Iran: Bringing the Deal Home

Published on January 16, 2014

The Islamic Republic of Iran and the negotiating team of the P5+1 UN Permanent Security Council members plus Germany reached an agreement this week on the terms of a six-month temporary, yet confidence building and ground breaking, deal on Iran’s nuclear program, which will be implemented starting this Monday, January 20.

The agreement lays out specific commitments on enrichment, research and development, stockpiles, and inspections by Iran in exchange for some limited sanctions relief from the P5+1, along with a timetable for implementation. The details have been publically released and distributed by the White House and we will not repeat them all here, although we would be happy to discuss them with those interested.

Suffice it to say the deal is the successful, fully intact, culmination of the loose framework first agreed to in the November 14, 2013 Joint Plan of Action – a deal that triggered howls of protest all over at the time from hawks ranging from Tehran to Tel Aviv, Riyadh, and Washington (See SGH 11/18/13, “Iran: Round Three Odds of Breakthrough in Geneva”).

*** With the agreement now signed and sealed, U.S. and European officials will continue to reassure the hawks that the pressure on Iran to comply and rollback its nuclear program even further will still remain, and that the oil export sanctions in particular remain fully in place, at least until Iran fulfills its commitments during this six month period. But for oil markets, the parallel easing that was approved of restrictions on the reinsurance of Iranian cargo vessels by European insurers has already and will have a material and immediate impact in facilitating the delivery of Iranian oil to markets, including the estimated 46-48 million barrels of Iranian crude oil floating in 23-24 tankers at sea. ***

*** In addition, and much to our surprise, we have heard from EU sources that the six month agreement, which is expected to lead to a “grand,” and by definition much more complicated and contentious, permanent agreement at its conclusion, could be extended for another six months. In fact, given the challenges faced by the negotiating parties to get to the next phase, we have picked up an actual expectation that this interim deal will result in a second six-month deal of either a continuation of the current measures as stands, or a continued, graduated step by step parallel negotiations process, rather than a grand deal. ***

*** The impact, or even possibility, of an extension would avoid a cliff style, “do or die,” confrontation in six months, ensuring further stability and easing for oil markets, make room for more modest and achievable targets and rewards for both sides, and, incidentally, push the negotiations over the next phase beyond the November 2014 US midterm elections. With the ink barely dry on the first six-month deal, it is however in no one’s interests to even suggest the real possibility of such a longer, more drawn out cycle. ***

The Rush to Tehran

Any hint of a potential change in the time frame to an eventual agreement, especially hot on the heels of an extremely hard fought breakthrough and victory on the first stage of a deal with Iran would immediately pour fuel over the fire of conservatives and security hawks already fuming over what they perceive as an overly generous Obama tilt towards Iran.

Reports out of the Russian media that Foreign Minister Sergei Lavrov was scheduled to discuss a new oil for trade deal with Iran – interpreted by some as implying a weapons barter, such as the air defense systems Moscow has on occasion dangled in front of Iran and as a threat to the US – have already raised alarm bells in Washington, and among those warning of a potential uncontrolled fraying of the sanctions regime once the proverbial glass has been broken.

Iran’s President Hassan Rouhani and Foreign Minister Javad Zarif, ultimate pragmatists, and committed to a successful deal with the West, on their way to what is expected to be an international love-fest at the ski resort of Davos, have gone out of their way to quickly dispel those rumors, which would be a clear and immediate violation of the existing sanctions agreements, as have senior Russian officials. US officials, however, remain quietly cautious in their response to these allegations.

On a less sinister note, the EU has also already opened the floodgate to potential new commercial activity with Iran, albeit with a much clearer assurance of maintaining sanctions discipline. Trade missions and policy makers rushing to make the trip to Tehran include private sector firms like Renault and PSA, the Italian Finance Minister, and the President of Poland.

There is even, from what we understand, some consideration of imminently establishing a permanent EU mission to Tehran. With over 130 missions abroad, Iran is the only major country the EU does not at this point have relations with.

In addition to commercial ties, on a strategic level the EU has long anticipated the re-opening of gas routes to Iran as an alternative to Russia, especially in light of the increasingly tense relationship with President Putin.

This potential boom in the restoration of EU trade with Iran will undoubtedly up the pressure from US companies on the Treasury Department to review, separate from the oil sanctions, the long standing “OFAC” trade sanctions against Iran. The administration however categorically continues to rule out any movement or even discussion of this whatsoever until at least after the first phase is completed.

