Overview
US-Iran negotiations started off rocky this week in Switzerland. Iranian negotiators ended Sunday talks early over American threats to resume bombing if a deal is not reached. The walkout followed days of Israeli strikes on Lebanon and Iran’s declared closure of the Strait of Hormuz (although ships continued to transit the waterway). Nonetheless, Pakistani and Qatari mediators expressed optimism following the second day of talks, and some concrete progress was announced. Both the US and Iran, plus energy importers and Gulf countries, deeply want a durable deal and are clearly committed to substantive negotiations. If a deal is not reached, it will likely be disagreements over the conflict in Lebanon or misalignment on the scope of restrictions on Iran’s nuclear program that scuttle it. Markets are holding steady on optimism around the new talks, but the hurdles are significant. A failure to come to a deal will put a stop to sanctions relief and $300 billion in development projects, not to mention risking the re-closure of the Strait of Hormuz and renewed global economic disruption.
The Lebanon Issue
Fighting between Israel and Hizballah in Lebanon is the key stumbling block in US-Iran peace negotiations. The initial MOU included Lebanon in the broader ceasefire, but strikes have continued. On Friday, the US announced that Israel and Hizballah had reached a new ceasefire, although neither side publicly endorsed the deal and clashes continued over the next several days. An Israeli spokesperson confirmed that Israel would continue to proactively eliminate potential threats. This posture is something less than a full cessation of hostilities but is in line with the lulls in fighting following other regional ceasefires.
Tehran has long sought to tie the fate of the conflict against Hizballah to the broader war with the US. The Islamic Republic seeks to protect a powerful proxy and curtail Israeli regional activity. From the Iranian perspective, the conflict in Lebanon is just one front of the broader war with the US and Israel, and any peace deal that excludes Israeli operations there is incomplete. Iran is especially eager to safeguard Hizballah, one of its few remaining proxies with any power projection capabilities. Hizballah, for its part, has condemned bilateral Israel-Lebanon talks and demanded the full withdrawal of the Israeli army from Lebanon’s south.
Israel, on the other hand, is loath to abandon an opportunity to further weaken Hizballah or to concede any strategic autonomy going forward. Prime Minister Benjamin Netanyahu is also being squeezed by domestic political concerns: Netanyahu is fighting to establish goodwill with the public and his far-right governing coalition ahead of fall elections in which he is currently projected to fall short of a majority. Netanyahu is unlikely to agree to a ceasefire that does not allow broad license for Israeli defensive action or provide a concrete pathway to disarm Hizballah (a political puzzle unsolved for decades). Setting aside Israeli interests for a US deal granting significant concessions to Iran would be all political downside in Jerusalem.
Optimistically, negotiators emerged from talks on Monday saying that the US and Iran had agreed to a mechanism to halt the fighting between Israel and Hizballah. The framework reportedly includes a “de-confliction cell” to prevent incidents from spiraling into escalation, but the exact mechanism is unclear. The mechanism tables key issues like the scope of Israeli presence in postwar Lebanon or a process to disarm Hizballah. A comprehensive Lebanon deal acceptable to both Jerusalem and Tehran is unlikely, but there still may be room for an agreement. The status of Hizballah is an existential concern for Jerusalem, but less so for Tehran. Iran may be willing to overlook low-level conflict in Lebanon if the rest of the deal is sufficiently beneficial. In this way, the Lebanese issue could be something of a Schrödinger poison pill: tolerable if Iran wants it to be, or an excuse to walk if the deal is not good enough.
Nuclear Particulars
The other major stumbling block will be the particulars of the nuclear deal under discussion in Geneva. Limiting Iran’s progress towards a nuclear weapon was among Washington’s initial reasons for launching the war against Iran and is ostensibly the chief goal of a peace agreement. Nonetheless, the two parties look no closer together on the nuclear issue now than they did in February (when the Trump administration and Iran had already engaged in several rounds of nuclear talks). The initial 14-point MOU signed last week included an Iranian pledge not to seek a nuclear weapon. The pledge is not especially substantive: Iran has long claimed that it will never seek a nuclear bomb, pursuant to a 2003 fatwa by Ayatollah Khomeini against the production of weapons of mass destruction. Successive US administrations have considered the fatwa more diplomatic posturing than concrete law and will want to see concrete limits.
Current and previous nuclear negotiations hinge on three primary pillars: a framework for independent inspections, the status of existing highly enriched uranium, and the level of permissible enrichment. The first point has already been publicly addressed, with less than optimistic progress. Following the second day of talks, US Vice President JD Vance said that Iran had agreed to permit the International Atomic Energy Agency (IAEA), the UN nuclear watchdog, to inspect nuclear sites damaged by the war. The next day, Iranian negotiators rejected the report, saying that no agreement had been made. The back-and-forth may be diplomatic posturing but does not bode well for US demands beyond the most basic inspections. The implementation of the Additional Protocol, which would allow surprise inspections at undeclared sites, would likely pose issues.
