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NATO Parliamentary Assembly

MEDITERRANEAN AND MIDDLE EAST SPECIAL GROUP

THE IRANIAN CHALLENGE TO MIDDLE EASTERN AND GLOBAL SECURITY

DRAFT REPORT*

Raynell ANDREYCHUK (Canada)Rapporteur

www.nato-pa.int 23 October 2013

* The Mediterranean and Middle East Special Group (GSM) will consider adoption of this report in 2014.

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TABLE OF CONTENTS

I. INTRODUCTION 1

II. THE NUCLEAR NON-PROLIFERATION TREATY (NPT) AND THE COMPREHENSIVE SAFEGUARDS AGREEMENT (CSA) WITH IRAN 2

III. IRAN’S NUCLEAR AMBITIONS: DOMESTIC AND INTERNATIONAL DRIVERS 6

IV. TEHRAN’S WORLD VIEW, REGIONAL POLITICS AND THREAT PERCEPTIONS 8

V. THE RISKS OF IRANIAN NUCLEAR ACQUISITION12

VI. A TWO TRACK APPROACH: ASSESSING THE EFFICACY OF SANCTIONS 14

VII. THE EFFORTS OF THE P5+1 GROUP 17

VIII. IS THERE A MILITARY SOLUTION TO THE CRISIS? 18

IX. CONCLUSION 19

BIBLIOGRAPHY 21

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I. INTRODUCTION

1. Iran’s nuclear programme ranks very high in any list of challenges to global peace and security. The matter has become a central concern for the international community, and although the NATO Alliance is not today a key protagonist in the matter, several European and North American governments are actively engaged in efforts to resolve the problem. That effort will invariably condition the security environment in which the Alliance operates and, in this sense, the stakes are very high. Not surprisingly, therefore, it is fast becoming a textbook case of international crisis management, although the protagonists have yet to write the conclusion. Indeed, at this writing, unanticipated political developments in Iran are helping to revivify diplomatic efforts to resolve this vexing problem.

2. Every international crisis differs, but analysts are looking closely at past crises to derive rules of the road for handling the nuclear stand-off with Iran. In contrast with the Cuban Missile crisis, for example, the Iranian crisis involves a plethora of players with overlapping and competing interests. The world today is more multipolar than in 1961, and the capacity of the great powers to work out solutions is accordingly diminished. Indeed, a very sharp debate among defence intellectuals about what is to be done has added a layer of uncertainty to the game. Moreover, the moves each player makes on this multi-dimensional chessboard have consequences for all the other players. The extraordinarily opaque and uncertain nature of highly factionalised and fluid Iranian politics and decision-making adds yet another layer of complexity. Those engaged in negotiations must factor in how the regime and other actors in Iranian society, including factions within the ruling elite and even the regime’s oppressed opponents, will respond to particular offers, threats and actions. They must also consider the concerns and possible responses of other key actors in the Gulf, the broader Middle East, Russia and China. The variable geometry of post-Cold War inter-state relations imposes a colossally difficult structure for settling high stakes nuclear disputes.

3. For the United States, its European Allies and Canada, Iran’s resistance to inspections of its nuclear facilities violates international law, and there is evidence that its nuclear program has matured significantly in recent years. As a result, many governments and analysts feel that Iran poses a very serious proliferation threat with serious strategic implications. If Iran succeeds in building a usable nuclear weapon, it would theoretically provide a shield behind which the regime might implement a more coercive kind of diplomacy in an already volatile region. It could also increase the risk that nuclear capabilities might be funneled to other international actors including, in worst case scenarios, sub-state actors (Kroenig). Israel sees Iran’s nuclear programme as a direct and potentially existential military threat and the change of government has not assuaged Israeli concerns. The United States and Europe also take these threats seriously and have sought to provide reassurance to Israel so that it does not feel isolated and compelled to act on its own. Although Canada is not directly engaged in the nuclear talks, it too has a high stake in the outcome and strongly supports what the United States and its European partners are seeking to achieve.

4. Iranian officials are well aware that until recently there has been little international consensus about how to best manage this crisis. The agreement of both the United States and the EU to impose very tough sanctions, however, suggested that at least the West has managed to agree on a tough line which many believe has helped convince Iranian authorities to change the tone and possibly the substance of their diplomacy. There is now a general consensus that the international community must follow up on the overtures the new Iranian government have extended and, once again, to look for a way out of the nuclear impasse. Indeed, the recent election of Hassan Rouhani, a moderate cleric open to dialogue with the West represents an important potential opportunity to back away from conflict, but it is still too early to fathom how far the the Rouhani government will move toward the international community’s demands. Lively domestic debates about how to manage this crisis continue both in Iran and in key countries like

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the United States. One thing is clear at this juncture Rouhani’s election and his words are opening up new diplomatic opportunities although the international community will very likely continue to call for concrete measures to accompany Tehran’s changing rhetoric.

5. This report will explore several components of this complex and ongoing diplomatic and security challenge. It will explore its legal dimensions, identify some of the concerns, pressures and strategic stakes key players confront, and examine the assumptions informing their respective approaches. It will also discuss the ways in which domestic politics are shaping the Iranian regime’s nuclear ambitions and consider how Hassan Rouhani’s election could be a game changer if, of course, he is able to leverage his popular mandate to alter Iran’s long-standing approach to the nuclear question. Finally, it will lay out several policy options that the key players must now consider.

II. THE IRANIAN NUCLEAR PROGRAMME AND THE TREATY ON THE NON-PROLIFERATION OF NUCLEAR WEAPONS (NPT)

6. Iran acceded to the NPT in 1970, and its Comprehensive Safeguards Agreement (CSA) with the International Atomic Energy Agency (IAEA) entered into force in 1974. Although the Islamic Republic is entitled to employ nuclear technology for peaceful purposes, representatives of the international community have long charged that its covert efforts violate the nuclear safeguards commitments it has undertaken as a member of the IAEA. Tehran's consistent failure to report significant elements of its programme to the IAEA has heightened international concerns over its nuclear capabilities and intentions (NTI, The Nuclear Threat Initiative). Although the Atomic Energy Organization of Iran (AEOI) officially oversees the development of Iran’s nuclear programme, final decisions lie with the Supreme Leader (SL) Ali Khamenei. At the moment, there is no concrete evidence that the SL has actually decided to produce a nuclear weapon, although it is clear that Iran is rapidly accumulating the necessary resources and technologies that may provide the SL with a so-called break out option (Takeyh, 2012).

7. The Iranian Revolutionary Guard Corps (IRGC) plays a special role in protecting Iran’s nuclear programme and is often understood as constituting a barrier to a breakthrough in international negotiations as that program confers it status and leverage. The IRGC comprises an estimated 125,000 personnel, ground, naval, and aviation branches acting independently of the regular armed forces (Global Security). It is also a major financial power within Iran and has forged ties with firms producing critical nuclear technology. Should Iran’s nuclear programme or nuclear facilities come under threat, the IRGC, and especially its Qods special forces, could defend the programme by mounting intelligence operations abroad, possibly attacking critical regional and Western infrastructure and mobilising affiliated militant organisations to act against a range of international interests/assets in the region (Bruno & Bajoria).

8. Iran’s decision-making process and the chain of command governing the nuclear programme are complex and opaque. The Supreme Leader, Ayatollah Khamenei, and a relatively small group of senior leaders and advisors, including members of the Supreme National Security Council (SNSC) take all the key nuclear decisions. Major decisions concerning nuclear policy require the SL’s approval. Officially, the Iran Atomic Energy Council directs Iran’s general nuclear policy. Created in 1974, the Council together with the AEOI approves national nuclear policy, while laying out the regulations and directives guiding those programmes. The 15-member Atomic Energy Council is composed of the president, cabinet ministers, head of the AEOI, and four nuclear scientists. The SNSC is concerned mainly with defence and national security policies, comprising leading members of the military, the IRGC, the secret service, the Foreign Minister, representatives of the Supreme Leader, and other ministers as required.

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9. It is important to note that Iran’s nuclear programme predates the 1979 Iranian revolution. Shah Mohammad-Rezā Shāh Pahlavi established that programme in the late 1950s with the support of Dwight D. Eisenhower’s Atoms for Peace programme. This was part of a US effort to increase its military, economic and civilian assistance to Iran. Two years later the Shah established the Tehran Nuclear Research Center and negotiated with the United States for support in building a US designed five-megawatt reactor (Newsweek, 2008). Over the next decade the United States provided Iran with nuclear fuel and equipment for research purposes. The US goal was to assist Iran in developing its nuclear energy capacity while discouraging Tehran from conducting its own fuel-cycle research. On 1 July 1968, Iran signed the NPT. Six years later Iran completed its Safeguards Agreement with the IAEA. By the 1970s, France and Germany had joined the United States in providing assistance to the Iranian nuclear programme.

