PHOTO: Supreme Leader addresses crowd in Tehran, June 4, 2015

On Thursday, I joined the Reuters Global Oil Forum for an extended Q&A session, hosted by Christopher Johnson, about Iran and the nuclear talks, starting with the scenarios of success or failure and moving to regional crises and Iranian domestic politics:

Welcome to an oil forum discussion looking at what could happen as Iran moves to finalize a nuclear deal with the big global powers. We have been joined by Scott Lucas, Professor of International Politics at the University of Birmingham and founding editor of the website EA WorldView.

Negotiators have given themselves a deadline of June 30 for a final deal on Iran’s nuclear program. Officials and analysts are almost all now saying that they expect a deal by or very soon after June 30. So what happens after that? Scott, can you lay out some possible scenarios?

Best-case scenario — Deal within days after June 30. Arrangements for economic links, include energy sector, develop and rapprochement over
issues in region. Possibly some opening of political and social space in Iran.

Worst outcomes?

Worst-case: No deal. No direct war but….

1) Economic warfare v. Iran
2) Iran’s asymmetrical warfare through support of groups in Iraq, Syria, Lebanon, etc.
3) Rouhani Government is a goner
4) Very bad situation on all fronts (social, political, economic) for Iranians

Middle-case scenario (which I think is most likely): Deal is reached but continued tension and fencing over implementation, with domestic groups sniping both in US and Iran — Continued tension over Iraq, Syria, Lebanon, etc. Hardliners and Revolutionary Guards continue to box in Rouhani Government.

What happens if we get the Best case?

We can all celebrate with champagne or soft drinks. Space opens up for economic and energy deals, which just means the difficult discussions shift to terms of contracts. It will be a long-term process, both for Iran to get rebuilding of economy with investment and for foreign companies to begin to do business there after the break of years

Which sanctions would be lifted and by when? And which would not be lifted?

UN sanctions are easiest to lift and could be on day of deal or soon after. European Union sanctions of July 2012 are next — on surface, that’s not too difficult though a true relaxation is bound up with easing of US restrictions.

US sanctions are toughest because of the web of both Executive Orders and Congressionally-mandated sanctions. Don’t expect that to occur for months after deal is signed. US will wait til last possible moment for IAEA “verification” of Iranian compliance

I have heard traders say they don’t think “sanctions” — however defined — will be lifted for as long as year. Is that realistic?

Some sanctions may take up to a year to be fully removed, though it’s important to realize that not all sanctions will take that long. It is a complex political, economic, and legal web because of the build-up of sanctions over decades.

Which sanctions have most impact on oil flows from Iran?

Banking sector and financial sanctions have had huge impact. EU can lift restrictions in July 2012 decisions, which means SWIFT can be reinstated for financial transfers, and insurance can be provided for oil tankers. But it takes time to put a system back into place.

Then you have to consider the US legislation which has prohibited financial transactions. Even if SWIFT is reinstated, can someone fall foul of the Americans by using it for a transaction with Iran?

There are numerous examples we can add. When can gold again be transferred to Iran? When can components for Iranian industry again be shipped?

Great questions.

Just wish I had the answers.

OK. If that is the most likely path, can we look at alternatives? Where are the likely snags?

Publicly, there is a lot of hostile rhetoric from both sides, but any real snags will be behind the scenes. We’re at stage of detailed drafting of final text, with hours spent on a few words.

Issues include….

1) The exact procedure and timing for lifting of sanctions;
2) The exact procedure for reduction of Iran’s stock of low-enriched uranium and conversion of 20% uranium to fuel plates;
3) The exact procedure for inspection of some — not all — military sites;
4) The arrangements for inspections with Iran’s accession to Additional Protocol of Nuclear Non-Proliferation Treaty.

And those are just the headline issues.

Could any of those throw the whole deal?

I think they can delay completion, which is why we probably won’t have an agreement by June 30. But I think slow if sometimes painful progress is being made on all matters.

Remember, the huge hurdle was getting a framework for an agreement, and that was cleared at start of April. It’s harder to walk away after that Framework has been established.

How long might you expect a deal to be delayed? Are we talking days? Weeks? Months? Presidencies?

Days — weeks raises the political temperature and adds to the jitters.

Yes. Oil market would respond swiftly, I would think.

Can you explain a bit more, Christopher?

Well, I think the market is ambivalent. On the one hand, it knows that the likelihood of a deal is very high and has factored in a gradual increase in supply from Iran, although possibly too little.

But it also knows that there is huge opposition to the lifting of sanctions.

How much increase has been factored in, assuming we are at baseline of 1.4 million barrels per day export right now?

