Iran's Nuclear Negotiations and the West

During the past seven years of negotiations between the Western powers and Iran, Iran has persistently claimed that its uranium enrichment and heavy water reactor facilities are aimed at producing nuclear fuel for power generation. The Western powers, however, suspect that the program is intended to develop nuclear weapons. In the United States, according to a poll conducted by CNN in October, nine out of ten Americans believe that Iran is intent on developing a nuclear bomb.

Iran has been subjugated to sanctions, restrictions on investments, and the constant threat of attack and regime change. While it is unclear what impact these actions have had on the Iranian regime’s domestic economic challenges, they have had a major impact on Iran’s hardened position on the nuclear negotiations. Recently, however, weakened by reports of a fraudulent presidential election, questions raised about regime legitimacy, and the harsh and inhumane treatment of demonstrators by the paramilitary, President Ahmadinejad’s government has softened its position. It has agreed to allow access to Iranian nuclear scientists, proposed buying medical uranium from abroad, unveiled and opened for inspection the uranium enrichment facility near Qom, and even indicated a willingness to ship 80 percent of its 1500 kilograms of stockpiled low-grade uranium to Russia and France for further enrichment into fuel rods. These rods are to be used for medical research in a reactor sold to Iran in the 1970s during the Shah’s government. Iran has also agreed to hold further negotiations that are not to be solely about nuclear issues but seem to be predominantly about them.

The United States, frustrated by the lack of progress on the nuclear issue with Iran, bogged down in Afghanistan, faced with substantial security issues in Pakistan, and still engaged in Iraq, expressed enthusiasm with Tehran’s new, more conciliatory position. However, Iran’s internal political turmoil has delayed the implementation of the latest offer of shipping the low-enriched uranium (LEU) abroad for further processing. This has resurrected the calls for additional sanctions.

Q1: Have sanctions effected a change in Iran’s position?

A1: Given U.S. mistrust toward Iran, talk continues about sanctions such as an embargo on the sale of refined products and gasoline to Iran. Because of Iran’s dependence on gasoline imports for about 35 percent to 40 percent of its consumption, an embargo, it is believed, would cause a serious blow to the regime. However, other measures have also been implemented or are continually discussed, such as targeting insurance and reinsurance companies, export credit institutions, banks that provide letters of credit for trade, and all entities that may sell equipment, technology, or even invest in the nation. Some of these actions have successfully increased the cost of trading with Iran and thus the price of many imported products in Iran. Although the effectiveness of these actions is often debated, the actions certainly have reduced Iran’s capability in the oil and gas sector. Iran’s oil export is now half of what it was during the Shah’s era, and Iran, the second-largest gas reserve holder in the world, hardly produces enough to supply its domestic needs. Iran imports gas from Turkmenistan and exports some to Turkey, but its overall production is just about equal to its domestic consumption. The financial sanctions also seem to have had a significant impact on the cost of doing business with Iran and continue to present difficulty for traders in the bazaar.

The difficulty with sanctions is that, when it comes to trade (unlike investments), it is unclear how successful they have been. Other countries have been ready to step in and supply many of Iran’s needs. Another problem with sanctions is that they often do not affect the targeted regime but rather impose hardships on ordinary people. Years of sanctions may have raised the cost of doing business with Iran but have not weakened the Islamic regime, nor have sanctions forced the regime to change its behavior. In fact, one can make a case that sanctions have actually strengthened the financial power and influence of Iran’s Revolutionary Guards. The guards’ active involvement in trade and investment has further militarized Iran’s economy. The Revolutionary Guards also benefit from looking the other way for their preferred smugglers and illegal elements. Often sanctions have unintended consequences. Assuming gasoline sanctions are effective (a questionable assumption, given the diverse set of companies and nations selling or willing to sell gasoline to Iran) and gasoline imports were reduced, the effect would likely be helpful to the regime’s finances by relieving it of the billions of dollars of subsidies brought about by buying gasoline at $1.50 a gallon and selling it at an average price of $0.25 to $0.30. It would also be politically convenient to blame the West for the pain and suffering brought upon the public.

If, in fact, the intent of sanctions is to harm the regime and not the average person, a much more effective way would be to target the funds held by senior government officials, in particular Revolutionary Guards’ holdings abroad. It is estimated that some $200 billion–$300 billion of Iranian investment reside in Dubai and United Arab Emirates companies. Some 10,000 Iranian companies are registered there. Identifying the owners of these funds and attempting to confiscate those funds associated with persons and organizations that have been supporting actions contrary to U.S. interests would give the United States a much stronger hand in subsequent negotiations.

Q2: Is a military option really on the table?

A2: Although the new Obama administration is positive and conciliatory and may even genuinely wish to engage with the Islamic Republic, the current political climate in the United States in general and in the Congress and the Senate in particular seems to be confrontational. It appears that the only option perceived viable is military action by the West to destroy Iran’s nuclear facilities.

