April 16, 2012

TSG IntelBrief: Iran Nuclear Talks Produce Potential for Resolution

• The nuclear talks on April 13-14 did not begin broaching core substantive issues, but Iran’s agreement to discuss in earnest its nuclear program was enough to justify starting a long process of negotiations with the six negotiating powers. The talks will likely require several rounds, over many months, to determine an outcome.

• By the end of 2012, the international community will know whether Iran is willing to make the compromises needed to avoid even tougher sanctions — or possibly U.S.and/or Israeli military action against its nuclear facilities. While the talks are going on, international tensions with Iran will be reduced, taking some of the “risk premium” out of the price of oil.

As of mid-April 2012, a process of negotiations with Iran appears to have been set in motion. Talks between the six negotiating powers ("P5+1": the United States, Britain, France, China, Russia, and Germany) and Iran took place as scheduled April 13-14 in Istanbul, with EU foreign policy director Catherine Ashton as chair. Both sides went into the meetings with relatively low expectations, but indicating potential acceptance of less than their maximalist positions. Each of the parties had hoped, at the very least, to avoid the abject failure of the last round of talks, held in Istanbul in January 2011, which broke up in relative acrimony and with no agreement to continue discussions.

At the conclusion of the talks, both sides characterized them as positive and constructive. Most significantly, a firm date was announced for a second round: May 23 in Baghdad, Iraq. Baghdad had been mentioned by Iran as a future venue in early April 2012, and the agreement to continue talks there suggest that the P5+1 are looking for ways to accommodate some Iranian demands. The logistical and security challenges of holding the negotiations in Iraq had made the P5+1 countries highly reluctant to take up this idea.

The announcements suggested that all of the parties saw the talks as the beginning of a long process rather than an opportunity for an immediate substantive breakthrough. Neither side announced any firm steps that would be taken immediately – for example, Iran allowing specific facilities inspections or altering its enrichment of uranium, or the U.S. and its allies easing sanctions. In advance of the next round, according to Ms. Ashton, lower-level negotiators and experts are to develop specific, substantive proposals for the two sides to take up in Baghdad.


Expectations Will Rise Going Forward

In the course of the next round of talks in Baghdad, both sides will be expecting substantive progress on their core objectives. The P5+1 will likely seek to nail down firm agreement for Iran to allow inspections of some of its facilities where work on a nuclear explosive device was suspected, and for Tehran to implement its own recently proposed option of halting uranium enrichment to the 20% level (uranium at or above this level is considered highly enriched and more easily converted into the form necessary to produce a nuclear weapon). The P5+1 will likely also want to see progress on bringing the hardened Fordow enrichment site under greater supervision by international inspectors.

In turn, Iran will want as an outcome of the second round some signal from the United States and its allies that they might ease the sanctions that are crippling Iran's economy. Of significance, the May 23 talks in Baghdad will take place approximately one month before a European Union embargo on purchases of Iranian oil is to take full effect on July 1. That embargo coincides with the onset of U.S. sanctions against foreign countries that do not significantly cut their oil purchases from Tehran. Together, these sanctions could reduce Iran's oil export earnings by a crippling 40%, according to various estimates.

Although both the U.S. and the EU have formally — and publicly — decided to implement these sanctions, there are means by which implementation can be waived or delayed. However, it is highly likely that the United States and the EU will not agree to ease any sanctions unless and until firm agreement on their core negotiating objectives is reached, and Iran's compliance has been assessed and verified by international inspectors.     


Indicators of Success or Failure

With tensions over Iran's nuclear program running high over many months, all sides will seek enough progress in coming rounds of talks to avoid a breakdown of the process that might facilitate the revival of Israeli threats to strike Iran's nuclear facilities, or causes Iran to renew its threat to close the strategic Strait of Hormuz. Whether or not Iran actually has the capability to made good on such a threat, the fact that 30% of internationally-traded oil passes through that waterway considerably raises the stakes involved.

The May 23 round of talks is likely to make incremental progress toward an overall solution. However, after a third or fourth round of talks, which might stretch well into the summer of 2012, the United States, its allies, and Israel, will expect to see major progress toward the core objective of verifiably limiting Iran's enrichment of uranium to levels appropriate for electricity generation (3.5% - 5%). If such core objectives have not been achieved by the end of 2012 — after the U.S. presidential election in November 2012 — the Israelis and those U.S. officials most suspicious of Iranian intentions will invariably argue that the process has failed.

If the talks do break down, it will likely result from Iran's reluctance to allow the unfettered inspections needed to verify its level or uranium enrichment. That reluctance would be largely driven by Iran's Supreme Leader Ali Khamene'i's wariness of the negotiating process. Over the course of his long career in Iranian revolutionary politics, Khamene'i has tended to see the United States as focused first and foremost on overthrowing the Islamic regime rather than reaching pragmatic working relationships with Tehran. At the same time, the reluctance of the United States and its allies to ease sanctions in advance of firm results will almost certainly reinforce those suspicions.




• Tensions over Iran's nuclear program are likely to remain relatively low through the summer of 2012 as the negotiating process proceeds. Further Israeli talk of a military strike on Iran's nuclear facilities will remain muted or absent through this period. As tensions abate, the "risk premium" that heightened tensions with Iran were injecting into the price of oil (an estimated $10 per barrel) might decline as well.



• The inherent wariness of Iran's Supreme Leader to reach any deal with the United States — coupled with the U.S. and allied reluctance to ease sanctions against Iran in advance of verified Iranian compliance — will likely prevent a resolution of the Iran nuclear issue in 2012. The negotiating process might not necessarily end entirely but, by the end of 2012, resulting tensions with Iran will have risen to early 2012 levels and discussions of increased sanctions and possible Israeli or even U.S. military action are likely to return to the forefront. The risk premium brought about by worries over the Iranian nuclear program would once again produce a rise in oil prices.


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