February 18, 2014

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TSG IntelBriefs: Iran Nuclear Talks: Gauging Optimism

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Talks on a Comprehensive Deal Begin

As of mid-February 2014, talks between Iran and the P5+1 (US, UK, France, Russia, China, plus Germany) are under way to convert the interim nuclear deal known as the “Joint Plan of Action” (JPA) into a permanent settlement of the nuclear issue. Although all parties have said that talks will be difficult and no positive outcome is assured, there is some cause for optimism. Implementation of the JPA formally began on January 20. On the same day, the International Atomic Energy Agency (IAEA) certified that Iran had taken the required steps, including severing applicable connections, that would preclude enrichment uranium to 20% U-235—a significant part of the process to produce weapons grade uranium (90% U-235). Also on January 20, the US and European Union eased sanctions on Iran in line with the requirements of the JPA, and US State and Treasury Departments issued the required waivers of US law to do so. On February 1, Iran received the first $550 million installment of the $4.2 billion in hard currency oil revenue it is allowed to receive directly during the JPA period.    
In advance of the start of the talks on February 17, Iran agreed to provide answers to IAEA’s interrogatories about Iran’s purported calculations and experimentations to produce a nuclear explosive device (so-called “possible military dimension,” of its nuclear program). That represented a key confidence-building measure that has led some in the international community to raise their estimates of the possibility of reaching a permanent settlement. However, because of the complexity of any final deal, US officials continue to assert that the most likely outcome of the talks is an extension of the interim deal beyond its July 20, 2014 expiration.

However, mixed messages—or at least rhetoric—from Tehran continue. With last week’s 35-year anniversary celebration of the Iranian Revolution—and almost obligatory anti-US and anti-Israel vitriol—Iran’s supreme leader Ayatollah Khamenei said the “[nuclear talks] would lead to nowhere,” and the same time remarked, “Iran will not breach what it started.”

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Sanctions Erosion?

The sanctions relief requirement of the JPA has been a matter of contention between the US and some of its international partners. In addition to providing Iran with $4.2 billion in hard currency, the JPA requires the US and its partners to lift sanctions (for the JPA period) on: Iran’s trading in precious metals; purchase of automotive manufacturing parts and equipment; purchase of civilian aircraft parts; and exportation of petrochemicals.

These measures were of significant interest to many countries: Turkey and the United Arab Emirates, for example, have had large scale dealings with Iranian merchants in gold and other precious metals. China and France are major suppliers of Iran’s automotive manufacturing sector, and Iran’s domestically produced cars are based on designs by Renault and Peugeot. Japan and South Korea are major buyers of Iran’s petrochemicals. China, Japan, South Korea, Turkey, and India are the remaining buyers of significant quantities of Iranian oil—all want to buy more and could assess as low the risk of US sanctions.

Beyond these selected sectors, many firms consider Iran to be a significant potential market in the Middle East. Iran has over 70 million people and its gross domestic product (GDP) is over $500 billion annually. Iran’s population is well educated and sophisticated and, despite the positions of its government over the past 35 years, have an appetite for Western goods and technology.  

The economic and financial interests in the Iranian market explain why governments and corporations were heartened by the JPA, and hope for a final settlement in which all remaining sanctions on Iran are lifted permanently. However, these same financial interests have caused tensions between the US and some of its partners—tensions that Iran seeks to exploit as nuclear talks proceed. Since JPA implementation began in January 2014, major trade delegations from France, Italy, Turkey, and other countries have been meeting with Iranian officials and businessmen to explore future deals. Responding to the visit to Iran of over 100 French executives, President Obama said during his joint press conference on February 11 with visiting French President Francois Hollande, that any company that enters the Iranian market in advance of sanctions lifting does so at its own peril “because [the United States] will come down on them like a ton of bricks.”  

In its efforts to ensure compliance does not erode broadly, the Administration continued to impose sanctions on violating foreign entities under existing laws and Executive Orders. On February 6, companies from Turkey, Spain, Germany, and UAE were sanctioned.

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Divisions on the Way Forward

Even though, according to US officials such as Undersecretary of State Wendy Sherman, no major deals have been signed with Iran that would violate sanctions, stepped up engagement has been cause for concern. In particular, Israeli Prime Minister Benjamin Netanyahu justified his opposition to the JPA on the grounds that modest sanctions relief would undermine compliance with remaining sanctions broadly, and reduce pressure on Tehran to make an acceptable final settlement deal.  Prime Minister Netanyahu has cited trade delegation visits to Tehran as affirmation of his views. He is likely to use the delegation visits to again criticize the wisdom of the JPA when he visits President Obama in early March.

US officials take the opposite position. In their view, the sanctions easing of the JPA has given Iran a “taste” of sanctions relief, and a re-imposition of all sanctions could cause major domestic unrest in Iran. According to this argument, the sanctions relief is giving Iran more, not less, incentive to negotiate a permanent settlement in good faith. Still, US officials acknowledge that it is uncertain whether Iran will be willing to reduce the size and scope of its nuclear program to a point acceptable to the P5+1. The US position, in many ways agreeing with Mr Netanyahu, is that an acceptable final state of Iran’s nuclear program is one in which it has no capacity to secretly or suddenly produce enough fissile material for a nuclear device. This almost certainly implies that Iran would have to accept a purely symbolic uranium enrichment capability—directly contradicting regime assertions that any final settlement must accept Iran’s inalienable right to enrich uranium.

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• Prime Minister Netanyahu’s March visit to Washington will likely result in agreement that any final nuclear deal with Iran leave Tehran with a symbolic—and heavily inspected—uranium enrichment program

• Iran’s regional neighbors, such as Turkey, Iraq, and UAE, and key trading partners in Europe and Asia, will try to take advantage of the JPA to explore future business with Iran, although concern for US reaction to sanctions transgressors make unlikely major deals in the absence of a permanent nuclear deal    

• However, Iran’s major oil customers China, Japan, South Korea, Turkey, and India might slightly increase their purchases of Iranian oil even though the JPA requires Iran’s exports to remain constant at one million barrels per day.

• Iran will continue to negotiate a permanent nuclear agreement to achieve sanctions easing, but all sticking points with the P5+1 will not be bridged by the expiration of the JPA on July 20

• It is likely the JPA in its present form will be extended until the end of the year.  

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