Over the past week, the latest phase of US-led sanctions against Iran has dominated the media. For months, the United States has pressured countries to curtail their imports of Iranian crude oil and is now threatening to penalize banks that participate in oil deals with Iran. In keeping with the US sanctions campaign, the European Union on July 1 implemented an oil embargo against Iran. The bloc already has begun banning European countries from reinsuring tankers carrying Iranian oil.

On the surface, the sanctions appear tantamount to the United States and its allies serving an economic death sentence to the Iranian regime. Indeed, sanctions lobbyists and journalists have painted a dire picture of hyperinflation and plummeting oil revenues. They argue that sanctions are depriving Tehran of resources that otherwise would be allocated to Iran's nuclear weapons program. This narrative also tells of the Iranian regime's fear of economically frustrated youths daring to revive the Green Movement to pressure the regime at its weakest point.

But Iran's response to sanctions deadlines has been relatively nonchalant. Contrary to the sanctions lobbyist narrative, this response does not suggest Iran will halt its crude oil shipments, nor does it portend a popular uprising in the streets of Tehran. Instead, it suggests that sanctions are likely a sideshow to a much more serious negotiation in play.

Loopholes in the Sanctions Campaign

The sanctions applied thus far certainly have complicated Iran's day-to-day business operations. However, Iran is well versed in deception tactics to allow itself and its clients to evade sanctions and thus dampen the effects of the US campaign.

One way in which Iran circumvents sanctions is through a network of front companies that enable Iranian merchants to trade under false flags. To enter ports, merchant ships are required to sail under a flag provided by national ship registries. Tax havens, such as Malta, Cyprus, the Bahamas, Hong Kong, the Seychelles, Singapore and the Isle of Man, profit from selling flags and company registries to businesses looking to evade the taxes and regulations of their home countries. Iranian businessmen rely heavily on these havens to switch out flags, names, registered owners and agents, and addresses of owners and agents.

The US Treasury Department has become more adept at identifying these firms, but a government bureaucracy simply cannot compete with the rapid pace at which shell corporations are made. Several new companies operating under different names and flags can be created in the time it takes a single sanctions lawsuit to be drawn up.

Many of Iran's clients turn a blind eye to these shell practices to maintain their crude oil supply at steep discounts. Notably, the past few months have been rife with reports of countries cutting their Iranian oil imports under pressure from the United States. However, after factoring in the amount of crude insured and traded via shell companies, the shift in trade patterns is likely not as stark as the reports present.

The United States already has exempted China, Singapore, India, Turkey, Japan, Malaysia, South Africa, South Korea, Sri Lanka, Taiwan and the 27 members of the European Union from the sanctions. Many of these countries imported higher than average quantities of Iranian crude in the months leading up to their announcements that they had cut down their supply of Iranian crude. China, South Korea, India and Japan also are finding ways to provide sovereign guarantees in lieu of maritime insurance to get around the latest round of sanctions. Even though many of these countries claim to have reduced their oil imports from Iran to negotiate an exemption, falsely flagged tankers carrying Iranian crude likely compensate for much of Iran's officially reduced trade.

US lawmakers are drawing up even stricter sanctions legislation in an effort to track down more Iranian shell companies, but the US administration is likely aware of the inadequacies of the sanctions campaign. In fact, while Congress is busy trying to expand the sanctions, the US administration is rumored to be preparing a list of options by which it can selectively repeal the sanctions for when it sits down at a negotiating table with Iran.

The Real Negotiation

While talk of sanctions has dominated headlines, a more subtle dialogue between Iran and the United States has been taking place. In an editorial appearing in US foreign policy journal The National Interest, two insiders of the Iranian regime, Iranian political analyst Mohammad Ali Shabani and former member of Iranian nuclear negotiating team Seyed Hossein Mousavian, communicated several key points on behalf of Tehran:

The United States and Iran must continue to negotiate.

-         Sanctions hurt Iran economically but by no means paralyze Iranian trade.

-         Iran cannot be sure that any bilateral agreement made with the United States will be honored by a new administration come November.

-         The United States must abandon any policy intended to bring about regime change in Tehran.

-         Washington has few remaining options other than military intervention, which is an unlikely outcome.

-         Iran can significantly increase pressure on the United States by, for example, threatening the security of the Strait of Hormuz, an act that would raise the price of US oil.

Perhaps most important, they said, "the Islamic Republic is willing to agree on a face-saving solution that would induce it to give up the cards it has gained over the past years."

On June 27, the United States delivered an important message. US Chief of Naval Operations Adm. Jonathan W. Greenert said during a Pentagon news conference that the Strait of Hormuz had been relatively quiet and that the Iranian navy had been "professional and courteous" to US naval vessels in the Persian Gulf. According to Greenert, the Iranian navy has abided by the norms that govern naval activity in international waters. Previously, armed speedboats operated provocatively close to US vessels, but they have not done so recently, Greenert said. It is difficult to imagine Greenert making such a statement without clearance from the White House.

Red Lines

When Iran began the year with military exercises to highlight the threat it could pose to the Strait of Hormuz, Stratfor laid out the basic framework of the US-Iranian relationship. Both countries have defined their red lines. Iran raises the prospect of closing the Strait of Hormuz or detonating a nuclear device. The United States moves its naval carriers into the Persian Gulf to raise the prospect of a military strike. Both remind each other of their respective red lines, yet both stay clear of them because the consequences of crossing them are simply too great.

The situation calls for a broader accommodation. Over the past decade, Iran and the United States have struggled in negotiations toward such an accommodation. At the heart of the negotiation is Iraq -- a core vulnerability to Iran's western flank if under the influence of a hostile power and Iran's energy-rich outlet to the Arab world. The United States has tried to maintain a foothold in Iraq, but there is little question that Iraq now sits in an Iranian sphere of influence. With Iraq now practically conceded to Iran, the other components of the negotiation are largely reduced to atmospherics.

Iran's biggest deterrent rests in its threat to close the Strait of Hormuz. The leverage Tehran holds over the strait allows Iran room to negotiate over its nuclear program. Of course, the United States would prefer that Iran abandon its nuclear ambitions and will continue efforts to impede the program, but a nuclear Iran might in the end be tolerated as long as Washington and Tehran have an understanding that allows for the free flow of oil through the strait.

Everything from the sanctions campaign to US covert backing of Syrian rebels to the nuclear program becomes negotiable. As the Iranians put it, a path has been created for a "face-saving solution" that would allow both to walk away from the dialogue looking good in front of their constituencies, but would also require the sacrifice of some of the levers they have gained in the course of the negotiation.

With only four months until the US election, it is difficult to imagine that this negotiation will reach the point of a strategic understanding between Washington and Tehran. However, one would be remiss to overlook the important confidence-building measures that are being communicated at a time when neither power wants to skirt its respective red lines, Iraq is more or less a moot issue and the United States is trying to redirect its focus away from the Middle East.

Courtesy www.stratfor.com