Why 2021 Would Be Inauspicious For a New Iran Deal

(Bloomberg Opinion) -- In late January next year, the U.S. will have either an embattled Trump administration in its second iteration, or a Biden administration eager to take the reins and reorient foreign policy. Both men are keen to reach an accommodation with Tehran quickly. Trump has boasted he could negotiate a deal in four weeks; Biden will want to show progress on his foreign-policy goals within his first 100 days in office.

The president and his challenger have both committed to prioritize U.S. dealings with the Islamic Republic. Biden is interested in a return to the 2015 nuclear deal, with some caveats. Trump wants a tougher new deal that covers issues like Iran's regional intervention and missile programs. In both scenarios, the first likely incentive to Iran will be a relaxation of U.S. sanctions on its oil exports.

But there's an inconvenient fact neither has acknowledged: global oil markets, and especially Gulf Arab oil producers, are not ready to welcome a return of Iranian oil. Even as the U.S. accelerates efforts to make a deal with Iran in early 2021, the Gulf Arab states will be counting the costs of the twin crises of 2020 — the Russo-Saudi oil war and the coronavirus pandemic. The most optimistic outlook for oil prices, predicated on the regulatory approval of at least one Covid-19 vaccine in the U.S. by the end of 2020, suggests a recovery to $65 per barrel by the end of 2021. That is below break-even levels for most Gulf states, even with sharp budget-tightening.

The return of Iranian oil will depress prices even further, deepening the pain for the Arab producers. This bodes ill for the chances of a U.S.-Iran deal.

To succeed, any accommodation of Iran must include its neighbors — especially Saudi Arabia, the UAE and Bahrain — at the negotiating table, and they won't be in a position to negotiate when they are at their weakest economically.

To complicate matters even more, regardless of who wins the White House, there is sure to be a battle in the 2021 U.S. Congress over the Saudi-American relationship, with bipartisan  calls for the suspension or curtailment of arms sales, as punishment for a range of perceived offenses by Riyadh, ranging from its treatment of journalists to allegations of intelligence operations on U.S. soil.

A Biden administration would be especially tough on Saudi Arabia. According to the his campaign, he will reassess the bilateral relationship. One idea being discussed by the Biden foreign-policy team is to demonstrate dissatisfaction by putting  the Saudis in a diplomatic naughty-corner early in 2021, before resuming normal diplomatic and security ties towards the end of year.

An attempt to negotiate a new deal in this atmosphere will only antagonize Riyadh, rather than encourage a change in Saudi behavior. The possibility of a leadership transition from King Salman bin Abdulaziz to Crown Prince Mohammed bin Salman only heightens the risk – if pushed into a corner, the prince will likely be even less tolerant of dissent at home and competition in the region. The worst-case scenario: He may feel compelled to make a show of force against foreign adversaries.

Iran, on the other hand, will have significant leverage in 2021 if the occupant of the White House is keen on a deal. But given the dire condition of its economy and the chokehold of American economic sanctions, Tehran might be persuaded to return to negotiations in exchange for relief outside of oil exports. And this is likely the best strategy for all sides to pursue: a slow roll into 2021 with incentives to de-escalate regional tensions and to aid economic recovery, but not an Iranian re-entry into oil markets.

Instead of rushing into a new deal, the U.S. should encourage Iran and its Arab neighbors to use 2021 for confidence-building measures, such as of cooperation in dealing with the coronavirus pandemic and other forms of economic engagement that had seemed possible when the nuclear deal was signed in 2015.

Iran, in turn, can show good faith by at least publicly disavowing support for the Houthi rebels in Yemen, and ending its supply of weapons and training. The return of inspectors from the United Nations nuclear watchdog agency will give Tehran an opportunity to demonstrate willingness to cooperate with international initiatives. It might even open preliminary negotiations to halt any further enrichment activities.

The Gulf Arab states, in the meanwhile, could use the year to nurse their injured economies under austerity measures and perhaps to jump-start privatization and tourism initiatives. This, combined with global economic recovery, could make 2022 more a propitious time for a new Iran deal.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Karen E. Young is a resident scholar at the American Enterprise Institute.

©2020 Bloomberg L.P.