The status of the uranium stockpile has been partially agreed: the initial MOU committed Iran to down-blending its highly enriched uranium pursuant to a forthcoming agreement and under the supervision of the IAEA. Prior to the 12-day war in June, it was estimated that Iran held some 440 kg of uranium enriched to at least 60% and 180 kg enriched to at least 20% (both above the threshold to be considered “highly enriched,” but not weapons-grade). Iran has previously claimed that it was all destroyed in American and Israeli strikes. The inclusion of down-blending in the MOU is a tacit acknowledgement that at least some remains. The US seeks greater dilution or, preferably, the removal of Iranian stores to a third country. Both will be tricky. Iran has previously offered to down-blend uranium to 20% in exchange for sanctions relief, a number that is drastically higher than the 5% typically needed for energy use. The removal of uranium stores will also be contentious. Under the 2015 Joint Comprehensive Plan of Action (JCPOA), President Obama’s nuclear deal, Iran shipped its enriched uranium stockpile to Russia, but this is no longer diplomatically viable.
The least has been publicly said about enrichment ceilings. Under the JCPOA, Iran was permitted to enrich up to 3.67% – a level sufficient for civil use in most nuclear reactors. Iran has offered that ceiling in previous rounds and publicly maintained that it has not surpassed it (in contrast with independent assessments). The US and Israel have increasingly called for no enrichment at all on Iranian soil. Iran is likely to be inflexible on maintaining future capabilities given a severe lack of trust in US agreements.
The Spoilers that Weren’t: Hormuz, Missiles, and Proxies
Equally as interesting as potential spoilers are the obstacles that were once top-line priorities but now appear to have fallen to the wayside. Chief among these is the future status of the Strait of Hormuz: the 14-point MOU did not prohibit Iranian control of the Strait. Instead, it agreed that Iran would arrange for the safe passage of commercial vessels “with no charge, for 60 days only.” Following that period, Iran is encouraged to define future administration of the waterway with Oman and other littoral states, in line with international law and sovereign claims. Following meetings in Muscat this week, media reported that Iran is establishing an insurance agency and requiring “Strait insurance” (free for now) for all transiting vessels. Neither the US nor its partners have raised significant objections, despite the global economic risks of a continued economic chokehold. It is possible that negotiators view nuclear issues as the priority or that the Strait has effectively been decided by force, with adaptation to a new reality already underway.
Similarly, both Washington and Tehran have decentered discussion of Iran’s missile capabilities and proxy powers. Limiting Iran’s regional power projection tools was one of the US’ stated war objectives when the conflict began. But Tehran’s missile capabilities were not wiped out in four months of war, and neither missiles nor proxies were mentioned in the 14-point MOU or the first few days of negotiations. These elements have been a consistent goal for the US and a priority for its Gulf allies and Israel, but negotiations have come to nothing. The Trump administration may be pragmatically looking to omit them to improve the possibility of a good nuclear deal (just as President Obama did in 2015). But the US’ willingness to sweep these issues under the rug could further fray relations with Gulf capitals. The Arab Gulf states are already reassessing the utility of the American security umbrella after the conflict.
Implications for the Global Economy
The fate of an Iran deal will have wide-ranging impacts on the global economy. If unsuccessful, the reversal of ongoing sanctions relief would create new compliance confusion. The cancellation of the $300 billion development fund will cause significant downsides for global businesses (especially in the Middle East and Asia), as no plan for reconstruction would occur. In the fallout, an unconstrained Iran could squeeze the global energy market once again. On the other hand, a successful outcome could provide significant new opportunities for a historic reconstruction of Iran, ensure a freer flow of traffic through the Strait of Hormuz, and inject new slack into the global energy market with the re-entry of Iranian crude.
Nonetheless, a resumption of all-out war is not likely in the next few months, even if a deal is elusive. The US is eager to rebuild military stockpiles and reroute capabilities out of the region. Iran needs time to rebuild a domestic economy that is nearly ruined. Both sides are eager to avoid more economic global shocks – at least prior to November midterm elections in the US. But a return to low-level conflict under the auspices of an imperfect ceasefire is possible, with the US and Israel continuing strikes on Iran to punish, deter or degrade nuclear or missile capabilities. Iran, on the other hand, will be eager to flex its newfound power over the Strait of Hormuz, dampening if not halting maritime traffic.