10. There were, however, already concerns about the Shah’s nuclear ambitions. In August 1974, a US special national intelligence estimate noted that although "Iran's much publicised nuclear power intentions are entirely in the planning stage," the Shah could lead Iran to pursue a nuclear weapons programme, especially in the shadow of India's successful nuclear test in May 1974. By that time, France had signed a deal to build two reactors at Darkhovin, while Germany’s Kraftwerk Union had begun to construct two reactors at Bushehr in 1975. Both projects were subsequently cancelled due to concerns about Iranian ambitions (Newsweek).

11. After the Shah’s fall, the revolutionary government of Ayatollah Khomeini initially cut back or cancelled much of the Shah’s nuclear programme including plans for power reactors. The devastating Iran-Iraq war (1980-1988) during which chemical weapons were used, however, galvanised Iran’s revolutionary leaders to revisit what was, in effect, a nuclear moratorium. The discovery of Iraq's clandestine nuclear weapons programme in 1991, as well as a growing US presence in the region during the Gulf War, provided additional justifications for rebuilding Iran’s civilian nuclear programme.

12. Since the 1990s Iran has made steady progress in developing capacities covering the full nuclear fuel cycle. It has developed uranium-mining infrastructure, constructed a broad based research capacity, built uranium conversion and enrichment facilities, and produced its own fuel. In 2002 the IAEA began investigating allegations that Iran had conducted a range of clandestine nuclear activities. France, Germany and the United Kingdom, referred to as the EU-3 in the context of international negotiations, agreed to launch a diplomatic effort to persuade Iran to disclose the full scope of its nuclear programme and to forgo its uranium enrichment and reprocessing-related activities.

13. International pressure following the 2002-2003 revelations led Iran to suspend temporarily its enrichment-related activities and to sign the Non-Proliferation Treaty’s Additional Protocol in 2003 allowing the IAEA greater access to nuclear sites. Negotiations between Iran and the EU-3 began in 2004 with Iran signing the Paris Agreement to extend a temporary suspension of selected nuclear activities. While suspending enrichment-related work for roughly two years, Iran continued to develop and manufacture centrifuges.

14. In a 2004 report, the IAEA charged Iran with failing to declare the following major activities: laser isotope and plutonium enrichment experiments, uranium imports from China, tests of uranium conversion processes, uranium enrichment and its introduction into centrifuges, the associated production of enriched and depleted uranium, the existence of a pilot enrichment facilities at the Kalaye Electric Company Workshop and laser enrichment plants at the Tehran Nuclear Research Center and at Lashkar Ab’ad. Experiments at these sites involved nuclear material that Iran was legally obliged to declare to the IAEA. In August 2005, Tehran announced it was resuming uranium conversion at the Isfahan Nuclear Technology Center. By early 2006, IAEA inspectors confirmed that Iran had once again resumed its enrichment programme. The

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IAEA Board of Governors subsequently referred Iran’s case to the UN Security Council (UNSC). Shortly thereafter, Tehran announced that it would stop implementing the Additional Protocol.

15. Since 2003, the IAEA has not received sufficient information from Iran to fully gauge the extent of its nuclear programme and its compliance, or lack thereof, with the NPT. A November 2011 IAEA report expressed “concerns about possible military dimensions to Iran’s nuclear programme”, though most activities described dated to the pre-2003 period. While Iran questioned the report’s evidence as well as the IAEA's legal authority to investigate non-nuclear activities, the report helped trigger a series of US and EU sanctions. A February 2012 IAEA report then revealed that Tehran was continuing to advance its capacity to enrich uranium.

16. The Additional Protocol, to which Iran agreed in February 2003, requires Tehran to provide design information on new nuclear facilities. Iran has challenged this and refused to provide the IAEA with information such as details on its heavy-water reactor under construction at Arak or explanations about a February 2010 Iranian announcement that it “possessed laser enrichment technology”. Iran may also have violated its CSA when it decided to construct new enrichment facilities without informing the IAEA. It also failed to notify the IAEA of its decision to enrich uranium. Article 45 of the agreement requires that Tehran notify the IAEA “with design information in respect of a modification relevant for safeguards purposes sufficiently in advance for the safeguards procedures to be adjusted when necessary” (IAEA, 1974).

17. The IAEA Board has never formally found that any of these activities fail to comply with Tehran’s CSA, nor has it referred these issues to the UN Security Council. It did, however, adopt a resolution in November 2009 that described Iran’s failure to notify the agency of the Fordow facility as “inconsistent with” Iran’s safeguards agreement. Yet this statement did not constitute a formal finding of noncompliance. A September 2012 IAEA Board of Governors’ resolution also expressed “serious concern” that Tehran has not complied with the obligations described in IAEA Board of Governors’ and UN Security Council resolutions, but, once again, this did not contain a formal finding of noncompliance (Kerr).

18. The IAEA also reports that it held an additional round of talks with Iran in May 2013, following nine rounds of failed talks, aimed at agreeing on a “structured approach” to resolve outstanding issues, including the military dimensions to Iran’s nuclear programme. While the IAEA continues to verify the non-diversion of declared nuclear material, “it is unable to provide credible assurances about the absence of undeclared nuclear material and activities in Iran, and cannot therefore conclude that all nuclear material in Iran is used for peaceful activities.” (IAEA, 2013).

19. There have also been concerns that Iran might follow the North Korean example and simply withdraw from the NPT to pursue its nuclear programme unfettered by international legal strictures. Iran’s 2009 announcement that it was constructing a second uranium enrichment facility at Qom, the Fordow Fuel Enrichment Plant, was particularly alarming. A withdrawal from the NPT, however, would trigger even more comprehensive sanctions while raising at least the possibility of military strikes on Iran’s nuclear facilities, something Tehran has been obviously very keen to avoid. Given Tehran’s disclosure of the Fordow plant in 2009 and subsequent participation in nuclear talks with the P5+1 Group (five permanent UNSC members plus Germany), it seems unlikely that it is planning to withdraw from the NPT. Moreover, Iran’s new President is clearly signaling a desire to lower tensions with the international community, a signal that is welcome but not sufficient to allay concerns. Only opening up Iranian facilities to rigorous international inspection will achieve that.

20. To date, the UNSC has adopted six resolutions (No. 1698, 1737, 1747, 1803, 1835, 1929) to address Iran’s nuclear programme. The central ambition here has been to encourage Iran to suspend its uranium enrichment programme, comply with the IAEA Board of Governors requirements and undertake confidence-building measures outlined in the February 2006 IAEA

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Board of Governors resolution-including reconsidering the construction of its heavy-water reactor and ratifying the IAEA Additional Protocol. The Security Council adopted almost all of these resolutions under Chapter VII of the UN Charter. They are therefore legally binding and include a set of progressively more severe sanctions against Iran and Iranian entities/persons in the event of non-compliance (Davenport, August 2012).

21. Iranian officials have raised several legal arguments challenging the IAEA’s mandate to investigate suspected violations of Iran’s nuclear obligations. The IAEA has “the right and the obligation to ensure that safeguards will be applied.” It is mandated to ensure nuclear material is never diverted from declared activities and to investigate allegations of undeclared nuclear material and activities. In the case of Iran’s Parchin nuclear site, which the IAEA suspects of engaging in weaponisation-related activities, the IAEA claims the authority to conduct inspections designed to ensure that nuclear material is not diverted to nuclear weapons production (Albright, Heinonen, & Kittrie, 2012).

22. Negotiations to resolve compliance issues between the P5+1 Group and Iran have so far failed to resolve the crisis although there are more reasons for optimism for the current round of talks that have just begun in Geneva. Tehran maintains that it has no interest in acquiring nuclear weapons while continuing to assert its right to develop a peaceful nuclear programme. Prior to the current round of talks negotiations in recent years have focused more on short-term confidence-building measures than on achieving a comprehensive agreement. More often than not, Iran has used negotiations as a stalling tactic while its leaders vehemently denied all charges of non-compliance (Arms Control Association, 2013).

23. The tone of current talks seems very different although the challenges are formidable. Iran is expected to offer to scale back its uranium enrichment programme. This would have been an important concession several years ago, but its programme is now so advanced that this alone will not assure the international community that Iran is not near the nuclear weapons threshold. Iran has hundreds of centrifuges in operation and has nearly completed constructed on a plant that will produce plutonium. What would have been a good deal several years ago, is now insufficient. Thus Iran comes to the table with a very advanced nuclear programme in hand while the international community brings a sanctions regime which has severely damaged the Iranian economy and which could be further strengthened if talks fail to yield progress. The Iranians have hinted that they will accept some constraints on the nuclear programme in exchange for an easing of sanctions. The international community will likely want far greater constraints than those the Iranians might initially offer. Any easing of sanctions would, at best, be proportional to Iranian concessions.

