China Securities Co., Ltd.: Is the negotiation between the US and Iran as "smooth and successful" as the market expects?

China Securities Co., Ltd. released a research report stating that the choice of a memorandum of understanding (with weaker legal binding force) rather than an institutionalized agreement (such as a treaty or agreement) by the United States and Iran reflects a lack of mutual trust. This round of negotiations between the US and Iran is an asymmetric bilateral negotiation, which historically has a higher success rate than other forms of negotiations. However, due to two major issues jurisdiction over the Strait of Hormuz and uranium enrichment, the US and Iran have not reached a consensus, and it is expected that the subsequent negotiations will continue. From the perspective of the negotiation process, the current negotiations may enter into detailed discussions such as sanctions relief, but high-level official meetings have not yet been initiated. The lack of high-level direct meetings in negotiations, historically indicates that there is still a long way to go before an agreement is reached. It is expected that in the short term, the high-intensity confrontation between the US and Iran will be temporarily suspended, and both sides are likely to maintain a "negotiating while playing" state. The main points of view of China Securities Co., Ltd. are as follows: 1. What does a memorandum of understanding mean? A memorandum of understanding is a "political commitment" with the lowest legal binding force in the United States. Under US law, a memorandum of understanding does not require approval from both houses of Congress, but can be reached by the signature of the President or the executive department. Compared to diplomatic texts with legal effect in US domestic law such as "treaties," "conventions," and "agreements," memorandums of understanding have lower legal effect in the US. Historically, the actual implementation rate of memorandums depends heavily on the "cost of default" under bilateral geopolitical interests. Historical evidence shows that the lack of legal binding force does not necessarily mean low enforcement. When a memorandum of understanding meets the risk aversion needs of both parties (such as the 1963 US-Soviet hotline) or has deep geopolitical interests support (such as the 2016 US-Israel military aid memorandum), it usually achieves better coordinated fulfillment. On the contrary, without clear consequences for non-compliance, memorandums are difficult to enforce (such as the 1994 Budapest Memorandum on Security Assurances). The fragility and uncertainty of the current US-Iran memorandum may be higher than that of the 2015 "Iran Nuclear Agreement" (strategic consensus level). Unlike the 2015 "Iran Nuclear Agreement," which was publicly a "strategic consensus" and incorporated into UN Security Council Resolution 2231 and endorsed by the highest multilateral legitimacy, the current US-Iran memorandum has been stripped of higher-dimensional political cooperation and demands by the great powers, and has become more of a political bargaining tool. 2. What does a multilateral negotiation mean? Multilateral mechanisms focus on legitimacy endorsement, and asymmetric bilateral negotiations historically have a higher success rate. Historical experience shows that due to divisions in the interests of various parties, multilateral negotiations often struggle to achieve substantive consensus, with their core value lying more in endorsing agreements that have been reached. On the other hand, "asymmetric bilateral negotiations" dominated by great powers with overwhelming strength have a higher historical success rate in pushing for substantive compromises. The current US-Iran contacts belong to asymmetric bilateral negotiations, which are a type with a higher success rate. Although Iran has strong countermeasures in regional proxy systems and strait blockades, the US still holds a dominant advantage in terms of military, financial, and ally networks as hard power metrics. In other words, in comparison of great power balances, Iran is inferior to the US, so US-Iran bilateral negotiations fundamentally belong to asymmetric bilateral negotiations. According to historical experience, negotiations structures with such asymmetry between the national strengths of the two parties have a high probability of reaching an agreement. However, it should be noted that Iran's dominance in the Strait of Hormuz is significantly higher than before, which means that Iran's influence on the global economy is greater than before. Therefore, whether the current US-Iran negotiations can be considered a classic "asymmetric" bilateral negotiation is still debatable. However, historical experience also shows that there are many cases of failed negotiations in asymmetric negotiations, stemming from the inability of both parties to reach consensus on their "political bottom lines." Compared to other types of negotiations - multilateral negotiations, symmetric bilateral negotiations, asymmetric bilateral negotiations are more likely to achieve results, but there are also too many historical examples showing that asymmetric bilateral negotiations are prone to failure due to the inability to bridge the "political bottom lines" of both parties. For example, in the 2019 Hanoi US-DPRK summit, the US demand for substantive denuclearization as a precondition for talks formed an irreconcilable political bottom line, leading to the breakdown of negotiations on reciprocal measures. Similarly, from 2021 to 2022, the US and Iran have been faced with insurmountable structural contradictions in the substantive arrangements for nuclear facilities constraints and sanction