Iran: Moving to the Next Round

Published on November 25, 2013

Well, it certainly did not take long for skeptics and critics of the nuclear agreement reached between Iran and the P5+1 in Geneva this weekend to loudly voice their concerns with the deal. And not surprisingly, Israel’s Prime Minister Benjamin Netanyahu was one of the first out of the gate, decrying the agreement as a “historic mistake” before the ink on the treaty was barely allowed to dry.

But for all the criticism, markets that had remained skeptical of an actual deal right up to Friday have given it a tentative thumbs-up: oil prices have plunged – which we expect will remain under pressure – while risk markets have rallied. Perhaps ironically, even the Tel Aviv stock exchange has eked out some gains on the prospects of a de-escalation of tensions, even if the easing of tensions proves temporary (see SGH 11/18/13, “Iran: Round Three Odds of Breakthrough in Geneva”).

*** The terms of the six month deal, we believe, will be implemented rapidly and with little actual resistance from opponents on both sides of the table. In Iran, conservatives in the Majlis, Iran’s parliament, were not shy about attacking President Hassan Rouhani before the last round of Geneva talks for putting so much of Iran’s nuclear enrichment advances on the bargaining table right off the bat in exchange for very limited concessions. But Supreme Leader Ayatollah Ali Khamenei has pointedly and in no uncertain terms lent his personal support to the deal since then, congratulating Rouhani and the Iranian people for putting the country on a more positive path than it has been under the current nuclear and economic impasse. ***

*** In the US, a large number of US Senators from both sides of the aisle have likewise openly criticized the agreement, but they will not stand in the way of this deal either. A broad and bipartisan group including Charles Schumer (D- NY), Rob Menendez (D-NJ), Mark Kirk (R- IL), and Marco Rubio (R- FL), are in support of legislation that steps up sanctions on Iran, but only should the two sides fail to reach a comprehensive agreement after the six month first phase of the deal is over, or should Iran violate the terms of the interim deal. This legislation will likely be mirrored on the House side, also in broad bipartisan fashion, with both the Majority and Minority Whips, Kevin McCarthy (R-CA) and Steny Hoyer (D-MD) respectively, pledging enforcement. ***

*** For the all-important oil markets, the agreement of course does not lift oil export restrictions on Iran, but it does raise the possibility of future increases in both export and perhaps even more importantly in production capacity (see again, SGH 11/18/13, “Iran: Round Three Odds of Breakthrough in Geneva”) – all at a time when domestic production of shale oil in the US continues to expand. In addition, from what we understand, China has already been quietly increasing imports from Iran in the run up to Geneva, with year on year imports we hear up approximately 25%. The Obama Administration can and has provided waivers to various (mostly Asian) importers of oil from the sanctions, but the concern from skeptics is that these waivers may now be either formally increased or informally breached more easily after an interim deal. ***

Fraying Sanctions, Either Way

While more leakage may indeed be the case and a cause for concern, if the talks had in fact failed, the international sanctions discipline would have increasingly frayed anyway. Specifically, we understand Beijing had sent signals that while it had agreed to sign on as a member of the P5+1 to sweeping oil and financial sanctions on Iran in order to bring Tehran to the negotiating table, that enthusiasm would not last forever. It would have faded rapidly if the US, pushed by Congress, were to have driven a bargain so harsh it scuppered the Geneva talks once Iran had come to the table in what can at least be construed in some courts of international public opinion as good faith.

There is a reassessment meanwhile underway in Israel of the effectiveness of Netanyahu’s brutally sharp and candid warnings and communications policies, and whether these have in fact served to marginalize Tel Aviv’s role as a partner of the US in these negotiations or not. Either way, Tel Aviv and Washington will now go to great lengths to reaffirm and reassert the historic and strategic alliance between the two countries, and Israel will, despite its objections, allow the first stage of the agreement to proceed with no interference. The focus will entirely be on the second and hopefully permanent phase of nuclear negotiations.

But despite Israel’s concerns over a potential erosion of the unity and effectiveness of sanctions, the Geneva

agreement did achieve one of Netanyahu’s objectives – that is to distance Tehran further from that uranium enrichment “neckline” in the Wile E. Coyote cartoon style bomb depiction he memorably drew at the United Nations in September of 2012. Iran has up to now deliberately stopped short of the 225 to 250 kg of 20% enriched uranium stockpile estimated needed to produce a bomb (when converted to 90%), and has now agreed to “neutralize” its estimated stockpile of 190 kg over these six months down to zero by converting it to fuel rods, and to desist from any further enrichment beyond 3.5%.  

While this would and does fall short of the objective of dismantling Iran’s capacity, it is a real concession nevertheless, in that it pushes Iran further back in its ability to “turn the key” on a nuclear weapon. Furthermore, that Tehran has agreed to freeze development of its plutonium reactor in Arak when it is still estimated at over a year away from being operational, means that were a second round deal fail, the Western powers would at least have a window to “deal with” Arak, which is potentially the most dangerous site due to the severe consequences of a plutonium cloud, as well as with the uranium, if it were militarily attacked.

Finally, for Iran, even if there is in fact a quiet trickle or erosion in the oil sanctions regime, which could on the margins depress an already oversupplied oil market, those and the $7 billion release of frozen assets would still fall far short of the relief from the deep freeze on financial transactions and large scale oil exports and investments that has crippled the Iranian economy. In other words, Iran will still have plenty of incentive to keep negotiating.

Year-old Back Channel

On a final note, the press broke a story over the weekend that Deputy Secretary of State William Burns and Vice President Joe Biden’s national security adviser Jake Sullivan had been holding secret back channel negotiations with Iran for over a year, including in Muscat, the capital of Oman.

But we had noted just such a back channel was indeed underway in a report more than a year ago (see SGH 10/11/12, “Iran: A November Opening”) as an outreach to Tehran by the Obama Administration in anticipation of a second term win. On the Iranian side, the back channel talks were encouraged by former President Ali Akbar Hashemi Rafsanjani in anticipation of the June 2013 elections when former Iranian President Ahmadinejad would be stepping down.

The incoming President Rouhani is in fact a protégé of Rafsanjani, who happens to also have enormous commercial interest in the country. This outreach, almost exactly a year ago, was subsequently picked up by a newspaper at that time as well, but quickly denied by an Obama administration sensitive to election politics.

We also wrote in August of this year of a visit by Sultan Qaboos of Oman to Tehran, and that he is known in the intelligence community as a back channel intermediary between the US and Iran, as well as of a visit to Tehran at the time by UN Undersecretary Jeffrey Feltman, a former State Department official.

Members of Congress have rightly, therefore, responded to these revelations with a shrug. They are more focused now on “keeping Iran’s feet to the fire” than old history, and crafting legislation that would, some might say cynically, also give Congress the political freebie of taking credit should there be a successful final outcome in claiming it was they, not the Obama administration, who kept the Iranians at the negotiating table. There is no urgency however to crafting that legislation, and it will after all just have to wait until after Thanksgiving.

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