24. One US negotiator has said “We are going to make judgments based on the actions of the Iranian government, not simply its words, although we appreciate the change in tone,”(Gordon and Erdbrink, 14 October 2013) The US, for example, will demand that the highly sensitive Parchin military base be opened for inspections while the Iranian government maintains that this base is only a regular military base and that this would transgress its legitimate security interests. Tehran is very reluctant to have its military bases opened for inspection.

25. Finally, several governments have suggested that the ultimate goal of negotiations ought to be the creation of a nuclear free zone in the Middle East. Iran itself first floated the idea in 1974 and Egypt later extended the idea to include biological and chemical weapons in talks aiming to create a Weapons of Mass Destruction-Free Zone (WMDFZ). Although virtually all the governments of the region oppose Iran’s nuclear program, many also see the Israeli undeclared nuclear capability as a threat and believe that it has served as a catalyst for proliferation. The Middle East Nuclear Weapon Free Zone (MENWFZ) is a long-standing proposed agreement that its supporters argue would reduce tension in the region and make the achievement of a peaceful settlement to the Palestinian question possible insofar as it would constitute a major

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confidence building measure in the eyes of those who support this approach. Israel has chosen not discuss nuclear demilitarization except in the context of a comprehensive peace settlement including Palestinian issues and all of Israel’s neighbors, such as Syria and Iran, and it maintains a position of studied ambiguity about its own programme. Israel is not a signatory to the NPT and thus is not legally subject to its strictures.  

26. In December 2012 the UN General Assembly passed a non-binding resolution calling on Israel to put its programme under IAEA supervision and to adhere to the NPT. Israel, in turn, has challenged the credibility and bias of that institution on matters of Middle East peace and security. Israeli officials have said that any talks on a WMDFZ would first require a durable peace and regional states’ compliance with international obligations. For Arab states, Israel’s accession to the NPT would be a prerequisite for talks. In the context of the 2010 Review Conference of the NPT, the international community finally endorsed the objective of holding a Conference in 2012 on the establishment of a WMDFZ, to be attended by all States of the Middle East. In October 2011 Finnish Under-Secretary of State, Ambassador Jaakko Laajava was selected as the Conference facilitator. One month later, however, the Conference was postponed indefinitely as several Middle Eastern states including Iran and Israel refused to participate.

III. IRAN’S NUCLEAR AMBITIONS: DOMESTIC AND INTERNATIONAL DRIVERS

27. Crisis management is, in part, the art of communication under conditions of enormous stress among actors who often do not fully and sympathetically comprehend each other’s respective outlooks. Such communication requires not only a very clear appreciation of national goals, means and limitations, it also demands an acute understanding of what makes the other side tick. For this reason, it is essential to garner some understanding of Iran’s nuclear ambitions and what actions and signals might move it off this course.

28. Achieving that understanding poses a complex set of problems, and one would first need to address, if not fully answer, several fundamental questions. Is Iran’s apparent quest for the technology needed to build nuclear weapons driven by the notion that this capability is essential for defending national sovereignty? Is it driven by the ruling elite’s desire to maintain positions of power and control within Iran - positions that afford that elite and its extended networks all manner of special privileges and wealth? Is the quest for nuclear weapons capability seen as an effective source of leverage in Iran’s byzantine domestic political universe, and would the acquisition of this technology therefore help the current elite further entrench itself even further in privileged positions? Or does this alleged quest for nuclear technology with break-out potential reflect both the country’s enduring hegemonic ambitions in the region and its desire for greater influence beyond it? It is also important to consider whether defence and security policies more generally are the product of objective assessments of threats in the international environment, the dynamics generated through the interaction of domestic politics and institutions, or some ambition for national prestige or religious and ideological vindication. Finally, there is the critical question of whether nuclear weapons have become an integral part of a millenarian vision inspired by a highly radical interpretation of Shia theology (Sherrill). How one answers these questions will invariably shape the strategy for coping with the Iranian nuclear problem.

29. The Iranian regime was founded on the principles of an Islamic revolution that were essentially anti-American, anti-Western and anti-democratic in nature, even though the cacophonous style of rule in that country is sometimes misunderstood as a kind of proto-democratic pluralism (Amuzegar). The ruling elite has fashioned an ideology which is simultaneously nationalistic and Islamic. It has identified the national interest more broadly with the interests of Shia Islam and Iran’s place in the Islamic world. The regime has viciously attacked those elements in civil society which openly disagree with it, and Iran’s human rights record is consequently appalling. The country ranks 175 out of 179 countries in terms of press freedom, it

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has banned trade unions and undermined professional associations. It also lacks an independent judiciary, enforces a brutal 7th century penal code, employs violence against dissidents, and has thus hardly served as a model for those seeking more open and plural societies in the Muslim world (Amuzegar).

30. It is also important to understand how the regime in Tehran is structured. This is far easier said than done, and an array of Western scholars has built their careers garnering insights on Iran’s opaque decision-making process. Until recently it seemed that hardliners were ascendant, while reformists, such as former President Mohammad Khatami, who once sought dialogue with the United States, were marginalised. The election of Hassan Rouhani with the support of the more moderate former Presidents Khatami and Akbar Hashemi Rafsanjani, who the Guardian Council had barred from standing in this election, suggests that the regime may now worry that it ignores moderate forces and the policies they support at its own peril. Politics, which for many years has been a struggle among various hardline factions, has apparently become more complex and plural. Hardliners, however, continue to harbour ambitions for the region, are dedicated to countering the Western presence there, and strongly support the nuclear programme. Rouhani and those around him have also been dedicated supporters of the nuclear programme, but they are also realists who are very concerned that the country’s other pressing needs are being sacrificed to pursue it. Indeed the public’s dissatisfaction with the economic and political status quo has recast the political atmosphere in Iran; the regime’s nuclear ambitions as such are hardly the most salient issue among Iran’s unhappy citizens, who generally support the basic nuclear programme. Nevertheless, this situation could well provide an opportunity for the international community to come to a new understanding with the regime on the nature of that programme. There are signs now that even some conservatives are beginning to find common ground with their more liberal co-nationals. Gen Hassan Firouzabadi, the second in command of Iran’s armed forces and member of the National Security Council recently endorsed the government’s ambitions for nuclear talks underway in Geneva and said it was a unique opportunity to end hostilities with the West (Fassihi, 21 October 2013).

31. The Iranian state is characterised by parallel lines of authority and intensive rivalries that spring from institutional opacity (Sherrill). There is, of course, a state apparatus that administers the work of government, but there are also clerical lines of authority that shape policy in formal and informal ways. The lines between state and market have also grown extraordinarily blurry, and the level of corruption in Iran is significant; Iran ranks 133 on Transparency International’s Corruption index - tied with Russia (Corruption Index 2012). By its very nature, corruption also obscures the policy making process, and it suggests that state institutions are weak and that rivalries for access to resources abound and are tolerated.

32. Even the clerical hierarchy engages in this game, and sometimes their policy positions are designed to obscure other activities, including graft and nepotism. Theology can play here as well. It has been suggested that the influential ayatollahs of the holy city of Qom view the Supreme Leader, Ali Khamenei, with a degree of disdain and suspicion and, among other things, question his theological credentials (Daragahi). Moreover, there is a noticeable degree of fluidity within the system so some of those who today wield power and influence might well be marginalized tomorrow. That said, the Supreme Leader holds enormous power in this system and exercises that power through both formal and informal channels. For the limited number of people allowed to play a role in domestic politics, therefore, the game is intense and demands constant vigilance. Of course, the country’s ruling elite deny most Iranians any real role in politics, and until recently even slightly moderate figures were marginalised (Pollack and Takeyh). Again, the recent presidential elections point to a change in this regard although whether this is permanent or tactical remains to be seen. Much hinges on the negotiations with the international community. How those talks proceed could help condition Iran’s political future.

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33. The nuclear programme itself has long been a product of this byzantine and obscure ruling structure beset with bitter rivalry in a game from which most of Iranian society is essentially excluded. Such a system is by its nature unstable. All of this creates a genuine conundrum for the international community as it is not always clear who is making decisions, where these figures stand in a fluid hierarchy, what their motives and ambitions are, and what the best means might be to influence them.

