Political economy of Iranian-US negotiations

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Article Summary
While many are optimistic that Iran and the P5+1 countries will reach a deal regarding Tehran’s nuclear program, implementation remains a challenge.

On Nov. 20, 2013, a new round of nuclear negotiations began between Iran and the six major powers (P5+1). These negotiations revolve around the framework agreement brokered by Washington and Tehran. The agreement will draw the negotiation road map for the next six months. Negotiations are taking place between Iran on one hand and the five UN Security Council permanent members and Germany on the other. In essence, however, Iran is negotiating with the United States. This limitation does not diminish the important role other countries are playing in negotiations. It does reflect, however, the fact that the prices required to make a success of the negotiation process are held exclusively by Washington and Tehran.

The United States is entering negotiations with the goal of holding off the technological advancement achieved by Iran during the past years. Meanwhile, Iran is sitting at the negotiation table with the aim of having the US economic sanctions, which have encumbered the Iranian economy, lifted. In other words, the core essence of the negotiation process is founded on mutual concessions or gains: technological advancement in exchange for economic sanctions. Based on this, Iran will espouse all required means to prove that its nuclear program is peaceful and transparent, while drawing a red line when it comes to having a full nuclear fuel cycle. The United States will unilaterally and gradually lift economic sanctions imposed on Iran. In short, the barter is based on exchanging the Iranian technological advancement for the economic sanctions. With every step back Iran takes in its nuclear program, the United States will reciprocate in sanctions. As such, nuclear negotiations are becoming strongly correlated with political economy, international law and laws of nuclear physics.

Economic sanctions: the US method

Iran entered the latest rounds of negotiations worn out by economic sanctions unilaterally imposed by the United States, whether through a decision issued by the White House or Congress. The sanctions turned Iran’s economy into a barter economy, especially since the United States banned companies across the world from dealing with the Central Bank of Iran. If they did not comply, they would be subject to sanctions themselves. The US sanctions caused the Iranian currency to depreciate.

Additionally, economic development rates have witnessed a setback while the living standards of millions of Iranians slumped. Changing the economic equation was a main reason behind the election of Hassan Rouhani last summer, since this issue was top priority on his presidential agenda. Until now, US economic pressure has not yet led Iran to give up in terms of its nuclear issue. Nonetheless, this pressure is pushing Iran to move forward in negotiations to fend off additional economic collapses, which are foreseen in case sanctions remained.

Economic sanctions are divided into different types of sanctions, which can be summarized in simple words as follows: trade and investment sanctions and financial sanctions. Each of these two has its own impact and conditions.

In the classical description, economic sanctions aim at curtailing economic transactions. This is why sanctions are considered more effective when the subjected country relies heavily on economic transactions to control the activity of its main sectors. This is the case of Iran, which heavily relies on oil exports. The top export product in Iran, oil makes up 80%-90% of Iranian exports and contributes to 40%-50% of Iran’s revenues.

Since Iran wishes to expand oil drilling operations in its fields and explore new fields, it needs huge investments in the oil sector. The indirect oil embargo — by banning any dealings with the central bank, combined with a halt of foreign investments in the energy sector (oil and gas) — proves very harmful to Iran and its economy.

Financial sanctions put additional pressure on Iran. In addition to freezing the deposits of the government, companies and individuals, obstructing the flow of investments into Iran is an important aspect of these sanctions. This type of sanctions channels its pressure to Iran’s foreign currency reserves. It does not even require international coverage from the Security Council. While these financial sanctions are hostile measures taken by the United States against Iran, they do not constitute a clear violation of international law.

Negotiations revolve around $20 billion

Iran hopes to yield an amount of $20 billion during the next six months, the time needed for implementation of the road map after the signature of the framework agreement. Regardless of the technical details it must abide by — approval on conducting inspections without prior notice, decrease of uranium enrichment ratio from 20% to 3.5%, reduction of enriched uranium reserves to 20%, specifying the number of centrifuges needed for uranium enrichment, putting the Arak nuclear reactor on hold — Iran has its eyes set on economic goals.

According to the draft framework agreement, the United States must free $3 billion of Iranian frozen assets as a first step. Since Iran exports oil to countries in exchange for gold due to sanctions imposed on its central bank, lifting the ban on Iran’s precious metals trade proves necessary for the country to sell the excessive amounts of accumulated gold. During 2012, Turkey paid Iran $1.5 billion-worth of gold per month, which means that Iran can amass as much as $9 billion in cash from Turkey in exchange of its oil exports during the coming six months of negotiations. According to Business Monitor International data, Iran exported $11.2 billion-worth of petrochemical products before the imposition of the last ban.

If the ban on these goods were lifted, and using these figures as a key indicator, Iran’s exports could reach around $5 billion to $6 billion during the next six months. Since June 2013, shortly before the Iranian presidential elections, the United States imposed sanctions on the Iranian automotive sector under the pretext that it was linked to the Iranian Revolutionary Guard. The latter was in control of the nuclear program until the election of Rouhani. It created trade networks in many countries to work around the ban through third parties. Prior to the imposition of the last sanctions package and during only seven months of 2012, Iran exported cars for $1.4 billion. Therefore, Iran’s automotive exports will reach $1.3 billion during the six months of negotiations. In total, Iran can cash in approximately $20 billion during the six months needed to implement the road map.

Iran’s monetary reserve

Iranian reserves are estimated at $80 billion, $10 billion of which are frozen, while $20 billion are liquid and disposable. The remaining $50 billion are relatively hard to manage due to barter, an exchange system Iran resorted to with countries like China, India, Japan, South Korea and Turkey due to imposed sanctions.

Alleviating sanctions on the above-mentioned sectors would allow Iran to acquire $20 billion of its own funds once the embargo is lifted. This suggests that Iran’s monetary reserves will increase by a quarter, reaching $100 billion. Iran’s liquid reserves would also rise from $20 billion to $40 billion, and were likely to continue to gradually increase should sanctions on Iranian exports, worth $50 billion but constrained by exchange of goods, be lifted.

Thus, liquid reserves will increase from $20 billion to $70 billion. Obviously, all these amounts are Iranian funds and do not include any US aid. They would come by mere mitigation of sanctions.

The gold balance

The United States is playing the card of mitigating economic sanctions in its negotiations to entice Iran to make more concessions regarding its nuclear program. The US negotiating behavior walks a fine line. On one hand, the United States offers limited economic advantages that can be undone (appetizers) but are necessary for the continuation of the negotiation process. On the other hand, it is careful not to make early substantial concessions (main dishes), because this will relatively ease the pressure of sanctions on Iran, pushing it toward taking a more radical stance in future negotiation rounds.

Iran is well aware that every step backwards it takes regarding its nuclear file will be met with a step backwards in its economic negotiations with the United States. If Iran responds disproportionately to US overtures, the United States will eventually dictate its terms and manage to achieve through negotiations what it has failed to do through economic sanctions.

Both the Iranian and US sides are keen on reaching a settlement. Achieving it has high chances of success indeed, yet the road map toward its implementation will be difficult.

In short, both parties hold valuable assets. They use them to study their own and each other’s next steps, so as to keep a tight grip on the reins of negotiations. This of course will apply to the round of negotiations that began on Nov. 20, which will deal with both nuclear and economic issues.

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Found in: us-iranian relations, us-iranian rapprochement, p5+1, nuclear talks, nuclear program, iran nuclear weapons
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