Defense experts and military leaders have articulated that this option, even if successful, would only delay the situation as Iran would likely start to rebuild the facilities with greater determination. Also, the military option might rally the people around a regime whose legitimacy is questioned by the Iranian public, would increase the price of oil exorbitantly, and may cause horrendous regional conflicts if Iran decides to retaliate against not just the United States but also U.S. allies in the region. Finally, such an option would require repeated air strikes to destroy hidden facilities and then more air strikes if new facilities are built. It is not clear whether the U.S. public would have the stomach for such actions. It is also not clear whether Israel’s security would be enhanced in the long run by such an option. Thus it is surprising that the military option has such support. A significant number of American citizens advocate harsher actions against the Islamic Republic. An October Fox News poll showed that nearly 70 percent thought that President Obama is not tough enough on Iran, and more than 60 percent thought the United States should use force to prevent Iran from obtaining the bomb. This position is thus not uniquely that of Neocon or Israeli lobby supporters. Another poll by Pew found that more than 60 percent of U.S. citizens favor military action. Although the Europeans and even the U.S. administration clearly do not wish to become entangled in another regional war, the possibility exists that Israel may decide to strike Iran and not be concerned too much about the U.S. administration’s hesitancy, given the U.S. public’s sentiment. Therefore the military option, though clearly undesirable, cannot be discounted.

Q3: Will the talks be successful?

A3: Neither the Obama nor the Ahmadinejad administration wants to see a breakdown of talks. The Islamic regime is facing its biggest challenges (both ideological and political) since coming to power. The challenges are first and foremost among the religious leaders, but are also among the political and paramilitary establishment. To aggravate the situation, Iran faces economic and social challenges because of the miserable handling of the economy but also because of the demographic characteristics of the nation. With 70 percent of the population under 35 years of age, unemployment is officially in the teens, but if one includes people who have given up looking for jobs or are underemployed, the unemployment rate is closer to 30 percent. Corruption is rampant, and many systems lack meritocracy and only benefit their supporters. The situation is explosive. The regime is fighting both secular and religious elements and thus does not want to tangle with the international community as well. The conservative paramilitary could also argue that because they now have the knowledge to make the bomb, it is not wise to push any further. Given these facts, it is likely that the talks will continue and that some limited progress will take place. However, the negotiations are likely to be long and hard. Iran’s main goal is to secure diplomatic legitimacy. It wants recognition of its prominent role in the region and a guarantee that there will be no foreign attempt at regime change. The nuclear issue and even Iran’s adventurism in the region are primarily about the nature of its regime. The question we need to ask ourselves is, should the Iranian nuclear negotiations be the only, or even primary, issue to be addressed in dealing with the Iranian regime?

Q4: Why is Iran hesitant to transfer its LEU to Russia for further processing in France? Is this deal not attractive to both parties?

A4: The negotiations are progressing slowly primarily because of lack of trust on all sides—but they are progressing. The inspection of the new facility in Qom appears to have been concluded without any interruptions. The International Atomic Energy Agency (IAEA) delegation visiting the facility had no complaints with their access, and the tests did not appear to identify any significant concerns.

The tentative agreement to transfer the uranium Iran has enriched to 3 percent–5 percent concentration has been delayed but is still being hammered out. The stumbling block is the lack of trust on both sides. The Iranians are worried that if they ship the uranium out, the West would not honor the commitment to send the enriched uranium for medical research back to Iran. This worry is understandable, given that in the 1970s, Iran invested 10 percent in a French enrichment operation to have access to reactor fuels; however, since the Islamic Republic came into power, the French have reneged on the agreement and for all practical purposes have confiscated Iran’s investment. Iran is now being asked to trust the French to return their fuel.

The role of the Russians in this process is for Iran to have another party implicitly guarantee that the French will adhere to their commitment. Iran is not necessarily convinced that Russia will be an honest broker in this process. Even President Ahmadinejad has complained that Russia seems to be delaying the Bushehr nuclear power plant repeatedly and with numerous questionable excuses. Therefore, we should not be surprised if another country that all parties trust becomes involved in the negotiations. China is one possible nation, but they have not expressed any interest. Turkey is another alternative, and the IAEA has approached Iran on this issue. Although the initial response was not encouraging, Iran seems to be receptive to this option. The United States would probably accept Turkey in such an exchange.

Iran’s position that they ship the uranium out in phases and buy the medical isotopes immediately is probably not an acceptable option. However, a phased solution of some form is likely to work. It will require a bit more going back and forth, and the West will insist that much more uranium be shipped out than Iran can replenish.

