Iran: Is the Sharpie pen mightier than the sword?

The answer to the question depends on two known unknowns: Tehran, of course, but also the fickle global markets. It is astonishing that the second of these is not part of the analysis.

As things stand, it is far from clear that a deal will get done. If it does, the basic framework will likely be that Iran replaces Uranium enrichment with the prospect of dollar enrichment via sanctions relief. Clearly the current sticking point is whether the ban will leave room for ‘civil’ use, or whether the ban on enrichment will be total. The idea of replacing enrichment of the Uranium kind with enrichment of the dollar kind is not new. We have, of course, been here before with the JCPOA. The difference will likely come through enforcement. On non-adherence, or even as a pre-emptive measure should the indicators point in the wrong direction, it is clear that the military strike option remains firmly in the plans. There is no need to write that into the deal. The JCPOA, on the other hand, simply has a sanctions ‘snapback’.

That difference is crucial. Like in any deal, there is embedded optionality: Iran could adhere to its terms or breach them. The snapback in the JCPOA is backward-looking. It puts Iran back in the position it was in at the signing ceremony. Snapback is therefore not a remedy; it is a free option for Iran. Military action to backstop Iranian commitments is, on the other hand, forward-looking. Although never without consequences of its own, its purpose would be designed to put the region in the position it would be in if Iran had adhered to its commitments. Iran’s option to breach would therefore have tangible downside for Iran in a way that a snapback does not. That’s important.

This is not to say that any new deal would fix the flaws of the JCPOA, which would have become apparent over time. If the ‘art of the (nuclear) deal’ is the assumption that Iran’s reintegration into the global economy will steer it towards dollar enrichment and away from its penchant for Uranium enrichment, that is the same assumption that underpinned the JCPOA. And that is astonishingly simplistic, crude and a shocking failure in the understanding of power dynamics.

This is a regime bent on pursuing regional hegemony, exporting terrorism and not simply delegitimising the State of Israel but attacking her. It is difficult to imagine that Tehran would be satisfied with economic prosperity taking the place of—and not being in addition to—nuclear threshold status. It assumes the U.S. dollar is the regime’s sole metric. Undoubtedly the IRGC, as a criminal enterprise as well as a sponsor of terrorism, is motivated by financial gain with its massive interest in the Iranian economy. However, it is quite a leap to think that its interest in the accumulation of money completely displaces its interest in wholesale regional agitation and projecting power in its crudest form.

But it is not just about the regime’s ideology. It is about the global markets. There is no rational basis for assuming that any new entrant (or returning entrant after a long period on the sidelines) can just plug-in and play. Heavy crude, cement and automobile manufacturing make Iran’s immediate post-sanctions business case most attractive to those countries it already deals with under sanctions, such as Russia, China and India. An uncompetitive economy weighed down by nationalised industries, widespread corruption, a weak rial, outdated oil industry infrastructure and downward pressure on power exports due to increased domestic demand, all amount to a drag on productivity. It is hardly the most attractive proposition for many other investors.

Sovereign debt is, in theory, highly attractive when issued by any country coming out of sanctions and with a highly educated young workforce. Some global macro hedge fund analysts are already looking at this in readiness. Such a country only has growth potential. However, the markets are not rational and, in this case, thankfully so. Any nuclear deal that addresses the nuclear issue but still leaves holders of Iranian paper effectively funding global terrorism, is a hard turn-off. It completely changes the investment analysis.

That, then, would leave Iran without enrichment of any kind. And that presents real risk. The ‘art of the (nuclear) deal’ will not be in saying that the Sharpie pen is mightier than the sword, but in recognising these challenges which inevitably lie ahead.