March 11, 2022

IntelBrief: Iran Talks Intersect Ukraine Crisis

AP Photo

Bottom Line up Front

  • The spike in world oil prices has instilled urgency in multilateral talks in Vienna to restore the 2015 Iran nuclear agreement that the United States exited in 2018.
  • While diplomats from all parties to the talks recently asserted that an agreement in Vienna was at hand, last minute Russian demands have complicated final progress on the agreement.
  • If an agreement is reached, Iran could likely eventually put an additional 1.5 million barrels per day of crude oil on the market, reducing the upward pressure on world oil prices.
  • Russia seeks to ensure that Ukraine-related U.S. sanctions would not prevent it from resuming full trade relations with Iran under a restored nuclear pact with Tehran.

Last minute Russian demands are stalling significant momentum in ongoing talks in Vienna to restore full Iranian and U.S. compliance with the 2015 multilateral Iran nuclear deal. The talks involve all seven parties to the deal—Iran and six powers referred to as the P5+1 (i.e. the United States, Russia, China, France, and the United Kingdom as the permanent five Security Council members, plus Germany). The 2015 nuclear agreement, which the Trump administration exited in 2018, trades strict limitations on Iran’s nuclear program for broad relief from U.S. sanctions that have significantly reduced Iran’s oil exports and shut Iran out of the international financial system. Secretary of State Antony Blinken said on March 6 that significant progress has been made, but some key issues remain outstanding and require resolution before an accord can be finalized. Navigating new Russian demands—to ensure that sanctions related to the invasion of Ukraine would not impact Russian trade with Iran—has challenged recent progress on the nuclear agreement.

The Vienna talks began well before Russian President Vladimir Putin’s intentions to launch an all-out invasion to try to replace Ukraine’s government became clear. U.S. diplomats have stated, throughout the rounds of talks, that Russian diplomats were helpful in trying to convince Iran to make the necessary concessions to reach an agreement. They had stated that the Russian invasion of Ukraine has not materially affected the ability of Russian and U.S. diplomats to continue working together to bring the talks to a successful conclusion; however, Tehran’s rhetoric on complying with Russian demands has shifted in recent days, prompting additional barriers to proceeding in negotiations. When asked how U.S. and Russian diplomats could continue working together in Vienna despite the Ukraine invasion, U.S. officials explain that it is in the interest of all parties to restore an accord that limits Iran’s nuclear program, which has expanded significantly over the past three years. In its latest quarterly report, dated March 3, 2022, the International Atomic Energy Agency reported that: “Iran is now closer than ever to having enough highly enriched uranium-235 that, when further enriched, would be enough for a nuclear bomb.”

Russia’s invasion of Ukraine has instilled new urgency in U.S. efforts to conclude a deal in Vienna. U.S.-led sanctions imposed on Russia in response to the Ukraine invasion have caused world oil prices to spike by about 20% since the Russian attack began—to over $110 per barrel. Prices of natural gas, on which European countries are highly dependent, had been increasing well before the invasion, and have similarly escalated since the Russian attack. U.S. sanctions reimposed on Iran in 2018 have reduced Iran’s oil exports from their normal baseline level of about 2.5 million barrels per day (mbd) to below 1 mbd. Iran’s oil exports would be lower except for the fact that China has decided to run the risk of triggering U.S. sanctions on any country that buys oil from Iran. About 60-70% of Iran’s oil exports now go to China alone. A deal in Vienna that results in the lifting of sanctions on Iran could put about 1.5 mbd of crude oil back on the market, although it could take Iran several months before it is capable of fully restoring oil export operations to that level. Myriad factors could influence the degree to which a full Iranian return to the oil export market might ease world oil prices, including whether Saudi Arabia and other major producers cut back production to compensate for an increase in Iranian supply. But most energy experts assess that a deal in Vienna will be highly favorable for oil consumer nations and would give Washington additional leverage with which to sanction Russia’s energy sector.

The U.S. urgency to try to complete the Vienna talks has also provided Russia with leverage that Moscow wants to use to erode Western sanctions imposed for its invasion of Ukraine. On March 5, Russia’s Foreign Minister Sergei Lavrov issued a demand for written guarantees that Ukraine-related sanctions won’t prevent it from trading broadly with Tehran under a revived Iran nuclear pact. Lavrov’s demands appeared to broaden the previous Russian requirement—already agreed to in the Vienna talks—that Ukraine-related sanctions would not affect Russia’s performance of post-deal civilian nuclear power work in Iran. Secretary of State Blinken stated on March 6 that the sanctions on Russia over its invasion of Ukraine "have nothing to do with the Iran nuclear deal." It is also likely that Tehran realizes that its leverage over the final stages of the nuclear negotiations has increased, by virtue of its ability to put more crude oil on the market. It is not clear that Tehran, which is reeling from nearly four years of comprehensive U.S. sanctions, has demanded any new concessions that might derail reaching an agreement, to date. But Tehran, like Russia, is likely to look for ways to take advantage of the U.S. and European interest in quickly getting more oil on the global market and limiting the economic pain from the Ukraine-related sanctions. As Russia has, Iran historically has sought to use any available opportunities to maximum advantage. Expressing concern about the latest obstacle, Britain, France and Germany issued a statement on Tuesday, arguing, “The window of opportunity is closing… We call on all sides to make the decisions necessary to close this deal now, and on Russia not to add extraneous conditions to its conclusion.’’