exemptions. Currently, the two basic issues of disagreement between the US and Iran are jurisdiction over the Strait of Hormuz and how to deal with the Iranian nuclear issue. One is the opposition over jurisdiction in the Strait of Hormuz (Iran claims sovereignty and harmless passage, while the US calls for international waters and freedom of navigation); the other is the handling of the Iranian nuclear issue. Not to mention the many details involved in the handling of the Iranian nuclear issue, there is currently no effective way to unify the demands of both parties. Therefore, it is still not possible to judge whether the US-Iran negotiations can achieve positive results in the short term. 3. What do the time, place, and officials in attendance mean? In terms of time, historically negotiations usually need at least two quarters or even longer. The experience of the 2013 US-Iran negotiations and the 2021-2022 US-Iran negotiations shows that it usually takes about half a year from initial negotiations to reaching an agreement. Given the significant deficit of mutual trust between the two parties and the extremely complex technical details, this round of negotiations is using the most flexible and basic form of a memorandum of understanding. Even so, based on historical experience, it can be inferred that the US and Iran will need at least two quarters or more to go from contact to formal authorization. In terms of location, negotiations may enter into detailed discussions on the thawing of sanctions. Diplomatic venues have phase-prospective significance. Oman focuses on "political breakthroughs and secret probing," traditional multilateral centers (Geneva/Vienna) are suitable for "final signatures and multilateral endorsements"; while Qatar's Doha, relying on its regional financial hub status, is usually responsible for "asset disposal and fulfillment delivery." At the end of May, senior Iranian officials discussed the unfreezing of $24 billion in overseas assets in Qatar, which may indicate that the discussions have entered the detailed level of thawing sanctions. In terms of personnel, high-level direct dialogue has not yet been initiated, indicating that there is still a distance from reaching a final negotiation outcome. Although there have been preliminary contacts between high-ranking US and Iranian officials, key decision-makers such as US Secretary of State Pompeo are still in the stage of public pronouncements and "statements in the air." The absence of high-level face-to-face direct meetings reflects that there is still a significant distance between the two parties on core bottom lines, and the current core goal of maintaining indirect contact mechanisms is to prevent conflicts from escalating, rather than establishing final outcomes. 4. Overall assessment: US and Iran are still engaged in a continuous game under high-intensity confrontation easing The market may have overestimated the speed of substantive breakthroughs in US-Iran negotiations. The memorandum itself has limited legal binding force, and multilateral contacts mainly reflect risk management and easing of tensions, not necessarily meaning that an agreement has entered the final stage. At present, although the two sides have established a phased negotiation framework, the issues of the Strait of Hormuz and Iran's nuclear program are still important points of disagreement, involving sensitive issues such as sovereignty, security, and regional order. Given that these issues are politically sensitive, maintaining strategic ambiguity and avoiding touching on core positions are still important prerequisites for pushing the negotiations forward. Referring to the US-Iran negotiation experiences during the Obama and Trump administrations, it usually takes a long time from initiating contact to reaching initial results, and it is expected that there will still be a need for time for subsequent negotiations. In the future, attention should focus on the progress of high-level direct contacts between the two sides. In particular, the formal meeting of the US Secretary of State and the Iranian Foreign Minister is often a key signal of substantive progress in negotiations. Risk warnings There is a risk of unexpected changes in geopolitical developments and sanctions policies. Iran's relationships with regional countries and the West are complex, and any sudden conflicts or diplomatic events could severely disrupt global energy markets, supply chains, and risk preferences. Additionally, unexpected tightening or relaxation of Western sanctions policies towards Iran will directly and significantly impact Iran's oil exports, financial access, and international trade, leading to major fundamental volatility. Data availability and reliability risks. Due to restrictions from international sanctions and internal statistical systems, data on Iran's macro economy, finance, and industries may have issues such as incomplete disclosure, lagging, or discrepancies in methodologies. The analysis and modeling in this report rely on available data, with a risk of errors due to incomplete information. Spillover risks from the global macroeconomic and financial environment. If the pace of monetary policy tightening in major Western economies exceeds expectations, it could indirectly but significantly affect Iran's economy and financial markets through capital flows, exchange rates, and a contraction of global aggregate demand. Internal policy and stability risks in Iran. There is uncertainty in Iran's domestic political agenda, economic reform process, and social stability. Major adjustments in internal policies or social unrest could alter the economic trajectory, affecting the business and investment environment.