PHOTO: US Secretary of State John Kerry and Iranian Foreign Secretary Mohammad Javad Zarif and their teams on Wednesday (Carlos Barria)
On Wednesday, I was part of a panel taking questions from the Reuters Global Oil Forum, focusing on the state of the Iranian nuclear talks.
The other panelists were Richard Nephew, formerly one of the US State Department’s top officials for sanctions and now with the Center on Global Energy Policy at Columbia University, and Hannah Poppy of The Risk Advisory Group. The host was Reuters’ Christopher Johnson.
What follows is, I think, one of the sharpest assessments of the possibility of a deal by July 7 and — equally important — what the deal means for the lifting of sanctions and Iran’s political and economic future.
WILL THERE BE A DEAL?
JOHNSON: The latest we have from Vienna is a statement by Iran’s Deputy Foreign Minister Abbas Araqchi — he has told reporters that there are still issues to resolve before a final nuclear agreement, but “the atmosphere of the talks is positive”.
Foreign Minister Zarif also says progress has been made.
One noted observer outside the talks, Olivier Jakob, said just before that statement was made that he thought a deal had effectively been done.
How should we read the Vienna talks? Is a deal about to be announced?
NEPHEW: I think that a deal will happen, but it is not about to be announced. The reality is that these issues are extraordinarily tough. Access [for the International Atomic Energy Agency] to military and other sites is a real problem for Iran. So is timing of sanctions relief.
LUCAS: There is progress in private vs. the public “tough talk” by Presidents Rouhani and Obama to cover themselves with domestic audiences:
1. Advance on the Iran uranium stockpile, meeting the June 2015 target;
2. Advance on inspections of military sites, with probable compromise for inspection of some but not all;
3. Advance on timing of sanctions relief with link to Iranian compliance with terms in a three-phase arrangement covering a few months.
JOHNSON: What sort of timeframe should we expect?
NEPHEW: Timeline for a deal? Probably in the next week or two.
JOHNSON: There’s a new “deadline” on July 7. What does that mean in reality?
NEPHEW: Nothing much. That deadline was to ensure sanctions relief from the November 2013 [interim] deal didn’t fall apart and to ensure that the Iranians kept their program in check. It can be extended again and again and again if need be.
The real problem is that, at some point, the negotiators will get too dug in and will have to go home.
LUCAS: My understanding is that announcement by July 7 will not be the “start date” of the agreement, but to confirm process for the next stage of a 30-day review by US Congress while Iran prepares for implementation.
NEPHEW: Yes, that’s right. It will just be the start of the implementation process. That may take up to 4-6 months depending on nuclear steps.
Implementation process will involve: 1) Congressional review; 2) Iranian nuclear steps starting (like centrifuge removals);
3) Drafting of UN Security Council resolution to relieve sanctions; 4) Drafting of sanctions waivers and similar legislation in the European Union.
WHAT WILL BE THE TIMETABLE FOR SANCTIONS RELIEF?
QUESTION: Given current pace of negotiations, and assuming they go without much disruption, when can sanctions relief be expected at the earliest?
NEPHEW: My bet remains early 2016.
LUCAS: “Phase 3” is beginning of lifting of sanctions (at least in principle) when IAEA verifies implementation [by Iran]?
NEPHEW: Yeah, I think that’s probably right.
QUESTION: How long do you think IAEA verification of the Iranian actions will require?
NEPHEW: IAEA verification probably will take 1-2 months, leaving aside the PMD [Possible Military Dimensions] issue for a moment.
The real issue is that Iran has to do stuff for the IAEA to verify.
QUESTION: As the “deadline” gets pushed back further and further, will US domestic politics play a greater part as we get closer to the election?
NEPHEW: I do not think so. The people in this race are already defining their positions. The real issue is whether there is successful implementation to stop whomever is [the next] President from cancelling deal, if he/she feels it is better to kill the deal than let it sit.
WILL SANCTIONS RELIEF MEAN AGGRESSIVE IRANIAN ACTION OR RECONCILIATION IN MIDDLE EAST?
QUESTION: What are the risks that Tehran will use any money freed up to fund anti-Western groups?
NEPHEW: Well, look, they will probably send some money to proxy groups and so forth. That’s the nature of Iranian foreign policy.