34. Interestingly, the condition of the national economy emerged as the most salient issue in the recent presidential election campaign. These elections took place on 14 June 2013 with 8 candidates, all vetted by the Guardian Council, vying for the position (two candidates were disqualified and two opposition figures who had previously run for president, including former President Akbar Hashemi Rafsanjani, were placed under house arrest) in the run up to the elections. Myriad factories have closed or are operating well below capacity and an estimated 3,000 cargo ships are stranded as a result of sanctions. The government has been compelled to borrow heavily from the central bank to underwrite large deficits and three million people are now unemployed, including 800,000 university graduates. At a debate among the candidates, during the campaign Vali Akbar Velayati, a foreign policy adviser to the Supreme Leader suggested that “if we don’t make peace with the world, and expand our relations, especially with our neighbours, we will miss many opportunities.” (Fassihi) Most analysts believe that the new President will have no direct say on the Iranian nuclear programme (Ahmari), but clearly public patience with Iran’s global isolation is mounting and the election result could foreshadow changes that will invariably create new diplomatic openings.

IV. TEHRAN’S WORLD VIEW, REGIONAL POLITICS AND THREAT PERCEPTIONS

35. There is an acute sense among the leadership that the international community, and particularly the United States and Israel, seeks to undermine or even overthrow the regime. These leaders derive legitimacy, in part, from the country’s long rivalry with and resistance to the United States, and certain factions maintain a vested interest in perpetuating that struggle insofar as it has long generated leverage within the Iranian system itself. From Tehran’s perspective, the United States poses a multifaceted threat that is not simply military and economic in nature. Its leaders believe that US values, culture and political practices perennially threaten Iran’s religious and cultural values that, in turn, lie at the core of the regime’s legitimacy and self-perception (Amuzegar). Iran’s Supreme Leader Khamenei has claimed that the United States wants nothing less than the negation of Iran’s identity. He has used such positions to reinforce the culture of resistance which certainly informs the country’s nuclear ambitions (Pollack and Takeyh). Playing up this threat, of course, gives the regime wide latitude to enforce a kind of cultural and political conformism that, by extension, has strengthened its hold on state institutions. The accusation of susceptibility to Western values and mores has become a political cudgel employed frequently against the regime’s domestic critics. This militates against those Iranians who advocate putting the relationship with the United States and the West on a more pragmatic and mutually beneficial foundation. The new President appears to be positioning himself to challenge elements of this posture, but the international community will need to see concrete changes before it can feel confident to move.

36. The doctrine of national self-sufficiency represents another important leitmotiv of revolutionary Iran’s foreign, defence and economic policies. One reason that the regime, until recently seemed so impervious to the threat of sanctions is that such measures reinforced a sense of isolation and persecution and thus confirmed the leadership’s worst fears about the aims and designs of outside powers. By extension sanctions allegedly could even provide an opportunity to lower the country’s dependence on the international community as such. From this perspective, the world appeared to be a lonely place bereft of allies and friends in which a nuclear weapons capability could provide an essential guarantee of security. The paradox has been that Iranian behavior made its isolation a self-fulfilling prophecy (Gorman and Yadron). Iran does need

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the rest of the world and the sanctions regime has demonstrated the very exacting cost of isolation. The Iranian people appear to have reached the limits of toleration and no longer want to pay this price. The new government seems to have a radically different approach and openly admits that one of their central ambitions is to end the sanctions regime and to do so at the bargaining table.

37. Iran’s sense of isolation has also had a sectarian dimension. The Shia regime operates in a region dominated by Sunni Muslims. Its greatest rival for regional influence is Saudi Arabia and that rivalry has long had an apparent theological edge to it. Indeed, the Saudis and the Iranians, respectively, each see themselves as bearing special responsibilities to the Sunni and Shia denominations of the Islamic faith. This adds a Manichean dimension to the rivalry, regionalises it, and undercuts efforts to find common ground (Sherrill).

38. Iran’s closest ally in the region, Bashar al-Assad’s Syria, is now in the midst of a horrific civil war. Tehran has been Syria’s most staunch defender, providing weapons and other support for government forces. Iran’s backing for the Lebanese Shiite militia Hezbollah is also consequential in this regard as those forces have joined Iranian Revolutionary Guards units to participate on the government side in the Syrian war. If Assad were to fall, Iran would lose a key ally and a source of regional leverage. This is creating a strategic quandary for the United States and other Allies, which while challenging the legitimacy of the Assad regime, also worry about extremists in the opposition and any change that would strengthen Iran’s regional influence.

39. Iran also enjoys an increasingly close relationship with the Shia-led government of Iraq - a relationship that is of increasing concern to Iran’s Sunni neighbours. In the eyes of Iranian officials, the triumph of the Shia majority in Iraq represented a great advance for Shi’ism in the region and a vindication of Iran’s persistence. The Gulf monarchies have a completely opposed view here, and this constitutes yet another manifestation of the zero sum game underway in the region.

40. There are roughly 14 million Shia living in the Persian Gulf, and 50% of the region’s oil reserves are located in Shiite regions, even though most governments are Sunni dominated (Oktav). The sense of military vulnerabilities among the Gulf States is exacerbated by large Shia populations, which the governments in those countries sometimes see as an Iranian fifth column. Arab Shia are often treated as such, and, of course, this only nourishes resentment and enlivens the potential for future instability. Both Shia control of the state in Iraq and the Arab uprisings have deepened Shia consciousness throughout the Persian Gulf region, a development that became apparent during the 2010-2011 anti-government demonstrations in Bahrain (Oktav). The Gulf Monarchies view Shia demonstrations of any kind with trepidation. This became clear when Saudi Arabia deployed forces to help the Bahraini military put down demonstrations in Manama, which both governments alleged were Iranian inspired. Opposition forces strongly challenged this reading of events, but this has further illustrated how sensitive the Shia question is and how the region’s states link this problem, fairly or unfairly, with Iran.

41. Although regional tension has a sectarian dimension, an apparent disparity of power enlivens a pervasive sense of insecurity throughout the Gulf region. The Gulf monarchies collectively have a population that is only one-third that of Iran’s, they have far less industrial capacity and are militarily weaker despite their great oil wealth. The Gulf Cooperation Council (GCC) countries have a total of 175,600 personnel under arms compared to 540,000 in Iran. Moreover, the GCC is not a formal military alliance and thus the capacity of its members to work together on the battlefield is questionable. This lack of military cohesion partly reflects the sometimes-difficult relations and rivalries among its members. US power, which many understand as a critical deterrent to Iran, is a more crucial factor in the region’s strategic landscape; yet, there are also deep suspicions about US motives and commitment, and this creates a kind of strategic schizophrenia that adds further complexity to the regional security picture (Oktav).

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42. For its part, the United States maintains a significant military presence in the region including a large naval facility in Bahrain, air force installations in Qatar and ground forces in Kuwait. This presence feeds Iranian concerns about America’s hegemonic ambitions and leads to the charge that the American presence is somehow a factor in the oppression of Shia Muslims. Ironically, the US intervention in Iraq has made a Shia government in Baghdad possible so one needs to take Iranian claims with a rather large grain of salt. In any case, this cycle of mutual recrimination is very much a factor in the nuclear debate.

43. Iran has land and water borders with 15 countries and lies at the very center of the world’s most important petroleum hub. Its position on the Straits of Hormuz is of enormous strategic importance and provides the regime with a critical source of leverage. Iran also borders the Caspian Sea, which endows it with influence in yet another vital energy-producing region. Iran’s location at the world’s energy crossroads weighs heavily in the strategic calculations of all the players in the current nuclear stand-off, although to different degrees. Obviously, for Israel, which sees the nuclear programme as an existential threat, the energy factor is less important. For Europe, which imports much of its energy from the region, the prospect of a disruption of tanker traffic weighs more heavily in strategic calculations.

44. Although Iran has historically had a difficult relationship with Russia and with the Soviet Union, relations between the two countries improved markedly after the Soviet Union’s collapse. Iran is no longer on the Russian border as the countries of Central Asia now constitute a buffer between these longtime rivals (Sherrill). This has made it easier for the two countries to find common ground. Russia has since provided military and technical support to Tehran, including assistance in constructing and outfitting the nuclear power facility in Bushehr. Russia, like Iran, has provided arms to Syria, and both have defended the Assad regime in diplomatic circles. Russia has resisted any efforts to impose UN sanctions on Syria and has warned that the opposition and the foreign fighters now operating on the Syrian battlefield could be more destabilising than the current government. The Russian and Iranian governments, by their very nature, also abhor the links Western governments make between human rights and legitimacy and, by extension, steadfastly defend the fundamental norm of the sovereign independence of states (Smith).

