Will Iran yield?
The US is massing equipment and capabilities in a manner suggesting that Iran, not just the Houthi, is on the target list, forcing Iran to negotiate.
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Summary: Iran faces a choice between an all-out war, a limited war, or making domestically destabilising concessions to America. We explain which scenario we believe is most likely, and the potential commercial implications of each.
President Donald Trump’s sent a letter to Iran’s Supreme Leader Ali Khamenei through the UAE. Trump told Iran that it could either enter negotiations or face military consequences.
Trump is trying to push Iran into time-limited negotiations on the nuclear issue, Iran’s regional activities, and Iran’s ballistic missile programme. Trump officials have demanded comprehensive concessions on all three.
Iran agreed to start negotiations in Oman - Iran claims indirectly, while Trump claims they will be direct talks. These are set to begin on 12 April.
Negotiation topics
With regards to the regional activities, Iran’s response has been that it accepts any agreements that its local allies accept, denying responsibility for the activities of its allies and proxies. The alternative would be for Iran’s leaders to accept their responsibility for the Houthi (Ansar Allah) maritime blockade, or Hamas’ 7 October attack. Moreover, with Syria lost, and Hezbollah decapitated and severely degraded, Iran’s regional position is much weaker. Indeed, the Alawites in Syria may seek Israeli help against the Turkish-backed groups, as Syria heads towards partition.
Iran is still strong in Iraq, but even there, militias are being integrated into the formal security services in a manner that would weaken Iran. We assess that Iran is willing to quietly negotiate over these issues, but not publicly, in the hope of keeping its influence in Iraq.
With regards to the ballistic missile programme, this is Iran’s only viable tool against Israel, Turkey, and Pakistan. It is likely non-negotiable for Iran, aside from accepting limitations on missiles with a range longer than 2000km. Moreover, with Iran’s regional activities so severely weakened, its ability to pass such missiles to its proxies is also degraded, reducing the issue’s importance. Indeed, such missiles may be used against Sunni powers, rather than Israel.
Iran’s bind
This leaves the nuclear issue as the last remaining sticking point. The problem here, for Iran, is as follows:
The nuclear programme is a matter of national prestige. The regime has spun the narrative that having a nuclear programme makes Iran into a great power, and forces international actors to negotiate with it as an equal.
With the Islamic Revolution defeated - Iran no longer has any realistic hope of pursuing Imam Khomeini’s vision of exporting the revolution - making concessions to the Americans now creates a major problem: if Iran is reconciled with the US, which it describes as the “Great Satan”, what purpose does having an Islamic revolutionary regime at home serve?
These domestic considerations reduce Iran’s ability to make any meaningful concessions beyond the 2015 JCPOA nuclear agreement, which limited Iran’s nuclear activities - but, generally speaking, not the underlying uranium enrichment and research capabilities.
Iran’s bind is that if it agrees to American demands to dismantle its nuclear capabilities, rather than again curtail its activities, this would be domestically destabilising. And if it does not agree to these demands, it risks a war targeting its nuclear capabilities and perhaps its entire energy and industrial base.
Iran’s leaders are evidently divided over this issue. Former Foreign Minister and Vice Presidential Mohammad Javad Zarif is likely in favour of concessions, as is President Masoud Pezeshkian and some of the less ideological realist and centrist forces. Iran’s military knows that it cannot defeat the US, but, equally, that the US cannot conquer and occupy Iran without bankrupting itself and taking unacceptable casualties. From a Shi’a religious perspective, there is a conflict: one side would argue that they should adhere to Imam Hossein’s “never humiliation” and “death is nothing but joy, and life with the unjust is nothing but misery” slogans. The other side would argue that the Supreme Leader Ali Khamenei should place national interest and the survival of the regime above short term considerations. The former option, pursued to its logical conclusion, would lead to, at least, the destruction of Iran’s nuclear programme and perhaps its energy and industrial base, the latter, to an embarrassment that may destabilise the regime and render it illegitimate, but that keeps the nation functioning for now. Khamenei is the final decision maker, but all those around him know that his time in power is limited by his age (85 years), making them less likely to follow him into a suicidal adventure.
Scenarios
We envision three scenarios:
A limited war: In this scenario, the Americans would strike Iran’s nuclear programme, but not its industrial base. Iran’s retaliation is limited and symbolic.
An all-out war: In this scenario, Iran retaliates to strikes against its nuclear programme. This leads to American strikes against its energy and industrial infrastructure. Iran retaliates by expanding its own strikes against America, including bases in the Gulf, Iraq, Syria, and elsewhere. America targets Iran’s command and control, leadership, and most manufacturing capabilities.
An agreement: Iran accepts the dismantlement of its nuclear programme in exchange for comprehensive sanctions relief. The Islamic Revolution Guards Corps (IRGC) is reduced to a praetorian guard for the regime, rather than a regional force. Khamenei’s succession creates a major crisis over the future form of government of Iran, as it transitions from a revolutionary, pan-Islamic state, to a nationalist, Shi’a-first state. Such a state would find it natural to align with the US, Israel, and the West, against Turkey, Pakistan, and Sunni radicalism.
Forecast
Our view is that the most likely scenario is…
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