But they have a lot of domestic development requirements. But I suspect that they’re going to spend most of it on infrastructure and similar development projects that have stalled because of sanctions. After all, Rouhani was elected on this promise.
POPPY: I’m not sure a deal will lead to a change on Iran’s strategy for proxies.
LUCAS: Analysis is split on this. As Richard says, there is an immediate need for the money to go to economic recovery as well as attraction of foreign investment. But — possibly in line with Hannah — Iran could step up support for Assad in Syria, having delayed for months on giving him more credit.
Iran could also step up backing of Hezbollah as well as economic aid (think soft power, not hard) to Ansar Allah in Yemen, and also support of Iraqi Shia militias.
NEPHEW: I think that’s all true. The real issue is that Iran can be matched dollar for dollar, so that [Tehran’s actions] won’t be determinative [of the region’s future]. How the rest of the U.S./partner regional policy shapes up will be.
POPPY: Right, so regional developments, rather that a deal per se are more likely to determine what support Iran gives to allies.
NEPHEW: Totally agree.
POPPY: Exactly, so the question is more, will Iran and US expand talks post-deal onto other regional issues?
NEPHEW: Maybe, but there will be an incentive for both sides to also harden their regional positions. So, conversations may not be that productive.
LUCAS: I would add that a successful deal opens up space for Rouhani and Zarif as they will be bolstered. So they could renew push for “engagement” strategy, which has been stalled during the nuclear talks process.
Do Rouhani and Zarif get an advance towards their objective of working with Saudi Arabia, rather than against it?
POPPY: That’s an interesting question, but one that also depends on the Saudi attitude, which doesn’t exactly appear to be particularly keen on the idea of dialogue with Iran right now.
NEPHEW: I agree with Hannah on Saudi views being important. But Zarif and other regime views will also harden if Yemen
continues to be bloody.
LUCAS: Hypothetical: Could the tough Saudi line be eased if Rouhani and Co. offer genuine pursuit of political resolution in Yemen?
POPPY: Yes, agreement with Yemen will be central to that. Thus Omani mediation would be needed.
NEPHEW: I’ll dissent here: I think that the Saudis right now would fear a political settlement that leaves Iran with any power in Yemen. And that’s the only thing the Iranians would help to engender (in Saudi’s view).
So, I think the best chance for a political settlement is if the Iranians stay out of it — which Iran won’t want to do.
POPPY: Agreed about it being an issue of Saudi perception, which is what makes it harder to forecast.
LUCAS: Hypothetically, if Rouhani/Zarif/Rafsanjani offer to pull back support of President Assad but keep Syrian system in place?
NEPHEW: I think that this would be too hard for the Iranians right now. But, maybe that would help.
HOW QUICKLY CAN IRAN RAISE OIL EXPORTS?
JOHNSON: Earlier today we published a poll of 25 analysts. It showed most of the oil industry expects a very slow increase in Iranian oil exports if/when a deal if done.
Most analysts expect Iranian oil exports to have increased by about 60% percent in a year’s time — 750,000 barrels per day by June 30, 2016. Does that sound about right to you?
NEPHEW: I think that is potentially too optimistic, personally. I think that the fields may be in worse shape than we expect and that the Iranian system may be slow to get it going.
I think that they’ll have some difficulty in selling their overfilled storage and that will make it hard to boost, but I admit that I don’t know that to be true. My sense is more that 500,000 extra [barrels per day] within 6 months is more feasible.
LUCAS: – How much increase of the 750K bpd will be from stored oil? How much from new production? And how much of the 750K depends on foreign investment in the fields?
JOHNSON Re investment, a lot. And Iran would be relying on some US companies if it wants quick results.
NEPHEW: Very good questions. This is part of the reason why I’m skeptical about all the numbers flying around.
I also agree on investment: they will need something to go into it to get to 750,000. I think 500,000 is in their reach.
On US companies, I don’t think that they’re likely to be part of the deal. Only “secondary” — i.e. not involving us people — sanctions to be relieved.
JOHNSON: That will present real issues to Iran, then. US companies have the best track record on most of the difficult areas that Iran face.