45. Like Russia, China has also opposed stronger sanctions against Tehran. Its reasoning is complex. As a matter of principle, it too resists international interference in the internal matters of sovereign states and pays little if any heed to matters of human rights. Its continued support for the Assad government is illustrative. After Saudi Arabia, Iran is China’s second largest supplier of oil in the region. Obviously, any measures that restrict the flow of oil from Iran are costly for China, which is scouring the globe to diversify its energy supply base. Some Chinese strategists also see their country as engaged in a worldwide strategic rivalry with the United States, and accordingly, welcome relations with countries that, at the very least, complicate US interests. Iran represents a case in point of this zero sum approach. But if tensions between Iran and the United States were to escalate, China would probably have to reconsider this posture, as its relationship with the United States, however competitive, is ultimately more consequential than its relationship with Iran. It is also not in China’s interest to see another country join the nuclear club. China, for example, recently expressed serious irritation with its North Korean ally for testing yet another nuclear device. There is a certain irony here as China did so little to prevent that country from going nuclear in the first place.

46. Turkey is another critical player in the region. It has a large and capable military, and this gives it a special role in balancing Iran’s power in the region. Its primary international focus today, however, is on the situation in Syria with which it shares a long border. There is a tug of war between Iran and Turkey for influence in Syria and Iran’s continued arming of the Assad regime is of great concern to Turkey as is its refusal to comply with NPT strictures.

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47. Israel is perhaps the most consequential regional player in the current crisis besides Iran itself, even though its borders are 1,000 km away from Iran and it harbours no claims on Iranian territory. The problem, rather, is that while no Israeli leaders have threatened to eliminate Iran, former Iranian President Ahmadinejad had called for Israel’s evisceration on several occasions. That threat became particularly disquieting in light of Tehran’s nuclear ambitions, and Israel has taken this threat very seriously. Of course, Israel is an undeclared nuclear power itself and would hardly welcome playing the nuclear deterrence game with Iran. This, as well as Iran’s support for Hamas, Hezbollah and Islamic Jihad, shape Israel’s approach to Iran. But its greatest concerns involve the potential for Iran to develop offensive nuclear strike capabilities - something that Israel’s leaders believe would immediately pose an existential threat to Israel, which, of course, also enjoys a very close security partnership with the United States (Eisenstadt and Pollock).

48. The Israeli government has consistently questioned the motives of the Rouhani government’s overtures to the international community and warns that these are siren calls issued from a regime which has changed tactics without losing sight of its strategic objectives. The Prime Minister’s office issued a statement noting that "The true test is not Rouhani's words, but rather the deeds of the Iranian regime, which continues to aggressively advance its nuclear programme while Rouhani is giving interviews” (Greenberg)  Prime Minister Netanyahu has said that “ no deal is better than a bad deal and a bad deal would be a partial agreement which lifts the sanctions off Iran and leaves them with the ability to enrich uranium or to continue work on their heavy water plutonium reactor.” (Reed, John) Israel’s Prime Minister has noted as well that “Israel will not enable Iran to have nuclear weapons capability”, although he has declined to elaborate on how Israel would specifically achieve this aim. He has called for Iran to dismantle its centrifuges and frequently refers to the need for a watertight inspection regime. Along these lines, Israel has also recently expressed its disappointment that the United Kingdom is moving to reopen diplomatic ties with Iran when it is not yet clear that the regime has changed in any fundamental way. Of course, Israel’s interests are taken seriously in the West, and the United States, in particular, will want to ensure that Israel is on board with any deal that emerges out of the Geneva talks (Blitz, 16 October 2013). The Obama Administration must not only consider Israeli concerns, but it must also take into account that Congress is highly sensitive to them as well.

49. There is, however, a key asymmetry in US and Israeli threat perceptions. This asymmetry, in turn,constitutes a subtle feature of the problem. In the minds of a number of Israeli strategists and leaders, a nuclear Iran would immediately pose an existential threat to Israel. That threat has compelled Israeli officials to at least contemplate a pre-emptive strike and to seek to garner domestic and international support for such a strike should it ever prove necessary. Of course, the current climate of détente automatically puts such considerations on the backburner, although it is certainly not off the table. The United States also takes this threat seriously but, from its perspective, the threat is not existential, and would not likely be so for some time. This disparity of perception could explain some of the apparent tension between Prime Minister Netanyahu and President Obama over how to best deal with this crisis.

50. Although NATO is not a central actor in the Iranian crisis, several of its members are, and the Alliance as a whole clearly has a stake in the outcome. Indeed, if Iran succeeds in its efforts to procure a working nuclear weapon, for the first time ever, NATO would confront two nuclear-armed countries on its borders (Tertrais). This would represent a significant evolution of the military situation and demand an important adjustment in NATO strategy and force posture. If Iran were to acquire such a weapon, the Alliance would need a strategy premised on containment, deterrence and reassurance to key Allies and partners in the region. It could not discount the possibility of nuclear blackmail and might need to extend new security guarantees to ensure that Turkey would not be exposed to this kind of pressure (Tertrais). For the moment, however, the matter is off the Allied agenda, although NATO’s limited missile defence programme is under development largely with Iran in mind. Some analysts believe that NATO ought to be

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thinking through the implications of a crisis that begins before rather than after Iran has acquired a nuclear weapon; but the lack of consensus within the North Atlantic Council on how to approach the Iranian challenge makes this all but impossible. Again progress in Geneva could render these concerns moot, but there is much work to do before that kind of progress is possible. That said, the international community as a whole for the moment is very focused on the Geneva talks.

V. THE RISKS OF IRANIAN NUCLEAR ACQUISITION

51. It is nonetheless essential to be mindful of the downside risks of Iran’s eventual acquisition of a nuclear weapon. Those risks are myriad. First of all, there is the possibility that if Iran were to acquire a nuclear weapon, other powers in the region, including Saudi Arabia, Turkey and Egypt might seek to match that capability. Thus Iran’s move could prove a catalyst to regional nuclear proliferation. It is not clear, of course, that all or even any of these powers would respond to evidence that Iran had acquired a weapon by seeking to acquire their own. Their decisions would depend on a number of factors including the degree to which they would be willing to rely on a US security guarantee. In that case, these states would need to believe that the US guarantee would remain credible even in the face of a nuclear-armed Iran.

52. Those who are most worried about the proliferation risk point to the way India’s nuclear programme galvanised Pakistan to develop its own nuclear weapons capability. Those analysts who are less concerned cite East Asia’s response to North Korea’s first nuclear test. No country in the region that did not already have a nuclear weapons capacity sought to acquire one after the Korean tests. That said, most experts believe that Japan would be able to develop these weapons relatively quickly if it ever felt that it needed to deter North Korea with its own nuclear umbrella. It is worth noting here that Japan enjoys a very strong US security guarantee while Pakistan does not.

53. Nuclear accidents, theft or unauthorised use of nuclear weapons would pose another set of compelling potential threats. Although most analysts do not believe that Iran would willingly pass nuclear weapons or capabilities on to non-state actors, some argue that it might consider doing so under certain extreme conditions. These analysts cite Iran’s support for terrorist organisations and its past use of terrorism as a political tool - for example, in the Khobar Tower bombing - as a worrying precedent. However, there are very obvious differences here, and the question is whether Iranian leaders would willingly incur an existential threat to play a nuclear terrorist card that would yield it marginal strategic advantage.

54. A more compelling problem perhaps derives from the notion that a nuclear Iran would be a more aggressive regional actor. There is some evidence of this in the case of Pakistan, which almost went to war with India over Kashmir within months of testing a nuclear weapon. In that instance, Pakistan allowed armed groups and militants to launch attacks in Kashmir perhaps because it felt emboldened by its new-found nuclear capability. In other words, possession of those weapons might have encouraged the leadership to act with impunity and recklessness. Many analysts cite this case as demonstrating that nuclear proliferation is destabilising, not because a country might be tempted to use its newly acquired nuclear arsenal, but rather because it would foster a sense of invulnerability and encourage the use of coercive diplomacy (Tertrais).

55. There are concerns, for example, that Iran, which has claims on islands in the Persian Gulf, might seek to exercise those claims if emboldened by a nuclear capability. It might also be more inclined to follow through on perennial threats to close the Straits of Hormuz to tanker traffic in response to international challenges. Iran most recently threatened to close the Straits in response to a round of tough US and European sanctions. But it quickly backed off when US officials made it very clear that they would see this as crossing a red line and might therefore precipitate a US military response (Bumiller et al.) (Torbati). It is legitimate to ask whether a

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nuclear-armed Iran would have backed down in similar circumstances. It is also worth speculating on whether a nuclear Iran would more actively engage with Shia groups beyond its borders - a policy that Gulf countries fervently oppose.

