The stalemate continues for Tehran

27 November 2014

The window of opportunity may be closing for an agreement on Iran’s nuclear programme

For those hoping the rapprochement between Tehran and the world’s leading P5+1 powers – the US, the UK, Russia, China, France and Germany – would open the way to huge business opportunities, the break-up of talks on Iran’s controversial nuclear programme this week without a resolution will come as a big disappointment.

Progress was made to narrow the gaps between the two negotiating positions, and the commitment to continue the discussions is a positive development, but calls from hardliners on both sides to take a tougher stance could yet scupper the talks before a deal is reached.

Strict economic sanctions against the Islamic Republic will now remain in place for at least another seven months.

Hopes dashed

Businesses from international oil companies (IOCs) to carmakers and telecoms groups have visited Tehran since the interim agreement was signed in November 2013 in the hope of being first through the door when sanctions are lifted.

The first high-profile visit was a delegation of more than 100 French firms in February, including energy group Total and car manufacturer Renault. The international sanctions against Iran’s banks and oil industry – a response to its alleged clandestine nuclear programme – have prevented such companies doing business with the country, with almost all foreign companies having exited the key energy sector.

Iran has attempted to redraw its unpopular buy-back contracts offered to oil firms with a new model of development deals to attract IOCs back to the country, but no company is likely to move without permanent sanctions relief in place.

In October, Boeing signed a small but symbolic deal with national carrier Iran Air to provide data aircraft manuals and navigation charts. Worth $120,000, the contract may seem insignificant, but it represents the first time a US aerospace firm has done business with Tehran since the 1979 Islamic Revolution. Regional neighbours such as Dubai were also eagerly eyeing a pick-up in trade, but will now have to wait for any potential windfall.

Iran and the six world powers emerged from talks in Vienna on 24 November, after failing to agree on several sticking points on the reduction in Tehran’s uranium enrichment activities and the rolling back of economic sanctions.

Meanwhile, the Islamic Republic’s ailing economy has been hit by a further blow as falling oil prices threaten to significantly weaken the government’s spending power next year.

The P5+1 countries and Iran are now aiming to reach an agreement by 1 March and to confirm the technical details of the deal by 1 July. Under the extension, Tehran will be allowed to access $700m a month in frozen overseas assets in the period until talks resume in March.

The two sides remain positive a deal can be reached. “We intend to build on the current momentum in order to complete these negotiations within the shortest possible time, up to four months, and if necessary until the end of June to finalise any possible remaining technical and drafting work,” Iran’s Foreign Minister Mohammad Javad Zarif and EU envoy Catherine Ashton said in a joint statement.

The differences in the two sides’ negotiating positions include the number of centrifuges Tehran will be allowed to keep in its uranium enrichment programme; the level of relief from international sanctions it will receive after the initial agreement; the duration of the deal; and the reasons behind unexplained explosives tests in the Islamic Republic that some suspect are linked to a nuclear weapons programme.

Sticking points

Iran currently has 19,000 centrifuges installed at its enrichment plants in Fordow and Natanz and does not appear to be willing to reduce this volume. The six world powers insist that under an agreement Tehran would have to reduce this number to 4,500, and are demanding that the remainder are neutralised, with parts given to the International Atomic Energy Agency (IAEA).

Under an agreement, Iran would want all sanctions against its banks and energy sector lifted immediately, whereas the P5+1 group has suggested a gradual rolling back of sanctions as Tehran hits specific targets on its nuclear programme revisions. At the same time, Iran is pushing for a deal lasting five to seven years, while the world powers have suggested a longer-term deal of at least 10 years.

The breakdown of the talks represents the second extension of negotiations since the original interim deal was hammered out in Geneva a year ago. Iran and the P5+1 group also failed to reach a deal in July. Although the extension gives the sides a third chance to reach a permanent agreement, it also gives hard-line influences in Iran and the US another chance to derail the negotiations.

Iran’s President Hassan Rouhani appears to have the most to lose from the continuing stalemate. Rouhani, who assumed office in August 2013, has prioritised tackling the economic and administrative problems he adopted from his predecessor, Mahmoud Ahmadinejad.

The dire health of the Iranian economy has been exacerbated by new sanctions in 2012 against the country’s oil exports and, more recently, plummeting oil prices. Iran’s oil exports have dropped by more than 1 million barrels a day (b/d) since sanctions against shipments of crude were introduced in 2012. The Washington-based Energy Information Administration (EIA) estimated that net exports averaged 1.3 million b/d in 2013, compared with 2.5 million b/d in 2011, making the Islamic Republic a relatively small exporter within Opec.

On top of this, the Brent crude price has fallen by more than 25 per cent since June, leaving Tehran with a major hole to fill in its planned budget for the next year.

Oil Minister Bijan Zanganeh told Iranian state television in the build-up to the Vienna talks that the country could rapidly double its exports if sanctions were lifted, which would provide some immediate relief to Rouhani’s economic woes.

But any efforts made by the president could be undermined by disruptive influences within Iran’s political sphere – the Iranian Revolutionary Guards Corps and Basij volunteer militias, the intelligence-security apparatus, the judiciary and the parliament – while Rouhani’s negotiating position must also fall in line with Supreme Leader Ayatollah Ali Khamenei.

“There is no doubt Khamenei expects Rouhani to strive to achieve the removal of the sanctions against Iran, but he does not seem interested in sharing responsibility for any retreat from the nuclear programme,” said Hossein Bastani in a paper for UK think-tank Chatham House. “If he comes to the conclusion that the political costs of nuclear talks far outweigh the economic benefits they can bring, he will once again put an end to them.”

Rouhani has put a softer face on Iran’s dealings with the West since he replaced the embattled figure of Ahmadinejad. But the supreme leader’s recent public statements will do little to reassure the US and its allies that they are dealing with a new, more cooperative Iran.

“In the nuclear issue, America and colonial European countries got together and did their best to bring the Islamic Republic to its knees, but they could not do so – and they will not be able to do so,” Khamenei was quoted as saying on his personal website after the Vienna talks ended.

There is also growing unease in Washington, with President Barack Obama facing pressure from the new Republican-controlled Congress. A group of 43 senators recently authored a letter to Obama demanding that any final deal with Iran should be approved by Congress and that the extension of talks should be coupled with increased sanctions against the Islamic Republic.

Obama has insisted that tougher embargoes would antagonise Tehran and would put the US at odds with other countries backing the current sanctions regime.

Growing risks

“While a presidential veto is possible, a worst case scenario where the Republicans manage to get the needed number of Democrats to surpass a presidential veto, could prompt Iran to restart its nuclear activities and cooperate less with the IAEA, an act that could force the US to reconsider its diplomatic drive and raise geopolitical risks in the region,” says Alia Moubayed, senior economist at the UK’s Barclays Capital.

Although there are powerful parties on both sides of the line that would not welcome a deal under any circumstances, negotiators do appear to have made some progress on reconciling the differences between the demands of Iran and the P5+1 group.

A unique opportunity was created when a new, more moderate president was elected in Iran and the US found itself with a leader willing to end 40 years of hostility between the two countries. But as the talks move into their second year with significant barriers to an agreement remaining, leaders favouring a deal will be wary that this window will soon close if concrete progress is not made when negotiations resume.

There is also growing uncertainty in Washington, with Obama facing pressure from the new Republican-controlled Congress

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