LUCAS: What is your optimistic projection for completion of contracts for foreign investment if we get a deal, given that there were talks in May between Oil Minister Zanganeh and European firms?
I hear from industry people that deals are closer than I would have suspected, but I’m skeptical until we see that new contract.
As [the possibility] snap-back of sanctions is real, and as the US congress hasn’t spoken, I think real long-term contracts are probably more distant.
POPPY: Do you think the way that sanctions relief will be implemented means that in general U.S. and U.S.-linked companies will struggle to get a foot in the door?
NEPHEW: Yes.
LUCAS: Because of Iranian reluctance or US Government dissuasion?
NEPHEW: Because the US-domestic sanctions will remain in place, in all likelihood, and because the politics surrounding this will be uncertain for a while. Every Republican candidate (among the major ones) have said they’ll repudiate the deal.
So, it’ll make it hard for people to want to stick their necks out, even if they were allowed. Or, anyway, it would make it hard for me!
LUCAS: Naive question: would this also keep BP at distance? Or is it beyond being a “British” firm and Britain’s politics vis-a-vis US?
NEPHEW: Well, by letter of the law, I think they’ll be ok. Foreign-incorporated companies are not covered by US “primary” sanctions. But, if I were a big company with lots of US interests in a tricky political situation in the US, I’d be nervous, sure.
POPPY: What if business start to make real money (or sense that they could) in Iran, will that change the attitude of Republican candidates?
NEPHEW: I’ve been hoping that would be the case for 18 months. Nothing yet.
US companies aren’t pushing for it. They fear being linked to Iranian “blood money”. So, there is no push factor on the US political system, beyond the arms control enthusiasts and those with reflexive concerns about Iran. Business sector has been (largely) silent.
POPPY: OK, that’s interesting, (and disappointing).
WHAT IF IRAN FAILS TO COMPLY WITH THE DEAL?
QUESTION: What steps could the West take if Tehran fails to comply with any of the terms of the deal?
NEPHEW: Well, sanctions snap-back is always a possibility. That would be for major, big violations. If they do little things, then it is possible more incremental steps could be taken. And, of course, if they breakout altogether, then the range of options goes upward to military action.
But I suspect there will be a robust dispute resolution process to avoid all of the problems that come with this
LUCAS: What is your understanding of position now on “snapback” sanctions? Will they be written into the deal?
NEPHEW: Well, it will be written in to the UN Security Council part of the deal. For US and EU sanctions, it may be more implicit so as to avoid spiking Iran in public (similar to Iranian ability to snap-back on us by restarting nuke program).
LUCAS: Is Russia going to agree to dispute resolution body outside UN Security Council?
NEPHEW: They’ll agree to one that works with the UN Security Council. They get the problem we have with the possibility of a veto. We get the problem they have with automaticity.
So, I suspect there will be a process layered in in front of the UNSC process so that everyone gets to have something close to what they want, without undoing what we (US) need for a deal.
LUCAS: How much of a factor does China play here, in either investment or uptake of oil exports?
NEPHEW: Well, I think they will want to play for sure. Smarter people than me will know how much oil they can buy, b2ut they’ll want to stay in the Iranian market to keep diversification.
On investment, i think they’ll compete for deals, for sure, but the Iranians want EU, Japanese and other products/money. So that may not be as easy for China as when the western majors walked away a few years back.
WHAT WILL HAPPEN INSIDE IRAN AFTER A DEAL?
NEPHEW: What do you think the domestic politics are for Rouhani/Zarif post-deal success? Will this lead to major positive change to the system? Or hardening?
POPPY: From speaking to people, a lot will hang on the 2016 Majlis [Parliament] elections, and also to what extent popular expectations about the deal can be managed.
LUCAS: Rouhani and Zarif are likely to get a boost on the deal, and Rouhani signaled on Sunday that he wants to take on the judiciary over its handling of social as well as legal issues, e.g., bans on public concerts, women at sporting events, and enforcement of hijab.
These are on the margins of the important political-legal questions, but they are important margins for Iranian public opinion, I believe.
Meanwhile, Rouhani-Rafsanjani face challenging task of assembling slate of candidates for 2016 Parliamentary elections, with possible obstruction by others within system such as veto or restrictions on the candidates.