I don’t think anyone actually knows — but various analysts have talked about another 500,000 bpd by early next year. Few traders seem to accept Iranian forecasts of another 1 million bpd by early 2016. That’s a lot in an already-oversupplied market.

500,000 bpd I can see. 1 million bpd? No way.

No deal at all would mean a complete rethink.

No deal at all means batten down the hatches. We will have an asymmetric war throughout the Middle East — Iraq-Syria-Lebanon-Yemen.

Go on. Under which scenario?

If we get a deal, then President Rouhani-Foreign Minister Zarif view of engagement with West to deal with regional issues gets a boost.

Think of Iran pulling away from Assad in Syria, keeping distance over Yemen. Even de facto cooperation with US on how to deal with Islamic State in Iraq.

If no deal, then Iranian military gets ascendancy. Probably stepped-up backing of Assad, possibly with Iranian troops going into Syria despite cost. More support for Hezbollah. Backing of Shia militias in Iraq, over US objections. Maybe step-up in military aid to Ansar Allah (Houthis) in Yemen.

What happens to Israel under these various scenarios?

Great question. Best-case: Many in Israel (if not Netanyahu) will be relieved if there is a deal that “sticks” with clear curbs on Iran’s nuclear program. However, Israel will watch the region with great caution to see if Iran tries to take advantage in areas like Syria and Lebanon.

Worst-case: If there is no deal, then Netanyahu Government will push US for aggressive action v. Iran. But that probably means stepped-up economic sanctions and covert action, rather than airstrikes.

The “middle case” (which, again, I think is one that will play out) is continuing Israeli pressure on US to say that Iran is not complying with a deal. So maintain sanctions and be tough in region v. Iranian aspirations.

Looking ahead, is there a chance that enmity between Iran and the West could gradually be replaced by some sort of friendship?

Engagement, yes. For example, US would be pleased if Iran would distance itself from Assad and Iran wants US to distance itself from Syrian rebels. That has the making of a rapprochement, but — given the Saudi position — only after a nuclear deal.

Both US and Iran want to push back Islamic State in Iraq, so there is scope for cooperation there. But Supreme Leader won’t do that unless he has sign of US “good faith” through nuclear agreement.

Remember that Rouhani has dealt with West for years, and Zarif has Ph.D. from US and Rouhani has Ph.D. from UK. Both see themselves as naturally dealing with West, not in permanent confrontation.

That’s not how the United States feels though, is it? Few if any U.S. politicians have ever been to Iran.

Depends on who you are talking about. Obama certainly has envisaged engagement, but his Administration have been split from start in 2009 over the approach. Most of Congress is hostile, of course, but Executive can do a lot to engage w/o Congressional approval.

A nuclear deal changes the political atmosphere and makes it easier to engage even with Congressional opposition. After all, if it was only a question of Congress, we wouldn’t be here discussing a possible deal by 2025, let alone June 30, 2015.

And what is likely to be the future relationship with Arab neighbours?. Saudi Arabia and its Sunni counterparts, in particular.

Lots of hostility now, but that is primarily because of Syria, Iraq, and Yemen, rather than the nuclear issue.

Even with hostility, groups on both sides want to maintain dialogue. That’s why the Iranian Deputy Foreign Minister was talking to Saudi Foreign Minister on Wednesday about Yemen (and probably other issues).

Again — a nuclear deal changes the atmosphere. Reopens possibility for Rouhani-Zarif hopes of engagement with Riyadh.

What does the Iranian domestic situation look like now? Have these negotiations changed the internal balance of power in Iran?

A battle waiting to break out, pending the nuclear outcome.

How so?

Hardliners are ready to push Rouhani-Zarif out, but they need the nuclear talks to fail.

Rouhani wants to deal with economic issues and to untie his hands on political and social matters, but he needs the nuclear talks to succeed for that to happen.

Supreme Leader is balancing between the factions right now, backing talks but trash-talking US and proclaiming Islamic Republic’s “resistance”.

If no deal, expect the Supreme Leader to swing firmly into an all-out “resistance” — economic, political, military preparedness — v. US.

For what it’s worth, just as US domestic scene is affected by 2016 elections, the Iran domestic scene is already looking at February 2016 Parliamentary elections.

So if, as you expect, a deal will be done, that strengthens Rouhani’s hand?

Absolutely.

And opens up the chance of movement “on political and social matters”? Such as?

Without a dea, Rouhani’s politically deceased. With it, he can — gradually — push for easing of post-2009 restrictions on politicians (though not release of leaders from house arrest), journalists, lawyers, activists, etc.

He can look at easing of restrictions on communications, such as Internet. He can seek easing of enforcement of social codes such as proper dress and proper public music (a big issue now in Iran).

And, of course, he can encourage Western — even US — investment.

Many thanks, Scott.