56. A nuclear Iran might also impose serious limitations on Western deployments in the region, complicating efforts to combat terrorism and piracy and to keep open the sea-lanes of communication in a region which is utterly vital to Western strategic, energy and economic interests. The strategic calculations undertaken by Western governments operating in the region would grow increasingly complex because the risk of conflict would now involve a nuclear element. For the United States and its Allies, a new strategy of containment factoring in Iran’s nuclear capability would then become essential. This would be costly and, of course, would occasion new risks. Developing a nuclear deterrence strategy would require all manner of counter measures and force deployments that would likely exceed in scale, scope and cost the very limited missile defence system now under construction in Europe. There is a risk that Western publics would not embrace this posture in the way they had the old containment strategy. This, in turn, could foment discord within NATO. It would also likely drive Israel to develop a sophisticated second-strike capability at enormous costs.

57. Some analysts suggest that a nuclear Iran might herald a new stability for the region, akin to the absence of war in Europe during the US-Soviet nuclear stand-off. But the costs of nuclear deterrence in the Middle East would be very high, and it seems very unlikely that any nuclear deterrence system in the Gulf region would prove as stable as the Cold War deterrence structure was in Europe. Finally, it goes without saying that Europe’s post-war stability came at an extraordinary cost; it divided Europe into two hostile camps and ideological systems with Eastern and Central Europe as well as the Soviet people paying the highest price for this division. This is perhaps not the model of stability that one ought to envision for the Gulf region.

58. Most analysts, however, believe that a nuclear Iran would make the Middle East less secure, encourage that country’s use of coercive diplomacy and increase, at least the potential for nuclear war. Possessing a nuclear weapons capability would allow Iran to act with greater impunity in the region and make it easier to play the terrorist card. Moreover, it might be tempted to wield nuclear threats at moments of grave international tension. While Iran would not likely share these weapons with terrorist groups or other countries, once it possessed a working nuclear weapon, it would work even more aggressively to block the peace process in the Levant, intervene more ardently in Iraqi politics, and work more assiduously to cultivate ties with Shia movements throughout the Gulf region and beyond (Kahl and Waltz).

VI. SANCTIONS AND NEGOTIATIONS

59. Since its founding in the 1970s, the Islamic Republic of Iran has been subjected to varying types of unilateral and multilateral sanctions as a result of its nuclear activities, human rights record, support of terrorist groups and intervention in regional affairs. The depth and breadth of sanctions have progressively increased and multiple actors with various policy goals have shaped these sanctions. The end result is a complex sanctions regime targeting virtually every important sector of Iran’s economy including sanctions on oil purchases from Iran, sharp reductions on Iran oil export and efforts to isolate Iran from the international banking system (Johnson). The economic effects of successive rounds of multilateral and US sanctions have slowed Iran’s economic growth and complicated the structural problems that beset Iran’s economy due to ineffective management. Iran’s conservative power structure has responded to sanctions in a multifaceted fashion, including defiance, mitigation, aversion, insulation and a self-serving public diplomacy campaign.

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60. The United States has adopted four sanction acts against Iran, and these have struck hundreds of companies and individuals. It has imposed an almost complete economic embargo, which targets, in particular, firms linked to the IRGC and those involved in illegal weapons smuggling. It has singled out senior Iranian officials for particular sanction and frozen the property of the Iranian Central Bank and other government agencies with assets in the United States. Sanctions have also gravely weakened Iran’s energy sector, which has historically generated the lion’s share of government income, as well as Iranian broadcasting and internet control agencies. “These measures have cut off Iran from the international banking system; declared the entire Iranian banking sector as money laundering entities; increased the number of sanctions the president is to impose; targeted Iran’s petrochemical industry, the CBI, the financial sector, and transportation infrastructure; and forced countries to curtail their purchases of Iranian oil in the face of sanctions.” (Cordesman et al.).

61. Iranian leaders now openly acknowledge that the sanctions applied in 2010 are creating a hard currency shortage that is posing enormous problems. The government currently owes billions of dollars to private contractors, banks and municipalities and has no easy way to make these payments. Oil sales have been halved and a significant share of its oil earnings are now held in escrow accounts in countries that purchase this oil. Money earned from these sales can only be spent in those countries, which is seriously distorting Iranian trade. It is, for example, currently compelled to purchase inferior production inputs from China because it cannot tap into its usual suppliers due to the sanctions. Suitcases of cash are now used to make critical payments and this is both expensive and highly risky.

62. In June 2013, the Obama Administration upped the ante, announcing by Executive Order a new round of sanctions on Iran’s currency and on its automobile industry - measures which aim to further undercut the purchasing power of the Iranian currency and cut off additional sources of revenue for the government. The Administration contends that this is part of a two track policy aiming to get negotiations on track while penalising Iran for not complying with its legal obligations. The latest round of sanctions also marks the first time that the Rial has been targeted. The sanctions will apply to any institutions that purchase or sell significant amounts of Iranian currency and to those holding that currency in accounts outside of Iran itself. The aim was to encourage all banks and commercial operators to dump their holdings of the Rial thereby further undercutting its already substantially depreciated value (the currency has already lost half of its value since January 2012). The United States will also ban the sale or transfer of goods or services to be used in Iran’s auto sector, which is another important source of revenue for the regime. Many of the components used in that sector are dual-use and can be incorporated into missiles and centrifuges (Lederman). Those providing material support to those firms on the US blacklist will be subject to prosecution. There is currently a push within the US Senate for even tougher measures. This could provide an opportunity for the Congress to play the “tough cop” in the Geneva talks and thereby strengthen the hand of U.S. negotiators. But the Chief U.S. negotiator, Wendy R. Sherman has asked for a delay in the Senate bill given the delicacy of current talks. The thinking is that it would be best to save this card if the current talks were to break down. To introduce tougher measures now could derail the negotiations at the outset.

63. New longer standing sanctions against the oil and petrochemical industry have had a devastating impact on the Iranian economy. Crude oil production has dropped by 700,000 barrels a day since 2012 and the fall in export earnings has cost Iran between $3 and $5 billion (Lederman). This has unfolded at a moment when the value of the Rial has declined precipitously over the past year - a development that dramatically erodes the country’s international purchasing power. The Administration is aware that these measures are also causing hardship for the Iranian people and has accordingly eased restrictions on the export of advanced communication equipment to Iranian civilians to help them interact with the rest of the world. The White House has communicated that it remains dedicated to achieving a diplomatic solution that would allow Iran to return to the community of nations if its meets its obligations under the NPT.

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64. The EU’s most recent round of sanctions is far more hard-hitting than previous approaches. It included bans on financial transactions, sales of shipping equipment and steel and imports of Iranian natural gas. The EU has also outlawed the provision of insurance and reinsurance to Iran - a measure which has hit Iran’s shipping and oil industries very hard. The EU has disconnected Iranian banks in breach of EU sanctions from the Society for Worldwide Interbank Financial Telecommunication System (SWIFT), which is the systemic link to the global network of digital financial transactions. It has also frozen the assets of the Iranian Central Bank. These sanctions mark a significant policy change for the EU, which had previously focused sanctions on specific people and companies. This has compelled Iranian traders to move huge amounts of cash to complete international transactions—a risky and costly practice that dramatically undercuts Iran’s trading system. The EU has exempted financial transactions when these involve humanitarian aid, food and medicine purchases and provisions for legitimate trade (Lewis). In 2011 the EU was Iran’s largest trading partner, importing roughly €14.5 billion worth of goods from Iran (90% of which were petroleum based) and exporting €11.3 billion (Blockmans). The EU’s latest sanctions now imperil this trade.

65. The EU’s ambition has been to signal that the regime must comply with the key relevant UNSC resolutions. The EU has also laid out a series of incentives including technical support for a peaceful nuclear programme and a normalisation of economic relations to assure that this is not simply a zero sum game. Iran initially reacted to the EU sanctions by threatening to close the Straits of Hormuz. The EU’s High Representative for Foreign Affairs and Security Policy, Catherine Ashton, is heading the contact groups’ efforts to break the current impasse and represented the EU at the latest round of talks in Geneva.

