Decisive phase of nuclear negotiations

In a qualifying match for the 2022 World Cup last November, Iran was down 1-0 to Lebanon after 90 minutes. On social media, skeptical Iranians prepared to blame their team’s impending defeat on Iranian hardliners. They reportedly wanted to lose the game to please Iran’s Lebanese proxy, Hezbollah. But in the four minutes of stoppage time, Iran scored two goals to secure the victory.

Today, the clock is ticking for Iran’s leaders in the all-important negotiations to revive the 2015 nuclear agreement in Vienna. At least according to their U.S. counterparts, the Iranians are not showing the necessary urgency in negotiations. In the process, it was former U.S. President Donald Trump who unilaterally pulled out of the Joint Comprehensive Plan of Action (JCPoA, as the 2015 agreement is officially known) in 2018 and reimposed tough economic sanctions on Iran.

Despite this crushing blow, Iran remained in the agreement for another 14 months before expanding its nuclear enrichment beyond the limits set in the JCPoA.

After six weeks of talks in Vienna, even reports of slow progress in the negotiations helped the Iranian rial currency, which had fallen to a new low late last year when negotiations were going badly, recover 10 percent. However, the prospects that the parties will reach an agreement before the United States and Europe lose patience with Iran’s rapid march toward weapons-grade uranium enrichment are slim.

A threat to peace in the Middle East

Failure in Vienna would jeopardize peace across the Middle East. Israel is trying to put the brakes on Iran’s nuclear program, which poses an immediate threat to its regional hegemony, but its acts of sabotage and assassination could trigger a wider regional conflict in which the U.S. could also become embroiled.

Iran is equally in dire need of a reprieve from sanctions, as the new hardliner in the presidency, Ebrahim Raisi, must deliver on his promise of economic growth. Annual inflation in Iran is 44 percent since Raisi’s election in June 2021. Without new revenues from oil exports, its government will not be able to boost the economy without driving up inflation. Iranians, whose standard of living has fallen to the level of 20 years ago, are therefore nervously waiting for good news from Vienna.

In particular, the risk that the United Nations will reimpose its own pre-JCPoA sanctions – exacerbating Iran’s economic desiccation – hangs like a sword of Damocles over Raisi’s presidency. But for practical and ideological reasons, Raisi’s team has brought new demands to Vienna, rejecting the framework for an understanding that his predecessor Hassan Rohani agreed to last June before talks were suspended.

Iranian hardliners believe the 2015 agreement suffers from two fundamental flaws. The first mistake, made clear by Trump, is the asymmetry in the price Iran and the U.S. are paying for America’s reneging on the agreement. The U.S. has refused to promise that if it rejoins the JCPOA, it will not leave the agreement again in the future. The fact that U.S. officials cite a long list of potential reasons for imposing sanctions on Iran-including the country’s poor human rights record, its missile arsenal, and the actions of its regional proxies-makes compromise even more difficult.

Fear of new sanctions

The second shortcoming of the JCPoA became apparent during the presidency of Barack Obama, who signed the agreement. Foreign companies remained reluctant to trade with or invest in Iran after the signing, fearing that the U.S. would continue to prosecute and fine them under non-nuclear sanctions.

With no clear solution to these problems in sight, Iran has sought to drive up the cost of a future U.S. exit. By taking five months to open the current round of talks in Vienna (from June to November) and also refusing to sit in the same room with the U.S. delegation, he caused plenty of frustration among U.S. negotiators. Iran has also continued to expand its enrichment of uranium, reducing the time it takes to build a bomb from a year under the JCPoA to a matter of weeks.

Whether these moves will result in an agreement more beneficial to the Islamic Republic than the JCPoA is doubtful. In any case, some hardliners believe that Iran’s economic woes are essentially homegrown and therefore can be fixed even if U.S. sanctions remain in place.

The country’s import dependence and banking crisis, they argue, should be addressed before nuclear negotiations begin, because greater economic resilience would benefit Iran more than a deal struck from a weak position. This is the logic behind Iran’s "resistance economy" as well as Raisi’s campaign promise not to let the country’s economic fate depend on the JCPoA.

Iran’s economic crisis comes to a head

Other Iranian hardliners believe that an emerging regional power with strict Islamic values has little to gain from rapprochement with the West. They see the current nuclear standoff as an opportunity to orient the Iranian economy eastward, including through long-term partnership agreements with China and Russia.

Raisi’s ambitious promises of new jobs and housing will not be fulfilled without economic recovery. The government’s dilemma is reflected in the draft budget for 2022-2023, which assumes a continuation of U.S. sanctions and, adjusted for inflation, projects the lowest spending in years.

While overall government spending is expected to rise by 9.6 percent, inflation is likely to reach 40 percent this year. Wages and salaries are expected to rise by 10 percent, leading to a 30 percent drop in real incomes for more than three million public sector workers.

With Iran’s main pension funds in the red and in need of public funds to pay their pensions, another six million pensioners face a loss of real income. It is therefore rare to see teachers or pensioners not protesting economic austerity measures for once in a week.

Perhaps what Raisi fears most is a repeat of the failure of former President Mahmoud Ahmadinejad, a conservative hardliner. Ahmadinejad’s neglect of international concerns over Iran’s nuclear program prompted the United Nations to impose its sanctions in 2010.

The desire to avoid a reimposition of these sanctions at all costs may be Raisi’s strongest incentive to seek a compromise in Vienna. Against this backdrop, the recent statement by Iran’s Supreme Leader Ayatollah Ali Khamenei that negotiations with the enemy are not tantamount to surrender may be just the signal Iranian nuclear negotiators need to reach an agreement after all in the few weeks they have left until the final whistle blows.

Translated from English by Andreas Hubig.

Djavad Salehi-Isfahani is a professor of economics at Virginia Tech University, a research fellow at the Economic Research Forum in Cairo and a member of the Middle East Initiative at the Harvard Kennedy School’s Belfer Center for Science and International Affairs.

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