran after Khamenei

As to domestic social and economic Iranian politics, while a win last week by Rafsanjani to head up the Assembly of Experts would certainly have presented a breath of fresh air to the overall reform movement in Iran, he was always a long shot for that role, and far too dramatic a shift at this point in time from the status quo.

And for all the renewed focus suddenly on the Assembly of Experts and its significance in a post-Khamenei world, in truth that institution has over the years transformed into what is in essence a rather unwieldy octogenarian rubber stamp group for the smaller subset of back room negotiators who will be making the succession decision.

Expectations in Tehran are that the succession, when it comes, may still go to one of three leading candidates: the moderate Grand Ayatollah Mohammad Hashemi Shahroudi, Rafsanjani himself, or in worst case, the hardline Ayatollah Mohammad-Taqi Mesbah Yazdi. The betting is that the winner will be one that very deliberately will represent if not some moderation, a continuity in the status quo.

The succession to the next Supreme Leader may in the end prove as important as the final terms of a nuclear deal between Iran and the P5+1 to the prospects for Mideast stability as well as the outlook for oil prices, and so will bear watching closely.

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