66. Canada has undertaken several rounds of sanctions in response to Iran’s continued lack of co-operation with the IAEA and the P5+1 group. It has imposed a total embargo on arms, oil-refining equipment, items that might contribute to the Iranian nuclear programme and banned dealing in the property of targeted Iranian nationals, outlawed investment in the Iranian oil and gas sector, working with Iranian banks, purchasing debt from the Iranian government, and providing services to Islamic Republic Shipping Lines (Canadian Ministry of Foreign Affairs and International Trade). In September 2012 Canada announced the closure of the Canadian Embassy in Iran and the expulsion of Iranian diplomats from Canada due to the Iranian regime’s increase of military aid to the Assad regime, its refusal to comply with UN resolutions pertaining to its nuclear programme, its deplorable human rights record and persistent anti-Semitic rhetoric.

67. It is difficult to say whether recent sanctions have triggered a rethinking in Iran. But, these measures appear to be having a far more compelling economic impact than earlier sanctions regimes and could have been at least an indirect factor in the outcome of recent presidential elections. Iranian oil production has dropped by 400,000 barrels a day since June 2012, largely as a result of sanctions (Reed, June 2013). Banking sanctions have broadened the effect of US sanctions with few countries and firms daring to risk exclusion from international financial markets. Those Asian countries which were purchasing Iranian oil have had to restructure energy supply chains in the face of threats to be cut off from access to the international financial system (McQuaile). South Korea, China, India and Japan have all scaled down purchases in recent months, with South Korea reportedly halting imports from Iran altogether in July 2012. The US government has issued waivers to 20 countries that have actively reduced their purchases of Iranian crude but have not been able to find alternative suppliers in the short run. These waivers have absolved countries like China and Singapore from financial sanctions (Marcus).

68. The International Energy Agency (IEA) now estimates that Iran’s oil exports in 2012 fell by 50% compared to 2011. The Institute for International Finance has noted that Iran’s GDP contracted by 3.5% in 2012, while inflation rose from 26.5% in 2011 to an estimated 50% in 2012. This has greatly eroded Iran’s purchasing power and caused the Rial to plunge to record lows

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against the US dollar. It is also estimated that the latest US and European sanctions on Iran’s energy sector have so far cost that country $46 billion (Blitz and Peel). In February 2013 the currency reached a record low and this apparently triggered a degree of political infighting in the run-up to the presidential elections - most notably between groups supporting Mahmoud Ahmadinejad and those supporting the Speaker of the Parliament Ali Larijani.

69. Oddly, many Iranian officials continued to argue that these sanctions had not harmed the economy while blaming the economy’s poor performance on corruption and insider subversion. Officials even credited the sanctions with providing a boost to the economy while reinforcing Iran’s drive for greater self-sufficiency. This seemed like a transparent rationalisation for an intolerable situation.

70. Most US and European policy-makers consider sanctions as the best current means of constraining Iran’s nuclear ambitions and they have become the primary source of international leverage in the current round of negotiations. Sanctions have exacted a high toll on Iran’s economy and have triggered a degree of public alienation in Iran with the state’s stewardship of the economy (Mason). The recent elections partly reflected broad public fatigue with the evident burdens associated with an ever more comprehensive sanctions regime. The Rouhani government has made the elimination of this sanctions regime a central aim of the nuclear negotiations and this has helped create space for genuine bargaining.

71. Western negotiators ave to develop creative approaches to test Iran’s willingness to move forward. Trust can be built if both parties recognise that their own security does not require the insecurity of the other and that mutual security will contribute to stability (Wheeler, Nedal). This demands, in turn, that both sides work harder to understand the motives behind their respective positions (Chubin).

72. While the Rafsanjani and Khatami administrations understood nuclear weapons as critical tools of deterrence, hardline conservatives are more attracted to the notion that these weapons offer Iran a means of achieving pre-eminence in the region. Other conservatives are now pressing for a more tempered approach although they share these objectives. They believe that Iran should accede to certain global norms and be prepared to negotiate mutually acceptable compacts with their adversaries (Takeyh, Maloney). The election of Rouhani marks the political rise of those advocating this somewhat more moderate position but resistance is very likely. For the moment though, Rohani’s approach is pre-eminent. The challenge will begin to emerge once the outlines of a deal begin to become evident. The essence of a deal will invariably involve a lifting of sanctions in exchange for full compliance with Iran’s NPT obligations

73. The position of the Supreme Leader as the ultimate arbiter of Iranian politics is obviously a critical element here. Thus far, Khamenei has been the most influential proponent of nuclear defiance. His foremost concern, however, is the survival of the regime, which is beset by economic difficulties and political uncertainties. Until recently Iran’s Supreme Leader seemed convinced that the political costs of genuine negotiations with the international community on the nuclear issue outweighed the economic benefits of concession making. This now appears to be changing (Takeyh, Maloney), and even before the elections there were signs that some degree of rethinking might be underway at the highest level of Iranian government. In a speech to the Munich Security Conference in January 2013, Iran’s then Foreign Minister Ali Akbar Salehi indicated that Iran was expecting the P5+1 powers to make a revised offer on sanctions with more significant concessions than those offered in talks in 2012. At that same conference, US Vice President Joe Biden announced that the Obama Administration was also prepared to hold bilateral talks to break the current impasse.

74. Of course, since then, these exchanges have deepened substantially. Indeed, the inauguration of President Rouhani provided an occasion for further signaling on the nuclear

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relationship. The newly elected President quickly issued a statement that read, "If you seek a suitable answer, speak to Iran through the language of respect, not through the language of sanctions." The White House statement that day noted that “The inauguration of President Rouhani presents an opportunity for Iran to act quickly to resolve the international community’s deep concerns over Iran’s nuclear programme. Should this new government choose to engage substantively and seriously to meet its international obligations and find a peaceful solution to this issue; it will find a willing partner in the United States” (Solomon). Then in late September at the UN General Assembly US. Secretary of State John Kerry met with his Iranian counterpart Mohammad Javad Zarif. This was followed the next day by President Obama’s telephone conversation with President Rouhani. These exchanges constituted the most high level discussions between the two countries in 36 years (Fassihi, 21 October 2013)

VII. THE EFFORTS OF THE P5+1 GROUP

75. The P5+1 group has essentially represented the international community’s position in talks with Iran over its nuclear programme. The foundation of its work is not only the NPT but also the various resolutions the UN Security Council has issued calling on Iran to comply with its legal obligations. The UN has also laid out a series of sanctions in response to Iran’s willful non-compliance. The first of these resolutions, UNSCR 1696, included no sanctions, although it suggested that these would eventually have to be introduced if Iran made no concessions. Since then, a UN sanctions regime has emerged, although China and Russia have consistently sought to water down these measures.

76. The international community has sought to illuminate a path to help Iran to move into a state of compliance with its NPT obligations - particularly with regard to Iran’s nuclear enrichment activities and the required inspection of key nuclear facilities (Singh, Spring 2012). The group had shown a degree of flexibility in its various offers to Iran, but the regime consistently rebuffed these. The contact group essentially offered to suspend the implementation of sanctions against Iran if it, in turn, agreed to stop enrichment and a range of other activities that violated the terms of the NPT. In 2008, it suggested that if Iran agreed to suspend enrichment, the United States would refrain from imposing yet another round of sanctions as a preliminary step toward full suspension as demanded in the UNSC resolutions. In 2009, the Vienna Group - France, Russia and the United States - acting on behalf of the P5+1, offered to exchange Iran’s low-enriched uranium (LEU) stock for highly-enriched uranium (HEU) fuel plates needed to operate the Tehran Research Reactor (TRR). This was controversial as it seemed to legitimize Iranian enrichment activities (Singh, Spring 2012). But the goal has always been to open a way for Iran to move off its escalatory trajectory. Iran did not accept this overture, and has since faced a series of ever more stringent sanctions. Russia and China have consistently pushed a less stringent line than the other group members and have worked to water down UN sanctions. This ultimately led both the EU and the United States to enact the tough unilateral sanctions described above. The question today is whether these will be sufficient to launch a serious round of talks on key questions surrounding the Iranian programme.

VIII. IS THERE A MILITARY SOLUTION TO THE CRISIS?

77. Experts have also speculated, oftentimes with great reluctance, on what a pre-emptive military attack on Iran’s nuclear installations might look like and the chances various kinds of military operations might have of success. Of course, the international community has been very divided on the question and right now such considerations are clearly on the back burner given the apparent onset of détente and the improved prospects for achieving a deal in Geneva. But it is nonetheless important to consider the arguments, particularly as there are no guarantees that a deal satisfying all the parties will be achieved. Those who have supported a strike have argued that Iran is utterly dedicated to acquiring a weapon, that it is close to doing so, that diplomatic and

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economic measures are not going to convince the leadership to end this particular quest, that technical or cyber solutions like Stuxnet provide only temporary relief, that it will be very difficult to put the nuclear genie back in the bottle once it is out, and that Iran’s possession of nuclear weapons will be extremely dangerous to regional and global security. From this perspective, although a strike option represents a terrible and painful option, failing to act militarily would be even worse (Kroenig). Of course, if Iran were to have a nuclear weapon, the scope for action would narrow dramatically and Western governments and regional players might then be compelled to adopt a comprehensive deterrence strategy laden with other risks and costs.

