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Barack Obama

Factbox: Key political risks to watch in Iran

TEHRAN (Reuters) - President Mahmoud Ahmadinejad has derided a new wave of sanctions against Iran as ineffective, but, as the measures bite, he has said the Islamic Republic is willing to return to talks about its nuclear program.

Iran has always said its nuclear activities are peaceful, but that has not assuaged fears that its real motivation is seeking an atomic bomb, something the United States, and its ally Israel, say they could not tolerate.

So the risk of military action against Iran -- something which would have major repercussions on the global oil trade -- remains, despite renewed efforts to seek a diplomatic solution.

At home, Ahmadinejad has largely re-asserted political control, with a crackdown on the opposition which challenged his 2009 re-election in the streets. But economic problems might stir further unrest.

As well as the new sanctions, Ahmadinejad’s policy to phase-out subsidies on staples such as fuel and food -- starting in September -- is also likely to have a big economic impact.

Both might already be having at least a psychological effect on Iranians who complain of rising inflation, despite official figures to the contrary, and growing queues at filling stations, possibly due to fears that sanctions will cause gasoline shortages.

Below is an outline of the main political risks for Iran:

NUCLEAR TALKS

Iran has said it could resume negotiations on its nuclear program in September, a move welcomed by Washington.

A resumption of talks would ease tensions and reopen the possibility of a diplomatic resolution to the nuclear stand-off which otherwise risks escalating into a military conflict.

But several obstacles stand in the way.

Ahmadinejad said he wants to expand the talks beyond the so-called P5+1 group with which it has previously negotiated.

Those are the five permanent members of the U.N. Security Council -- the United States, Britain, France, Russia and China -- and Germany. Talks with them stalled last October after reaching an agreement in principle for a nuclear fuel swap, meant to address concerns about Tehran’s uranium enrichment.

State Department spokesman P.J. Crowley has said: “We hope to have the same kind of meeting coming up in the coming weeks that we had last October.” That implies Washington does not want other countries involved.

The P5+1 countries have also yet to comment on Ahmadinejad’s two other conditions -- that they say whether they come to the talks as friend or foe of Iran and what they think of Israel’s alleged nuclear arsenal.

One good omen for the talks is the possibility that Iran might agree to stop enriching uranium to 20 percent purity if world powers agree to the nuclear fuel swap in which it would get fuel for a medical reactor in exchange for shipping some of its uranium stockpile abroad.

Turkish Foreign Minister Ahmet Davutoglu said on July 28 that this was Iran’s position.

What to watch:

- Any confirmation from Iran on its stance on uranium enrichment -- the key concern for those countries that believe Iran wants weapons-grade material.

- Narrower fuel swap talks -- between Iran and the “Vienna Group” of Russia, France, the United States and the IAEA -- may start in September to look at the fuel swap proposal, the success of which could be crucial to getting any wider deal.

MILITARY CONFLICT?

The United States and Israel, Iran’s main foes, do not rule out military action if diplomacy fails to end the nuclear row.

Obstacles to such a move include: possible responses by Iran which has said it could target U.S. troops in the region and close the Strait of Hormuz, a vital shipping lane for oil; the difficulty in ensuring dispersed and well-defended nuclear installations are destroyed; and possible actions by Middle East groups linked to Iran, Hezbollah and Hamas.

A representative of Supreme Leader Ali Khamenei said Iran could respond militarily if its ships are searched under any cargo inspection regime which is called for in the latest U.N. Security Council resolution.

“If as per the ... resolution, the members of the council are authorized to inspect equipment destined for the Islamic Republic, and if they should want to make straits, oceans and waterways unsafe for us, then the Strait of Hormuz and the Persian Gulf will become unsafe for them,” Mojtaba Zolnour was quoted as saying by the semi-official Fars news agency.

Gulf Arab neighbors are also concerned about the possibility of a nuclear Iran and the United Arab Emirates’ Washington envoy even suggested his country may support any U.S. military action, a stance the UAE government sought to downplay.

What to watch:

- Progress in moves to resume nuclear talks. A resumption in talks might calm talk of military conflict, although hawks in the West are likely to see it as a success for what they see as Iran’s desire to play for time.

- Any further reaction from Israel and Washington over whether having the new sanctions in place means military action is now less likely than before.

- Any military build-up in the region; signs of Gulf facilities being offered for military action.

SANCTIONS

The European Union agreed a list of new sanctions on July 26 which, like U.S. measures, go much further than those agreed by the U.N. Security Council..

Ever tighter restrictions on financial services make it harder for Iranian companies to do business with the West and vice-versa. And measures targeting Iran’s gasoline imports -- on which it relies for up to 40 percent of its consumption -- have started to bite. Traders said Iran was depending more on friendly countries, mostly China and Turkey, for fuel supplies.

Sanctions also restrict Iran’s ability to import equipment or call on Western companies that could help it increase its own refining capacity.

Western energy companies had already begun pulling out of Iran before the new round of sanctions, slowing the development of major projects including the massive South Pars gas field.

That has a wider impact, denting Iran’s ability to raise the $25 billion it says the energy sector needs in new investment each year to prevent crude exports from drying up.

A bullish Iran maintains that its dual policy of suppressing gasoline demand by removing subsidies while increasing refining capacity will make it a gasoline exporter in the next four years.

What to watch:

- How will Iran plug the gasoline imports gap? Will China and Russia, which resisted tougher measures in the U.N. Security Council resolution, become ever more important partners in Iran’s energy sector which is in desperate need of investment?

- Will Ahmadinejad be forced to speed up the subsidy phase-out, running the risk of angering public opinion?

- Will there be a resumption of nuclear talks and will that offer any possibility that the sanctions could be eased?

SUBSIDY PHASE-OUT

Ahmadinejad’s flagship economic policy -- phasing out the $100 billion the state pays every year to subsidize the price of staples like food and fuel [ID:nLDE64Q08S] -- is due to start in September and poses enormous economic and political risks.

The first phase will see $20 billion of annual subsidies cut in the first six months.

Critics of the scheme, including prominent lawmakers, say it could stoke inflation and provoke social unrest. The government says that those in need will receive compensation in cash.

With sanctions starting to bite, the government hopes an increase in petrol pump prices will suppress demand and relieve Iran’s reliance on gasoline imports.

But any big price rises are bound to prove unpopular. Gasoline rationing, introduced in 2007, provoked riots in Tehran and a similar reaction this time cannot be ruled out, even if the authorities proved effective in stamping out street protests following Ahmadinejad’s re-election in June last year.

What to watch:

- How deep will the cuts be and how will the public, and the economy, react?

- Will there be a surge in inflation, currently around 10 percent, and a drag on economic growth, 1.5 percent last year?

Editing by Samia Nakhoul

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