Brian Stewart: Is there still room for compromise with Iran?

The mere threat of more economic sanctions is already causing turmoil within Iran, Brian Stewart writes. But is that enough to get it to compromise its nuclear ambitions?

For those key, mostly Western, nations struggling to curb Iran's nuclear ambitions, the challenge now is to get the balance of pressure tactics right in these exceptionally stormy times.

Much of the attention, naturally, is on the real possibility that diplomatic miscalculations between Iran and the U.S. could lead to a disastrous armed conflict in the Strait of Hormuz, the narrow choke point through which much of the world's oil sails to markets. But that is still a worst-case scenario.

In reality, much of the drama is not what makes the headlines and is being played out amid secret diplomatic wrangling between six key nations over which pressure tactics and economic sanctions will work without making the situation worse.

It's an extraordinarily complex web of negotiations because most of the nations involved have conflicting strategic and economic interests and very little stomach right now for high-risk diplomacy.

Don't expect much clarity. The core group trying to manage the crisis even has two names. Some call it the P5+1, others refer to the EU3+3. Both stand for the U.S., Britain, China, France, Germany and Russia, though at this point, neither China nor Russia has backed additional sanctions.

The central problem comes down to finding those sanctions that are tough enough to shake Tehran into a compromise over its nuclear plans, but not so tough, or so rapidly enforced, that they backfire on a fragile global economy and trigger a ruinous run-up in oil prices. 

Iran's Supreme Leader Ayatollah Ali Khamenei told reporters Monday that Iran would not yield to sanctions by the West. Two days later, on Jan. 25, 2012, the government was forced to raise interest rates to try to stop a run on the rial, which has fallen 50 per cent over the past month. (Reuters)

Peel back the onion skin even more and the problem also comes down to designing action that is tough enough to satisfy Israel that peaceful pressure on Iran is still preferable to a military strike — while making sure such action is not so severe it scares away other nations from joining the cause.

Tough(ish) talk

From a diplomatic point of view, this is an extraordinarily difficult balance to get right, especially when the divided Iranian regime is so hard to read.

If you look closely, however, you'll find the new sanctions efforts are being crafted to handle the crisis in virtual slow motion in order to keep nerves as steady as possible. It all sounds far more rushed and muscular than it really is.

Note how French President Nicolas Sarkozy sounded — to Washington's delight — when the EU announced it was enacting its own economic and diplomatic sanctions on Iran just a few days ago.

"Time is limited," Sarkozy, the toughest-talking European leader, insisted. "France will do everything to avoid a military intervention, but there is only one way to avoid it: a much tougher, more decisive, sanctions regime."

In fact the European sanctions will only go into effect on July 1; around the same time new U.S. laws aimed at blocking the global financing of Iran's oil exports will finally take hold.

While the leaders beat their own drums to announce dramatic action, their diplomats are quietly cautioning the media to expect a slower pace: "Time is essential in order to have the proper effect and to avoid unintended effect," a senior EU official told reporters on Tuesday.

Election year

In fact, both the U.S. and EU know that cutting off Iranian supplies has to be slowly phased in so that those nations who rely on Iranian oil can seek alternate sources over months, not weeks.

Any faster pace could trigger a scramble that could lead to soaring oil prices at the worst possible economic moment.

As Europe buys 18 per cent of Iran's crude oil, an immediate cut off would be a body blow to Tehran.

But there was no way Europe's 27 nations could have gone along with any faster action given the heavy reliance its three most troubled economies — Greece, Spain and Italy — have on Iranian crude.

A somewhat similar constraint faces an election-bound Barack Obama.

He's under fierce attack from Republicans and pro-Israel supporters for being too timid when it comes to Iran, yet he has several reasons to not over-respond.

Overly tough or precipitous action could bring on a spike in oil prices that would damage any hopes of a U.S. economic recovery and wreck Obama's chances of re-election.

A crisis could well play into Republican hands. But the administration is also aware that other nations will follow the U.S. lead only if Washington's actions — in contrast to the Bush years — appears calm, reasonable and considerate of multinational interests.

Room for compromise?

The big effort now is to win over a very hesitant China, which imports 500,000 barrels of oil a day from Iran.

Iranian woman shop at a bazaar in north Tehran in December 2011. (Reuters)

It is still reluctant to join in sanctions. But at the same time, with Washington as the go-between, Beijing has been openly talking to its important new friend Saudi Arabia about insuring replacement supplies.

There's a growing expectation now that China will reduce Iranian imports as sanctions take hold, an expectation that is already adding to the pressure on Iran.

So how does Iran respond to this creeping threat of sanctions? Well, primarily by trying to spook those same markets the West is trying to calm.

That's why it has vowed to close off the Strait of Hormuz, to limit global oil supply, and why it has also hinted at stirring up insurgency throughout the Middle East.

No one's taking these threats lightly, but most diplomatic opinion is that this sabre-rattling is mainly crisis theatre, designed to drive up oil prices in the short term and panic areas like the EU especially.

But now that Europe has shown no signs of backing down, there's growing speculation that Iran may be looking for a compromise to lower the heat while "The Group" is considering what to offer in return.

One possible compromise that is said to be under discussion this week is to allow Iran to continue to enrich uranium but at levels below that capable of producing weapons material.

For The Group, it would be a modest climb-down from previous demands that Iran "freeze" nuclear expansion entirely. It would still insist on verification, of course, which is more than Iran's been willing to provide in any depth in the past.

Although Iran has vowed it will never bow to foreign pressure, it faces the reality that its economy is already in shambles, even months before these far tougher sanctions take hold, as Iranians ditch the local currency and dive into panic hoarding.

In the meantime, this is a crisis where sharp words take attention away from murky reality.

Whatever efforts are being made to settle this peacefully will be played out between a seemingly unknowable Iranian government and a super-secretive diplomatic group that hasn't even settled on a real name.