78. The IEA and Western intelligence services have identified the key facilities driving Iran’s nuclear programme including those in Qom and Natanz. The Iranians have buried some of these assets deep underground, and protect them with substantial air defences. The Natanz centrifuge facilities, for example, lie underground, but some analysts speculate that these would not survive the largest US bunker buster bombs, which can penetrate 200 feet of reinforced concrete (Kroenig). The Qom facility is embedded in a mountain and would pose a more serious challenge for military planners. Other targets include the heavy water reactor in Arak and a range of other small research or production facilities as well as key air defence installations deployed throughout the country. Israel likely does not possess sufficient conventional assets to inflict long-term damage on some of these facilities, and this is why it was seeking to prepare the US Administration and the US public for the theoretical possibility of a US action. Although the Israeli government has expressed a high degree of pessimism about the current talks, it has backed away from language that suggested some kind of military action might be imminent.

79. Israeli brinksmanship has not gone over well in some US circles and has exposed rifts in US strategic thinking. Clearly any attack on these critical and often hardened assets would be very difficult militarily given the level of air defences protecting them. Moreover, limited military measures could quickly escalate into a broader regional war with global consequences. An Iranian retaliation would be likely both through conventional military means and possible terrorist strikes in the region, in Europe and even in North America. In the event of an attack on Iranian facilities, the Iranian government would also likely seek to close the Straits of Hormuz, through which 20% of the world’s oil passes. All of this suggests that if elements of the international community pursued this option, they would have to simultaneously seek to limit the scope of the conflict while signaling a way out to Iran. This would not be easy, and the risk of uncontrolled escalation would therefore be quite high. Still, some see those risks as less compelling than the threats that a nuclear Iran would pose.

80. At the same time, however, many of Iran’s leaders believe that not possessing nuclear weapons rather than having them is the greatest risk they face. Both Libya and Iraq gave up their nuclear weapons programme, and Western forces subsequently played a part in overthrowing governments in both countries. By contrast, the international community has taken no military action against two recent nuclear states, North Korea and Pakistan. Iran’s decision makers take away an important lesson from this precedent; a credible nuclear weapons capability can dissuade others from contemplating military intervention.

81. There are other measures short of a frontal military attack that might slow nuclear weapons development. The Stuxnet virus attacked key computer systems in the Iranian programme and set back the enrichment process. But this was a one shot effort and was only able to slow the programme, not shut it down. There have also been reports of sabotage in various facilities and even the assassination of one nuclear scientist. One obvious problem with assassination strategies is that they tend to unite scientists in a common cause. Western assessments too often discount bureaucratic dysfunction in Iran’s nuclear programme. Doing anything to build an esprit de corps among that community would be counter-productive, particularly when Iran’s meddling politicians, theologians and bureaucrats have done so much to undermine that solidarity, interfere in the discovery process and thus unwittingly slow down their national nuclear programme.

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Dysfunctional bureaucracies and authoritarian coercion are not conducive to scientific progress and complex development projects; efforts are needed to ensure that Western policy does not provide remedies for those chronic problems in Iran (Hymans).

IX. CONCLUSION

82. The Iranian nuclear crisis has unfolded at a moment of increasing uncertainty in the Middle East as a whole. Indeed upheaval in Egypt and Syria alone is creating enormous uncertainty and challenging the collective foreign policy imagination of the international community. To some extent, events in Syria and Egypt have even begun to distract attention from the Iranian situation. But this nuclear challenge will not go away and will have to be addressed soon.

83. In the wake of recent Presidential elections, the situation in Iran itself remains highly fluid, although President Rouhani appears to have been given the benefit of the doubt by the regime’s fractious ruling elite. The international community must carefully monitor this evolving situation and constantly reassess the approach it takes. Western governments need to ensure that they adopt a common approach and that the goal remains winning Iranian compliance with its obligations under the NPT, thereby preventing it from getting to the point of no return. Skillful diplomacy and imagination are needed to reassure Iran that compliance is in its own interest as well and will augur not only the lifting of sanctions but also improved relations with the rest of the world. Of course, once a clear deal is on the table there is likely to be a real struggle inside Iran the outcome of which will be difficult to forecast. It is hardly ensured that reformist elements will be positioned to hold the line.

84. Thus the international community will have to establish shared criteria that will help it understand when Iran has reached the nuclear threshold. It must also find agreement on how to prevent Iran from taking the final steps towards a nuclear breakout. This will not be easy, and communication among the partners and with Iran will be essential. The most often discussed scenarios for resolving this challenge include a negotiated settlement, and failing that, a further ratcheting up of sanctions, some kind of a military option that could well lead to rapid escalation, reluctant acceptance of a nuclear-armed Iran, or the persistence of the status quo during which Iran makes progress on the technological front but refrains from taking the final steps toward a nuclear breakout. Obviously the first of these scenarios is by far the most desirable. The others are not. Even an initially limited war would be difficult to keep limited, particularly in a region which has all the features of a strategic tinderbox. Indeed, it is not clear that military action would achieve the desired end. As for the current status quo, it is not likely to endure and, in any case, is neither desirable nor stable. For the moment, therefore, the focus ought to remain on the first of these scenarios which would involve negotiating a settlement.

85. That President Hassan Rouhani has fully embraced negotiations is very significant. The current talks are characterized by a very high level of direct engagement among the key players, which would give an ‘endgame proposal’ a better chance of success. (Singh, 2013).

86. A key problem is that the West and Iran view sanctions and negotiations through very different lenses. The West hopes that Iran will conclude that its pursuit of the nuclear track will be so costly in terms of sanctions that it will trigger more extensive popular unrest. In today’s Middle East, the dangers of such unrest are very apparent. The Iranian leadership sees sanctions expressly being designed to destabilise it. The international community must continue to engage Iran on the fundamental linkages between nuclear weapons on the one hand, and strategic, political and economic security on the other. A strategic dialogue on WMDs with Iran and other states in the region is needed to understand Iran’s perceptions of security and threat. Developing a series of confidence-building measures could help lay a foundation for more substantial progress.

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87. Sanctions will ultimately only prove as effective as the prospect of suspending them in exchange for full Iranian compliance with its NPT obligations. The measure of efficacy lies in what can be obtained once these are removed, not what happens when they are imposed (Vaez). Iranian officials see such a step as a condition for any accord. It could well be that a limited suspension might prompt Iran to take reciprocal measures. The international community will have to consider developing meaningful, realistic sanctions relief to match meaningful, realistic nuclear concessions. To facilitate progress on negotiations, P5+1 and the IAEA should agree on a structured framework to resolve the agency’s concerns about the possible military dimensions of Iran’s nuclear programme, incrementally linking the lifting of sanction to the resolution of outstanding issues between Iran and the IAEA. The international community will also need to re-evaluate the impact of specific sanctions insofar as their effects will likely endure (International Crisis Group).

88. Although NATO itself is not a protagonist in the negotiations, a number of its members - France, Germany, the United Kingdom and the United States - are playing central roles. The outcome, moreover, is of direct interest to the Alliance. Turkey shares a border with Iran and if Iran were to acquire a nuclear weapon, the Alliance would have to reassess its deterrence posture. This is a critical challenge to the Alliance, even if it is not directly on the NATO agenda. The Allies are thus obliged to monitor events very closely because if there were an escalation of tension or if Iran were to cross the nuclear threshold, then NATO would suddenly confront a set of challenges affecting its core mission of collective defence. NATO’s members need to begin discussing this scenario despite the still lively debates about how best to prevent such a breakout from occurring.

89. For its part, the Iranian regime has shown that it is prepared to factor in the carrots and the sticks that the international community is holding out, although, so far, this has not brought about the fundamental concessions that the international community is seeking. When Iran publically stated that it would close the Straits of Hormuz after the latest round of tough sanctions, the US Administration unambiguously stated that it would never allow this to stand, and deployed more naval assets to the region to hammer home the point. The Iranians soon backed away from the threat. Clearly, the regime has a capacity to act rationally based on hard calculations, but the international community must carefully calibrate its messages and display intent both to back up its positions and to ease off sanctions and other hard measures when Iran itself moves toward concession. The challenge lies in deepening international solidarity on these key points and keeping open the lines of communication to Iran’s leaders.

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