Iran's Vienna gambit

BLACKSBURG, VIRGINIA  —  In a qualifying match last November for the 2022 soccer World Cup, Iran trailed Lebanon 0-1 at the end of the scheduled 90 minutes. On social media, sceptical Iranians were getting ready to blame their team’s imminent defeat on Iran’s hardline leaders, who supposedly wanted to lose the match in order to please Iran’s Lebanese proxy, Hizbollah. But, in the four minutes of stoppage time, Iran scored two goals to secure victory.

Today, the clock is ticking for Iran’s leaders in the high-stakes negotiations in Vienna aimed at reviving the 2015 nuclear deal. According to their American counterparts, at least, they are not showing the requisite urgency.

But it was former US president Donald Trump who unilaterally withdrew in 2018 from the Joint Comprehensive Plan of Action (JCPOA) (as the 2015 deal is formally known) and reimposed harsh economic sanctions on Iran. Despite the crushing blow, Iran remained in the agreement for another 14 months before increasing its nuclear enrichment level beyond the limits set by the JCPOA.

After six weeks of talks in Vienna, even reports of slow progress helped spark a 10 per cent rebound in Iran’s currency, the rial, which had fallen to new lows late last year when the negotiations started badly. But prospects are slim that the parties will reach a deal before the United States and Europe lose patience with Iran’s rapid march toward weapons-grade enrichment.

Failure in Vienna would jeopardize peace across the Middle East. Israel is trying to slow down Iran’s nuclear programme, which directly threatens its regional hegemony, but its acts of sabotage and assassinations may trigger a wider regional conflict that could drag in the US.

Iran’s need for respite from sanctions is equally urgent, because its new hardline president, Ebrahim Raisi, must deliver on his promise ofeconomic growth. Annual inflation has been running at 44 per cent since Raisi’s election in June 2021. In the absence of new revenue from oil exports, his administration will not be able to jump-start the economy without pushing inflation higher. Iranians, whose living standards have declined to the level of 20 years ago, are thus nervously waiting for good news from Vienna.

In particular, the risk that the United Nations will reimpose its own pre-JCPOA sanctions, and thus tighten the economic siege of Iran, hangs over Raisi’s presidency like a sword of Damocles. But, for practical and ideological reasons, Raisi’s team brought new demands to Vienna, setting aside the framework that his predecessor, Hassan Rouhani, had agreed to last June before the talks recessed.

Iranian hardliners believe that the 2015 accord suffered from two fundamental defects. The first flaw, exposed by Trump, was the asymmetry in the respective prices paid by Iran and the US for America reneging on the deal. Moreover, the US has refused to pledge that, should it rejoin the JCPOA, it will not leave the agreement again in the future. The fact that US officials repeat a long list of potential reasons for sanctioning Iran, including the country’s poor human-rights record, missile arsenal and regional proxy forces, makes compromise even more difficult.

The JCPOA’s second defect was apparent during the presidency of Barack Obama, who had signed the agreement. Foreign firms hesitated to trade with or invest in Iran, fearing that the US might still prosecute and fine them under non-nuclear sanctions.

With no clear solution to these problems in sight, Iran has tried to raise the cost of any future US exit. It frustrated US negotiators by waiting forfive months (from June to November) before starting the current round of Vienna talks, and refuses to seat its delegation in the same room with the Americans. Iran has also continued to enhance its nuclear enrichment, reducing the time it needs to make a bomb from one year under the JCPOA to a few weeks today. Whether these steps will result in a more advantageous agreement for the Islamic Republic is doubtful.

In any case, some hardliners believe that Iran’s economic malaise is essentially domestic, and can thus be cured even with US sanctions in place. The country’s import dependence and banking crisis, they argue, should be fixed before entering nuclear negotiations, because greater economic resilience would do more for Iran than a deal reached from a weak position. This is the logic behind Iran’s “resistance economy”, as well as Raisi’s campaign pledge not to tie the country’s economic fate to the JCPOA.

Other Iranian hardliners think a rising regional power with strict Islamic values will gain little from engaging with the West. They see the current nuclear standoff as an opportunity to redirect Iran’s economy eastward, including through long-term partnership agreements with China and Russia.

But Raisi’s ambitious promises of new jobs and housing will be impossible to fulfill if the economy fails to recover. The government’s predicament is reflected in the proposed budget for 2022-23, which assumes that US sanctions will continue and is the most contractionary in years. While total government expenditure is set to increase by 9.6 per cent, inflation is likely to reach 40 per cent this year. Wages and salaries are expected to rise by 10 per cent, resulting in a 30 per cent decline in the real incomes of more than three million public-sector workers.

With Iran’s main pension funds in the red and having to draw on public money to stay afloat, another 6 million retirees also may face a loss of real income. It is therefore a rare week when teachers or pensioners are not protesting against economic austerity.

Perhaps Raisi’s deepest fear is of repeating the singular failure of former president Mahmoud Ahmadinejad, a fellow conservative and hardliner, whose negligence regarding international concerns about Iran’s nuclear programme led the UN to impose sanctions in 2010. A desire to avoid presiding over their return may be Raisi’s strongest incentive to reach a compromise in Vienna.

Against this backdrop, the recent statement by Iran’s supreme leader, Ayatollah Ali Khamenei, that negotiating with the enemy does not amount to surrender may be just the signal that Iranian nuclear negotiators need to reach a deal in the few weeks left to play ball before the final whistle.

Djavad Salehi-Isfahani, professor of Economics at Virginia Tech, is a research fellow at the Economic Research Forum in Cairo and an associate of the Middle East Initiative at the Harvard Kennedy School Belfer Centre. Copyright: Project Syndicate, 2022. 

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