POPPY: Right, so I guess the issue is whether they could maintain that high to February and beyond.
NEPHEW: Yes, I think that all makes sense.
POPPY: I remain unconvinced on how important those social issues are, at least compared to things like corruption/foreign investment.
LUCAS: – I get sense that many in Iranian public (how many?) see these as markers re the Rouhani promise of opened political and social space, but I take your point.
THE RUSSIANS AND THE SAUDIS
QUESTION: How does the need to increase pressure on Russia play into deal making on Iran?
NEPHEW: My view is that allowing us to put more pressure on Russia when Iranian oil is back on the market is a positive thing (for sanctioners), but is not ultimately the thing that will determine a deal. US/EU have shown they can walk and chew gum at same time on Russia and Iran sanctions.
And, anyway, at least some part of the Iran/Russia energy pictures are different in their implications for Europe and elsewhere.
POPPY: I would agree with @Richard in that they’ve managed to “firewall” the talks from other serious geopolitical issues so far.
LUCAS: Beyond that, do you think we will get any other politics re oil supply if deal is done, e.g., Saudi strategy on supply and price in negotiations with OPEC?
NEPHEW: Well, my sense is that the Saudis already anticipate Iranian oil coming back on. So I think the politics are going to remain as is: Saudi push to maintain (if not expand) market share, and competing like hell against Iran coming back in.
JOHNSON: Absolutely right. Saudis are building market share steadily.
LUCAS: How long before financial transactions (which have affected countries such as India re oil from Iran) can be fully restored post-deal?
NEPHEW: Should be as soon as banks want to do it when secondary sanctions are suspended (ceased to apply, whatever).
So I would anticipate some would start in early 2016, but others will be more reluctant. Could take years for big banks that were burned to go back in.
SO WILL A DEAL STICK?
JOHNSON: What are the chances of major violations by Iran, do you think?
NEPHEW: Million dollar question. My view is that they will not do a major violation because they fear consequences which could go to military options. After all, a big violation would also put a big bulls-eye on them, and smaller violations won’t materially affect breakout timelines.
So, my sense is that there will be some cheating and testing, but they’ll play nice until deal expires. Then who knows? But also then options remain to counter them.
LUCAS: – It will cost Iran too much — to point of economic crisis — to
break the agreement and get caught.
Interesting that [International Atomic Energy Agency head Yukiya] Amano going to Tehran tomorrow to begin to define inspections and procedures for compliance, including which military sites can be inspected and the protocol/limits of the inspections.
NEPHEW: To be clear, I don’t think there will be some military sites off=limits. US won’t accept that.
What they may accept is a procedure to try to resolve issues without inspectors tromping around sensitive places. But there cannot be no-go areas in Iran (just as, for Iran, there cannot be capricious abuse of inspection rights).
LUCAS: But how will Iran accept “all military sites” written into the deal? What would be the acceptable language around that?
NEPHEW: It won’t be. The deal will probably say Iran accepts the Additional Protocol. That itself permits access to undeclared sites in the country without exception.
The real issue is not “where” but “how quickly, how often, and who can go”.
This is the trickiest of tricky issues still being worked on. Iran will need to sort out rhetoric and reality.
JOHNSON: Do you think there is a specific issue that holding up a deal at this point? Is that [inspections of military sites] the sticking point perhaps?
NEPHEW: Yes, i think this is a big one. I could be wrong, but I’d bet money this is why Zarif had to go home. He didn’t go home just to change his suitcase.
LUCAS: Well, he does like to rotate his shirts. But [he went to Tehran for] updates of Rouhani and Supreme Leader on that issue and on the timetable and procedure for sanctions relief.
NEPHEW: Probably right.
QUESTION: Everyone is going to be watching very closely between now and when a deal is implemented. What should we expect to see — will it be smooth sailing or rocky?
NEPHEW: A bit of both. Congressional debate will cause bad rhetoric in Iran and likewise [in US]. There will also be technical glitches.
Iran will have to do a lot in a little amount of time. They’re liable to get one or two things off-course.
But I think that the big issues will be worked out, and that it will, in the end, be implemented.
LUCAS: Agreed with Richard. Each step forward in process makes sabotage more difficult from either side.
