Iran is cornered by sanctions: give it a face-saving way out

Sanctions are working to pressure Tehran. Now, negotiations need to give it a chance to change its behaviour.

At the Dubai Strategy Forum five years ago, Iran's Speaker of Parliament Ali Larijani famously dismissed US efforts to isolate or intimidate Iran over its nuclear programme by saying: "The US plays baseball. We play chess. Let them come." The comment was probably uttered with a flick of the wrist and more than a measure of pride.

Well, "they" have indeed come, and five years later Iran finds itself cornered by an elaborate, multi-pronged, gradually escalating diplomatic and economic squeeze.

In fact, from the time Mr Larijani made that statement until today, there has been a methodical squeeze led by the United States with a growing cast of partners, several of whom have taken the lead in their own right. Those countries that are not "on board" have been persuaded, pushed, cajoled, intimidated, sanctioned, shamed and threatened. They have largely fallen in line, with concessions both big and small.

The western countries leading the "squeeze" are no slouches when it comes to chess. Consider the following: Iran's oil and gas sector is in precipitous decline, hitting production lows not seen in a decade. Because of sanctions, persuasion and intimidation, no major bank is willing to do deals with Iran, no major re-insurer will provide cover for Iranian ships and the European Union will stop all purchases of Iranian crude oil by July 1. Foreign corporations with healthy profits from Iran operations are packing up and fleeing, and Iran's own investors and industrialists are sending capital abroad rather than invest in an uncertain environment at home.

Iran has become toxic in European investment circles. Even companies that can legally operate in Iran are too intimidated by the cloud of sanctions, and are packing up. What about Asia? After all, most of Iran's crude oil goes to East Asia. Figures for the first quarter of 2012 show that Iran's biggest buyers - China, Japan, and South Korea - have cut purchases by a combined 30 per cent. Chinese companies that signed multibillion dollar investment deals in Iran are dragging their feet. Japanese companies are looking for oil elsewhere. Korean banking authorities are shackling Iranian banks.

In Dubai, which has usually been open to Iranian business, the climate has changed dramatically. Simple banking transactions have become cumbersome and routine business matters get stuck in red tape. When rumour spread that Emirati banks would no longer trade in Iranian rials, the currency crashed in Tehran. Today, most Emirati banks simply refuse to do business with Iranian banks, to "avoid any headaches down the road", as one bank official put it.

The story goes on. The SWIFT interbank messaging system made history by expelling Iran from its service - a first. Lloyds Register, the world's most important shipping adviser with a presence in every major port, has simply packed up and left. While Asian insurers are still willing to brave Iran "risk", none of the major re-insurers will do so, leaving many ships packed with Iranian crude without cover. Iran's major tanker operator, NITC, routinely turns off its on-board vessel tracking systems, going "undercover" to unload their wares. Reports abound of ships idling at sea loaded with Iranian crude.

But lest we go too far, it must be remembered that the Iran squeeze is still just that - a squeeze, not a chokehold. Yes, Iranian oil production is down and, yes, the EU oil import ban, and Asian refiners' cutbacks, will hit Iran's bottom line. All told, it will probably mean that Iran will need to find new buyers for about one third of its oil. Even if it is unable to do so, it will still be able to sell two thirds of its oil. As one of the top five oil exporters, this is still a significant amount, up to $100 billion (Dh367 billion) last year. Losing one third of revenues is not a small matter, but it is not an existential threat.

So, where does that leave Iran and the P5 + 1 talks over its nuclear programme, to be picked up again in Baghdad on May 23? Clearly, Iran is hurting, but it is not drowning. The P 5 + 1 - the UN Security Council members plus Germany - should be cognisant of this fact. Iran wants the squeeze to end. By all accounts, Iran's chief nuclear negotiator, Saeed Jalili, made that clear to Lady Catherine Ashton, the EU foreign policy chief who led the P 5 + 1 side in the recent Istanbul talks.

It will be critical for Lady Ashton to come to the table with clear incentives, and a road map for a face-saving exit for Tehran. Too much political capital has been invested in the nuclear programme for Supreme Leader Ayatollah Ali Khamenei to simply slink away and retreat. But if a technical agreement on uranium enrichment with verifiable inspections could be reached, which Iran can sell to its public as a "victory", the P 5 +1 and Iran might end up with the most common result between advanced chess players: a draw.

We are not there yet. There are more moves to be played, and Iran's king is increasingly cornered in the chess match. But there are no time limits on this match-up and, to be sure, this is no game. A checkmate will not mean a clean handshake and a goodbye. It could turn out to be dangerous. Playing for the "public" draw, while staying true to the P 5 +1 red lines, might be the best strategy going forward.

Afshin Molavi is a senior adviser at Oxford Analytica and a senior fellow at the New America Foundation

On Twitter: @AfshinMolavi