One potential hurdle that may make the negotiations problematic is that Iran’s enriched uranium needs for the medical center only require some 800 kilograms of its LEU to be further processed while Iran has close to 1500 kilograms of the material. The amount to be shipped will present an issue sooner or later.

The questionable legitimacy of the Ahmadinejad government has also caused much of the delay. Both the conservatives and the opposition are using this transaction to attack the regime. Both are arguing that the regime is giving away the crown jewels in order to demonstrate that it is a legitimate government.

Q5: What is the position of the Iranian opposition in this negotiation?

A5: The Iranian public has been convinced over the years that enriching uranium for power generation is (1) critically important, (2) its right under the IAEA agreements, and (3) a technology highly desirable for a country to be regarded as technologically advanced. Therefore, transferring the uranium abroad is probably perceived as giving up some autonomy. Although it appears that the Ahmadinejad faction supports the deal and hopes that this would give it some legitimacy and even support from the younger population that wants engagement with the West, the more conservative factions of the government would like to see Ahmadinejad and his gang fail. Even the speaker of the Parliament has objected to this transaction. Khamenei seems to be questioning the deal as well. He is highly skeptical of engagement with the West and needs assurances this is not a “trick.”

The opposition wants to get rid of Ahmadinejad but is preoccupied with challenging the regime in a way that does not threaten its survival, given the massive crackdown on opposition organizations and supporters. Thus even Mousavi, one of the two opposition leaders, has blasted the deal. However, he has also stated that now that the regime has agreed to the transfer, the regime should keep the commitment made in Geneva; otherwise Iran will be perceived as unreliable and in a worse situation than before—an interesting instance of political posturing.

More important, the opposition justifiably feels that the West and in particular the United States has sold it out for limited progress on the uranium enrichment negotiations. Clearly the offer made in Geneva is not an easy one for all the parties in the Iranian political system.

Q6: How do we progress on our negotiations with the regime?

A6: The nuclear negotiations, though the critical issue from the perspective of the United States and its allies, are not high on the list of issues from Iran’s point of view. Iran faces economic difficulties ranging from high unemployment, the lack of foreign and even domestic investments, and the need for technology to develop its industries (particularly the oil and gas sector) to Afghan illegal immigration issues and the major problem of narcotics (15 percent of Afghan opium is used in Iran). Given these difficulties, the Iranian regime wants firm assurances that the United States will not seek regime change. Iran wants to play a significant role in the region both economically and strategically. How do we address Iran’s concerns while managing relations with other regional allies? These are significant issues that will have to be addressed in any grand bargain.

A critical issue for U.S. policy should be to determine what kind of regime the United States is willing to label as legitimate. The present regime faces challenges from both the clerical and the secular power centers. It is becoming clear that the Revolutionary Guards and the Basij have been and will continue to be relied on heavily to keep the population under control. The price the regime has paid and will continue to pay is a further paramilitarization of the economy. At the same time the economy is in shambles and will likely continue to deteriorate as oil prices hover around $80 a barrel. The economy’s burdensome legacy and economic mismanagement have brought about double-digit inflation, unemployment and underemployment of about 30 percent, and price distortions due to extensive subsidies and supports. The overvalued national currency is responsible for the country’s substantial capital flight, a dramatic decline in the country’s foreign exchange reserves, and an enormous level of government debt. Foreign and domestic investments have evaporated because of both sanctions and the difficulty of doing business in such a corrupt environment. Furthermore, the management of the economy and the administration is declining in quality. Nepotism, the growing role of the paramilitary in all aspects of the economy, and the lack of any meritocracy have resulted in poor economic performance and shortages of critical social amenities from housing to health care. Rising poverty and a widening gap between the privileged, well-connected rich and the population at large are also of great concern. Finally we see a regime that is becoming globally isolated and economically more and more desperate.

As a result, the opposition, both clerical and secular, though ruthlessly trampled and reduced for fear of reprisal, still clearly manifests itself at every national holiday that allows demonstrators to gather.

The opposition questions whether we the United States are with them or are against them. Recent chants of the opposition ask, “Obama, Obama, are you with them or with us?” (This rhymes much better in Farsi.)

The sanctions are hurting those demonstrators more than the regime. The Iranian regime wants legitimacy and assurances that there will be no foreign attempts at regime change. If the United States and world powers are willing to give such a regime what it requires, we can live with an Iran that has the ability to make a nuclear device but, with very strong supervision and safeguards, does not go that route. Can the Islamic regime be contained until it changes? Or is it a better path to actively support the opposition since nuclear capability under different regimes may not be so disconcerting?

Fariborz Ghadar is a distinguished scholar and senior adviser at CSIS. He is also the William A. Schreyer Professor of Global Management, Policies, and Planning, and founding director of the Center for Global Business Studies at Penn State University.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2009 by the Center for Strategic and International Studies. All rights reserved.

Fariborz Ghadar