The Iran Nuclear Program Framework by Bill O’Grady of Confluence Investment Management

On April 2, the P5+11 negotiating team and Iran announced a framework to deal with Iran’s nuclear program. The framework is a “roadmap” to establishing a final agreement in June. Negotiations on this issue have been underway for years; this framework could be a major step toward delaying Iran’s entry into the “nuclear club,” the group of nations that have nuclear weapons.

In this report, we will begin with a short history of Iran’s nuclear program. Next, we will review the details of the framework. The third part will address the broader policy issues surrounding Iran’s nuclear program. An analysis of the real issue, regional hegemony, will follow along with a review of the political factors of the deal. We will conclude with the potential market effects from this framework.

The History

Iran began to build a nuclear power industry in the 1950s as part of Eisenhower’s “Atoms for Peace” program. By the late 1960s, it had a small research reactor, fueled with highly enriched uranium. In the 1970s, the Shah wanted to build 23 nuclear power plants to allow Iran to export more oil. U.S. and European firms vied for Iran’s business. President Ford offered to build Iran a reprocessing facility that would have allowed Iran to extract plutonium, which would have created a clear path for Iran to develop nuclear weapons.

After the 1979 Iranian Revolution, foreign cooperation with Iran’s nuclear industry ground to a halt. Although Ayatollah Khomeini opposed nuclear weapons on theological grounds, Iran resumed nuclear research in 1981. The U.S. effectively prevented Iran from acquiring materials or support for its nuclear industry by applying diplomatic pressure. Still, in 1984, West German intelligence warned that if Iran was able to procure enriched uranium from Pakistan, then “it might be two years away from a bomb.”2 In the 1990s, Iran continued to develop its nuclear industry, although the U.S. was able to convince some nations to cancel investments to slow Iran’s progress. Russia did provide support for the Bushehr nuclear power plant during the decade.

During the 2000-2009 period, two secret nuclear sites were revealed through information passed to the West from Iranian dissident groups. This discovery led to calls for additional International Atomic Energy Agency (IAEA) inspections. Negotiations between various parties, including the E.U. and the U.N., were ongoing through the decade. Iran has added centrifuges to enrich uranium over the past 25 years, increasing from around 100 to nearly 20,000.

In response to Iran’s expansion of its nuclear facilities, the West has steadily increased pressure on the regime. Sanctions have been steadily expanded.3 The U.S. has used cyber-warfare against Iran’s nuclear facilities.4 Iran has maintained that its nuclear program is for peaceful purposes; the West disagrees and worries that Iran is attempting to build nuclear weapons.

Over the past two decades, three presidents have indicated that an Iranian nuclear weapon was intolerable and that the U.S. would not hesitate to use military means to prevent that outcome from occurring. The best way to guarantee that Iran’s nuclear program does not make that step would be to prevent uranium enrichment.

Candidate Obama indicated he would break the deadlock by offering to negotiate with Iran. Although talks had been ongoing for some time, he promised to do more to bring a deal to fruition. Along with ending the Iraq War, Obama made improved relations with Iran a cornerstone of his foreign policy platform.

President Obama implemented a harsh sanctions regime on Iran. He also continued and expanded the cyber-warfare which began under President Bush. So, there has been a clear “carrot and stick” approach. Unlike his predecessors, Obama clearly wanted a change in relations with Iran. As we have noted before, the current president appeared to be seeking a “Nixon to China” moment with Iran.5 That position seems to be the administration’s aim in current talks with Iran.

The Framework

The outline of the deal is as follows:

  1. Iran will operate 5,060 of first generation centrifuges at Natanz, the only approved site for enrichment activities. It will not enrich uranium beyond the 3.67% level, which is well below the 90% required for weapons production.
  2. The hardened facility at Fordow will be repurposed for nuclear research and isotope production.
  3. The heavy water reactor at Arak will have its core reactor destroyed or removed, preventing it from producing plutonium.
  4. Of the 10k kilograms of enriched uranium that Iran holds, 9.7k kilograms will be exported or diluted on site.
  5. Iran agrees to an enhanced inspection regime from the IAEA.
  6. The West agrees to lift or suspend sanctions.

There are details to work out, which will take place over the next three months. These details are not small issues. The two which will be the most problematic will be points five and six. Just how aggressively and openly the IAEA will be able to operate has not been resolved. Iran wants the West to remove sanctions immediately after a deal is concluded. That outcome isn’t likely as sanctions are the only restraint on Iranian behavior; if Iran cheats, it will be very difficult to put sanctions back in place. A war will likely be the only way to prevent Iran from proceeding to build a nuclear weapon. So, the West needs to create conditions where sanctions relief is quick enough to act as a benefit to Iran to keep it compliant with the deal, and yet, at the same time, not ease them so fast that Iran feels it can stop cooperating.

The Nuclear Policy Issue

Ostensibly, the goal of negotiations with Iran is to prevent it from developing nuclear weapons. As noted above, for the past two decades, three American presidents have suggested that a nuclear armed Iran was intolerable; the best way to prevent that outcome was to not allow Iran to enrich uranium and the U.S. would be willing to use military means to prevent Iran from gaining such a weapon. Now, the goal has changed from preventing Iran from enriching uranium to allowing it to have nuclear capabilities just short of developing a weapon. What has changed?

First, the Obama administration has concluded that America has no appetite for another Middle East war. Attacking Iran would not be a cakewalk. The country is big; it has a large population that will be hostile, and a military well trained in asymmetric warfare. If the U.S. and its “coalition of the willing” struggled to pacify Iraq, Iran will be exponentially more difficult. Mere airstrikes, unless they are nuclear in nature, won’t end Iran’s nuclear program. In fact, once the bombing stops, one would expect Iran to move aggressively toward building a nuclear weapon.

Second, maintaining the current sanctions regime forever will be nearly impossible. Although sanctions have, to a great extent, become the weapon of first resort for the West, they rely on widespread compliance. Sanctions not only cause hardship to the target, but they have negative ramifications for trading partners. For example, the current sanctions on Russia have had just modest effects on the U.S., but the impact on Europe’s economy has been significant. Thus, the longer the sanctions are in place and the more “collateral damage” they cause to those supporting the sanctions regime, the harder they are to maintain. In the case of Iran, sanctions

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