Nursing a Deal through Gunfire

The White House in the meantime already has its hands full with a very public battle with the Senate to block a new Iran sanctions bill led by Senators Mark Kirk (R-IL) and Bob Menendez (D-NJ) that would threaten Iran with additional measures were it to fail to comply with the deal.

The bill is wildly popular in Congress, both as a high profile gesture of support for Israel, and quite cynically as political positioning by Congress to take credit for the success, as well as distance itself from the possible failure, of the Obama outreach.

But odds are that Majority Leader Harry Reid never brings the bill to the floor, and simply agrees to leave it hanging as a threat. Even if it is brought to the floor and passed, it is structured to be only triggered if Iran fails to comply, and as such, beyond angry protests, it probably will not, as warned by the White House, lead to a breakdown of negotiations from the Iranian side.

So in fact, for markets, a Senate sanctions bill would not as generally assumed be a bullish event, a potential killer of a deal with Iran that would have eventually brought more oil back to markets. Rather, negotiations would likely continue, and a new sanctions bill would more probably serve more to¬†further erode, as warned by the White House, Obama’s negotiating position and the international sanctions discipline, most specifically with China and most especially with Russia – already the most questionable beneficiary of the current track of negotiations. And that would if anything be yet another bearish signal for oil.

In either case the Senate bill will most likely remain bluster and noise, a political club to hold over the President’s head and advertise to domestic constituencies rather than a factor that actually breaks down negotiations that Tehran and Washington are already deeply vested in.

Secretary of State Kerry for his part has invested a good deal of personal effort in mending the strained relationship between President Obama and Israeli Prime Minister Bibi Netanyahu, and assuring the US ally of its continued support and mutual interest.

The fact remains, however, that the gap between Tel Aviv and Washington’s objectives on Iran has been clear now for some time – namely the difference between the insistence in Tel Aviv that the international community seek a full dismantling of all of Iran’s nuclear capabilities versus the willingness to allow for a limited nuclear program. And the American Israeli Political Action Committee will be gearing up the pressure in readiness for its annual meetings in March.

On the Saudi side, from what we understand General Lloyd Austin, head of CENTCOM, which includes the Gulf and Middle East, has been spending considerable time in Riyadh assuring the Kingdom of the ultimate military support of the United States should push ever come to shove despite its increasing dialogue with Iran.

But while US military ties with Saudi Arabia and the Gulf indeed remain at the highest level, including the sale for example of $140 billion or so of aircraft to the GCC, the reality is that Obama administration officials concede that on top of the unprecedentedly harsh and emotional public complaints by senior Saudi officials over US policy in Bahrain, Egypt, and Syria, there is a real difference in policy on Iran between the two that both countries will simply need to adapt to. Former Ambassador to the US, Prince Bandar, perhaps due to the fact that he was so very close to the United States through his career, has been singled out as especially unhelpful in his recent public comments.

President Rouhani, on the other hand, with international political momentum on his side, and drawing on the oxygen provided against his own hardliners from the deal with the P5+1, yesterday reached out an “arm of friendship” to Riyadh.

The Gulf States, including Dubai, have already responded positively and embraced recent developments in the Iran negotiations with some guarded enthusiasm, even despite ongoing territorial disputes over some islands. But the proxy war being played out between Sunni Saudi Arabia and Shia Iran in Syria remains a bitter and absolute, immediate impediment to any rapprochement whatsoever between the al-Saud and Iran.

While Iran was “dis-invited” (or more accurately, never invited) to the struggling Geneva II peace talk round on Syria, the State Department has nevertheless been looking for any sign from Iran that it can play a more constructive role in the negotiations and international regional arena on Syria before then considering pulling Tehran in even in the sidelines of a regional agreement.

Zarif’s laying of a memorial wreath on the tomb of former Hezbollah leader and accused terrorist Imad al-Mughniyeh was certainly not helpful, but that one is being chalked up to distasteful domestic politics and theatrics.

As to concrete steps with Syria, while the EU and U.S. have little expectation that Tehran will abandon its ally Bashar al-Assad, they would at least like to see evidence of cooperation on the military de-escalation front through minimal humanitarian measures to start such as allowing for more direct access for relief convoys and medical supplies to war victims in Syria.

That would at least be a first step, and a high profile one, for the political elements in Iran to demonstrate they are willing and perhaps more importantly capable to even slightly reform Iran’s Revolutionary Guard led image as a “bad actor” on the regional stage.

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